Financial Accounting 6th Edition By Spiceland,Thomas, Herrmann 2022. All Chapters 1-12_TEST BANK by ACADEMIAMILL

APPENDIX C: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ A dollar now is worth more than a dollar later. _____ Cash payments of equal amounts over time periods of equal length. _____ Accumulation of a series of equal payments. _____ Interest earned on the initial investment and on previous interest. _____ Accumulation of an amount with interest.

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2) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Simple interest i. Present value of an annuity Phrases: _____ Amount today equivalent to a specified future amount. _____ The rate at which future dollars are equal to current dollars. _____ Interest earned on the initial investment only. _____ The factor that causes money today to be worth more than the same amount in the future. _____ Current worth of a series of equal payments received in the future.

3) Compute the future value of the following invested amounts at the specified periods and interest rates: Item a. b. c.

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Invested Amount $27,000 $37,000 $17,000

Interest Rate 9% 6% 11%

Number of Periods 11 5 16

4) Compute the future value of the following invested amounts at the specified periods and interest rates: Item a. b. c.

Invested Amount $20,000 $30,000 $10,000

Interest Rate 8% 4% 12%

Number of Periods 10 8 15

5) Anthony would like to have $18,000 to buy a new car in three years. Currently, he has saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually, will he be able to buy the car in three years?

6) Michaela would like to have $10,000 for a European vacation in four years. Currently, she has saved $8,000. If she puts $8,000 in an account that earns 6% interest, compounded annually, will she be able to take the vacation in four years?

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7) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rates: Item a. b. c.

Invested Amount $34,000 $13,000 $50,000

Interest Rate 7% 4% 11%

Number of Periods 17 25 11

8) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item a. b. c.

Invested Amount $40,000 $20,000 $50,000

Interest Rate 7% 6% 11%

Number of Periods 20 25 10

9) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item

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Invested

Interest Rate

Number of 4

a. b. c. d.

Amount $1,900 $1,900 $1,900 $1,900

8% 8% 8% 8%

Periods 1 2 3 4

10) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item a. b. c. d.

Invested Amount $1,500 $1,500 $1,500 $1,500

Interest Rate 10% 10% 10% 10%

Number of Periods 1 2 3 4

11) If you had an investment opportunity that promises to pay you $26,000 in six years and you could earn a 10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity?

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12) If you had an investment opportunity that promises to pay you $20,000 in three years and you could earn a 10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity?

13) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $9,000 the first year, $18,000 for the next two years, and $20,000 for the next two years. Assuming a 11% discount rate, calculate the total present value of the cash flows.

14) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows.

15) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $6,000 the first year, $21,000 for the next two years, and $24,000 for the next two years. Assuming a 10% discount rate, calculate the total present value of the cash flows.

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16) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows.

17) Hillsdale is considering two options for comparable computer software. Option A will cost $35,000 plus annual license renewals of $1,200 for three years, which includes technical support. Option B will cost $19,000 with technical support being an add-on charge. The estimated cost of technical support is $4,300 the first year, $3,300 the second year, and $2,300 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 6%. Ignore income taxes. Determine which option should be chosen based on present value considerations.

18) Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 8%. Ignore income taxes. Determine which option should be chosen based on present value considerations.

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19) DON Corporation is contemplating the purchase of a machine that will produce net aftertax cash savings of $29,000 per year for 4 years. At the end of four years, the machine can be sold to realize after-tax cash flows of $5,300. Assuming a 10% discount rate, calculate the total present value of the annual cash savings and the salvage value of the machine.

20) DON Corporation is contemplating the purchase of a machine that will produce net aftertax cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Assuming a 12% discount rate, calculate the total present value of the annual cash savings and the salvage value of the machine.

21) Baird Bros. Construction is considering the purchase of a machine at a cost of $122,000. The machine is expected to generate cash flows of $20,000 per year for twelve years and can be sold at the end of twelve years for $10,500. The discount rate is 8%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Baird should purchase the machine.

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22) Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. The discount rate is 10%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Baird should purchase the machine.

23) Dobson Contractors is considering buying equipment at a cost of $80,000. The equipment is expected to generate cash flows of $15,100 per year for eight years and can be sold at the end of eight years for $6,000. The discount rate is 10%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.

24) Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. The discount rate is 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.

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25) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $89,000 per year for 5 years. Assuming a 7% discount rate, calculate the present value of the cash savings.

26) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for 5 years. Assuming an 8% discount rate, calculate the present value of the cash savings.

27) Samson Incorporated is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $130,000 per year for 7 years. Assuming a 7% discount rate, calculate the present value of the cash savings.

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28) Samson Incorporated is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years. Assuming a 10% discount rate, calculate the present value of the cash savings.

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Answer Key Test name: Appx C_6e_Problems_Spiceland 1) h; a; d; f; b 2) g; c; h; e; i 3)a. FV = $27,000 × 2.58043 (Table FV of $1; n = 11; i = 9%) = $69,672. b. FV = $37,000 × 1.33823 (Table FV of $1; n = 5; i = 6%) = $49,514. c. FV = $17,000 × 5.31089 (Table FV of $1; n = 16; i = 11%) = $90,285. 4)a. FV = $20,000 × 2.15892 (Table FV of $1; n = 10; i = 8%) = $43,178. b. FV = $30,000 × 1.36857 (Table FV of $1; n = 8; i = 4%) = $41,057. c. FV = $10,000 × 5.47357 (Table FV of $1; n = 15; i = 12%) = $54,736. 5)No. FV = $15,000 × 1.19102 (Table FV of $1; n = 3; i = 6%) = $17,865, which is less than the $18,000 desired amount. 6)Yes. FV = $8,000 × 1.26248 (Table FV of $1; n = 4; i = 6%) = $10,100, which is more than the $10,000 desired amount. 7)a. PV = $34,000 × 0.31657 (Table PV of $1; n = 17; i = 7%) = $10,764. b. PV = $13,000 × 0.37512 (Table PV of $1; n = 25; i = 4%) = $4,877. c. PV = $50,000 × 0.31728 (Table PV of $1; n = 11; i = 11%) = $15,864.

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8)a. PV = $40,000 × 0.25842 (Table PV of $1; n = 20; i = 7%) = $10,337. b. PV = $20,000 × 0.23300 (Table PV of $1; n = 25; i = 6%) = $4,660. c. PV = $50,000 × 0.35218 (Table PV of $1; n = 10; i = 11%) = $17,609. 9)a. PV = $1,900 × 0.92593 (Table PV of $1; n = 1; i = 8%) = $1,759. b. PV = $1,900 × 0.85734 (Table PV of $1; n = 2; i = 8%) = $1,629. c. PV = $1,900 × 0.79383 (Table PV of $1; n = 3; i = 8%) = $1,508. d. PV = $1,900 × 0.73503 (Table PV of $1; n = 4; i = 8%) = $1,397. 10)a. PV = $1,500 × 0.90909 (Table PV of $1; n = 1; i = 10%) = $1,364. b. PV = $1,500 × 0.82645 (Table PV of $1; n = 2; i = 10%) = $1,240. c. PV = $1,500 × 0.75131 (Table PV of $1; n = 3; i = 10%) = $1,127. d. PV = $1,500 × 0.68301 (Table PV of $1; n = 4; i = 10%) = $1,025. 11) PV = $26,000 × 0.56447 (Table PV of $1; n = 6; i = 10%) = $14,676. 12) PV = $20,000 × 0.75131 (Table PV of $1;n = 3;i = 10%) = $15,026. 13) Year

Cash Flow

PV Factor

$9,000

18,000

20,000

0.90090 (Table PV of $1; n = 1; i = 11%) 0.81162 (Table PV of $1; n = 2; i = 11%) 0.73119 (Table PV of $1; n = 3; i = 11%) 0.65873 (Table PV of $1; n = 4; i = 11%) 0.59345 (Table PV of $1; n = 5; i = 11%) Total PV of cash savings

Present Value $8,108 14,609 13,161 13,175 11,869 $60,922

14)

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Year

Cash Flow

PV Factor

$ 6,000

10,000

12,000

0.89286 (Table PV of $1; n = 1; i = 12%) 0.79719 (Table PV of $1; n = 2; i = 12%) 0.71178 (Table PV of $1; n = 3; i = 12%) 0.63552 (Table PV of $1; n = 4; i = 12%) 0.56743 (Table PV of $1; n = 5; i = 12%) Total PV of Cash Savings

Present Value $ 5,357 7,972 7,118 7,626 6,809 $34,882

15) Year

Cash Flow

PV Factor

1 2 3 4 5

$6,000 21,000 21,000 24,000 24,000

0.90909 (Table PV of $1; n = 1; i = 10%) 0.82645 (Table PV of $1; n = 2; i = 10%) 0.75131 (Table PV of $1; n = 3; i = 10%) 0.68301 (Table PV of $1; n = 4; i = 10%) 0.62092 (Table PV of $1; n = 5; i = 10%)

Present Value $5,455 17,355 15,778 16,392 14,902

Total PV of Cash Savings

69,882

16) Year

Cash Flow

PV Factor

$9,000

15,000

18,000

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Present Value $8,036 11,958 10,677 11,439 10,214 $ 52,324

17)Option A should be chosen because it has the lower cost based on present value considerations. Option A. Year 0 1 2 3

Cash Flow $35,000 1,200 1,200 1,200

PV Factor 1.00000 0.94340 (Table PV of $1; n = 1; i = 6%) 0.89000 (Table PV of $1; n = 2; i = 6%) 0.83962 (Table PV of $1; n = 3; i = 6%)

Present Value $35,000 1,132 1,068 1,008 $38,208

Option B. Year 0 1 2 3

Cash Flow $19,000 4,300 3,300 2,300

PV Factor 1.00000 0.94340 (Table PV of $1; n = 1; i = 6%) 0.89000 (Table PV of $1; n = 2; i = 6%) 0.83962 (Table PV of $1; n = 3; i = 6%)

Present Value $19,000 4,057 2,937 1,931 $27,925

18)Option A should be chosen because it has the lower cost based on present value considerations. Option A: Year

Cash Flow

PV Factor

0 1

$25,000 1,000

1,000

1.00000 0.92593 (Table PV of $1; n = 1; i = 8%) 0.85734 (Table PV of $1; n = 2; i = 8%) 0.79383 (Table PV of $1; n = 3; i = 8%)

Present Value $25,000 926 857 794 $27,577

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Option B: Year

Cash Flow

PV Factor

0 1

$20,000 4,000

3,000

2,000

1.00000 0.92593 (Table PV of $1; n = 1; i = 8%) 0.85734 (Table PV of $1; n = 2; i = 8%) 0.79383 (Table PV of $1; n = 3; i = 8%)

Present Value $20,000 3,704 2,572 1,588 $27,864

19) PVA = $29,000 × 3.16987 (Table PVA of $1; n = 4; i = 10%) PV = $5,300 × 0.68301 (Table PV of $1; n = 4; i = 10%)

$91,926 3,620

Total present value

$95,546

20) PVA = $20,000 × 3.60478 (Table PVA of $1; n = 5; i = 12%) PV = $5,000 × 0.56743 (Table PV of $1; n = 5; i = 12%)

$72,096 2,837

Total present value

$74,933

21)Baird Bros. Construction should buy the machine. Present value of cash outflows

$122,000

Present value of cash inflows: Annual cash flows – $20,000 × 7.53608 (Table PVA of $1; n = 12; i = 8%) Residual value – $10,500 × 0.39711 (Table PV of $1; n = 12; i = 8%)

$150,722 4,170

Positive present value of net cash flows

154,892 $32,892

22)Baird Bros. Construction should buy the machine. Present value of cash outflows

$125,000

Present value of cash inflows: Annual cash flows − $20,000 × 6.14457 (Table PVA of $1; n = 10; i = 10%)

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$122,891

Residual value − $10,000 × 0.38554 (Table PV of $1; n = 10; i = 10%)

3,855

Positive present value of net cash flows

126,746 $ 1,746

23)Dobson Construction should buy the machine. Present value of cash outflows

$80,000

Present value of cash inflows: Annual cash flows − $15,100 × 5.33493 (Table PVA of $1; n = 8; i = 10%) Residual value – $6,000 × 0.46651 (Table PV of $1; n = 8; i = 10%)

$80,557 2,799

Positive present value of net cash flows

83,356 $3,356

24)Dobson Construction should buy the machine. Present value of cash outflows

$75,000

Present value of cash inflows: Annual cash flows − $15,000 × 4.96764 (Table PVA of $1; n = 8; i = 12%) Residual value − $5,000 × 0.40388 (Table PV of $1; n = 8; i = 12%)

$74,515 2,019

Positive present value of net cash flows

76,534 $ 1,534

25) PVA = $89,000 × 4.10020 (Table PVA of $1;n = 5;i =7%) = $364,918. 26) PVA = $80,000 × 3.99271 (Table PVA of $1;n = 5;i = 8%) = $319,417 27) PVA = $130,000 × 5.38929 (Table PVA of $1; n = 7; i = 7%) = $700,608 28) PVA = $100,000 × 5.33493 (Table PVA of $1;n = 8;i = 10%) = $533,493

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APPENDIX C TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The value of $1 today is worth more than $1 one year from now. ⊚ ⊚

true false

2) The time value of money is a concept, which means that the value of $1 increases over time. ⊚ ⊚

true false

Simple interest is interest earned on the initial investment only. ⊚ ⊚

true false

4) If you put $500 into a savings account that pays simple interest of 8% per year and then withdraw the money two years later, you will earn interest of $80. ⊚ ⊚

true false

5) If you put $600 into a savings account that pays simple interest of 10% per year and then withdraw the money two years later, you will earn interest of $126. ⊚ ⊚

true false

Compound interest is interest you earn on the initial investment and on previous interest. ⊚ ⊚

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true false

7) If you put $200 into a savings account that pays annual compound interest of 8% per year and then withdraw the money two years later, you will earn interest of $32. ⊚ ⊚

true false

8) If you put $300 into a savings account that pays annual compound interest of 10% per year and then withdraw the money two years later, you will earn interest of $63. ⊚ ⊚

true false

Future value is how much an amount today will grow to be in the future. ⊚ ⊚

true false

10) The more frequent the rate of compounding, the more interest that is earned on previous interest, resulting in a higher future value. ⊚ ⊚

11)

true false

Present value indicates how much a present amount of money will grow to in the future. ⊚ ⊚

true false

12) The discount rate is the rate at which someone is willing to give up current dollars for future dollars. ⊚ ⊚

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true false

13) The future value of $1,000 invested today for three years that earns 10% compounded annually is greater than the future value of a $500 annuity with the same interest rate over the same period. ⊚ ⊚

true false

14) The present value of $1,000 received three years from today with a discount rate of 10% is less than the present value of a $500 annuity with the same discount rate over the same period. ⊚ ⊚

15)

true false

An annuity includes cash payments of equal amounts over time periods of equal length. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 16) The concept that interest causes the value of money received today to be greater than the value of that same amount of money received in the future is referred to as the: A) Monetary unit assumption. B) Historical cost principle. C) Time value of money. D) Matching principle.

17)

Simple interest is computed as the interest rate times: A) The difference between the initial investment and any previous interest. B) The initial investment only. C) Any previous interest. D) The sum of the initial investment plus any previous interest.

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18)

Which of the following is a correct statement?

A) The future value table should be used when determining how much an amount today will grow to be in the future. B) The present value table should be used when determining how much an amount in the future is worth today. C) The number of compounding periods and interest rate per compounding period are needed to use the future value table and the present value table. D) All of the other answer choices are correct.

19) Mattison is trying to decide how much an investment of $10,000 today will grow to be in the future. Which of the following will shenot need to help calculate that amount? A) Future value table B) Present value table C) Number of compounding periods D) Interest rate

20) Anna Beth would like to save $10,000 by the time she finishes college and is trying to calculate how much she should invest today. Which of the following will shenot need to help calculate that amount? A) Future value table B) Present value table C) Number of compounding periods D) Interest rate

21)

The value today of receiving an amount in the future is referred to as the:

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A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity.

22)

The value that an amount today will grow to in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity.

23) Reba wishes to know how much would be in her savings account in five years if she deposits a given sum in an account that earns 6% interest. She should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

24) LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

25) Samuel is trying to determine what it's worth today to receive $10,000 in four years at a 7% interest rate. He should use a table for the:

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A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

26)

Below are excerpts from interest tables for 8% interest.

1 2 3 4

1.0000 2.0800 3.2464 4.5061

0.92593 0.85734 0.79383 0.73503

1.08000 1.16640 1.25971 1.36049

0.92593 1.78326 2.57710 3.31213

Column 2 is an excerpt from an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

27)

Below are excerpts from interest tables for 8% interest.

1 2 3 4

1.0000 2.0800 3.2464 4.5061

0.92593 0.85734 0.79383 0.73503

1.08000 1.16640 1.25971 1.36049

0.92593 1.78326 2.57710 3.31213

Column 3 is an excerpt from an interest table for the:

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A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

28) How much will $22,000 grow to in five years, assuming an interest rate of 12% compounded annually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $34,483 B) $60,771 C) $38,771 D) $35,200

29) How much will $25,000 grow to in seven years, assuming an interest rate of 12% compounded annually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $55,267 B) $46,000 C) $61,899 D) $52,344

30) How much will $9,000 grow to in five years, assuming an interest rate of 12% compounded quarterly? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $11,290 B) $9,540 C) $16,255 D) $17,483

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31) How much will $8,000 grow to in five years, assuming an interest rate of 8% compounded quarterly? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $10,989 B) $11,755 C) $11,888 D) $12,013

32) What is the value today of receiving $3,300 at the end of two years, assuming an interest rate of 11% compounded annually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $2,574 B) $2,778 C) $2,678 D) $3,128

33) What is the value today of receiving $2,500 at the end of three years, assuming an interest rate of 9% compounded annually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $1,984 B) $1,930 C) $2,104 D) $3,238

34) What is the value today of receiving $5,250 at the end of two years, assuming an interest rate of 8% compounded semiannually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.)

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A) $4,788 B) $1,680 C) $4,501 D) $4,488

35) What is the value today of receiving $5,000 at the end of six years, assuming an interest rate of 8% compounded semiannually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $3,151 B) $3,203 C) $3,428. D) $3,123

36) Davenport Incorporated offers a new employee two options. First, the employee can receive a one-time signing bonus at the date of employment. Second, the employee can take $26,000 at the date of employment and another $51,000 four years later. Assuming the employee's expected return is 9% annually, what single payment in the first option would be equal to the total of the payments in the second option? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $69,419 B) $24,500 C) $77,000 D) $62,130

37) Davenport Incorporated offers a new employee two options. First, the employee can receive a one-time signing bonus at the date of employment. Second, the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's expected return is 8% annually, what single payment in the first option would be equal to the total of the payments in the second option? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.)

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A) $60,000 B) $62,867 C) $72,867 D) $80,000

38) Today, Thomas deposited $140,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $190,400 B) $199,606 C) $203,006 D) $196,690

39) Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $109,270 B) $119,410 C) $142,576 D) $309,090

40) Today, King deposited $500,000 in an investment account that is expected to return 8%, compounded semiannually. What amount is expected to be in the account in four years? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $680,245 B) $687,129 C) $684,285 D) $668,352

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41) Carol wants to invest money in a 10% CD that compounds semiannually. Carol would like the account to have a balance of $57,000 four years from now. How much must Carol deposit to accomplish her goal? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $34,200 B) $28,500 C) $38,932 D) $38,580

42) Carol wants to invest money in a 6% CD that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $35,069 B) $43,131 C) $37,205 D) $35,000

43) Shane wants to invest money in a 10% CD that compounds semiannually. Shane would like the account to have a balance of $120,000 two years from now. How much must Shane deposit to accomplish his goal? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $98,724 B) $12,000 C) $108,844 D) $24,000

44) Shane wants to invest money in a 6% CD that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.)

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A) $88,848 B) $78,941 C) $25,336 D) $22,510

45) Bill wants to give Maria a $600,000 gift in four years. If money is worth 10% compounded semiannually, what is Maria's gift worth today? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $240,000 B) $409,808 C) $406,104 D) $279,904

46) Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $66,110 B) $81,310 C) $406,550 D) $330,560

47) At the end of each of the next four years, a new machine is expected to generate net cash flows of $9,500, $15,500, $13,500, and $18,000, respectively. What are the cash flows worth today if a 12% interest rate properly reflects the time value of money in this situation? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $30,448 B) $56,500 C) $41,887 D) $43,087

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48) At the end of each of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $41,557 B) $47,700 C) $32,403 D) $38,108

49) At the end of each of the next five years, an investment is expected to generate net cash flows of $5,000, $6,000, $7,000, $5,000, and $4,000, respectively. What are the cash flows worth today if a 6% interest rate properly reflects the time value of money in this situation? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $21,781 B) $22,884 C) $22,560 D) $23,142

50) Monica wants to sell her share of an investment to Barney for $60,000 in two years. If money is worth 10% compounded semiannually, what would Monica accept today? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $49,587 B) $12,000 C) $48,000 D) $49,362

51) Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.)

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A) $8,375 B) $41,874 C) $11,941 D) $41,000

52) How much must be invested now at 11% interest to accumulate to $22,000 in six years? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $14,520 B) $11,000 C) $11,589 D) $11,762

53) How much must be invested now at 9% interest to accumulate to $10,000 in five years? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $9,176 B) $6,499 C) $5,500 D) $5,960

54) How much must be invested now at 6% interest to accumulate to $50,000 in ten years? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $29,937 B) $22,366 C) $28,224 D) $27,920

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55)

The value today of receiving a series of equal payments in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity.

56)

The value that a series of equal payments will grow to in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity.

57)

Cash payments of equal amounts over time periods of equal length is referred to as: A) The time value of money. B) An annuity. C) The future value. D) Interest.

58) How much will $4,000 invested at the end of each year grow to in three years, assuming an interest rate of 10% compounded annually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $13,240 B) $45,856 C) $12,000 D) $15,972

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59) How much will $5,000 invested at the end of each year grow to in six years, assuming an interest rate of 7% compounded annually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $35,766 B) $26,813 C) $23,833 D) $7,504

60) How much will $3,000 invested at the end of each year grow to in 4 years, assuming an interest rate of 11% compounded annually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $13,663 B) $13,200 C) $13,929 D) $14,129

61) How much will $1,000 invested at the end of each year grow to in 20 years, assuming an interest rate of 10% compounded annually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $6,728 B) $8,514 C) $83,159 D) $57,275

62) What is the value today of receiving $7,000 at the end of each year for the next 2 years, assuming an interest rate of 8% compounded annually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.)

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A) $14,560 B) $12,157 C) $12,483 D) $51,278

63) What is the value today of receiving $5,000 at the end of each year for the next 10 years, assuming an interest rate of 12% compounded annually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $87,744 B) $28,251 C) $50,000 D) $15,529

64) What is the value today of receiving $4,000 at the end of each year for the next seven years, assuming an interest rate of 12% compounded annually? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $18,255 B) $40,356 C) $19,705 D) $33,600

65) What is the value today of receiving $3,000 at the end of each year for the next three years, assuming an interest rate of 3% compounded annually? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $8,486 B) $8,251 C) $9,000 D) $9,273

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66) What is the value today of receiving $5,000 at the end of each six-month period for the next four years, assuming an interest rate of 4% compounded semiannually? A) $34,512 B) $32,459 C) $33,664 D) $36,627

67) Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the end of the month, with interest of 12% on the unpaid balance. She should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

68) George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

69) Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting at the end of the first year. The value of this signing bonus is:

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A) The present value of the annuity. B) The future value of the annuity. C) $20 million. D) $0 because no cash is owed immediately.

70) Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

71)

Below are excerpts from interest tables for 8% interest.

1 2 3 4

1.0000 2.0800 3.2464 4.5061

0.92593 0.85734 0.79383 0.73503

1.08000 1.16640 1.25971 1.36049

0.92593 1.78326 2.57710 3.31213

Column 4 is an excerpt from an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

72)

Below are excerpts from interest tables for 8% interest.

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1 2 3 4

1.0000 2.0800 3.2464 4.5061

0.92593 0.85734 0.79383 0.73503

1.08000 1.16640 1.25971 1.36049

0.92593 1.78326 2.57710 3.31213

Column 1 is an excerpt from an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1.

73) Quaker State Incorporated offers a new employee two options. First, the employee can receive a one-time signing bonus at the date of employment. Second, the employee can take $9,500 at the date of employment plus $28,000 at the end of each of his first four years of service. Assuming the employee's time value of money is 11% annually, what single payment in the first option would be equal to the total of the payments in the second option? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $97,369 B) $96,369 C) $116,342 D) None of these answer choices are correct.

74) Quaker State Incorporated offers a new employee two options. First, the employee can receive a one-time signing bonus at the date of employment. Second, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what single payment in the first option would be equal to the total of the payments in the second option? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.)

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A) $23,026 B) $57,737 C) $62,711 D) None of these answer choices are correct.

75) At the end of each quarter, Patti deposits $1,600 into an account that pays 10% interest compounded quarterly. How much will Patti have in the account in five years? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $41,622 B) $48,872 C) $42,472 D) $40,872

76) At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $7,096 B) $7,013 C) $7,129 D) $8,880

77) Every six months, Scott deposits $2,500 into an account that pays 10% interest compounded semiannually. How much will Scott have in the account in four years? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $22,749 B) $23,873 C) $23,205 D) $28,590

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78) Miller borrows $350,000 to be paid off in two years. The loan payments are semiannual with the first payment due in six months, and interest is at 10%. What is the amount of each payment? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $98,704 B) $114,256 C) $70,000 D) $60,744

79) Miller borrows $300,000 to be paid off in three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $55,379 B) $106,059 C) $30,138 D) $60,276

80) Claudine Corporation will deposit $4,500 into a money market account at the end of each year for the next two years. How much will accumulate by the end of the second and final payment if the account earns 7% interest? (FV of $1, PV of $1, FVA of $1, and PVA of $1). (Use appropriate factor(s) from the tables provided.) A) $9,000 B) $9,215 C) $8,565 D) $9,315

81) Claudine Corporation will deposit $5,000 into a money market account at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the account earns 9% interest? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.)

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A) $32,617 B) $29,924 C) $27,250 D) $26,800

82) What is the value today of receiving five annual payments of $500,000, beginning one year from now, assuming an 11% discount rate? (FV of $1,PV of $1,FVA of $1, andPVA of $1).(Use appropriate factor(s) from the tables provided.) A) $2,500,000 B) $2,225,000 C) $1,847,950 D) $2,115,270

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 83) Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now.

84)

Briefly describe the difference between simple interest and compound interest.

85) Two banks each have stated CD rates of 12%. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD.

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86)

Explain the difference between present value and future value.

87)

Which three factors are necessary in calculating the present value of a single amount?

88) What is the relationship between the present value of a single amount and the present value of an annuity?

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Answer Key Test name: Appx C_6e_Spiceland 1) TRUE 2) FALSE 3) TRUE 4) TRUE Simple interest = ($500 × 8%) + ($500 × 8%) = $80. 5) FALSE Simple interest = ($600 × 10%) + ($600 × 10%) = $120. 6) TRUE 7) FALSE Compound interest = ($200 × 8%) + ($216 × 8%) = $33.28. 8) TRUE ($300 × 10%) + ($330 × 10%) = $63. 9) TRUE 10) TRUE 11) FALSE Present value indicates the value today of receiving some larger amount in the future. 12) TRUE 13) FALSE The three-year annuity represents three payments of $500 (= $1,500), so the annuity is greater. 14) TRUE

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The three-year annuity represents three payments of $500 (= $1,500), so the present value of the annuity is greater. 15) TRUE 16) C 17) B 18) D 19) B 20) A 21) B 22) A 23) A 24) B 25) B 26) B Each of the factors provided in Column 2 is less than 1.00000. The present value (that is, the value today) of a single amount that we will receive sometime in the future is always less than that single amount. So, the present value of $1 factors will always be less than 1.00000 (at any interest rate). Column 1 is an excerpt from an interest table for the future value of an annuity of $1, column 3 is an excerpt from an interest table for the future value of $1, and column 4 is an excerpt from an interest table for the present value of an annuity of $1. 27) A

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Each of the factors provided in Column 3 is greater than 1.00000. Annuities consist of multiple payments. Because an annuity is a repeating payment that is made at the end of each period, the future value of that repeating payment is always greater than the amount of each individual payment. So, the future value of $1 factors will always be greater than 1.00000 (at any interest rate). Column 1 is an excerpt from an interest table for the future value of an annuity of $1, column 2 is an excerpt from an interest table for the present value of $1, and column 4 is an excerpt from an interest table for the present value of an annuity of $1. 28) C FV = $22,000 x 1.76234 (Table FV of $1; n = 5; i = 12%) = $38,771 29) A FV = $25,000 × 2.21068 (Table FV of $1; n = 7; i = 12%) = $55,267 30) C FV = $9,000 × 1.80611 (Table FV of $1; n = 20; i = 3%) = $16,255 31) C FV = $8,000 × 1.48595 (Table FV of $1; n = 20; i = 2%) = $11,888 32) C PV = $3,300 x 0.81162 (Table PV of $1; n = 2; i = 11%) = $2,678 33) B PV = $2,500 × 0.77218 (Table PV of $1; n = 3; i = 9%) = $1,930 34) D PV = $5,250 x 0.85480 (Table PV of $1; n = 4; i = 4%) = $4,488 35) D PV = $5,000 × 0.62460 (Table PV of $1; n = 12; i = 4%) = $3,123 36) D

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The one-time equivalent would be $26,000 + the present value of $51,000; where n = 4 and i = 9%. That is, $26,000 + ($51,000 × 0.70843 from Table PV of $1) = $62,130 37) C The one-time equivalent would be $30,000 + the present value of $50,000 where n = 2 and i = 8%. That is, $30,000 + ($50,000 × 0.85734 from Table PV of $1) = $72,867 38) B FV = $140,000 × 1.42576 (Table FV of $1; n = 12; i = 3%) = $199,606 39) C FV = $100,000 × 1.42576 (Table FV of $1; n = 12; i = 3%) = $142,576 40) C FV = $500,000 × 1.36857 (Table FV of $1;n = 8; i = 4%) = $684,285 41) D PV = $57,000 × 0.67684 (Table PV of $1; n = 8; i = 5%) = $38,580 42) C PV = $50,000 × 0.74409 (Table PV of $1; n = 10; i = 3%) = $37,205 43) A PV = $120,000 × 0.82270 (Table PV of $1; n = 4; i = 5%) = $98,724 44) B PV = $100,000 × 0.78941 (Table PV of $1;n = 8;i = 3%) = $78,941 45) C PV = $600,000 × 0.67684 (Table PV of $1; n = 8; i = 5%) = $406,104 46) D PV = $500,000 × 0.66112 (Table PV of $1; n = 14; i = 3%) = $330,560 47) C PV = ($9,500 × 0.89286) + ($15,500 × 0.79719) + ($13,500 × 0.71178) + ($18,000 × 0.63552) = $41,887 Version 1

48) A PV = ($8,000 × 0.97087) + ($12,000 × 0.94260) + ($10,000 × 0.91514) + ($15,000 × 0.88849) = $41,557 49) B PV = ($5,000 × 0.94340) + ($6,000 × 0.89000) + ($7,000 × 0.83962) + ($5,000 × 0.79209) + ($4,000 × 0.74726) = $22,884 50) D PV = $60,000 × 0.82270 (Table PV of $1; n = 4; i = 5%) = $49,362 51) B PV = $50,000 × 0.83748 (Table PV of $1; n = 6; i = 3%) = $41,874 52) D PV = $22,000 × 0.53464 (Table PV of $1; n = 6, i = 11%) = $11,762 53) B PV = $10,000 × 0.64993 (Table PV of $1; n = 5, i = 9%) = $6,499 54) D PV = $50,000 × 0.55839 (Table PV of $1;n = 10,i = 6%) = $27,920 55) D 56) C 57) B 58) A FVA = $4,000 × 3.3100 (Table FVA of $1; n = 3; i = 10%) = $13,240 59) A FVA = $5,000 × 7.1533 (Table FVA of $1; n = 6; i = 7%) = $35,766 60) D FVA = $3,000 × 4.7097 (Table FVA of $1; n = 4; i = 11%) = $14,129 61) D FVA = $1,000 × 57.2750 (Table FVA of $1; n = 20; i = 10%) = $57,275 Version 1

62) C PVA = $7,000 × 1.78326 (Table PVA of $1; n = 2; i = 8%) = $12,483 63) B PVA = $5,000 × 5.65022 (Table PVA of $1; n = 10; i = 12%) = $28,251 64) A PVA = $4,000 × 4.56376 (Table PVA of $1; n = 7; i = 12%) = $18,255 65) A PVA = $3,000 × 2.82861 (Table PVA of $1; n = 3; i = 3%) = $8,486 66) D PVA = $5,000 × 7.32548 (Table PVA of $1;n = 8;i = 2%) = $36,627 67) D 68) C 69) A 70) D 71) D

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Except for the first factor, each of the factors provided in Column 4 is greater than 1.00000. Annuities consist of multiple payments. Because an annuity is a repeating payment that is made at the end of each period, the present value of that repeating payment is always greater than the amount of each individual payment. So, except for the first factor, the present value of $1 factors will always be greater than 1.00000 (at any interest rate). Since it relates to the first payment, which has not yet repeated, and because we are looking at present value (that is, the value today), the present value factor relating to the first payment that we will receive sometime in the future will always be less than 1.00000 (at any interest rate). Column 1 is an excerpt from an interest table for the future value of an annuity of $1, column 2 is an excerpt from an interest table for the present value of $1, and column 3 is an excerpt from an interest table for the future value of $1. 72) C Annuities consist of multiple payments. Because an annuity is a repeating payment that is made at the end of each period, the future value of that repeating payment is always greater than the amount of each individual payment. So, the future value of $1 factors will always be greater than 1.00000 (at any interest rate). Column 2 is an excerpt from an interest table for the present value of $1, column 3 is an excerpt from an interest table for the future value of $1, and column 4 is an excerpt from an interest table for the present value of an annuity of $1. 73) B

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The one-time equivalent would be $9,500 + The present value of a $28,000 annuity; where n = 4 and i = 11%. That is, $9,500 + ($28,000 × 3.10245 from Table PVA of $1) = $96,369. 74) B The one-time equivalent would be $8,000 + the present value of a $20,000 annuity wheren = 3, andi = 10%. That is, $8,000 + ($20,000 × 2.48685 from Table PVA of $1) = $57,737. 75) D FVA = $1,600 × 25.5447 (Table FVA of $1; n = 20; i = 2.5%) = $40,872 76) A FVA = $500 × 14.1920 (Table FVA of $1; n = 12; i = 3%) = $7,096 77) B FVA = $2,500 × 9.5491 (Table FVA of $1; n = 8; i = 5%) = $23,873 78) A $350,000/3.54595 (Table PVA of $1; n = 4; i = 5%) = $98,704 79) A $300,000/5.41719 (Table PVA of $1; n = 6; i = 3%) = $55,379 80) D FVA = $4,500 × 2.0700 (Table FVA of $1; n = 2; i = 7%) = $9,315 81) B FVA = $5,000 × 5.9847 (Table FVA of $1; n = 5; i = 9%) = $29,924 82) C PVA = $500,000 × 3.69590 (Table PVA of $1; n = 5; i = 11%) = $1,847,950 Version 1

83) The $100 received today can be invested to receive interest. Simple interest is computed only on the initial investment amount. Compound interest includes not only interest on the initial investment, but also interest on the accumulated interest to date. 84) Simple interest is computed only on the initial investment amount. Compound interest includes not only interest on the initial investment, but also interest on the accumulated interest to date. 85) The yield on a CD increases with more frequent compounding periods. Therefore, since both CDs have the same stated rate of 12%, Bank A, that compounds quarterly, offers a better yield than Bank B with semiannual compounding. 86) Present value tells us the value today of receiving some amount in the future. Future value is the value that an amount today will grow to in the future. The difference between the present value and the future value is the time value of money. 87) You need to know (1) the future amount, (2) the interest rate per period, and (3) the number of periods. 88) The present value of a single amount is the value today of receiving that amount in the future; whereas, the present value of an annuity is the sum of the present values of a series of equal cash payments.

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APPENDIX D: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are five terms with a list of phrases that describe or characterize the terms. Match each phrase with the best term. Term: A) Consolidated financial statements B) Available-for-sale securities C) Trading securities D) Held-to-maturity securities E) Equity method Phrase: 1) Used when an investor is presumed to have controlling influence through an equity investment. 2) Debt securities that a company expects to hold until they mature. 3) Debt investments held for reasons other than attempting to profit from trading in the near future. 4) Used when an investor is presumed to have significant influence through an equity investment. 5) Debt investments that the investor expects to sell (trade) in the near future.

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2) Listed below are five terms with a list of phrases that describe or characterize the terms. Match each phrase with the best term. Term: A) Equity method B) Consolidated financial statements C) Fair value method D) Trading securities E) Held-to-maturity securities Phrase: 1) Debt security that is recorded at amortized cost. 2) An investor owns 40% of the common voting shares in the company and can exercise significant influence. 3) Investor owns 2% of the outstanding shares of another company's common voting shares. 4) An investor owns over 50% of the common voting shares in the company. 5) Debt investments that the investor expects to sell (trade) in the near future.

3) On September 1, Investors, Incorporated purchases 1,500 shares (insignificant influence) of $1 par value common stock of Hamilton International at $15 per share. On October 15, the investment is sold for $18 per share. Required: Record the purchase and sale of the investment in Hamilton International.

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4) On September 1, Investors, Incorporated purchases 1,000 shares (insignificant influence) of $1 par value common stock of Hamilton International at $15 per share. On October 15, the investment is sold for $18 per share. Required: Record the purchase and sale of the investment in Hamilton International.

5) California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in the common stock of Oregon Outfitters. California Designs engages in the following transactions relating to its investment: January 1 Purchases 1,100 shares of Oregon Outfitters common stock for $23 per share. July 12 Sells 400 shares of Oregon Outfitters stock for $21 per share. September 30 Receives a cash dividend of $1 per share. December 31 Adjusts the investment to fair value. The fair value of Oregon Outfitters stock is now $18 per share.

Required: 1. Record each of these transactions, including the December 31 adjusting entry to fair value. 2. Calculate the balance of the Investments account on December 31.

6) California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in the common stock of Oregon Outfitters. California Designs engages in the following transactions relating to its investment: January 1 Purchases 1,000 shares of Oregon Outfitters common stock for $20 per share. July 12 Sells 300 shares of Oregon Outfitters stock for $18 per

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share. September 30 Receives a cash dividend of $1 per share. December 31 Adjusts the investment to fair value. The fair value of Oregon Outfitters stock is now $15 per share.

Required: 1. Record each of these transactions, including the December 31 adjusting entry to fair value. 2. Calculate the balance of the Investments account on December 31.

7) Athletic Accessories has the following transactions related to investments in common stock. May 1 June 30 October 18 December 31

Purchases 5,000 shares (insignificant influence) of Endurance Wear common stock for $23 per share. Receives a cash dividend of $1 per share. Sells 2,300 shares of Endurance Wear common stock at $26 per share. Adjusts the investments to fair value. The fair value of Endurance Wear common stock is now $32 per share.

Required: 1. Record each of these transactions, including an entry on December 31 to adjust the investment to fair value. 2. Calculate the balance of the Investment account on December 31.

8) Athletic Accessories has the following transactions related to investments in common stock. May 1 Purchases 5,000 shares (insignificant influence) of Endurance Wear common stock for $22 per share.

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June 30 Receives a cash dividend of $1 per share. October 18 Sells 2,000 shares of Endurance Wear common stock at $25 per share. December Adjusts the investments to fair value. The fair value of 31 Endurance Wear common stock is now $30 per share.

Required: 1. Record each of these transactions, including an entry on December 31 to adjust the investment to fair value. 2. Calculate the balance of the Investment account on December 31.

9) Sandy Sensations purchases $20,000 of 8%, 13-year bonds issued by Pizza Pier at face amount (par) on January 1, 2024. Interest is received semiannually on June 30 and December 31. Required: 1. Record the investment in bonds. 2. Record the receipt of the first interest payment on June 30, 2024.

10) Sandy Sensations purchases $20,000 of 7%, 10-year bonds issued by Pizza Pier at face amount (par) on January 1, 2024. Interest is received semiannually on June 30 and December 31. Required: 1. Record the investment in bonds. 2. Record the receipt of the first interest payment on June 30, 2024.

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11) Sanders Company purchases $20,000 of 9%, 10-year bonds issued by Poole Company for $18,754 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 10%. Interest is received semiannually on June 30 and December 31. Required: 1. Record the investment in bonds. 2. Record the receipt of the first interest payment on June 30, 2024. 3. What is the amortized cost of the investment after the first interest payment? (Round all amounts to nearest dollar.)

12) Sanders Company purchases $20,000 of 7%, 10-year bonds issued by Poole Company for $18,641 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 8%. Interest is received semiannually on June 30 and December 31. Required: 1. Record the investment in bonds. 2. Record the receipt of the first interest payment on June 30, 2024. 3. What is the amortized cost of the investment after the first interest payment? (Round all amounts to nearest dollar.)

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13) Sanders Company purchases $20,000 of 7%, 17-year bonds issued by Poole Company for $22,113 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received semiannually on June 30 and December 31. Required: 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2024. 3. What is the amortized cost of the investment after the first interest payment? (Round all amounts to nearest dollar.)

14) Sanders Company purchases $20,000 of 7%, 10-year bonds issued by Poole Company for $21,488 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received semiannually on June 30 and December 31. Required: 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2024. 3. What is the amortized cost of the investment after the first interest payment? (Round all amounts to nearest dollar.)

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Answer Key Test name: Appx D_6e_Problems_Spiceland 1) 1) A 2) D 3) B 4) E 5) C 2) 1) E 2) A 3) C 4) B 5) D 3) Date September 1 September 1

Account Title Investments

Debit 22,500

Cash

Credit

22,500

(Purchase common stock) ($22,500 = $15 × 1,500 shares) October 15

Cash ($18 × 1,500 shares)

27,000

October 15

Gain (difference)

4,500

October 15

Investments ($15 × 1,500 shares)

22,500

(Sale of investments above recorded amount)

4) Date September 1 September 1

Account Title Investments

Debit 15,000

Cash

Credit

15,000

(Purchase common stock) ($15,000 = $15 × 1,000 shares) October 15 October 15

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Cash ($18 × 1,000 shares) Gain (difference)

18,000 3,000

October 15

Investments ($15 × 1,000 shares)

15,000

(Sale of investments above recorded amount)

5)1. Date January 01 January 01

Account Title Investments

Debit 25,300

Cash

Credit

25,300

(Purchase common stock) ($25,300 = $23 × 1,100 shares) July 12 July 12 July 12

Cash ($21 × 400 shares) Loss (difference)

800

Investments ($23 × 400 shares)

(Sell investments below recorded amount) September 30 Cash ($1 × 700 shares) September 30

8,400

9,200

700

Dividend Revenue

700

(Receive cash dividends) December 31 December 31

Unrealized Holding Loss—Net Income Investments ($5 × 700 shares)

3,500 3,500

(Decrease investments to fair value)

2. The balance in the Investments account on December 31 is $12,600, equal to the 700 remaining shares times $18 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account. Investments

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Debit

Credit 25,300 9,200 3,500 12,600

6)1. Date January 01 January 01

Account Title Investments

Debit 20,000

Cash

Credit

20,000

(Purchase common stock) ($20,000 = $20 × 1,000 shares) July 12 July 12 July 12

Cash ($18 × 300 shares) Loss (difference)

600

Investments ($20 × 300 shares)

(Sell investments below recorded amount) September 30 Cash ($1 × 700 shares) September 30

5,400

6,000

700

Dividend Revenue

700

(Receive cash dividends) December 31 December 31

Unrealized Holding Loss—Net Income Investments ($5 × 700 shares)

3,500 3,500

(Decrease investments to fair value)

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2. The balance in the Investments account on December 31 is $10,500, equal to the 700 remaining shares times $15 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account. Debit

Investments Credit 20,000 6,000 3,500 10,500

7)1. Date May 1 May 1

Account Title Investments

Debit 115,000

Cash

Credit

115,000

(Purchase common stock) June 30 June 30

Cash

5,000

Dividend Revenue

5,000

(Receive cash dividends) October 18 October 18 October 18

December 31

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Cash ($26 × 2,300 shares)

59,800

Investments ($23 × 2,300 shares) Gain (difference) (Sell investments above recorded amount) Investments

52,900 6,900

24,300

December 31

Unrealized Holding Gain—Net Income (Increase investments to fair value)

24,300

May 1 Purchase common stock = ($23 × 5,000 shares) = $115,000 June 30 Dividend revenue = ($1 × 5,000 shares) = $5,000 December 31 Unrealized Holding Gain—Net Income = ($9 × 2,700 shares) = $24,300 2. The balance in the Investments account on December 31 is $86,400, equal to the 2,700 remaining shares times $32 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account. Debit

Investments Credit 115,000 52,900 24,300 86,400

8)1. Date May 1 May 1

Account Title Investments Cash

Debit 110,000

Credit

110,000

(Purchase common stock)

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June 30 June 30

Cash

5,000

Dividend Revenue

5,000

(Receive cash dividends) October 18

Cash ($25 × 2,000 shares)

50,000

October 18

Investments ($22 × 2,000 shares)

44,000

October 18

Gain (difference)

6,000

(Sell investments above recorded amount) December 31 Investments December 31

24,000

Unrealized Holding Gain—Net Income (Increase investments to fair value)

24,000

May 1 Purchase common stock = ($22 × 5,000 shares) = $110,000 June 30 Dividend revenue = ($1 × 5,000 shares) = $5,000 December 31 Unrealized Holding Gain—Net Income = ($8 × 3,000 shares) = $24,000 2. The balance in the Investments account on December 31 is $90,000, equal to the 3,000 remaining shares times $30 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account. Debit

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Investments Credit

110,000 44,000 24,000 90,000

9)1. & 2. Date Account Title January 1, Investments 2024 January 1, 2024 Cash

Debit 20,000

Credit

20,000

(Purchase bonds) June 30, 2024 Cash June 30, 2024

800

Interest Revenue

800

(Receive semiannual interest revenue)

June 30, 2024 Interest revenue = ($20,000 × 8% × 1/2) = $800 10)1. & 2. Date Account Title January 1, Investments 2024 January 1, 2024 Cash

Debit 20,000

Credit

20,000

(Purchase bonds) June 30, 2024 Cash June 30, 2024

Interest Revenue

700 700

(Receive semiannual interest revenue)

June 30, 2024 Interest revenue = ($20,000 × 7% × 1/2) = $700 Version 1

11)1. & 2. Date Account Title January 1, 2024 Investments January 1, 2024

Debit 18,754

Cash

Credit

18,754

(Purchase bonds) June 30, 2024 June 30, 2024 June 30, 2024

Cash ($20,000 × 9% × 1/2)

900

Investments (difference)

Interest Revenue ($18,754 × 10% × 1/2) (Receive semiannual interest revenue)

938

3. Amortized cost = $18,754 + $38 = $18,792 12)1. & 2. Date Account Title January 1, 2024 Investments January 1, 2024

Debit 18,641

Cash

Credit

18,641

(Purchase bonds) June 30, 2024 June 30, 2024 June 30, 2024

Cash ($20,000 × 7% × 1/2)

700

Investments (difference)

Interest Revenue ($18,641 × 8% × 1/2) (Receive semiannual interest revenue)

746

3. Amortized cost = $18,641 + $46 = $18,687 13)1. & 2. Date January 1, 2024

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Account Title Investments

Debit 22,113

Credit

January 1, 2024

Cash

22,113

(Purchase bonds) June 30, 2024

Cash ($20,000 × 7% × 1/2)

700

June 30, 2024

Investments (difference)

June 30, 2024

Interest Revenue ($22,113 × 6% × 1/2) (Receive semiannual interest revenue)

663

3. Amortized cost = $22,113 − $37 = $22,076 14)1. & 2. Date Account Title January 1, Investments 2024 January 1, 2024 Cash

Debit 21,488

Credit

21,488

(Purchase bonds) June 30, 2024 Cash ($20,000 × 7% × 1/2)

700

June 30, 2024

Investments (difference)

June 30, 2024

Interest Revenue ($21,488 × 6% × 1/2) (Receive semiannual interest revenue)

645

3. Amortized cost = $21,488 − $55 = $21,433

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APPENDIX D TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends. ⊚ ⊚

true false

2) “Seasonal” refers to the revenue activities of a company varying based on the time (or season) of the year. ⊚ ⊚

true false

3) When insignificant influence exists, an investment in equity securities should be accounted for by the equity method. ⊚ ⊚

true false

4) When significant influence exists, an investment in equity securities should be accounted for by the equity method. ⊚ ⊚

true false

5) When the investor has insignificant influence, the receipt of cash dividends from an equity investment is recorded as dividend revenue. ⊚ ⊚

true false

6) Investments in equity securities are reported at fair value when a company has an insignificant influence over another company in which it invests.

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⊚ ⊚

true false

7) Unrealized holding gains and losses from changes in the fair value of investments in equity securities are reported as a separate component of stockholders’ equity when an investor has insignificant influence. ⊚ ⊚

true false

8) Unrealized holding gains and losses from changes in the fair value of investments in equity securities are reported as part of current net income when an investor has insignificant influence. ⊚ ⊚

true false

9) Gains and losses on the sale of equity investments are reported as nonoperating revenues and expenses in the income statement. ⊚ ⊚

true false

10) Equity investments are reported at fair value when a company has a significant influence over another company in which it invests. ⊚ ⊚

true false

11) Under the equity method, the investor includes in net income its portion of the investee's net income. ⊚ ⊚

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true false

12) When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue. ⊚ ⊚

true false

13) Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements. ⊚ ⊚

true false

14) Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term liabilities that incur interest expense. ⊚ ⊚

true false

15) When debt investments are purchased at face amount, the cash interest received is calculated as the face amount of the bonds times the stated interest rate. ⊚ ⊚

true false

16) When debt investments are purchased at a discount or premium, the cash interest received is calculated as the face amount of the bonds times the market interest rate. ⊚ ⊚

true false

17) When debt investments are purchased at face amount, the interest revenue is calculated as the face amount of the bonds times the stated interest rate. ⊚ ⊚

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true false

18) When debt investments are purchased at a discount or premium, interest revenue is calculated as the amortized cost of the investment in bonds times the stated interest rate. ⊚ ⊚

true false

19) When debt investments are purchased at face amount, interest revenue will stay the same each semi-annual interest period. ⊚ ⊚

true false

20) When debt investments are purchased at a premium, interest revenue will increase each semi-annual interest period. ⊚ ⊚

true false

21) When debt investments are purchased at a discount, interest revenue will increase each semiannual interest period. ⊚ ⊚

true false

22) When debt investments are classified as held-to-maturity securities, any unrealized gains or losses are reported in the income statement as part of net income. ⊚ ⊚

true false

23) When debt investments are classified as trading securities, any unrealized gains or losses are reported as other comprehensive income. ⊚ ⊚

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true false

24) When debt investments are classified as available-for-sale securities, any unrealized gains or losses are reported as other comprehensive income. ⊚ ⊚

true false

25) The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investments by stockholders and payment of dividends. ⊚ ⊚

true false

26) The statement of comprehensive income is a statement that includes net income plus investments by stockholders less payment of dividends. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 27) One of the primary reasons for investing in equity securities includes: A) Acquiring debt of competing companies. B) Appreciation in the value of the stock. C) Earning interest revenue. D) Deducting dividend payments for tax purposes.

28)

One of the primary reasons for investing in debt securities includes: A) Receiving dividend payments. B) Acquiring significant influence. C) Earning interest revenue. D) Deducting interest payments for tax purposes.

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29) Which of the following is true with regard to how to account for company A's investment in company B's common stock? A) The fair value method is used when A owns more than 50% of B. B) The equity method is used when A owns from 20% to 50% of B. C) Consolidated financial statements are prepared when A owns less than 20% of B. D) All of the other answer choices are correct.

30) Which of the following is true with regard to how to account for company A's investment in company B's common stock? A) The fair value method is used when A’s ownership is presumed to have insignificant influence. B) The fair value method is used when A’s ownership is presumed to be temporary. C) The fair value method is used when A’s ownership is presumed to have significant influence. D) The fair value method is used when A’s ownership is presumed to be long-term.

31) Libby Company purchased 10% of the equity securities in another company for $160,000. At the end of the year, the fair value of the securities was $165,000. How should the investment be reported in the year-end financial statements? A) The investment in equity securities would be reported in the balance sheet at its $160,000 cost. B) The investment in equity securities would be reported in the balance sheet at its $165,000 fair value; an unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity. C) An unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity. D) The investment in equity securities would be reported in the balance sheet at its $165,000 fair value.

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32) Libby Company purchased 10% of the equity securities in another company for $100,000. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements? A) The investment in equity securities would be reported in the balance sheet at its $100,000 cost. B) The investment in equity securities would be reported in the balance sheet at its $105,000 fair value. C) An unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity. D) The investment in equity securities would be reported in the balance sheet at its $105,000 fair value; an unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity.

33) Bazar Company purchased 5% of the equity securities of another company for $120,000. At the end of the year, the fair value of the securities was $125,000. How should the investment be reported in Bazar’s year-end financial statements? A) The investment in equity securities would be reported in the balance sheet at its $125,000 fair value; an unrealized holding gain of $5,000 would be reported in net income. B) The investment in equity securities would be reported in the balance sheet at its $120,000 purchase cost; an unrealized holding gain of $5,000 would be reported in net income. C) An unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity. D) The investment in equity securities would be reported in the balance sheet at its $120,000 cost.

34) Bazar Company purchased 5% of the equity securities of another company for $100,000. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in Bazar’s year-end financial statements?

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A) The investment in equity securities would be reported in the balance sheet at its $100,000 cost. B) The investment in equity securities would be reported in the balance sheet at its $100,000 purchase cost; an unrealized holding gain of $5,000 would be reported in net income. C) An unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity. D) The investment in equity securities would be reported in the balance sheet at its $105,000 fair value; an unrealized holding gain of $5,000 would be reported in net income.

35) Sports Spectacular purchased 1,500 shares (8%) of stock in The Athletic Warehouse for $50 per share. By the end of the year, the stock price has increased to $52 per share. How would the change in stock price affect Sports Spectacular's net income? A) Increase net income by $78,000. B) Increase net income by $75,000. C) Increase net income by $3,000. D) No effect.

36) Sports Spectacular purchased 1,000 shares (8%) of stock in The Athletic Warehouse for $30 per share. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income? A) Increase net income by $32,000. B) Increase net income by $30,000. C) Increase net income by $2,000. D) No effect.

37) Healthy Life Company purchased 1,600 shares (4%) of stock in Silver’s Gym for $40 per share. By the end of the year, the stock price has decreased to $38 per share. How would the change in stock price affect Healthy Life's net income?

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A) Decrease net income by $60,800 B) Decrease net income by $64,000 C) Decrease net income by $3,200 D) No effect

38) Healthy Life Company purchased 1,000 shares (4%) of stock in Silver's Gym for $30 per share. By the end of the year, the stock price has decreased to $28 per share. How would the change in stock price affect Healthy Life's net income? A) Decrease net income by $28,000 B) Decrease net income by $30,000 C) Decrease net income by $2,000 D) No effect.

39) Sports Spectacular purchased 1,000 shares (8%) of stock in The Athletic Warehouse for $30 per share. By the end of the year, the Athletic Warehouse has paid dividends of $2 per share. How would Sports Spectacular account for the dividend? A) Decrease in the investment account B) Unrealized holding gain C) Dividend revenue D) Sports Spectacular would not recognize the dividend

40) At the beginning of the year, Douglas Company purchased 8,800 of the 220,000 shares of common stock of Herrmann Corporation at $60 per share as a long-term investment. The records of Herrmann Corporation showed the following by the end of the year: Net Income Dividends Paid Market Price per Share

$580,000 $250,000 $ 58

What amount should Douglas Company report in its year-end balance sheet for its investment in Herrmann?

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A) $561,200 B) $510,400 C) $528,000 D) $551,200

41) At the beginning of the year, Douglas Company purchased 10,000 of the 200,000 shares of common stock of Herrmann Corporation at $40 per share as a long-term investment. The records of Herrmann Corporation showed the following by the end of the year: Net Income Dividends Paid Market Price per Share

$500,000 $200,000 $ 38

What amount should Douglas Company report in its year-end balance sheet for its investment in Herrmann? A) $380,000 B) $400,000 C) $415,000 D) $425,000

42) On January 1, 2024, Nana Company paid $100,000 for 8,000 shares (10%) of the common stock of Papa Company. Papa reported net income of $52,000 for the year ended December 31, 2024. The fair value of the Papa common stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2024? A) $284,400 B) $300,000 C) $315,600 D) $360,000

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43) On January 2, 2024, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000. During 2024, Ranger had net income of $100,000 and declared and paid a dividend of $60,000. On December 31, 2024, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2024 income statement as income from this investment? A) $26,000 B) $7,200 C) $20,000 D) $27,200

44) If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company: A) Would record dividends received from Son Company as investment revenue. B) Would increase Investments account when Son Company declares dividends. C) Would record 40% of the net income of Son Company as equity income each year. D) All of these answer choices are correct.

45) When the equity method of accounting for investments is used by the investor, the Investments account increases when: A) A cash dividend is received from the investee. B) The investee reports a net income for the year. C) The investor records additional depreciation related to the investment. D) The investee reports a net loss for the year.

46) Which of the following increases the Investments account under the equity method of accounting?

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A) Decreases in the market price of the investee's stock. B) Dividends paid by the investee that were declared in the previous year. C) Net loss of the investee company. D) None of these answer choices are correct.

47) When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded as: A) a reduction in the Investments account. B) an increase in the Investments account. C) dividend income. D) a contra item to stockholders' equity.

48) The equity method of accounting for investments in voting common stock is appropriate when the investor: A) can significantly influence the investee. B) has voting control over the investee. C) intends to hold the common stock indefinitely. D) is assured of a continued supply of a valuable raw material.

49) Sports International purchased 1,100 shares of stock in The Gaming Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports International's net income under the equity method? A) Increase net income by $35,200 B) Increase net income by $33,000 C) Increase net income by $2,200 D) No effect

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50) Sports International purchased 100,000 shares of stock in The Gaming Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports International’s net income under the equity method? A) Increase net income by $32,000 B) Increase net income by $30,000 C) Increase net income by $2,000 D) No effect.

51) At the beginning of the year, Goldman Company purchased 12,000 of the 40,000 shares of common stock of Buchanan Corporation at $50 per share as a long-term investment. Goldman can exercise significant influence over Buchanan and properly records the investment using the equity method. The records of Buchanan Corporation showed the following by the end of the year: Net income Dividends paid Market price per share

$550,000 $240,000 $ 48

What amount should Goldman Company report in its year-end balance sheet for its investment in Buchanan? A) $693,000 B) $765,000 C) $600,000 D) $837,000

52) At the beginning of the year, Goldman Company purchased 10,000 of the 40,000 shares of common stock of Buchanan Corporation at $40 per share as a long-term investment. Goldman can exercise significant influence over Buchanan and properly records the investment using the equity method. The records of Buchanan Corporation showed the following by the end of the year: Net income Dividends paid

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$500,000 $200,000

Market price per share

$ 38

What amount should Goldman Company report in its year-end balance sheet for its investment in Buchanan? A) $380,000 B) $400,000 C) $475,000 D) $425,000

53) On January 1, 2024, Bremen Corporation acquired 40% of the shares of Destiny Company. Bremen paid $3,000,000 for the investment. For 2024, Destiny recognized net income of $500,000 and paid $300,000 of dividends. At December 31, 2024, Bremen’s investment in Destiny Company would be reported for: A) $3,200,000. B) $3,120,000. C) $3,000,000. D) $3,080,000.

54) On January 1, 2024, Clement Corporation purchased 30% of Meyer Corporation's common stock for $200,000. During 2024, Meyer had net income of $400,000 and declared and paid a dividend of $100,000. On December 31, 2024, the fair value of the Meyer stock owned by Clement had decreased to $180,000. How much should Clement report in its 2024 income statement as income from this investment? A) $10,000 B) $30,000 C) $120,000 D) $(20,000)

55)

Consolidated financial statements are prepared when one company has:

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A) Accounted for the investment using the equity method. B) Accounted for the investment as available-for-sale securities. C) Control over another company. D) None of the other answer choices are correct.

56) Which of the following investment securities held by Armstrong Incorporated may be classified as held-to-maturity securities in its balance sheet? A) Debt securities B) Equity securities C) Common stock D) All of the other answer choices are correct.

57) A company purchased bonds on January 1, 2024, for $207,913. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 10%, pay semiannual interest, and mature in 5 years. For what amount would these bonds be recorded when purchased? A) $7,913 B) $207,913 C) $200,000 D) $220,000

58) A company purchased $100,000 of 5%, 2-year bonds on July 1, 2024. The bonds were purchased at face amount. What is the amount of interest revenue as of December 31, 2024? A) $2,500 B) $5,000 C) $10,000 D) None of these answer choices are correct.

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59) A company purchased bonds on July 1, 2024, for $281,859. This price represents a market rate of 7% on bonds that have a face amount of $300,000, have a stated rate of 6%, pay semiannual interest, and mature in 8 years. What is the amount of interest revenue as of December 31, 2024? A) $19,730 B) $9,000 C) $9,865 D) $18,000

60) A company purchased bonds on July 1, 2024, for $107,106. This price represents a market rate of 7% on bonds that have a face amount of $100,000, have a stated rate of 8%, pay semiannual interest, and mature in 10 years. What is the amount of interest revenue as of December 31, 2024? A) $7,497 B) $4,000 C) $3,749 D) $8,000

61) A company purchased bonds on July 1, 2024, for $274,885. This price represents a market rate of 6% on bonds that have a face amount of $250,000, have a stated rate of 8%, pay semiannual interest, and mature in 6 years. What is the amortized cost of the bonds as of December 31, 2024? A) $273,132 B) $264,885 C) $276,638 D) $266,638

62) A company purchased $200,000 of 9%, 4-year bonds on January 1, 2024, for $200,000. As of December 31, 2024, the fair value of the bonds has increased to $205,000. Assuming the investment is classified as held-to-maturity securities, what amount would the company report for its investment in bonds on December 31, 2024? Version 1

A) $200,000 B) $218,000 C) $205,000 D) None of these answer choices are correct.

63) A company purchased $200,000 of 9%, 4-year bonds on January 1, 2024, for $200,000. As of December 31, 2024, the fair value of the bonds has decreased to $180,000. Assuming the investment is classified as held-to-maturity securities, what amount would the company report for its investment in bonds on December 31, 2024? A) $200,000 B) $218,000 C) $180,000 D) None of these answer choices are correct.

64) A company purchased $200,000 of 9%, 4-year bonds on January 1, 2024, for $200,000. As of December 31, 2024, the fair value of the bonds has decreased to $180,000. Assuming the investment is classified as trading securities, what amount would the company report for its investment in bonds on December 31, 2024? A) $200,000 B) $218,000 C) $180,000 D) None of these answer choices are correct.

65) A company purchased $200,000 of 9%, 4-year bonds on January 1, 2024, for $200,000. As of December 31, 2024, the fair value of the bonds has decreased to $180,000. Assuming the investment is classified as available-for-sale securities, what amount would the company report for its investment in bonds on December 31, 2024?

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A) $200,000 B) $218,000 C) $180,000 D) None of these answer choices are correct.

66) A company purchased bonds on July 1, 2024, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2024, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as held-to-maturity securities, what amount would the company report for its investment in bonds on December 31, 2024? A) $193,404 B) $195,703 C) $194,107 D) $195,000

67) A company purchased bonds on July 1, 2024, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2024, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as trading securities, what amount would the company report for its investment in bonds on December 31, 2024? A) $193,404 B) $195,703 C) $194,107 D) $195,000

68) A company purchased bonds on July 1, 2024, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2024, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as available-for-sale securities, what amount would the company report for its investment in bonds on December 31, 2024?

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A) $193,404 B) $195,703 C) $194,107 D) $195,000

69) A company purchased bonds on July 1, 2024, for $94,352. This price represents a market rate of 6% on bonds that have a face amount of $100,000, have a stated rate of 5%, pay semiannual interest, and mature in 7 years. As of December 31, 2024, the fair value of the bonds has increased to $95,000. Assuming the investment is classified as trading securities, what is the unrealized holding gain or loss recognized in the income statement in 2024? A) $648 gain B) $317 gain C) $5,000 loss D) No gain or loss is recognized in the income statement.

70) A company purchased bonds on July 1, 2024, for $94,352. This price represents a market rate of 6% on bonds that have a face amount of $100,000, have a stated rate of 5%, pay semiannual interest, and mature in 7 years. As of December 31, 2024, the fair value of the bonds has increased to $95,000. Assuming the investment is classified as available-for-sale securities, what is the unrealized holding gain or loss recognized in the income statement in 2024? A) $648 gain B) $317 gain C) $5,000 loss D) No gain or loss is recognized in the income statement.

71) A company purchased 6%, 7-year bonds on January 1, 2024, at face amount for $100,000. As of December 31, 2024, the fair value of the bonds has decreased to $95,000. In early 2025, the company sells the investment for $104,000. Assuming the investment is classified as trading securities, what is the gain or loss on the sale to be reported in the income statement in 2025?

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A) $4,000 gain B) $5,000 loss C) $9,000 gain D) No gain or loss is recognized in the income statement.

72) A company purchased 6%, 7-year bonds on January 1, 2024, at face amount for $100,000. As of December 31, 2024, the fair value of the bonds has increased to $102,000. In early 2025, the company sells the investment for $101,000. Assuming the investment is classified as available-for-sale securities, what is the gain or loss on the sale to be reported in the income statement in 2025? A) $2,000 gain B) $1,000 loss C) $1,000 gain D) $2,000 loss

73) A company purchased bonds on July 1, 2024, for $419,908. This price represents a market rate of 6% on bonds that have a face amount of $400,000, have a stated rate of 7%, pay semiannual interest, and mature in 6 years. As of December 31, 2024, the fair value of the bonds is $418,000. In early 2025, the company sells the investment for $417,500. Assuming the investment is classified as trading securities, what is the gain or loss on the sale to be reported in the income statement in 2025? (Ignore any amortization in 2025.) A) $500 gain B) $1,005 gain C) $1,005 loss D) $500 loss

74) A company purchased bonds on July 1, 2024, for $419,908. This price represents a market rate of 6% on bonds that have a face amount of $400,000, have a stated rate of 7%, pay semiannual interest, and mature in 6 years. As of December 31, 2024, the fair value of the bonds is $418,000. In early 2025, the company sells the investment for $417,500. Assuming the investment is classified as available-for-sale securities, what is the gain or loss on the sale to be reported in the income statement in 2025? (Ignore any amortization in 2025.) Version 1

A) $500 gain B) $1,005 gain C) $1,005 loss D) $500 loss

75) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

Amortization of Amortized Cost Discount $194,758 $790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

AIC purchased the bonds: A) At par. B) At a discount. C) At a premium. D) Cannot be determined from the given information.

76) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

$3,500 3,500 3,500 3,500

3,895 3,911 3,927 3,944

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025

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Amortization of Amortized Cost Discount $97,379 $395 411 427 444

97,774 98,185 98,612 99,056

6/30/2026 12/31/2026

3,500 3,500

3,962 3,982

462 482

99,518 100,000

AIC purchased the bonds for: A) $100,000. B) $97,379. C) $121,000. D) Cannot be determined from the given information.

77) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

Amortization of Amortized Cost Discount $194,758 $790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

AIC purchased the bonds for: A) $200,000. B) $194,758. C) $242,000. D) Cannot be determined from the given information.

78) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date 1/1/2024

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Cash Received

Interest Revenue

Amortization of Amortized Cost Discount $194,758

6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

$790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

What effect will recording the bond purchase have on the financial statements? A) Increase assets B) Increase liabilities C) Increase assets and liabilities D) No effect on total assets and total liabilities

79) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

Amortization of Amortized Cost Discount $194,758 $790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

The investment in bonds has a maturity in: A) Two years. B) Three years. C) Six years. D) Cannot be determined from the given information.

80) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity:

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Date

Cash Received

Interest Revenue

$8,400 8,400 8,400 8,400 8,400 8,400

9,206 9,243 9,280 9,320 9,361 9,406

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

Amortization of Amortized Cost Discount $204,584 $806 843 880 920 961 1,006

205,390 206,233 207,113 208,033 208,994 210,000

What is the annual market interest rate on the bonds? A) 9.0% B) 4.0% C) 8.0% D) 4.5%

81) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

Amortization of Amortized Cost Discount $194,758 $790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

What is the annual market interest rate on the bonds? A) 4% B) 3.5% C) 7% D) 8%

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82) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

Amortization of Discount

1/1/2024

Amortized Cost $126,701

6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

$5,850 5,850 5,850 5,850 5,850 5,850

$6,335 6,359 6,385 6,412 6,440 6,468

$485 509 535 562 590 618

127,186 127,695 128,230 128,792 129,382 130,000

AIC sells the bonds for $127,000 immediately after the interest payment on 12/31/24. What gain or loss, if any, would AIC record on this date? A) No gain or loss B) $3,000 gain C) $695 loss D) $3,000 loss

83) Absolute Investment Company (AIC) purchased bonds on January 1, 2024. AIC's accountant has projected the following amortization schedule from purchase until maturity: Date

Cash Received

Interest Revenue

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

1/1/2024 6/30/2024 12/31/2024 6/30/2025 12/31/2025 6/30/2026 12/31/2026

Amortization of Amortized Cost Discount $194,758 $790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

AIC sells the bonds for $196,000 immediately after the interest payment on 12/31/24. What gain or loss, if any, would AIC record on this date?

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A) No gain or loss B) $370 loss C) $4,000 loss D) $4,000 gain

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 84) How can an investor benefit from an equity investment that does not pay dividends?

85) Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method. How do we report unrealized holding gains and losses for these securities?

86) Under what circumstances do we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method.

87) Discuss the meaning of consolidated financial statements. When is it appropriate to consolidate financial statements of two companies?

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88) Investments indebt securities are classified for reporting purposes in one of three categories. List these three categories and explain which investments are included in each category. Also, briefly describe how the reporting differs for each category.

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Answer Key Test name: Appx D_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE When insignificant influence exists, the investment should be accounted for by the fair value method. 4) TRUE 5) TRUE 6) TRUE 7) FALSE Unrealized holding gains and losses from changes in the fair value of investments in equity securities are reported as part of current net income when an investor has insignificant influence. 8) TRUE 9) TRUE 10) FALSE When a company has significant influence over another company, the investment is recorded using the equity method and not adjusted to fair value. 11) TRUE 12) FALSE When the investor has significant influence, the receipt of cash dividends is recorded as a reduction in the Investments account. 13) TRUE 14) TRUE Version 1

15) TRUE 16) FALSE When debt investments are purchased at a discount or premium, the cash interest received is calculated as the face amount of the bonds times the stated interest rate. 17) TRUE 18) FALSE When debt investments are purchased at a discount or premium, interest revenue is calculated as the amortized cost of the investment in bonds times the market interest rate. 19) TRUE 20) FALSE If debt investments have originally been issued for a premium, the amortization of the premium results in a decreasing amortized cost of the investment over time. Because interest revenue equals the current amortized cost times the market rate, the interest revenue on bonds purchased at a premium will decrease each semi-annual interest period. 21) TRUE 22) FALSE Held-to-maturity securities are debt securities that a company expects to hold until they mature. These securities are carried at historical cost (or at amortized cost if the bonds were issued at a discount or premium) and, as such, unrealized gains or losses are not recognized. 23) FALSE We report trading securities as current assets at their fair value, and any unrealized gains or losses are recognized in the income statement as part of net income. 24) TRUE Version 1

25) TRUE 26) FALSE The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investments by stockholders and payment of dividends. 27) B 28) C 29) B 30) A 31) D 32) B 33) A 34) D 35) C 36) C 37) C 38) C 39) C 40) B $58 × 8,800 shares = $510,400 41) A $38 × 10,000 shares = $380,000 42) D $45 × 8,000 shares = $360,000 43) D ($60,000 × 12% ownership) + ($70,000 − $50,000) = $27,200 44) C 45) B 46) D Version 1

47) A 48) A 49) D Under the equity method, the investment is initially recorded at cost. After that, the investment balance is not adjusted for changes in fair value while held. 50) D Under the equity method, the investment is initially recorded at cost. After that, the investment balance is not adjusted for changes in fair value while held. 51) A $600,000 + ($550,000 × 30% ownership) − ($240,000 × 30% ownership) = $693,000 52) C $400,000 + ($500,000 × 25% ownership) − ($200,000 × 25% ownership) = $475,000 53) D $3,000,000 + (40% ownership × $500,000) − (40% ownership × $300,000) = $3,080,000 54) C $400,000 × 30% ownership = $120,000 55) C 56) A 57) B 58) A $100,000 × 5% × ½ year = $2,500 59) C $281,859 × 7% × 1/2 = $9,865 Version 1

60) C $107,106 × 7% × 1/2 = $3,749 61) A Interest payment = $250,000 × 8% × 1/2 = $10,000 Interest revenue = $274,885 × 6% × 1/2 = $8,247 Amortization of premium = $10,000 − $8,247 = $1,753 Amortized cost = $274,885 − $1,753 = $273,132 62) A Held-to-maturity securities are debt securities that a company expects to hold until they mature, which means until the issuer is required to repay the full amount of the bonds to the investors. Companies are not required to adjust held-to-maturity securities to fair value because there is not an expectation of selling these securities in the bond market before they mature. Instead, these securities are carried at historical cost (or at amortized cost if the bonds were issued at a discount or premium). 63) A Companies are not required to adjust held-to-maturity securities to fair value because there is not an expectation of selling these securities in the bond market before they mature. Instead, these securities are carried at historical cost (or at amortized cost if the bonds were issued at a discount or premium). 64) C Trading securities are reported as current assets at their fair value. 65) C Available-for-sale securities are reported at their fair value. 66) C

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Interest payment = $200,000 × 8% × 1/2 = $8,000 Interest revenue = $193,404 × 9% × 1/2 = $8,703 Amortization of discount = $8,703 − $8,000 = $703 Amortized cost = $193,404 + $703 = $194,107 67) D 68) D 69) B Interest payment = $100,000 × 5% × 1/2 = $2,500 Interest revenue = $94,352 × 6% × 1/2 = $2,831 Amortization of discount = $2,831 − $2,500 = $331 Amortized cost = $94,352 + $331 = $94,683 Unrealized holding gain = $95,000 − $94,683 = $317 70) D Unrealized gains and losses on available-for-sale securities are reported as other comprehensive income. 71) C Cash received on sale of $104,000 – Carrying value of $95,000 = $9,000 gain 72) C Cash received on sale of $101,000 – Initial investment of $100,000 = $1,000 gain. The increase in fair value in 2024 is included in other comprehensive income. Therefore, the gain in the 2025 income statement is unaffected by the increase in fair value in 2024. 73) D $418,000 − $417,500 = $500 loss 74) C

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Interest payment = $400,000 × 7% × 1/2 = $14,000 Interest revenue = $419,908 × 6% × 1/2 = $12,597 Amortization of premium = $14,000 − $12,597 = $1,403 Amortized cost = $419,908 − $1,403 = $418,505 Loss on sale = $418,505 − $417,500 = $1,005 75) B 76) B 77) B 78) D 79) B 80) A ($9,206 / $204,584) × 2 payments per year = 9.0% 81) D ($7,790 / $194,758) × 2 payments per year = 8% 82) C The amortized cost at 12/31/24 is $127,695. AIC sells the bonds for $127,000, at a loss of $695. 83) B The amortized cost at 12/31/24 is 196,370. AIC sells the bonds for $196,000, at a loss of $370. 84)Companies can gain from the increase in the value of their investment. Even without receiving dividends, investors still benefit when companies reinvest earnings, leading to even more profits in the future, and eventually higher stock prices. Many companies also make investments for strategic purposes to develop closer business ties, increase market share, or expand into new industries. 85)These securities are reported at fair value, and resulting holding gains and losses are included in the determination of net income for the period.

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86)When a company owns between 20% and 50% of the common stock in another company, it is presumed that the investing company exercises significant influence over the investee. Share ownership provides voting rights, and by voting these shares, the investing company can sway decisions in the direction it desires, such as the selection of members of the board of directors or the payment of dividends. This significant influence changes the accounting for the investment. When a company has significant influence over an investee, the company is required to use the equity method. Because we record equity income when the investee reports net income, it would be inappropriate to record equity income again when the investee distributes that same net income as dividends to the investor. To do so would be to double-count equity income. Instead, the investor records dividend payments received from the investee as a reduction in the Investments account. 87) Consolidated financial statements combine the parent and subsidiary operating activities as if the two companies were a single reporting company, even though both companies continue to operate as separate legal entities. It is appropriate to consolidate financial statements of two companies when the parent company owns a controlling interest (more than 50%) in the voting stock of the subsidiary.

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88) Investments in debt securities are classified as held-to-maturity, trading, or available-for-sale securities. Held-to-maturity securities are debt securities that the company expects to hold until they mature, which means until they become payable. Trading securities are securities that the investor expects to sell in the near future. These investments are adjusted to fair value with the unrealized gain or loss included in net income. Available-for-sale securities are investments that do not fit the other two categories; they are not expected to be sold in the near future, yet they are not expected to be held to maturity either. These investments are adjusted to fair value with the unrealized gain or loss included in comprehensive income.

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APPENDIX E: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are seven reasons why accounting practices differ across countries, followed by a list of descriptions. Match each description with the best reason. A) Legal system B) Sources of financing C) Political and economic ties D) Inflation E) Culture F) Tax laws G) Economic development Reason: 1) The extent of public disclosure depends on the secretiveness of society. 2) In some countries, asset values increase rapidly because of the general price level changes. 3) Countries share business activities and have political connections. 4) Some countries rely more heavily on debt capital than on equity capital to fund operations. 5) Common-law countries rely more heavily on public information. 6) More developed economies have more complex business transactions. 7) Alignment between financial reporting and tax reporting rules.

2) Below are seven reasons for differences in accounting practices among countries. For each reason, at least two options are provided. For each reason, select the option that best describes the United States. Reason: 1. Legal system 2. Tax laws

3. Sources of financing

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Options: (a) Common law (b) Code law (a) Different tax and financial accounting rules (b) Similar tax and financial accounting rules (a) More equity financing

4. Inflation 5. Culture 6. Political and economic ties 7. Economic development

(b) More debt financing (a) Low inflation (b) High inflation (a) Transparent (b) Secretive (a) British ties (b) German ties (c) Spanish ties (a) Developed economy (b) Developing economy (c) Underdeveloped economy

3) Below are seven reasons for differences in accounting practices among countries. For each reason, at least two options are provided. For each reason, select the option that best describes Germany. Reason: 1. Legal system 2. Tax laws

3. Sources of financing 4. Inflation 5. Culture 6. Political and economic ties 7. Economic development

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Options: (a) Common law (b) Code law (a) Different tax and financial accounting rules (b) Similar tax and financial accounting rules (a) More equity financing (b) More debt financing (a) Low inflation (b) High inflation (a) Transparent (b) Secretive (a) British ties (b) German ties (c) Spanish ties (a) Developed economy (b) Developing economy (c) Underdeveloped economy

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Answer Key Test name: Appx E_6e_Problems_Spiceland 1) 1) E 2) D 3) C 4) B 5) A 6) G 7) F 2) a, a, a, a, a, a, a 3) b, b, b, a, b, b, a

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APPENDIX E TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) In common-law countries (such as the United States, the United Kingdom, and Canada), greater emphasis is placed on public information than in code-law countries (such as Germany, France, and Japan). ⊚ true ⊚ false

2) For countries whose tax standards are closely tied to financial reporting standards (Central Europe and Japan), accounting earnings tend to be lower so companies can minimize tax payments. ⊚ true ⊚ false

3) In countries where debt financing is more common (Germany and Japan) compared to equity financing, there is greater emphasis on reporting the ability of the company to earn profits for its investors rather than the ability to repay debt. ⊚ true ⊚ false

4) Some countries are more secretive (Brazil and Switzerland), leading to fewer financial disclosures. ⊚ ⊚

true false

5) More economically developed economies (the United States and United Kingdom) have a need for more complex accounting standards. ⊚ ⊚

true false

6) Convergence of accounting practices is expected to increase the flow of resources across borders.

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⊚ ⊚

true false

Most countries around the world require or permit the use of IFRS. ⊚ true ⊚ false

8) The primary objective of the IASB is to develop accounting standards in the United States. ⊚ ⊚

true false

9) The Norwalk Agreement formalized the commitment between the FASB and IASB to the convergence of U.S. GAAP and IFRS. ⊚ ⊚

10)

true false

The FIFO inventory method is not allowed under IFRS. ⊚ true ⊚ false

11) IFRS allows, but does not require, revaluation of property, plant, and equipment to fair value. ⊚ true ⊚ false

12) Under U.S. GAAP, development expenditures are capitalized, while under IFRS, these expenditures must be expensed immediately. ⊚ true ⊚ false

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13) Under IFRS, inventory write-downs due to using the lower of cost and net realizable value are allowed to be reversed in a future year if net realizable value subsequently increases. ⊚ true ⊚ false

14) When preparing a statement of cash flows, IFRS allows companies to report cash outflows from interest payments as either operating or financing cash flows, while U.S. GAAP requires these outflows to be reported as only operating activities. ⊚ true ⊚ false

15) When preparing a statement of cash flows, IFRS allows companies to report cash inflows from interest and dividends as either operating or investing cash flows, while U.S. GAAP requires these inflows to be reported as only operating activities. ⊚ true ⊚ false

16) IFRS allows a category in the income statement for extraordinary gains and losses, while U.S. GAAP does not allow such a category. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 17) Which of the following characteristics of a country most likely results in lower reported earnings, all else being equal? A) Inflation B) Tax laws C) Population D) Culture

18)

Which of the following is not a reason why accounting differs across countries?

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A) Culture B) Population C) Tax laws D) Sources of financing

19) Countries that have different rules for financial accounting and tax accounting, rely more on equity financing, and have historic political and economic ties with Great Britain are referred to as what types of countries? A) Code-law countries B) European Union countries C) Common-law countries D) Conformist countries

20) Countries that have similar rules for financial accounting and tax accounting, rely more on debt financing, and have historic political and economic ties with Germany are referred to as what types of countries? A) Code-law countries B) European Union countries C) Common-law countries D) Conformist countries

21) When a country establishes financial reporting rules that closely resemble tax reporting rules, reported accounting profits tend to be: A) Negative. B) Higher. C) Lower. D) Misreported.

22)

One motivation for reducing differences in accounting practices across countries is to:

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A) Decrease the flow of international capital. B) Allow greater competition among companies. C) Reduce companies' tax burdens. D) Make it easier for investors to compare companies from different countries.

23)

IFRS stands for: A) Independent Financial Reporting System. B) International Financing Reform System. C) International Financial Reporting Standards. D) International Financial Regulation of Securities.

24) The body primarily responsible for establishing a single set of global accounting standards is the: A) IASB. B) SEC. C) FASB. D) IOSCO.

25)

Principles-based accounting standards: A) Are more characteristic of U.S. GAAP than international standards. B) Emphasize detailed implementation rules. C) Emphasize broad concepts. D) Offer less room for judgment.

26)

The Norwalk Agreement:

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A) Allowed foreign companies listed on U.S. stock exchanges to prepare financial statements in accordance with IFRS. B) Formalized the commitment between the FASB and IASB to converge U.S. GAAP and IFRS. C) Eliminated the requirement that U.S. firms report under U.S. GAAP. D) Gave authority to the IASB to set accounting standards for U.S. companies.

27) For which of the following topics is accounting under both U.S. GAAP and IFRS essentially the same? A) Receivables B) Long-term assets C) Inventory D) Research and development expenditures

28)

Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? A) Specific identification B) FIFO C) LIFO D) Average cost

29) Which of the following statements is correct for revaluation of property, plant, and equipment to fair value under IFRS? A) If one asset is chosen for revaluation, then all property, plant, and equipment must be revalued. B) Only buildings and other real estate property may be revalued. C) If one parcel of land is revalued, then all parcels of land must be revalued. D) All property, plant, and equipment are required to be revalued each year.

30) Which of the following statements is true regarding revaluation of property, plant, and equipment to fair value? Version 1

A) Only IFRS allows revaluation of property, plant, and equipment to fair value. B) Only U.S. GAAP allows revaluation of property, plant, and equipment to fair value. C) Both U.S. GAAP and IFRS allow revaluation of property, plant, and equipment to fair value. D) Neither U.S. GAAP nor IFRS allows revaluation of property, plant, and equipment to fair value.

31) Compared to that in the United States, the cost to companies in other countries of documenting effective internal controls is: A) Much greater. B) Slightly greater. C) About the same. D) Much less.

32) Why are some U.S. companies opposed to the elimination of the LIFO inventory method? A) Inventory amounts are more difficult to calculate under FIFO. B) LIFO most likely matches actual flow of inventory. C) Increased tax burden. D) Most international companies use LIFO.

33) Assuming rising costs, the switch from LIFO to FIFO or average cost would most likely have what effect(s)? A) Increase reported net income in the income statement B) Decrease tax obligations to the Internal Revenue Service (IRS) C) Increase reported net income and tax obligations D) Decrease reported net income and tax obligations

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34) Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under IFRS, what amount would be reported as an expense in the current year's income statement? A) $100,000 B) $150,000 C) $200,000 D) $300,000

35) Suppose a company has research costs of $95,000 and development costs of $335,000 for the year. Under U.S. GAAP, what amount would be reported as an expense in the current year's income statement? A) $430,000 B) $215,000 C) $95,000 D) $335,000

36) Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under U.S. GAAP, what amount would be reported as an expense in the current year's income statement? A) $100,000 B) $150,000 C) $200,000 D) $300,000

37) Would a company be more likely to report a contingent liability under U.S. GAAP or IFRS? A) U.S. GAAP B) IFRS C) Equally likely D) Contingent liabilities are not reported under IFRS

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38) Suppose a company pays interest of $16,000 for the year on borrowed amounts due in seven years. Under IFRS, what is the most the company can report this year as cash outflows from financing activities related to this item? A) $16,000 B) $2,286 C) $112,000 D) $0

39) Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two years. Under IFRS, what is the most the company can report this year as cash outflows from financing activities related to this item? A) $10,000 B) $2,000 C) $5,000 D) $0

40) Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two years. Under U.S. GAAP, what is the most the company can report this year as cash outflows from financing activities related to this item? A) $10,000 B) $2,000 C) $5,000 D) $0

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 41) Describe at least five reasons why accounting practices differ across countries. Which reason do you think is most important? Explain why.

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42)

What is the main objective of the International Accounting Standards Board (the IASB)?

43) Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? Explain why some U.S. companies will lobby strongly to keep this method as an allowable alternative.

44) What does it mean to revalue a long-term asset? How do U.S. GAAP and IFRS differ regarding revaluation of long-term assets?

45) How is preferred stock reported differently under U.S. GAAP and IFRS? Do you think preferred stock is a liability or an equity item? Why?

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Answer Key Test name: Appx E_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE In countries where debt financing is more common (Germany and Japan) compared to equity financing, there is less emphasis on reporting the ability of the company to earn profits, and greater emphasis on the ability of a company to repay debt. 4) TRUE 5) TRUE 6) TRUE 7) TRUE 8) FALSE The Financial Accounting Standards Board develops accounting standards in the United States, while the IASB's primary objective is to develop a single set of high-quality, understandable, and enforceable global accounting standards. 9) TRUE 10) FALSE The LIFO method is not allowed under IFRS. 11) TRUE 12) FALSE U.S. GAAP requires immediate expensing, while IFRS allows capitalization. 13) TRUE

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14) TRUE 15) TRUE 16) FALSE Neither U.S. GAAP nor IFRS allows the separate classification of extraordinary gains and losses in the income statement. 17) B 18) B 19) C 20) A 21) C 22) D 23) C 24) A 25) C 26) B 27) A 28) C 29) C 30) A 31) D 32) C 33) C 34) A 35) A 36) D 37) B 38) A 39) A 40) D

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41)Financial accounting standards and practices differ from country to country for many reasons, including different legal systems, the influence of tax laws, sources of financing, inflation, culture, political influence of other countries, and the level of economic development. See Illustration E-1 in the textbook for further details. Legal system (common-law vs. code-law) is often used as a way to describe overall differences in accounting practices between countries. Common-law countries, such as the United States, United Kingdom, Australia, and Canada, have separate rules for financial accounting and tax accounting, rely more on equity financing, and have political and economic ties with Britain. Code-law countries such as those in Central Europe and Japan have similar rules for financial accounting and tax accounting, rely more on debt financing, and many have political and economic ties with Germany. 42) The main objective of the IASB is to develop a single set of highquality, understandable, and enforceable global accounting standards to help participants in the world’s capital markets and other users make economic decisions. 43) LIFO is allowed under U.S. GAAP, but not under IFRS. U.S. companies currently using LIFO will lobby to keep this method because a switch from LIFO would greatly increase taxes for many U.S. companies. 44) To revalue a long-term asset is to periodically adjust the asset to fair value. Under U.S. GAAP, companies are not allowed to revalue longterm assets to fair value for financial reporting purposes. IFRS allows, but does not require, revaluation of long-term assets to fair value.

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45)Under U.S. GAAP, preferred stock is usually recorded as stockholders' equity with dividends reported as a reduction of retained earnings. Under IFRS, most preferred stock is reported as debt with the dividends reported in the income statement as interest expense. As we learned in Chapter 10, preferred stock has characteristics of both liabilities and stockholders' equity. Preferred stock can have characteristics nearly identical to bonds or characteristics nearly identical to common stock.

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CHAPTER 1: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match each business activity with its example. 1.A) Purchase office building. 2.B) Pay utilities. 3.C) Receive investments from stockholders. Operating Financing Investing

2) Match each financial statement with the accounts reported on it: 1.A) Dividends. 2.B) Assets and liabilities. 3.C) Revenues and expenses. Income statement Statement of stockholders' equity Balance sheet

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3) Match each organization to its role: 1.A) Ensure that auditors follow strict guidelines when conducting their audits. 2.B) Independent, private-sector group that is primarily responsible for setting financial reporting rules in the United States. 3.C) Develop a single set of high-quality, understandable global accounting standards. 4.D) Enforce proper application of financial reporting rules for companies whose securities are publicly traded. Financial Accounting Standards Board Public Company Accounting Oversight Board International Accounting Standards Board Securities and Exchange Commission

4) Match each qualitative characteristic with its definition: 1.A) All information necessary to describe an item is reported. 2.B) Information provides feedback on past activities. 3.C) Information is presented in time to make useful decisions. 4.D) Information is useful in helping to forecast future outcomes. 5.E) Measurements that independent parties would agree upon. 6.F) Information that does not bias the decision maker. Predictive value Confirmatory value Verifiability Timeliness Neutrality Completeness

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5) For each transaction, indicate whether a company would classify the related account as an asset, liability, stockholders' equity, dividend, revenue, or expense. Transactions 1. Receive cash from investors. 2. Pay rent for the current period. 3. Purchase office equipment. 4. Pay cash to stockholders. 5. Provide services to customers.

Related Accounts Common Stock Rent Expense Equipment Dividends Service Revenue

6) Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Indicate the account classification for each account name. Account Classifications 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

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Accounts Common Stock

Related Transactions Sell common stock to investors. Cash Receive cash from customers. Salaries Payable Incur amounts owed to employees. Service Revenue Sell services to customers. Utilities Expense Incur cost of utilities. Supplies Purchase of office supplies. Advertising Pay for cost of Expense advertising. Buildings Purchase building for operations. Accounts Payable Purchase supplies on credit. Dividends Distribute cash to stockholders.

7) Indicate whether a company would classify the transaction as financing, investing, or operating. Transactions 1. Receive cash from investors. 2. Pay rent for the current period. 3. Purchase office equipment. 4. Pay cash to stockholders. 5. Provide services to customers.

8) Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business Activity 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________

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Transactions Purchase office building. Pay building maintenance fees. Pay sales taxes to the local government. Provide services to customers. Borrow from the bank. Pay workers' salaries. Sell equipment used in operations. Sell common stock to investors.

9) Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business Activity 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

Related Transactions Sell common stock to investors. Receive cash from customers. Incur amounts owed to employees. Sell services to customers. Incur cost of utilities. Purchase rent one year in advance. Pay for cost of advertising. Purchase building for operations. Purchase supplies on credit. Distribute cash to stockholders.

10) Below are cash transactions of a company. Indicate whether the transaction will affect an account reported on the income statement or the balance sheet. Ignore the impact of the transaction on the Cash and Retained Earnings accounts. The first item has been completed as an example. Financial Statement 1. Income Statement 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

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Related Transactions Pay taxes for the current period. Borrow cash from the bank. Pay salaries to employees for the current period. Receive cash from customers for services provided in the current period. Pay one year of rent in advance. Pay for supplies. Pay for advertising for the current period. Pay for land. Pay utilities for the current period. Repay amount borrowed from the bank.

11) At the end of the current period, Rivet, Incorporated reports the following amounts: Assets = $58,900; Liabilities = $36,800; Dividends = $2,280; Revenues = $21,600; Expenses = $8,900. Calculate net income and stockholders' equity at the end of the period.

12) At the end of the current period, Rivet, Incorporated reports the following amounts: Assets = $50,000; Liabilities = $28,000; Dividends = $4,000; Revenues = $22,000; Expenses = $16,000. Calculate net income and stockholders' equity at the end of the period.

13) At the end of the current period, Aberdeen Company reports the following amounts: Assets = $23,000; Liabilities = $14,000; Dividends = $3,000; Revenues = $17,000; Expenses = $13,000. Calculate net income and stockholders' equity at the end of the period.

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14) At the end of the current period, Aberdeen Company reports the following amounts: Assets = $25,000; Liabilities = $15,000; Dividends = $3,000; Revenues = $20,000; Expenses = $13,000. Calculate net income and stockholders' equity at the end of the period.

15) Below are the account balances for Schroeder Corporation at the end of December. Use only the appropriate accounts to prepare an income statement. Accounts Cash Salaries expense Retained earnings Advertising expense Equipment Service revenue Common stock Accounts payable

Balances $ 8,000 1,800 1,200 1,250 11,600 13,500 5,700 2,340

16) Below are the account balances for Schroeder Corporation at the end of December. Use only the appropriate accounts to prepare an income statement. Accounts Cash Salaries expense Retained earnings Advertising expense Equipment Service revenue Common stock

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Balances $ 5,200 2,300 2,500 1,200 12,400 9,400 8,000

Accounts payable

2,200

17) At the beginning of the year (January 1), William and Sons had $8,900 of common stock outstanding and retained earnings of $4,600. During the year, the company reports net income of $2,020 and pays dividends of $2,320. In addition, the company issues additional common stock for $1,400. Prepare the statement of stockholders' equity for the year ended December 31.

18) At the beginning of the year (January 1), William and Sons had $12,000 of common stock outstanding and retained earnings of $4,200. During the year, the company reports net income of $3,200 and pays dividends of $1,200. In addition, the company issues additional common stock for $5,000. Prepare the statement of stockholders' equity for the year ended December 31.

19) Shalett Interiors has the following account balances at the end of the year. Use only the appropriate accounts to prepare a balance sheet. Accounts Equipment Accounts Payable Common Stock Service Revenue Cash

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Balances $ 71,400 12,900 18,400 56,800 9,600

Retained Earnings Salaries Expense Notes Payable

? 31,900 24,600

20) Shalett Interiors has the following account balances at the end of the year. Use only the appropriate accounts to prepare a balance sheet. Accounts Equipment Accounts payable Common stock Service revenue Cash Retained earnings Salaries expense Notes payable

Balances $78,000 12,000 20,000 62,000 8,000 ? 38,000 25,000

21) Glenview Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows. Accounts Cash received for sale of services to customers Cash received from issuance of common stock Cash paid to purchase office equipment Cash paid for building maintenance Cash paid for advertisement Cash paid to workers Cash paid for dividends to stockholders

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Amounts $ 49,000 27,000 (33,000) (4,100) (4,000) (16,000) (1,600)

Cash received from sale of land Cash received from bank borrowing

8,500 15,000

22) Glenview Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows. Accounts Cash received for sale of services to customers Cash received from issuance of common stock Cash paid to purchase office equipment Cash paid for building maintenance Cash paid for advertisement Cash paid to workers Cash paid for dividends to stockholders Cash received from sale of land Cash received from bank borrowing

Amounts $ 42,000 33,000 (49,000) (7,000) (8,000) (18,000) (3,000) 7,000 14,000

23) Each of the following independent situations represents amounts shown on the four basic financial statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements. 1.Revenues = $31,000; Expenses = $14,100; Net income = ________. 2.Increase in stockholders' equity = $28,000; Issuance of common stock = $5,300; Dividends = $2,000; Net income = ________. 3.Assets = $19,000; Liabilities = $6,000; Stockholders' equity = ________. 4.Total change in cash = +$26,000; Net operating cash flows = +$32,000; Net financing cash flows = +$15,600; Net investing cash flows = ________.

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24) Each of the following independent situations represents amounts shown on the four basic financial statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements. 1.Revenues = $27,000; Expenses = $18,000; Net income = ________. 2.Increase in stockholders' equity = $20,000; Issuance of common stock = $12,000; Dividends = $5,000; Net income = ________. 3.Assets = $25,000; Liabilities = $13,000; Stockholders' equity = ________. 4.Total change in cash = +$28,000; Net operating cash flows = +$30,000; Net financing cash flows = +$18,000; Net investing cash flows = ________.

25) During its first five years of operations, Waterhouse Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1. Year 1 2 3 4 5

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Net Income $ 2,600 2,600 3,300 4,100 6,900

Dividends $ 1,100 700 1,100 1,300 2,200

26) During its first five years of operations, Waterhouse Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1. Year 1 2 3 4 5

Net Income $ 1,700 2,700 3,200 5,400 7,600

Dividends $ 1,000 1,000 2,000 2,000 3,000

27) Below is information related to retained earnings for five independent situations. Calculate the answer to each. 1.A company reports an increase in retained earnings of $3,190 and net income of $4,510. What is the amount of dividends? 2.A company reports beginning retained earnings of $2,790, net income of $570, and $270 dividends. What is the amount of ending retained earnings? 3.A company reports an increase in retained earnings of $3,120 and dividends of $2,650. What is the amount of net income? 4.A company reports ending retained earnings of $2,810, net income of $620, and dividends of $840. What is the amount of beginning retained earnings? 5.A company reports an increase in retained earnings of $790 and net income of $1,490. What is the amount of dividends?

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28) Below is information related to retained earnings for five independent situations. Calculate the answer to each. 1.A company reports an increase in retained earnings of $3,200 and net income of $4,800. What is the amount of dividends? 2.A company reports beginning retained earnings of $1,800, net income of $1,200, and $200 dividends. What is the amount of ending retained earnings? 3.A company reports an increase in retained earnings of $2,500 and dividends of $1,500. What is the amount of net income? 4.A company reports ending retained earnings of $2,700, net income of $900, and dividends of $500. What is the amount of beginning retained earnings? 5.A company reports an increase in retained earnings of $500 and net income of $1,200. What is the amount of dividends?

29) Below is balance sheet information for five independent situations. Calculate the answer to each. 1.A company reports total assets of $3,640 and total liabilities of $410. What is the amount of stockholders' equity? 2.A company reports total liabilities of $3,300 and stockholders' equity of $1,200. What is the amount of total assets? 3.A company reports total assets of $2,900 and total stockholders' equity of $710. What is the amount of total liabilities? 4.A company reports an increase in assets of $2,790 and an increase in liabilities of $670. What is the amount of the change in stockholders' equity? 5.A company reports an increase in liabilities of $190 and a decrease in stockholders' equity of $1,040. What is the amount of the change in total assets?

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30) Below is balance sheet information for five independent situations. Calculate the answer to each. 1.A company reports total assets of $2,000 and total liabilities of $900. What is the amount of stockholders' equity? 2.A company reports total liabilities of $2,400 and stockholders' equity of $1,100. What is the amount of total assets? 3.A company reports total assets of $2,700 and total stockholders' equity of $700. What is the amount of total liabilities? 4.A company reports an increase in assets of $1,700 and an increase in liabilities of $400. What is the amount of the change in stockholders' equity? 5.A company reports an increase in liabilities of $300 and a decrease in stockholders' equity of $800. What is the amount of the change in total assets?

31) Below is cash flow information for five independent situations. Calculate the answer to each. 1.A company reports operating cash flows of $2,630, investing cash flows of $950, and financing cash flows of −$840. What is the amount of the change in total cash? 2.A company reports operating cash flows of $2,710, investing cash flows of −$300, and financing cash flows of −$850. If the beginning cash amount is $440, what is the ending cash amount? 3.A company reports operating cash flows of $840, investing cash flows of $700, and a change in total cash of $150. What is the amount of cash flows from financing activities? 4.A company reports operating cash flows of $660, financing cash flows of $430, and a change in total cash of $10. What is the amount of cash flows from investing activities? 5.A company reports investing cash flows of −$1,520, financing cash flows of $930, and a change in total cash of $390. What is the amount of cash flows from operating activities?

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32) Below is cash flow information for five independent situations. Calculate the answer to each. 1.A company reports operating cash flows of $3,200, investing cash flows of $700, and financing cash flows of −$400. What is the amount of the change in total cash? 2.A company reports operating cash flows of $1,800, investing cash flows of −$400, and financing cash flows of −$1,100. If the beginning cash amount is $500, what is the ending cash amount? 3.A company reports operating cash flows of $700, investing cash flows of $300, and a change in total cash of $100. What is the amount of cash flows from financing activities? 4.A company reports operating cash flows of $600, financing cash flows of $400, and a change in total cash of $100. What is the amount of cash flows from investing activities? 5.A company reports investing cash flows of −$1,400, financing cash flows of $900, and a change in total cash of $200. What is the amount of cash flows from operating activities?

33)

Southeast, Incorporated reports the following amounts at the end of the year:

Cash Buildings Accounts Payable Interest Expense Advertising Expense

$ 67,200 42,000 9,300 2,500 10,500

Service Revenue Salaries Expense Equipment Supplies Notes Payable

$ 99,700 67,800 66,000 3,800 49,000

In addition, the company had common stock of $77,000 at the beginning of the year and issued an additional $5,100 during the year. The company also had retained earnings of $21,100 at the beginning of the year and paid dividends of $1,400 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.

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34)

Northeast, Incorporated reports the following amounts at the end of the year:

Cash Buildings Accounts Payable Interest Expense Advertising Expense

$ 3,200 60,000 8,500 4,000 11,300

Service Revenue Salaries Expense Equipment Supplies Notes Payable

$ 92,500 72,800 72,000 6,400 40,000

In addition, the company had common stock of $65,000 at the beginning of the year and issued an additional $5,000 of common stock during the year. The company also had retained earnings of $20,700 at the beginning of the year and paid dividends of $2,000 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.

35) Below are incomplete financial statements for Louise, Incorporated. Calculate the missing amounts. Income Statement Service revenue Expenses:

$ (a)

Salaries Delivery Utilities Net income

9,800 5,100 4,700 (b) Statement of Stockholders' Equity Common Stock

Beginning Issuances

$ 22,900 (c)

Retained Earnings $ 17,200

Net income

6,800

Dividends

(d)

Ending

$ 35,900

$ 21,280

Balance Sheet

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Assets: Cash Supplies Prepaid rent Equipment Total assets

Liabilities: $ 11,800 2,500

Accounts payable Stockholders' Equity:

$ 17,800

(e) 25,900 (f)

Common stock Retained earnings Total liabilities and stockholders' equity

(g) (h) (i)

36) Below are incomplete financial statements for Barrington, Incorporated. Calculate the missing amounts. Income Statement Service revenue Expenses:

$ (a)

Salaries Delivery Utilities Net income

8,000 7,000 5,000 (b) Statement of Stockholders' Equity Common Stock

Beginning Issuances

$ 25,000 (c)

Retained Earnings $ 12,000

Net income

5,000

Dividends

(d)

Ending Assets: Cash

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$ 30,000

$ 15,000

Balance Sheet Liabilities: $ 15,000

Accounts payable

$ 15,000

Supplies

7,000

Stockholders' Equity:

Prepaid rent Equipment Total assets

(e) 35,000 (f)

Common stock Retained earnings Total liabilities and stockholders' equity

(g) (h) (i)

37) Use the following information available as of December 31 to prepare an income statement for the year and a balance sheet at December 31st for Kamloops Company. Fees received for services performed during the year, $126,000 Accounts payable, $17,800 Accounts receivable, $17,800 Miscellaneous expenses for the year, $9,700 Supplies on hand, $2,900 Notes payable, $22,000 Interest expense on the note for the year, $3,500 Equipment, $86,500 Cash on hand, $12,000 Salaries expense for the year, $70,700 Supplies expense for the year, $8,600 Rent expense for the year, $12,000 Common stock that has been issued, $56,000 Retained earnings at the end of the year, $23,400

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38) Use the following information available as of December 31 to prepare an income statement for the year and a balance sheet at December 31st for Bronzer Company. Fees received for services performed during the year, $120,000 Accounts payable, $18,500 Accounts receivable, $17,300 Miscellaneous expenses for the year, $8,700 Supplies on hand, $2,700 Notes payable, $30,000 Interest expense on the note for the year, $3,000 Equipment, $84,400 Cash on hand, $11,200 Salaries expense for the year, $71,500 Supplies expense for the year, $9,400 Rent expense for the year, $12,000 Common stock that has been issued, $60,000 Retained earnings at the end of the year, $7,100

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Answer Key Test name: Chap 01_6e_Spiceland_Problem Material 1)Operating B Financing C Investing A 2) Income statement C Statement of stockholders' equity A Balance sheet B 3) Financial Accounting Standards Board B Public Company Accounting Oversight Board A International Accounting Standards Board C Securities and Exchange Commission D 4) Predictive value D Confirmatory value B Verifiability E Timeliness C Neutrality F Completeness A 5) 1. Stockholders' equity; 2. Expense; 3. Asset; 4. Dividend; 5. Revenue 6) 1. Stockholders' equity; 2. Asset; 3. Liability; 4. Revenue; 5. Expense; 6. Asset; 7. Expense; 8. Asset; 9. Liability; 10. Dividend 7) 1. Financing; 2. Operating; 3. Investing; 4. Financing; 5. Operating 8) 1. Investing; 2. Operating; 3. Operating; 4. Operating; 5. Financing; 6. Operating; 7. Investing; 8. Financing

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9) 1. Financing; 2. Operating; 3. Operating; 4. Operating; 5. Operating; 6. Operating; 7. Operating; 8. Investing; 9. Operating; 10. Financing 10) 1. Income Statement; 2. Balance Sheet; 3. Income Statement; 4. Income Statement; 5. Balance Sheet; 6. Balance Sheet; 7. Income Statement; 8. Balance Sheet; 9. Income Statement; 10. Balance Sheet 11) Revenues $ 21,600 Assets $ 58,900 $ 58,900

− − = = −

Expenses $ 8,900 Liabilities $ 36,800 $ 36,800

= = + + =

Net Income $ 12,700 Stockholders' Equity $ X $ 22,100

12) Revenues $ 22,000 Assets $ 50,000 $ 50,000

− − = = −

Expenses $ 16,000 Liabilities $ 28,000 $ 28,000

= = + + =

Net Income $ 6,000 Stockholders' Equity $X $ 22,000

13) Revenues $ 17,000 Assets $ 23,000 $ 23,000

− − = = −

Expenses $ 13,000 Liabilities $ 14,000 $ 14,000

= = + + =

Net Income $ 4,000 Stockholders' Equity $ X $ 9,000

14) Revenues $ 20,000 Assets $ 25,000 $ 25,000

− − = = −

Expenses $ 13,000 Liabilities $ 15,000 $ 15,000

= = + + =

Net Income $ 7,000 Stockholders' Equity $X $ 10,000

15) Schroeder Corporation Income Statement For the year ended December 31

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Service revenue

$ 13,500

Expenses: Salaries

$ 1,800

Advertising

1,250

Total expenses

3,050

Net income

$ 10,450

16) Schroeder Corporation Income Statement For the year ended December 31 Service revenue

$ 9,400

Expenses: Salaries

$ 2,300

Advertising

1,200

Total expenses

3,500

Net income

$ 5,900

17) William and Sons Statement of Stockholders' Equity For the year ended December 31 Common Retained Stock Earnings Balance at January 1 Issuance of common stock

$ 8,900 1,400

Add: Net income for the year Less: Dividends Balance at December 31

Version 1

$ 10,300

$ 4,600

Total Stockholders' Equity $ 13,500 1,400

2,020

(2,320)

$ 4,300

$ 14,600

18) William and Sons Statement of Stockholders' Equity For the year ended December 31 Common Retained Stock Earnings Balance at January 1 Issuance of common stock

$ 12,000 5,000

$ 4,200

Add: Net income for the year Less: Dividends Balance at December 31

$ 17,000

Total Stockholders' Equity $ 16,200 5,000

3,200

(1,200)

$ 6,200

$ 23,200

19) Shalett Interiors Balance Sheet December 31 Liabilities

Assets Cash Equipment

$ 9,600 71,400

Accounts payable Notes payable Total liabilities

$ 12,900 24,600 37,500

Stockholders' Equity Common stock

18,400

Retained earnings

25,100*

Total stockholders' equity Total assets Assets $81,000 $81,000

= = −

$ 81,000 Liabilities $37,500 $37,500

Total liabilities and stockholders' equity + + −

43,500 $ 81,000

Stockholders' equity ($18,400 + Retained earnings) $18,400 = Retained earnings $25,100 = Retained earnings

20) Version 1

Shalett Interiors Balance Sheet December 31 Liabilities

Assets Cash Equipment

$ 8,000 78,000

Accounts payable Notes payable Total liabilities

$ 12,000 25,000 37,000

Stockholders' Equity Common stock

20,000

Retained earnings

29,000*

Total stockholders' equity Total assets Assets $86,000 $86,000

= = −

$ 86,000 Liabilities $37,000 $37,000

Total liabilities and stockholders' equity + + −

49,000 $ 86,000

Stockholders' equity ($20,000 + Retained earnings) $20,000 = Retained earnings $29,000 = Retained earnings

21) Glenview Financial Statement of Cash Flows For the year ended December 31 Cash Flows from Operating Activities Cash inflows: From sale of services to customers

$ 49,000

Cash outflows: For building maintenance

(4,100)

For advertisement

(4,000)

For workers

(16,000)

Net cash flows from operating activities

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$ 24,900

Cash Flows from Investing Activities Purchase office equipment

(33,000)

Sale of land

8,500

Net cash flows from investing activities

(24,500)

Cash Flows from Financing Activities Issue common stock

27,000

Borrow from bank

15,000

Pay dividends

(1,600)

Net cash flows from financing activities

40,400

Net increase in cash

40,800

Cash at the beginning of the year

7,100

Cash at the end of the year

$ 47,900

22) Glenview Financial Statement of Cash Flows For the year ended December 31 Cash Flows from Operating Activities Cash inflows: From sale of services to customers

$ 42,000

Cash outflows: For building maintenance

(7,000)

For advertisement

(8,000)

For workers

(18,000)

Net cash flows from operating activities

$ 9,000

Cash Flows from Investing Activities

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Purchase office equipment

(49,000)

Sale of land

7,000

Net cash flows from investing activities

(42,000)

Cash Flows from Financing Activities Issue common stock

33,000

Borrow from bank

14,000

Pay dividends

(3,000)

Net cash flows from financing activities

44,000

Net increase in cash

11,000

Cash at the beginning of the year

6,000

Cash at the end of the year

$ 17,000

23)1. Revenues $31,000

− −

Expenses $14,100

= =

Net Income $16,900

2. Change in Stockholders' Equity

$28,000 $28,000

= −

Issue Common Stock $5,300 $5,300

−

Dividends

Net Income

− +

$2,000 $2,000

+ =

$X $24,700

3. Assets

Liabilities

$19,000 $19,000

= −

$6,000 $6,000

+ =

Stockholders' Equity $X $13,000

4. Version 1

Total Change in Cash $26,000 $26,000

Operating Cash Flows $32,000 $32,000

= −

+ + −

Financing Cash Flows $15,600 $15,600

Investing Cash Flows $X ($21,600)

+ =

24)1. Revenues $27,000

− −

Expenses $18,000

= =

Net Income $9,000

2. Change in Stockholders' Equity

$20,000 $20,000

= −

Issue Common Stock $12,000 $12,000

−

Dividends

Net Income

− +

$5,000 $5,000

+ =

$X $13,000

3. Assets

Liabilities

$25,000 $25,000

= −

$13,000 $13,000

+ =

Total Change in Cash $28,000 $28,000

Stockholders' Equity $X $12,000

4. = −

Operating Cash Flows $30,000 $30,000

+ + −

Financing Cash Flows $18,000 $18,000

+ + =

Investing Cash Flows $X ($20,000)

25) Year 1 2 3 4 5

Net Income $ 2,600 2,600 3,300 4,100 6,900

Dividends $ 1,100 700 1,100 1,300 2,200

Retained Earnings* $ 1,500 3,400 5,600 8,400 13,100

* Retained earnings = Beginning Retained Earnings + Net Income − Dividends 26)

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Year 1 2 3 4 5

Net Income

Dividends

$ 1,700 2,700 3,200 5,400 7,600

$ 1,000 1,000 2,000 2,000 3,000

Retained Earnings* $ 700 2,400 3,600 7,000 11,600

* Retained earnings = Beginning Retained Earnings + Net Income − Dividends 27)1. Change in Retained Earnings $3,190 $3,190

= = =

Net Income $4,510 $4,510

− − −

Dividends $X $1,320

= =

Net Income $570

− −

Dividends $270

= = =

Net Income $X $5,770

− − −

Dividends $2,650 $2,650

= =

Net Income $620

− −

Dividends $840

= =

Net Income $1,490

− −

Dividends $X

2. Change in Retained Earnings [$X − $2,790] $X = $3,090

3. Change in Retained Earnings $3,120 $3,120

4. Change in Retained Earnings [$2,810 − $X] $X = $3,030

5. Change in Retained Earnings $790

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$790

$1,490

−

$700

Change in Retained Earnings $3,200 $3,200

= = =

Net Income $4,800 $4,800

− − −

Dividends $X $1,600

= =

Net Income $1,200

− −

Dividends $200

= = =

Net Income $X $4,000

− − −

Dividends $1,500 $1,500

= =

Net Income $900

− −

Dividends $500

= = =

Net Income $1,200 $1,200

− − −

Dividends $X $700

28)1.

2. Change in Retained Earnings [$X − $1,800] $X = $2,800

3. Change in Retained Earnings $2,500 $2,500

4. Change in Retained Earnings [$2,700 − $X] $X = $2,300

5. Change in Retained Earnings $500 $500

29)1. Assets

Liabilities

$3,640 $3,640

= =

$410 $410

+ +

Assets

Liabilities

$X $4,500

= =

$3,300 $3,300

+ +

Stockholders' Equity $X $3,230

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Stockholders' Equity $1,200 $1,200

3. Assets

Liabilities

$2,900 $2,900

= =

$X $2,190

+ +

Stockholders' Equity $710 $710

4. Change in Assets $2,790 $2,790

= = =

Change in liabilities $670 $670

Change in liabilities $190 $190

+ +

Change in stockholders' equity $X $2,120

5. Change in Assets $X ($850)

= = =

+ +

Change in stockholders' equity ($1,040) ($1,040)

30)1. Assets

Liabilities

$2,000 $2,000

= =

$900 $900

+ +

Assets

Liabilities

$X $3,500

= =

$2,400 $2,400

+ +

Assets

Liabilities

$2,700 $2,700

= =

$X $2,000

+ +

Stockholders' Equity $X $1,100

2. Stockholders' Equity $1,100 $1,100

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Stockholders' Equity $700 $700

4. Change in Assets $1,700 $1,700

= = =

Change in liabilities $400 $400

Change in liabilities $300 $300

Change in stockholders' equity $X $1,300

+ +

5. Change in Assets $X ($500)

= = =

Change in stockholders' equity ($800) ($800)

+ +

31)1. Total Change in = Cash $2,740 =

Operating Cash Flows $2,630

Operating Cash Flows $2,710

Operating Cash Flows $840

Operating Cash Flows $660

Investing Cash Flows $950

Investing Cash Flows ($300)

Investing Cash Flows $700

Investing Cash Flows ($1,080)

Financing cash flows ($840)

2. Total Change in = Cash ($X − $440) = $X = $2,000

Financing cash flows ($850)

3. Total Change in = Cash $150 =

Financing cash flows ($1,390)

4. Total Change in = Cash $10 =

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Financing cash flows $430

5. Total Change in = Cash $390 =

Operating Cash Flows $980

Operating Cash Flows $3,200

Operating Cash Flows $1,800

Operating Cash Flows $700

Operating Cash Flows $600

Operating Cash Flows $700

Investing Cash Flows ($1,520)

Investing Cash Flows $700

Investing Cash Flows ($400)

Investing Cash Flows $300

Investing Cash Flows ($900)

Investing Cash Flows ($1,400)

Financing cash flows $930

32)1. Total Change in = Cash $3,500 =

Financing cash flows ($400)

2. Total Change in = Cash ($X − $500) = $X = $800

Financing cash flows ($1,100)

3. Total Change in = Cash $100 =

Financing cash flows ($900)

4. Total Change in = Cash $100 =

Financing cash flows $400

5. Total Change in = Cash $200 =

Financing cash flows $900

33) SOUTHEAST, INCORPORATED Income Statement For the year ended December 31

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Service revenue

$ 99,700

Expenses: Salaries

$ 67,800

Advertising

10,500

Interest

2,500

Total expenses

80,800

Net income

$ 18,900 SOUTHEAST, INCORPORATED Statement of Stockholders' Equity For the year ended December 31 Common Retained Stock Earnings

Balance at beginning of the year Issuance of common stock

$ 77,000

$ 21,100

5,100

Total Stockholders' Equity $ 98,100 5,100

Add: Net income for the year

18,900

Less: Dividends

(1,400)

$ 38,600

$ 120,700

Balance at end of the year

Assets Cash Supplies Equipment Building

$ 82,100

SOUTHEAST, INCORPORATED Balance Sheet December 31 Liabilities $ 67,200 3,800 66,000 42,000

Accounts payable Notes payable Total liabilities Stockholders' Equity Common stock

82,100

Retained earnings

38,600

Total stockholders' equity

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$ 9,300 49,000 58,300

120,700

Total assets

$ 179,000

Total liabilities and stockholders' equity

$ 179,000

34) Northeast, Incorporated Income Statement For the year ended December 31 Service revenue

$ 92,500

Expenses: Salaries

$ 2,300

Advertising

11,300

Interest

4,000

Total expenses

88,100

Net income

$ 4,400 Northeast, Incorporated Statement of Stockholders' Equity For the year ended December 31 Common Retained Stock Earnings

Balance at beginning of the year Issuance of common stock

$ 65,000

$ 20,700

5,000

Add: Net income for the year Less: Dividends Balance at end of the year

Assets Cash Supplies Equipment

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$ 70,000

Total Stockholders' Equity $ 85,700

4,400

(2,000)

$ 23,100

$ 93,100

Northeast, Incorporated Balance Sheet December 31 Liabilities $ 3,200 6,400 72,000

Accounts payable Notes payable Total liabilities

$ 8,500 40,000 48,500

Building

60,000

Stockholders' Equity Common stock

70,000

Retained earnings

23,100

Total stockholders' equity Total assets

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$ 141,600

Total liabilities and stockholders' equity

93,100 $ 141,600

35)Income Statement, Net Income (b) = $6,800 (from Statement of Stockholders' Equity). Income Statement, Revenues (a) = $26,400 (Net Income $6,800 + Total Expenses $19,600). Statement of Stockholders' Equity, Common Stock Issuances (c) = $13,000 ($22,900 + (c) = $35,900). Statement of Stockholders' Equity, Dividends (d) = $2,720 ($17,200 + $6,800 − (d) = $21,280). Balance Sheet, Common Stock (g) = $35,900 (from Statement of Stockholders' Equity). Balance Sheet, Retained Earnings (h) = $21,280 (from Statement of Stockholders’ Equity). Balance Sheet, Total liabilities and stockholders’ equity (i) = $74,980 ($17,800 liabilities + $35,900 common stock + $21,280 retained earnings). Balance Sheet, Total assets (f) = $74,980 (Total assets = Total liabilities and stockholders’ equity). Balance Sheet, Prepaid Rent (e) = $34,780 ($74,980 Total assets − $11,800 Cash − $2,500 Supplies − $25,900 Equipment).

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36)Income Statement, Net Income (b) = $5,000 (from Statement of Stockholders' Equity). Income Statement, Revenues (a) = $25,000 (Net Income $5,000 + Total Expenses $20,000). Statement of Stockholders' Equity, Common Stock Issuances (c) = $5,000 ($25,000 + (c) = $30,000). Statement of Stockholders' Equity, Dividends (d) = $2,000 ($12,000 + $5,000 − (d) = $15,000). Balance Sheet, Common Stock (g) = $30,000 (from Statement of Stockholders' Equity). Balance Sheet, Retained Earnings (h) = $15,000 (from Statement of Stockholders’ Equity). Balance Sheet, Total liabilities and stockholders’ equity (i) = $60,000 ($15,000 liabilities + $30,000 common stock + $15,000 retained earnings). Balance Sheet, Total assets (f) = $60,000 (Total assets = Total liabilities and stockholders’ equity). Balance Sheet, Prepaid Rent (e) = $3,000 ($60,000 Total assets − $15,000 Cash − $7,000 Supplies − $35,000 Equipment). 37) KAMLOOPS COMPANY Income Statement For the year ended December 31 Service revenue $ 126,000 Expenses:

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Salaries Rent Supplies Interest Miscellaneous Total expenses Net income

Assets Cash Accounts Receivable Supplies Equipment

70,700 12,000 8,600 3,500 9,700 104,500 $ 21,500 KAMLOOPS COMPANY Balance Sheet December 31 Liabilities $ 12,000 17,800

Accounts payable Notes payable

$ 17,800 22,000

2,900 86,500

Total liabilities Stockholders' Equity

39,800

Common stock

56,000

Retained earnings

23,400

Total stockholders' equity Total assets

$ 119,200

Total liabilities and stockholders' equity

79,400 $ 119,200

38) Bronzer Company Income Statement For the year ended December 31 Service revenue Expenses: Salaries Rent Supplies Interest Miscellaneous Total expenses Net income

$ 120,000

71,500 12,000 9,400 3,000 8,700 104,600 $ 15,400 Bronzer Company

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Assets Cash Accounts Receivable Supplies Equipment

Balance Sheet December 31 Liabilities $ 11,200 17,300

Accounts payable Notes payable

$ 18,500 30,000

2,700 84,400

Total liabilities Stockholders' Equity

48,500

Common stock

60,000

Retained earnings

7,100

Total stockholders' equity Total assets

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$ 115,600

Total liabilities and stockholders' equity

67,100 $ 115,600

CHAPTER 1 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Accounting is a system of maintaining records of a company's operations and communicating that information to decision makers. ⊚ true ⊚ false

2) Accounting information is used by investors to decide whether to invest in a company's stock. ⊚ true ⊚ false

3) Accounting information is used by creditors to decide whether to invest in a company's stock. ⊚ true ⊚ false

4) The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes. ⊚ true ⊚ false

Financing activities include transactions the company has with investors and creditors. ⊚ ⊚

true false

6) Investing activities include transactions involving the purchase and sale of resources that are expected to benefit the company for several years. ⊚ ⊚

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true false

7) Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs. ⊚ ⊚

true false

A corporation is an entity that is legally separate from its owners. ⊚ true ⊚ false

Cash, inventory for sale to customers, supplies, and buildings are examples of liabilities. ⊚ true ⊚ false

10) Amounts owed to suppliers, employees, the government in the form of taxes, and utility companies are examples of liabilities. ⊚ true ⊚ false

11) If total assets of a company equal $12,000 and total stockholders' equity equals $4,000, then total liabilities equal $8,000. ⊚ true ⊚ false

12) If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000, then total assets equal $7,000. ⊚ true ⊚ false

13) The accounting equation shows that a company's total resources equal creditors' and owners' claims to those resources. ⊚ ⊚

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true false

14) The costs related to rent, utilities, and salaries in the current reporting period are examples of liabilities. ⊚ true ⊚ false

15)

The difference between revenues and expenses is referred to as net income or net loss. ⊚ true ⊚ false

16) If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000. ⊚ true ⊚ false

17) Expenses include a company’s costs of providing products and services to customers, as well as cash payments to its stockholders. ⊚ true ⊚ false

18)

Dividends represent a return of the company's profits to its owners, the stockholders. ⊚ true ⊚ false

19) One of the differences between a partnership and a corporation is that owners of a partnership have limited liability. ⊚ true ⊚ false

20) Limited liability means the stockholders are not held personally responsible for the financial obligations of the corporation. ⊚ true ⊚ false Version 1

21)

A company's total resources include assets and stockholders' equity. ⊚ ⊚

true false

22) Double taxation refers to a corporation's income being taxed twice—first when the company pays corporate income taxes on income it earns, and then again when stockholders pay personal income taxes when the company distributes that income as dividends to them. ⊚ true ⊚ false

23) Financial statements are periodic reports published by the company for the purpose of providing information to managers. ⊚ true ⊚ false

24) The balance sheet is a financial statement that reports the company's revenues and expenses over an interval of time. ⊚ true ⊚ false

25) The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders' equity over an interval of time. ⊚ true ⊚ false

26)

Stockholders' equity arises from two primary sources–common stock and revenue. ⊚ ⊚

true false

27) Common stock represents an external source of stockholders' equity, whereas retained earnings represents an internal source. Version 1

⊚ ⊚

true false

28) Retained earnings represent all net income minus all dividends over the life of the company. ⊚ ⊚

true false

29) Dividends are considered an expense in running the business and reported on the income statement. ⊚ ⊚

true false

30) All cash transactions reported on the statement of cash flows are classified as (1) operating activities, (2) investing activities, or (3) financing activities. ⊚ ⊚

true false

31) Investing cash flows generally include cash receipts and cash payments for transactions involving revenue and expense activities during the period. ⊚ true ⊚ false

32) Operating cash flows generally include cash transactions for the purchase and sale of resources that are expected to benefit the company for more than one year. ⊚ ⊚

true false

33) Financing activities provide information to investors and creditors about the mix of external financing of the company.

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⊚ ⊚

true false

34) Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings. ⊚ true ⊚ false

35) Financial accounting has an impact on everyday business decisions as well as wideranging economic consequences. ⊚ true ⊚ false

36) Investors and creditors rely heavily on financial accounting information in making investment and lending decisions. ⊚ true ⊚ false

37)

In general, if a company's net income is increasing, so will its stock price. ⊚ true ⊚ false

38) The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP). ⊚ true ⊚ false

39) Financial accounting and reporting standards in the United States are established primarily by the Financial Accounting Standards Board (FASB). ⊚ true ⊚ false

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40) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929. ⊚ true ⊚ false

41) The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC) the power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors. ⊚ true ⊚ false

42) The role of independent auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles (GAAP) in preparing the company's financial statements. ⊚ true ⊚ false

43) Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the fairness of that company's financial statements. ⊚ true ⊚ false

44) The primary objective of financial accounting is to provide useful information to managers in making decisions. ⊚ true ⊚ false

45) Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. ⊚ true ⊚ false

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46) The Financial Accounting Standards Board's conceptual framework does not prescribe Generally Accepted Accounting Principles. It provides an underlying foundation for the development of accounting standards and interpretation of accounting information. ⊚ true ⊚ false

47) The two fundamental decision-specific qualitative characteristics that make accounting information useful are comparability and understandability. ⊚ true ⊚ false

48) Relevance refers to accounting information having confirmatory value and/or predictive value. ⊚ true ⊚ false

49) To be a faithful representation of business activities, accounting information should be complete, neutral, and free from error. ⊚ true ⊚ false

50) The periodicity assumption indicates that the economic life of an enterprise can be divided into artificial time periods for financial reporting purposes. ⊚ true ⊚ false

51) The economic entity assumption states that in the absence of information to the contrary, the business entity will continue to operate indefinitely. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 52) What is the primary purpose of financial accounting?

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A) Determine the amount of tax liability owed to the government B) Communicate business activities to internal management C) Measure business activities and communicate those measures to external users to make decisions D) Measure the profitability of the company in order to assist employees with making decisions

53)

The primary purpose(s) of financial accounting is (are) to: A) Measure and record business transactions. B) Prepare federal and state tax returns. C) Communicate financial results to investors and creditors. D) Both measure and communicate financial information to external parties.

54)

Which definition below best describes financial accounting? A) Process of measuring income taxes owed to the government B) System of maintaining communication with a company's customers and suppliers C) Procedures designed to enhance the company's image to potential investors D) Measuring business activities and communicating them to external parties

55)

Financial accounting does not deal with which of the following? A) Measuring a company's economic activity B) Providing information to internal users C) Preparing financial reports D) Communicating financial results to investors

56)

Financial accounting:

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A) Provides information primarily for external decision makers. B) Provides information primarily for a company's employees. C) Provides information primarily for the use of managers of the company. D) Is primarily used to compute a company's tax obligation.

57) for:

The primary focus for financial accounting information is to provide information useful

A) Investing decisions and credit decisions. B) Investing decisions but not credit decisions. C) Credit decisions but not investing decisions. D) Neither investing decisions nor credit decisions.

58) Which of the following groups is not among the external users for whom financial statements are prepared? A) Creditors B) Regulators C) Investors D) Managers

59) Which of the following groups is not among the external users for whom financial statements are prepared? A) Customers B) Suppliers C) Employees D) Customers, suppliers, and employees are all external users of financial statements

60)

The form of business organization that is legally separate from its owners is a:

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A) Partnership. B) Sole proprietorship. C) Corporation. D) Separation entity.

61)

Which business form has the advantage of limited liability? A) Corporation B) Sole proprietorship C) Partnership D) All business forms share equal limited liability

62)

Limited liability means:

A) Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket. B) Liabilities of a company cannot exceed its assets. C) Companies are not allowed to borrow unless they are profitable. D) Companies are less likely to be sued if they are formed as a corporation.

63)

One disadvantage of the corporate form of business is: A) Limited liability. B) Access to more capital. C) Smaller in size. D) Double taxation.

64)

Which of the following is an operating activity?

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A) Issuing common stock B) Paying dividends C) Borrowing cash from a bank to acquire a building D) Paying electricity bills for the month

65)

How many of the following cash transactions are operating activities?

Borrow $50,000 from the bank. Purchase $12,000 in supplies. Provide services to customers for $27,000. Pay the utility bill of $750. Purchase a delivery truck for $12,000. Receive $25,000 from issuing common stock. A) One B) Two C) Three D) Four

66) Transactions related to the primary business activities of the company, such as selling goods and services to customers and the associated costs of doing so, are referred to as: A) Investing activities. B) Operating activities. C) Management activities. D) Financing activities.

67)

Draco Company engages in the following cash payments:

Purchase equipment Pay rent Repay loan to the bank Pay workers’ salaries

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$ 3,850 375 5,300 1,250

What is the total amount of cash paid for operating activities? A) $9,150 B) $3,850 C) $1,625 D) $6,550

68)

Draco Company engages in the following cash payments:

Purchase equipment Pay rent Repay loan to the bank Pay workers' salaries

$ 2,000 500 5,000 1,000

What is the total amount of cash paid for operating activities? A) $6,000 B) $2,000 C) $7,000 D) $1,500

69) Accountants are responsible for measuring various operating, investing, and financing activities. Which of the following correctly matches the activity with its type? A) Investing––paying for utilities used during the month B) Investing––purchasing land for cash C) Operating––paying cash dividends to stockholders D) Financing––providing products and services to customers

70) Transactions of a company that include the purchase and sale of resources that are expected to benefit the company for several years are referred to as:

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A) Investing activities. B) Financing activities. C) Expenditure activities. D) Operating activities.

71) McGill purchases additional office equipment to better serve its customers. This purchase is classified as what type of activity? A) Company activity B) Financing activity C) Investing activity D) Operating activity

72)

Cash transactions of a company with lenders and with stockholders are referred to as: A) Investing activities. B) Financing activities. C) External activities. D) Operating activities.

73)

Financing activities include:

A) Primary operations such as selling goods to customers. B) Transactions with company employees. C) Transactions the company has with investors and creditors. D) The purchase and sale of resources that are expected to benefit the company for several years.

74)

Financing activities include:

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A) The purchase of equipment. B) Issuing common stock to stockholders. C) Transactions with company employees. D) Selling goods or services to customers.

75)

The accounting equation is defined as: A) Assets = Liabilities + Stockholders' Equity. B) Assets = Liabilities − Stockholders' Equity. C) Net Income = Revenues − Expenses. D) Liabilities + Revenues = Assets.

76)

Which statement below best describes the accounting equation?

A) The change in retained earnings equals net income less dividends. B) Revenue and expense transactions tend to equal out over time. C) The total resources of the company equals creditors' and owners' claims to those resources. D) Financing activities equal investing and operating activities.

77) If a company has stockholders' equity of $60,000 at the end of the year, which of the following statements must be true? A) The company's assets exceed liabilities by $60,000. B) The company has issued $60,000 of common stock. C) Net income for the year equals $60,000. D) Total revenues during the year equal $60,000.

78) Emmitt had the following final balances after the first year of operations: assets, $36,900; stockholders' equity, $14,700; dividends, $2,100; and net income, $10,500. What is the amount of Emmitt's liabilities?

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A) $9,600 B) $36,900 C) $22,200 D) $23,000

79) Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders' equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt's liabilities? A) $55,000 B) $30,000 C) $13,000 D) $7,000

80)

An alternative form of the accounting equation is: A) Net Income = Revenues − Expenses. B) Stockholders' Equity = Assets + Liabilities. C) Assets = Liabilities − Stockholders' Equity. D) Assets − Liabilities = Stockholders' Equity.

81)

The accounts that represent the resources of the company are called: A) Liabilities. B) Revenues. C) Expenses. D) Assets.

82)

The assets of a company represent:

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A) Amounts owed to creditors. B) Sales of goods or services to customers. C) Total resources of a company. D) Investments by stockholders.

83)

Which of the following accounts represents a resource of the company? A) Common stock B) Service revenue C) Supplies D) Salaries expense

84)

Which of the following does not represent an asset of a company? A) Supplies held by the company B) Amounts owed to suppliers C) Equipment owned and used for operations D) Land owned by the company

85)

Creditors' claims to a company’s resources are referred to as: A) Dividends. B) Assets. C) Liabilities. D) Stockholders' equity.

86)

Liabilities are best defined as:

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A) Amounts the company expects to collect in the future from customers. B) Amounts owed to creditors. C) The amounts that owners have invested in the business. D) Payments to stockholders.

87)

Amounts owed to suppliers for supplies purchased on account are an example of a(n): A) Revenue. B) Asset. C) Liability. D) Expense.

88)

Which of the following does not represent a liability of a company? A) Salaries owed to employees B) Taxes owed to the government C) Amounts owed to suppliers D) All of the other answers are liabilities

89)

The accounts that typically include claims that must be paid by a specific date are called: A) Assets. B) Liabilities. C) Dividends. D) Stockholders' equity.

90)

Liabilities can be best described as:

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A) The total amount of costs used over the past year. B) Amounts expected to be distributed to stockholders. C) Amounts owed to creditors. D) The total amount of services provided to customers during the year.

91)

The stockholders' interest in a corporation is called: A) Dividends. B) Assets. C) Liabilities. D) Stockholders' equity.

92)

Owners’ claims to the company's resources are referred to as: A) Stockholders' equity. B) Revenues. C) Assets. D) Liabilities.

93) Using the information below from the accounting records of Thomas Corporation, owners’ claims to the company's resources amount to: Assets Liabilities Net income Retained earnings

$ 1,200,000 $ 800,000 $ 100,000 $ 250,000

A) $1,200,000 B) $800,000 C) $250,000 D) $400,000

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94)

Which of the following best describes revenue?

A) Resources of a company B) An amount recognized when the company sells products or provides services to a customer C) Cash received from a customer D) Dividends paid to stockholders

95)

The costs of providing goods and services to customers are referred to as: A) Assets. B) Expenses. C) Liabilities. D) Revenues.

96)

The costs associated with producing revenues are referred to as: A) Dividends. B) Assets. C) Liabilities. D) Expenses.

97)

Net income can best be described as: A) Net cash received by a company during the year. B) The difference between revenues and expenses. C) The profits retained in a company. D) Resources of a company.

98) Use the following appropriate amounts to calculate net income: Revenues, $10,300; Liabilities, $3,300; Expenses, $3,800; Assets, $18,300; Dividends, $1,400.

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A) $8,150 B) $6,500 C) $15,000 D) $5,100

99) Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000. A) $6,000 B) $8,000 C) $4,000 D) $14,000

100)

The account type that represents payments to stockholders is called: A) Liabilities. B) Assets. C) Stockholders' equity. D) Dividends.

101)

Dividends represent: A) Resources of the company. B) Distributions (most often cash) to the owners of the company. C) Amounts owed to creditors. D) Expenses of operating the company.

102)

The equation best describing the income statement is:

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A) Revenues − Expenses = Net Income. B) Assets = Revenues − Expenses. C) Assets = Liabilities + Stockholders' Equity. D) Revenues + Expenses = Net Income.

103)

Expenses are reported on which of the following statements? A) Income statement B) Statement of cash flows C) Balance sheet D) Statement of stockholders' equity

104)

Which of the following items would not appear in an income statement? A) Salaries expense B) Advertising expense C) Service revenue D) Cash

105)

Which of the following items would not appear in an income statement? A) Delivery Expense B) Accounts Payable C) Service Revenue D) Utilities Expense

106)

Consider the following account balances of the Shattuck Law Firm at the end of the year:

Accounts Payable Salaries Expense Cash Common Stock

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$ 4,400 12,800 1,700 2,400

Service Revenue Supplies Retained Earnings Utilities Expense

8,300 4,300 1,100 5,000

How many of these accounts would appear in Shattuck's year-end income statement? A) Five B) Four C) Three D) Two

107)

Consider the information below that relates to the end of the current period:

Accounts Receivable Rent Expense Insurance Expense Common Stock Service Revenue Supplies Equipment Income Tax Expense

$ 14,700 7,500 2,100 24,000 28,300 4,300 21,600 4,200

What is the amount of net income in the current period? A) $27,300 B) $29,200 C) $14,500 D) $10,200

108)

A company had the following amounts at the end of the year:

Cash Supplies Expense Dividends Service Revenue Prepaid Rent

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$ 11,200 1,500 2,600 23,500 4,300 23

Salaries Expense Accounts Payable Land

8,200 12,700 36,900

What amount would the company report for net income? A) $11,200 B) $6,900 C) $13,800 D) $42,300

109)

Net income (loss) is reported on which of the following financial statement(s)? A) Balance sheet and income statement B) Income statement and statement of stockholders' equity C) Statement of stockholders' equity and balance sheet D) Net income is reported only on the income statement

110)

Which of the following items is reported on the statement of stockholders' equity? A) Total assets B) Total expenses C) Net income D) Operating cash flows

111)

Which of the following accounts is reported on the statement of stockholders' equity? A) Accounts Payable B) Accounts Receivable C) Common Stock D) Supplies

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112)

Which of the following accounts is reported on the statement of stockholders' equity? A) Supplies B) Cash C) Salaries Payable D) Retained Earnings

113)

Which one of the following statements regarding financial reports is correct?

A) The balance sheet classifies all assets according to operating, investing, and financing activities. B) The income statement is used to show that a company's total resources equal the sum of claims to those resources. C) The statement of stockholders' equity updates the balances of common stock and retained earnings for related transactions during the year. D) The statement of cash flows reports cash inflows and outflows from operating activities only.

114)

Which of the following best explains the meaning of total stockholders' equity?

A) The difference between total revenues and total expenses, less dividends for the year B) The amount of common stock less dividends over the life of the company C) All revenues, expenses, and dividends over the life of the company D) Owners’ claims to resources, which arise primarily from contributions by the owners and company operations

115)

Which of the following statements regarding financial reports is not correct?

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A) A balance sheet presents the financial position of the company on a particular date. B) An income statement shows revenues and expenses over an interval of time. C) A statement of stockholders' equity reports liabilities, net income, and dividend information. D) A statement of cash flows classifies all cash transactions into three categories that correspond to the three fundamental business activities—operating, investing, and financing.

116)

Retained earnings at the end of the year is calculated using: A) Beginning retained earnings, net income, and dividends. B) Common stock and dividends. C) Stockholders' equity, net income, and dividends. D) Net income and dividends.

117) Alpha Company has an ending Retained Earnings balance of $51,200. If, during the year, the company paid dividends of $4,000 and had net income of $22,400, then what was the beginning Retained Earnings balance? A) $32,800 B) $35,100 C) $24,800 D) $69,600

118) Alpha Company has an ending Retained Earnings balance of $51,100. If, during the year, the company paid dividends of $4,300 and had net income of $22,500, then what was the beginning Retained Earnings balance? A) $24,300 B) $32,900 C) $300 D) $69,300

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119) The ending Retained Earnings balance of Carriage, Incorporated decreased by $1.9 million from the beginning of the year. The company declared a dividend of $6.2 million during the year. What was the net income for the year? A) $8.1 million B) $7.2 million C) $1.9 million D) $4.3 million

120) The ending Retained Earnings balance of Carriage, Incorporated decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income for the year? A) $7.5 million B) $6.4 million C) $4.4 million D) $1.0 million

121)

Consider the information provided below:

Beginning retained earnings Ending retained earnings Decrease in cash Net income Change in stockholders’ equity

$ 55,000 $ 112,000 $ 9,400 $ 83,000 $ 13,000

What was the total amount of dividends the company paid to stockholders in the current period? A) $26,000 B) $0 C) $112,000 D) $16,600

122)

Consider the information provided below:

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Beginning retained earnings Ending retained earnings Decrease in cash Net income Change in stockholders’ equity

$ 54,000 $ 110,000 $ 10,000 $ 84,000 $ 15,000

What was the total amount of dividends the company paid to stockholders in the current period? A) $13,000 B) $110,000 C) $28,000 D) $18,000

123) For the past five years, Mookie Consulting Services reported the following annual net income and dividend amounts: Year 1 2 3 4 5

Net Income $ 22,000 17,000 9,000 14,000 25,000

Dividends $ 2,000 2,000 1,000 3,000 4,000

If Mookie had Retained Earnings of $88,000 at the end of year 5, what was the company's Retained Earnings at the beginning of Year 1? A) $13,000 B) $25,000 C) $7,000 D) $1,000

124) Nina Corporation had the following net income (loss) for the first three years of operations, respectively: $6,500, ($1,700), and $2,800. If the Retained Earnings balance at the end of year three is $1,200, what was the total amount of dividends paid over these three years?

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A) $500 B) $7,600 C) $6,400 D) $0

125) Nina Corporation had the following net income (loss) for the first three years of operations, respectively: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years? A) $500 B) $0 C) $9,100 D) $8,000

126) Aikman Company paid dividends of $2,570, $0, $1,520 and $950 over the first four years of the company's existence, respectively. If Retained Earnings has an ending balance of $9,100 at the end of year four, what was the average annual amount of net income (loss) over the first four years for Aikman? (Round your answer to the nearest dollar amount.) A) $14,140 B) $1,260 C) $5,590 D) $3,535

127) Aikman Company paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company's existence, respectively. If Retained Earnings has an ending balance of $9,700 at the end of year four, what was the average annual amount of net income (loss) over the first four years for Aikman? A) $3,685 B) $14,740 C) $840 D) $1,260

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128) On January 1, Barton Brothers, Incorporated started the year with a $698,000 balance in Retained Earnings and a $599,000 balance in Common Stock. During the year, the company reported net income of $93,000, paid a dividend of $14,300, and issued more common stock for $20,500. What is total stockholders' equity at the end of the year? A) $1,396,200 B) $1,297,000 C) $1,355,200 D) $1,424,800

129) On January 1, Barton Brothers, Incorporated started the year with a $492,000 balance in Retained Earnings and a $605,000 balance in Common Stock. During the year, the company reported net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders' equity at the end of the year? A) $1,231,700 B) $1,097,000 C) $1,201,300 D) $1,588,300

130)

The financial statement that represents the accounting equation is the: A) Income statement. B) Statement of cash flows. C) Balance sheet. D) Statement of stockholders' equity.

131)

The equation best describing the balance sheet is: A) Assets = Liabilities + Stockholders' Equity. B) Revenues − Expenses = Net Income. C) Ending Retained Earnings + Dividends = Net Income. D) Revenues + Expenses = Net Income.

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132)

The financial statement that represents activity over the entire life of the company is the: A) Income statement. B) Balance sheet. C) Statement of financial accounting. D) Statement of cash flows.

133)

Liabilities are reported on which of the following statements? A) Income statement B) Statement of cash flows C) Balance sheet D) Statement of stockholders' equity

134)

Consider the following account balances of the Shattuck Law Firm at the end of the year:

Accounts Payable Salaries Expense Cash Common Stock Service Revenue Supplies Retained Earnings Utilities Expense

$ 4,400 12,800 1,700 2,400 8,300 4,300 1,100 5,000

How many of these accounts would appear in Shattuck's year-end balance sheet? A) Five B) Four C) Three D) Two

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135) The two categories of stockholders' equity usually found in the balance sheet of a corporation are: A) Common stock and liabilities. B) Assets and liabilities. C) Common stock and retained earnings. D) Revenues and expenses.

136)

Which of the following isnot reported in the balance sheet? A) Assets B) Retained Earnings C) Expenses D) Liabilities

137)

Which of the following is a balance sheet item? A) Net Income B) Dividends C) Utilities Expense D) Cash

138)

Which of the following statements isnot correct about the financial statements?

A) An income statement reports revenues, expenses, and net income information. B) The statement of stockholders' equity presents common stock, dividends, and retained earnings information. C) A balance sheet reports assets, liabilities, revenues, and expenses. D) The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities.

139)

The balance sheet depicts which of the following equations?

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A) Net income = revenue − expenses B) Ending retained earnings = beginning retained earnings + net income − dividends C) Assets = liabilities + stockholders' equity D) Net cash flows = total cash inflows − total cash outflows

140)

Which of the following financial statements reports a company's retained earnings? A) Income statement B) Balance sheet C) Statement of cash flows D) All of the other answers are financial statements that report retained earnings.

141)

Which of the following isnot reported in the balance sheet? A) Assets B) Common stock C) Retained earnings D) Revenues

142)

Which of the following is not a major section in the statement of cash flows? A) Operating cash flows B) Customer cash flows C) Financing cash flows D) Investing cash flows

143) Cash paid for which of the following activities would affect the amount reported for operating cash flows in the statement of cash flows?

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A) Issuing common stock B) Paying dividends C) Paying electricity bill for the month D) Borrowing cash from a bank to acquire a building

144) How many of the following transactions would affect operating cash flows? (All transactions involve cash.) Repay $40,000 borrowed from the bank. Pay $11,000 in salaries to employees. Receive $25,000 from customers for services provided. Pay $750 for advertising. Purchase equipment for $15,000. Receive $25,000 from the sale of land. A) One B) Two C) Three D) Four

145) Investing cash flows in the statement of cash flows would include which of the following? A) Paying salaries for the month B) Purchase of land C) Paying dividends to stockholders D) Selling goods or services to customers

146) Lansing Company purchases additional office equipment to better serves its customers. This cash purchase is reported on the statement of cash flows as what type of activity?

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A) External activity B) Investing activity C) Financing activity D) Operating activity

147) Financing cash flows in the statement of cash flows would include which of the following? A) Paying salaries for the month B) Purchase of land C) Paying dividends to stockholders D) Selling goods or services to customers

148) Cash received from a bank borrowing would be reported on the statement of cash flows as what type of activity? A) Investing B) Merchandising C) Operating D) Financing

149) The total change in cash equals $44,000, net operating cash flows equals $22,000, and net investing cash flows equals ($13,000). What is net financing cash flows? A) $15,000 B) $35,000 C) $25,000 D) $45,000

150)

The financial statement(s) that record activity over an interval of time include the:

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A) Income statement. B) Balance sheet. C) Balance sheet and income statement. D) Income statement and statement of cash flows.

151)

Which of the following is the correct order for preparing the financial statements listed? A) Balance sheet, statement of stockholders' equity, and income statement B) Balance sheet, income statement, and statement of stockholders' equity C) Statement of stockholders' equity, income statement, and balance sheet D) Income statement, statement of stockholders' equity, and balance sheet

152) In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and (3) statement of stockholders' equity? A) 1, 2, 3 B) 3, 2, 1 C) 1, 3, 2 D) 2, 3, 1

153)

Which financial statement is typically prepared first? A) Balance sheet B) Income statement C) Statement of stockholders' equity D) Statement of cash flows

154) Which of the following best represents value created for stockholders during the current period?

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A) Retained earnings B) Total assets C) Net income D) Stockholders' equity

155) While many financial accounting numbers have an impact on stock prices, which of the following has the single greatest impact, on average? A) Total dividends B) Total assets C) Total revenues D) Net income

156) Which financial accounting number impacts stock prices more than any other single piece of information? A) Retained earnings B) Net income C) Common stock D) Total assets

157) Which financial statement best reveals to investors and creditors information about a company's debt? A) Income statement B) Balance sheet C) Statement of cash flows D) Statement of stockholders' equity

158)

GAAP is an abbreviation for:

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A) Generally authorized accounting procedures. B) Generally applied accounting procedures. C) Generally accepted auditing practices. D) Generally accepted accounting principles.

159)

Generally Accepted Accounting Principles (GAAP) are best defined as: A) Standards for presenting financial accounting information. B) Government-mandated rules that companies must follow. C) Rules that best estimate profitability for a company. D) The group of individuals that create and enforce all accounting rules.

160) The body of rules and procedures that guide the measurement and communication of financial accounting information in the United States is known as: A) Standards of Professional Compliance (SPC). B) Generally Accepted Accounting Principles (GAAP). C) Generally Accepted Auditing Standards (GAAS). D) Rules of Financial Reporting (RFR).

161) The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the: A) FASB. B) IASB. C) SEC. D) IRS.

162) Financial accounting and reporting standards in the United States are established primarily by the:

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A) Securities and Exchange Commission. B) Financial Accounting Standards Board. C) International Accounting Standards Board. D) U.S. Congress.

163) The private sector organization that is currently responsible for setting accounting standards in the United States is the: A) Financial Accounting Standards Board. B) Accounting Principles Board. C) Securities and Exchange Commission. D) American Institute of Certified Public Accountants.

164)

The legal authority to set accounting standards lies with the: A) Financial Accounting Standards Board. B) Accounting Principles Board. C) Securities and Exchange Commission. D) American Institute of Certified Public Accountants.

165)

The International Accounting Standards Board: A) Is governed by the U.S. Securities and Exchange Commission. B) Can overrule the FASB when their policies disagree. C) Promotes the use of high-quality, understandable global accounting standards. D) Is the primary standard-setting body in the United States.

166)

Financial accounting objectives do not include providing information:

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A) Useful to investors and creditors in making decisions. B) To determine market values, assess profit potential, and evaluate management. C) Helpful to investors in predicting cash flows. D) About a company's economic resources and claims to those resources.

167)

Which statement below best describes the objectives of financial accounting?

A) Provide information that helps to predict cash flows B) Provide information about the economic resources, claims to resources, and changes in resources and claims C) Provide information that is useful to investors and creditors in making decisions D) All of the answer choices describe objectives of financial accounting.

168) Of the following, the most important objective for financial accounting is to provide information useful for: A) Predicting cash flows. B) Determining taxable income. C) Providing accountability. D) Increasing future profits.

169)

Independent auditors express an opinion on the: A) Extent to which financial statements are in compliance with GAAP. B) Accuracy of the amount of income taxes a company owes to the government. C) Quality of the company's products. D) Well-being and fair treatment of a company's workforce.

170) To ensure that management has in fact appropriately applied GAAP, the SEC requires independent outside verification of the financial statements of public traded companies by an:

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A) Advisor. B) Attorney. C) Auditor. D) Analyst.

171) Which of the following best describes auditors with regards to their role in financial reporting? A) Consultants that are hired by company management to advise on key matters related to competition, product pricing, employee retention, and financial reporting strategies B) Key employees of the company that actively participate on the management team in strategic planning, product development, and financial reporting C) Government employees assigned by local officials to ensure accurate financial reporting and operational integrity by the company D) Independent party hired by management to express a professional opinion of the extent to which the company’s financial reporting is in compliance with generally accepted accounting principles

172)

The role of the Public Company Accounting Oversight Board is to: A) Advise investors and creditors of companies’ future profit potential. B) Ensure that auditors follow a strict set of guidelines when conducting their audits. C) Assist company management in the case of financial default on debt. D) Develop accounting and reporting standards in the United States.

173)

A career in a public accounting firm traditionally involves working in the area of: A) Auditing. B) Tax preparation/planning. C) Business consulting. D) All of the other answer choices are correct statements.

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174)

A career in private accounting indicates: A) Working undercover for an organization such as the Federal Bureau of Investigation

(FBI). B) Being employed by one of the "Big 4" accounting firms. C) Providing accounting services to the company that employs you. D) All of the other answer choices are correct statements.

175)

The term "cooking the books" refers to:

A) Purposely providing misleading financial information to investors and creditors. B) Hiring an auditor to provide independent verification of the fairness of financial statements. C) Filing all tax-related statements by the required deadline. D) Preparing internal budgets to plan for expenditures in the following year.

176)

Fundamental qualitative characteristics of accounting information are: A) Relevance and comparability. B) Comparability and consistency. C) Faithful representation and relevance. D) Faithful representation and consistency.

177) The qualitative characteristic that says accounting information can influence users' decisions by allowing them to assess past performance is: A) Timeliness. B) Neutrality. C) Confirmatory value. D) Predictive value.

178) Accounting information that does not provide measurement bias in favor of a particular set of companies has the characteristic of:

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A) Relevance. B) Consistency. C) Materiality. D) Neutrality.

179) If accounting information is considered to have faithful representation, then which of the following is true? A) The information represents to users what it claims to represent. B) The information follows conservatism principles and is also material. C) The information is considered pertinent to or affects decisions. D) The information will have predictive value, feedback value, and is timely.

180) For accounting information to be relevant, it should possess which of the following characteristics? A) Predictive value and confirmatory value B) Large in amount and timely C) Comparability and consistency D) Verifiability

181)

Materiality is based upon which factor(s)? A) Timeliness of an item B) Amount and nature of an item C) Consistency of an item D) Relevance of an item

182)

The conceptual framework's qualitative characteristic of relevance includes:

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A) Predictive value. B) Verifiability. C) Completeness. D) Neutrality.

183)

According to the conceptual framework, verifiability implies: A) Consensus. B) Logic. C) Legal evidence. D) Legal verdict.

184)

The conceptual framework's qualitative characteristic of faithful representation includes: A) Predictive value. B) Neutrality. C) Confirmatory value. D) Comparability.

185)

Constraints on qualitative characteristics of accounting information include: A) Freedom from material error. B) Going concern. C) Neutrality. D) Cost effectiveness.

186)

Enhancing qualitative characteristics of accounting information include: A) Relevance and comparability. B) Comparability and consistency. C) Faithful representation and relevance. D) Cost effectiveness and materiality.

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187)

The major underlying assumptions of accounting include all of the following except: A) Economic entity. B) Monetary unit. C) Legal liability. D) Going concern.

188)

If a company has gone bankrupt, its financial statements likely violate the: A) Periodicity assumption. B) Monetary unit assumption. C) Going concern assumption. D) Economic entity assumption.

189)

The assumption that a business will continue to operate into the future is the: A) Monetary unit assumption. B) Periodicity assumption. C) Economic entity assumption. D) Going concern assumption.

190) The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the: A) Monetary unit assumption. B) Economic entity assumption. C) Going concern assumption. D) Periodicity assumption.

191) The assumption that the life of the business can be divided into time intervals for reporting purposes is the:

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A) Monetary unit assumption. B) Periodicity assumption. C) Economic entity assumption. D) Going concern assumption.

192) The assumption that amounts are reported using a common scale (such as the dollar in the United States) is the: A) Monetary unit assumption. B) Periodicity assumption. C) Economic entity assumption. D) Going concern assumption.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 193) Define accounting. Describe the two primary functions of financial accounting and its role in our society.

194) Describe the three fundamental business activities that accountants measure using the statement of cash flows.

195)

List and describe the four financial statements most frequently provided to external users.

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196)

How does the value of an audit affect financial statements?

197) Define the four basic assumptions underlying Generally Accepted Accounting Principles: (a) economic entity, (b) going concern, (c) periodicity, (d) monetary unit.

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Answer Key Test name: Chap 01_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE Creditors lend money to a company. 4) FALSE Financial accounting primarily serves to provide information to external parties. 5) TRUE 6) TRUE 7) TRUE 8) TRUE 9) FALSE These are examples of assets. 10) TRUE 11) TRUE 12) FALSE Total assets = Total liabilities ($16,000) + Total stockholders' equity ($9,000) = $25,000. 13) TRUE 14) FALSE These are examples of expenses. 15) TRUE 16) TRUE 17) FALSE Expenses include costs of providing products and services. Cash payments to stockholders are called dividends. Version 1

18) TRUE 19) FALSE Stockholders of a corporation have limited liability. 20) TRUE 21) FALSE Assets are the total resources of a company. Liabilities are amounts owed to creditors. Stockholders' equity represents owners’ claims to those resources. These claims arise from two primary sources: (1) contributions by the owners themselves and (2) net resources generated by company operations. 22) TRUE 23) FALSE Financial statements are designed to provide information to external users. 24) FALSE The income statement reports revenues and expenses. 25) TRUE 26) FALSE Stockholders’ equity arises from two primary sources—common stock and retained earnings. 27) TRUE 28) TRUE 29) FALSE Dividends are not an expense. Expenses are the costs necessary to run the business to produce revenues. Dividends, on the other hand, are not costs related to providing products and services to customers; dividends are distributions (most often cash) to theowners of the company – the stockholders. 30) TRUE Version 1

31) FALSE These are operating activities. 32) FALSE Operating cash flows include cash receipts and cash payments for transactions involving revenue and expense activities during the period. Investing cash flows generally include cash transactions for the purchase and sale of investments and long-term assets. Long-term assets are resources owned by a company that are thought to provide benefits for more than one year. 33) TRUE 34) TRUE 35) TRUE 36) TRUE 37) TRUE 38) TRUE 39) TRUE 40) TRUE 41) TRUE 42) TRUE 43) TRUE 44) FALSE Financial accounting is intended primarily to provide information to investors and creditors. 45) TRUE 46) TRUE 47) FALSE The two fundamental characteristics are relevance and faithful representation. 48) TRUE 49) TRUE Version 1

50) TRUE 51) FALSE The economic entity assumption states that we identify all economic events with a particular economic entity. In other words, only business transactions involving the specific company should be reported as part of the company’s financial accounting information. 52) C 53) D 54) D 55) B 56) A 57) A 58) D 59) D 60) C 61) A 62) A 63) D 64) D 65) C (1) Purchase supplies, (2) Provide services to customers, and (3) Pay utility bill. 66) B 67) C Operating cash flows include cash receipts and cash payments for transactions involving revenue and expense activities during the period. Cash paid for operating activities = $375 + $1,250 = $1,625. 68) D

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Operating cash flows include cash receipts and cash payments for transactions involving revenue and expense activities during the period. Cash paid for operating activities = $500 + $1,000 = $1,500. 69) B 70) A 71) C 72) B 73) C 74) B 75) A 76) C Assets = Liabilities + Stockholders' Equity. 77) A Assets − Liabilities = Stockholders' Equity. 78) C Assets ($36,900) = Liabilities ($22,200) + Stockholders' Equity ($14,700) 79) B Assets ($55,000) = Liabilities ($30,000) + Stockholders' Equity ($25,000). 80) D 81) D 82) C 83) C 84) B 85) C 86) B 87) C Version 1

88) D 89) B 90) C 91) D 92) A 93) D Owners’ claims (Stockholders' Equity) = Assets ($1,200,000) − Liabilities ($800,000) 94) B 95) B 96) D 97) B 98) B Revenues ($10,300) − Expenses ($3,800) = Net Income ($6,500). 99) B Revenues ($12,000) − Expenses ($4,000) = Net Income ($8,000). 100) D 101) B 102) A 103) A 104) D 105) B 106) C Salaries Expense, Service Revenue, and Utilities Expense. 107) C Service Revenue ($28,300) − Rent Expense ($7,500) − Insurance Expense ($2,100) − Income Tax Expense ($4,200) = $14,500. 108) C Version 1

Service Revenue ($23,500) − Supplies Expense ($1,500) − Salaries Expense ($8,200) = $13,800. 109) B 110) C 111) C 112) D 113) C 114) D 115) C 116) A 117) A Beginning Retained Earnings ($32,800) + Net Income ($22,400) − Dividends ($4,000) = Ending Retained Earnings ($51,200). 118) B Beginning Retained Earnings ($32,900) + Net Income ($22,500) − Dividends ($4,300) = Ending Retained Earnings ($51,100). 119) D Beginning Retained Earnings ($0) + Net Income ($4.3) − Dividends ($6.2) = Ending Retained Earnings (−$1.9) 120) C Beginning Retained Earnings ($0) + Net Income ($4.4) − Dividends ($5.4) = Ending Retained Earnings (−$1.0). 121) A Beginning Retained Earnings ($55,000) + Net Income ($83,000) − Dividends ($26,000) = Ending Retained Earnings ($112,000) 122) C

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Beginning Retained Earnings ($54,000) + Net Income ($84,000) − Dividends ($28,000) = Ending Retained Earnings ($110,000). 123) A Beginning Retained Earnings ($13,000) = Ending Retained Earnings ($88,000) − Total Net Income ($87,000) + Total Dividends ($12,000). 124) C Beginning Retained Earnings ($0) + Net Income ($6,500 − $1,700 + $2,800) − Dividends ($6,400) = Ending Retained Earnings ($1,200) 125) D Beginning Retained Earnings ($0) + Net Income ($7,100 − $1,600 + $3,600) − Dividends ($8,000) = Ending Retained Earnings ($1,100). 126) D Beginning Retained Earnings ($0) + Net Income ($14,140) − Dividends ($2,570 + $0 + $1,520 + $950) = Ending Retained Earnings ($9,100). Divide net income amount by 4 to get average ($14,140 / 4 years) = $3,535. 127) A Beginning Retained Earnings ($0) + Net Income ($14,740) − Dividends ($2,410 + $0 + $1,570 + $1,060) = Ending Retained Earnings ($9,700). Divide net income amount by 4 to get average ($14,470 / 4 years) = $3,685. 128) A Total Stockholders’ Equity = Common Stock ($599,000 + $20,500) + Retained Earnings ($698,000 + $93,000 − $14,300) = $1,396,200. 129) C Total Stockholders’ Equity = Common Stock ($605,000 + $27,500) + Retained Earnings ($492,000 + $92,000 − $15,200) = $1,201,300. Version 1

130) C 131) A 132) B 133) C 134) A Accounts Payable, Cash, Common Stock, Supplies, and Retained Earnings. 135) C 136) C 137) D 138) C 139) C 140) B 141) D 142) B 143) C 144) C (1) Pay salaries, (2) Receive from customers, and (3) Pay advertising. 145) B 146) B 147) C 148) D 149) B Total change in cash ($44,000) = net operating cash flows ($22,000) + net investing cash flows (−$13,000) + net financing cash flows ($35,000). 150) D 151) D 152) D Version 1

153) B 154) C 155) D 156) B 157) B 158) D 159) A 160) B 161) A 162) B 163) A 164) C 165) C 166) B 167) D 168) A 169) A 170) C 171) D 172) B 173) D 174) C 175) A 176) C 177) C 178) D 179) A 180) A 181) B 182) A Version 1

183) A 184) B 185) D 186) B 187) C 188) C 189) D 190) B 191) B 192) A 193)Accounting is "the language of business." The functions of financial accounting are to measure the business activities of a company and to communicate those measurements to external parties for decisionmaking purposes. A large number of people, including investors and creditors, rely on financial accounting information to make informed, and presumably, better decisions about companies. 194)Financing activities include transactions the company has with investors and creditors. There are two basic sources of this external funding–the owners of the company who invest their own funds in the business, and creditors who lend money to the company.Investing activities include transactions involving the purchase and sale of resources that are expected to benefit the company for several years.Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so.

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195) The income statement presents revenues and expenses over an interval of time. The statement of shareholders' equity summarizes the changes in stockholders' equity (common stock and retained earnings) over an interval of time. The balance sheet presents the financial position of the company on a particular date. The statement of cash flows presents the cash receipts and cash payments over an interval of time for operating, investing, & financing activities. 196) Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations. Auditors express a professional opinion of the extent to which the financial statements are prepared in compliance with GAAP and are free of material misstatement. If auditors find mistakes or fraudulent reporting behavior, they require the company to correct all significant information before issuing financial statements. 197)Economic entity - All economic events can be identified with a particular economic entity.Going concern - In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.Periodicity - The life of a company can be divided into artificial time periods to provide timely information to external users.Monetary unit - In the U.S., financial statement elements should be measured in terms of the U.S. dollar. It assumes that the value of a dollar is stable over time.

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CHAPTER 2: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match each step of the measurement process with its description. 1.A) Assess whether the transaction results in a debit or credit to the account balance. 2.B) Post transactions to the general ledger. 3.C) Analyze the impact of the transaction on the accounting equation. 4.D) Use source documents to identify accounts affected by an external transaction. 5.E) Prepare a trial balance. 6.F) Record transactions in a journal using debits and credits. Step 1 Step 2 Step 3 Step 4 Step 5 Step 6

2) Match each term with its definition. 1.A) Activities of the company conducted with separate economic entities. 2.B) Events that affect the financial position of the company but do not include an exchange with a separate economic entity. 3.C) A summary of the effects of all transactions related to a particular item over a period of time. 4.D) Full set of procedures used to accomplish the measurement/communication process of financial accounting. 5.E) A list of all account names used to record transactions of a company. Chart of accounts Internal transactions Accounting cycle External transactions Accounts

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3) Match each term with how related transactions affect the accounting equation. 1.A) Transactions that increase stockholders' equity. 2.B) Transactions that decrease stockholders' equity related to distributions to stockholders. 3.C) Transactions that affect the right side of the accounting equation not related to stockholders' equity. 4.D) Transactions that affect the left side of the accounting equation. 5.E) Transactions that decrease stockholders' equity related to cost of generating revenues. Assets Revenues Liabilities Dividends Expenses

4) Match each term with its description. 1.A) Simplified form of a general ledger account. 2.B) List of all accounts and their balances showing that debits equal credits. 3.C) Right side of an account. 4.D) Left side of an account. 5.E) Format used to record transactions of a company. 6.F) Chronological record of all transactions. Debit Journal entry Journal Credit Trial balance T-account

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5) Below are the steps in the measurement process of external transactions. Arrange them from first (1) to last (6). 1.(a) Post the transaction to the T-accounts in the general ledger. 2.(b) Assess whether the impact of the transaction results in a debit or credit to the account balance. 3.(c) Use source documents to identify accounts affected by external transactions. 4.(d) Analyze the impact of the transaction on the accounting equation. 5.(e) Prepare a trial balance. 6.(f) Record transactions using debits and credits.

6) A company received a utility bill of $640 but did not pay it. Indicate the amount of increases and decreases in the accounting equation.

7) A company received a utility bill of $600 but did not pay it. Indicate the amount of increases and decreases in the accounting equation.

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8) A company purchases supplies on account for $2,300. Indicate the amount of increases and decreases in the accounting equation.

9) A company purchases supplies on account for $1,700. Indicate the amount of increases and decreases in the accounting equation.

10) A company provides services to customers on account for $2,900. Indicate the amount of increases and decreases in the accounting equation.

11) A company provides services to customers on account for $2,400. Indicate the amount of increases and decreases in the accounting equation.

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12) A company pays $870 dividends to stockholders. Indicate the amount of increases and decreases in the accounting equation.

13) A company pays $800 dividends to stockholders. Indicate the amount of increases and decreases in the accounting equation.

14) A company pays $1,100 cash for supplies previously purchased on account. Indicate the amount of increases and decreases in the accounting equation.

15) A company pays $1,300 cash for supplies previously purchased on account. Indicate the amount of increases and decreases in the accounting equation.

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16) The following transactions occur for the Hamilton Manufacturers. 1.(a) Provide services to customers on account for $4,300. 2.(b) Purchase equipment by signing a note with the bank for $10,500. 3.(c) Pay advertising of $1,700 for the current month. Analyze each transaction and indicate the amount of increases and decreases in the accounting equation.

17) The following transactions occur for the Hamilton Manufacturers. 1.(a) Provide services to customers on account for $4,500. 2.(b) Purchase equipment by signing a note with the bank for $10,000. 3.(c) Pay advertising of $1,500 for the current month. Analyze each transaction and indicate the amount of increases and decreases in the accounting equation.

18) Using the notion that the accounting equation (Assets = Liabilities + Stockholders' Equity) must remain in balance, indicate whether each of the following transactions is possible. 1.(a) Cash decreases; Accounts Payable decreases. 2.(b) Salaries Expense increases; Salaries Payable decreases. 3.(c) Accounts Receivable decreases; Service Revenue increases.

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19)

Suppose a company has the following balance sheet accounts:

Accounts Land Building Salaries payable Common stock Accounts payable Cash Retained earnings Supplies Equipment

Balances $8,500 ? 3,400 ? 2,800 5,100 11,700 3,400 4,500

Calculate the missing amounts assuming the company has total assets of $50,000.

20)

Suppose a company has the following balance sheet accounts:

Accounts Land Building Salaries payable Common stock Accounts payable Cash Retained earnings Supplies Equipment

Balances $9,000 ? 3,700 ? 2,600 5,300 11,600 3,200 4,500

Calculate the missing amounts assuming the company has total assets of $40,000.

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21) For each of the following accounts, indicate whether a debit or credit is used to increase (+) or decrease (−) the balance of the account. Account (a) Common Stock

Debit

Credit

(b) Liability (c) Asset (d) Revenue (e) Dividend (f) Retained Earnings (g) Expense

22) For each of the following accounts, indicate whether we use a debit or a credit to increase the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends

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23) For each of the following accounts, indicate whether we use a debit or a credit to decrease the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends

24)

A company issues common stock for $27,000 cash. Record the transaction.

25)

A company issues common stock for $20,000 cash. Record the transaction.

26) A company purchases a building for $140,000, signing a note payable. Record the transaction.

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27) A company purchases a building for $100,000, signing a note payable. Record the transaction.

28)

A company purchases equipment for $20,000 cash. Record the transaction.

29)

A company purchases equipment for $15,000 cash. Record the transaction.

30)

A company purchases office supplies on account for $7,000. Record the transaction.

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31)

A company purchases office supplies on account for $7,500. Record the transaction.

32)

A company provides services to customers on account, $4,300. Record the transaction.

33)

A company provides services to customers on account, $3,500. Record the transaction.

34)

A company provides services to customers for $3,300 cash. Record the transaction.

35)

A company provides services to customers for $2,400 cash. Record the transaction.

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36) A company pays employees' salaries of $5,900 for the current period. Record the transaction.

37) A company pays employees' salaries of $4,200 for the current period. Record the transaction.

38)

A company pays $2,400 in cash dividends to its stockholders. Record the transaction.

39)

A company pays $2,000 in cash dividends to its stockholders. Record the transaction.

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40) A company collects $5,100 cash from customers for services previously provided on account. Record the transaction.

41) A company collects $4,000 cash from customers for services previously provided on account. Record the transaction.

42) A company receives $6,200 cash in advance from customers for services to be provided next year. Record the transaction.

43) A company receives $6,500 cash in advance from customers for services to be provided next year. Record the transaction.

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44)

A company pays $7,000 for maintenance in the current period. Record the transaction.

45)

A company pays $5,400 for maintenance in the current period. Record the transaction.

46) A company pays $16,000 to purchase a one-year insurance policy. Record the transaction.

47) A company pays $12,000 to purchase a one-year insurance policy. Record the transaction.

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48) Record the following transactions for Acme Builders: 1.(a) Purchase office supplies on account, $1,500. 2.(b) Provide services to customers for cash, $3,000. 3.(c) Pay $1,700 in salaries for the current month.

49) Record the following transactions for Acme Builders: 1.(a) Purchase office supplies on account, $1,200. 2.(b) Provide services to customers for cash, $2,500. 3.(c) Pay $1,100 in salaries for the current month.

50) Record the following transactions for the Stroud Music Store: 1.(a) Provide music lessons to students for $13,000 on account. 2.(b) Purchase music supplies on account, $1,700. 3.(c) Pay rent for the current month, $2,700. 4.(d) Receive $10,700 cash from students in (a) above.

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51) Record the following transactions for the Stroud Music Store: 1.(a) Provide music lessons to students for $12,000 on account. 2.(b) Purchase music supplies on account, $1,500. 3.(c) Pay rent for the current month, $2,000. 4.(d) Receive $10,000 cash from students in (a) above.

52) Rite Shoes was involved in the transactions described below: 1.(a) Purchased $8,000 of supplies on account. 2.(b) Paid weekly salaries, $1,000. 3.(c) Provided services to customers on account, $5,400. 4.(d) Paid for supplies purchased in (a) above. 5.(e) Placed an order for $6,300 of supplies. Record each transaction. If an entry is not required, state "No Entry."

53) Rite Shoes was involved in the transactions described below: 1.(a) Purchased $8,200 of supplies on account. 2.(b) Paid weekly salaries, $920. 3.(c) Provided services to customers on account, $5,300. 4.(d) Paid for supplies purchased in (a) above. 5.(e) Placed an order for $6,200 of supplies. Record each transaction. If an entry is not required, state "No Entry."

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54) Record the following transactions. If an entry is not required, state "No Entry." 1.(a) Started business by issuing 10,000 shares of common stock for $28,000 2.(b) Hired Rebecca as an administrative assistant, promising to pay her $2,200 every two weeks. 3.(c) Rented a building for three years at $590 per month and paid six months' rent in advance. 4.(d) Purchased equipment for $5,400 cash. 5.(e) Purchased $1,600 of supplies on account. 6.(f) Provided services to customers for $7,900 cash. 7.(g) Paid employees’ salaries, $5,300. 8.(h) Paid for supplies purchased in item (e). 9.(i) Paid $890 for current advertising in a local newspaper. 10.(j) Paid utility bill of $1,500 for the current month.

55) Record the following transactions. If an entry is not required, state "No Entry." 1.(a) Started business by issuing 10,000 shares of common stock for $20,000. 2.(b) Hired Rebecca as an administrative assistant, promising to pay her $2,000 every two weeks. 3.(c) Rented a building for three years at $500 per month and paid six months' rent in advance. 4.(d) Purchased equipment for $5,400 cash. 5.(e) Purchased $1,800 of supplies on account. 6.(f) Provided services to customers for $7,800 cash. 7.(g) Paid employees' salaries, $5,200. 8.(h) Paid for supplies purchased in item (e). 9.(i) Paid $800 for current advertising in a local newspaper. 10.(j) Paid utility bill of $1,300 for the current month.

56)

Consider the following T-account for Accounts Payable:

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Accounts Payable Debit

Credit 10,600 8,200

5,000 ?

Balance

Required: 1.Compute the ending balance of the Accounts Payable account. 2.Give an example of a transaction that would have resulted in the $8,200 posting to the account. 3.Give an example of a transaction that would have resulted in the $5,000 posting to the account.

57)

Consider the following T-account for Accounts Payable: Accounts Payable Debit

Credit 10,200 8,800

4,500 ?

Balance

Required: 1.Compute the ending balance of the Accounts Payable account. 2.Give an example of a transaction that would have resulted in the $8,800 posting to the account. 3.Give an example of a transaction that would have resulted in the $4,500 posting to the account.

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58)

Consider the following transactions for Julianne Corporation:

a.Issue common stock for $15,000. b.Purchase equipment for $11,200 cash. c.Pay employees’ salaries of $3,500. d.Provide services to customers for $6,600 cash. 1.Post these transactions to the Cash T-account. Assume the balance of Cash before these transactions is $4,800. 2.Calculate the ending balance of the Cash account.

59) Consider the following transactions for Carrington Corporation: a.Issue common stock for $10,000. b.Purchase equipment for $11,500 cash. c.Pay employees' salaries of $3,700. d.Provide services to customers for $6,200 cash. 1.Post these transactions to the Cash T-account. Assume the balance of Cash before these transactions is $4,200. 2.Calculate the ending balance of the Cash account.

60)

Use the following information to prepare a trial balance.

Cash Deferred revenue Prepaid insurance Accounts payable Retained earnings Utilities expense

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$6,600 1,600 1,300 2,200 2,000 3,200

Dividends Salaries expense Accounts receivable Common stock Service revenue Maintenance expense

61)

1,900 2,900 3,500 6,900 7,600 900

Use the following information to prepare a trial balance.

Cash Deferred revenue Prepaid insurance Accounts payable Retained earnings Utilities expense Dividends Salaries expense Accounts receivable Common stock Service revenue Maintenance expense

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$ 6,200 1,200 1,200 1,900 1,600 3,000 1,200 2,200 3,400 6,200 7,100 800

Answer Key Test name: Chap 02_6e_Spiceland_Problem Material 1)Step 1 D Step 2 C Step 3 A Step 4 F Step 5 B Step 6 E 2)Chart of accounts E Internal transactions B Accounting cycle D External transactions A Accounts C 3) Assets D Revenues A Liabilities C Dividends B Expenses E 4) Debit D Journal entry E Journal F Credit C Trial balance B T-account A 5) 1(c); 2(d); 3(b); 4(f); 5(a); 6(e) 6)

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Assets $0

= =

Liabilities $640

+ +

Stockholders' Equity −$640

Assets $0

= =

Liabilities $600

+ +

Stockholders' Equity −$600

8) Assets $2,300

= =

Liabilities $2,300

+ +

Stockholders' Equity $0

Assets $1,700

= =

Liabilities $1,700

+ +

Stockholders' Equity $0

Assets $2,900

= =

Liabilities $0

+ +

Stockholders' Equity $2,900

Assets $2,400

= =

Liabilities $0

+ +

Stockholders' Equity $2,400

10)

11)

12) Assets −$870

= =

Liabilities $0

+ +

Stockholders' Equity −$870

= =

Liabilities $0

+ +

Stockholders' Equity −$800

13) Assets −$800

14) Assets −$1,100

= =

Liabilities −$1,100

+ +

Stockholders' Equity $0

Assets −$1,300

= =

Liabilities −$1,300

+ +

Stockholders' Equity $0

15)

16)

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(a) (b) (c)

Assets

+$4,300 +$10,500 −$1,700

= = =

Assets

+$4,500 +$10,000 −$1,500

= = =

Liabilities

Stockholders' Equity

+ + +

+$4,300 $0 −$1,700

Liabilities

Stockholders' Equity

$0 +$10,000 $0

+ + +

+$4,500 $0 −$1,500

$0 +$10,500 $0

17)

(a) (b) (c)

18) (a) Yes; (b) No; (c) No 19)Building: Total Assets ($50,000) = Land ($8,500) + Building (?) + Cash ($5,100) + Supplies ($3,400) + Equipment ($4,500); therefore, Building = $28,500. Common Stock: Total Liabilities and Stockholders' Equity ($50,000) = Salaries Payable ($3,400) + Common Stock (?) + Accounts Payable ($2,800) + Retained Earnings ($11,700); therefore, Common Stock = $32,100. 20)Building: Total Assets ($40,000) = Land ($9,000) + Building (?) + Cash ($5,300) + Supplies ($3,200) + Equipment ($4,500); therefore, Building = $18,000. Common stock: Total Liabilities and Stockholders’ Equity ($40,000) = Salaries Payable ($3,700) + Common Stock (?) + Accounts Payable ($2,600) + Retained Earnings ($11,600); therefore, Common Stock = $22,100. 21) (a) −,+; (b) −,+; (c) +,−; (d) −,+; (e) +,−; (f) −,+; (g) +,− Version 1

22)(a) debit; (b) credit; (c) debit; (d) credit; (e) debit; (f) credit; (g) debit; (h) debit 23) (a) credit; (b) debit; (c) credit; (d) debit; (e) credit; (f) debit; (g) credit; (h) credit 24) Account Title Cash

Debit 27,000

Common Stock

Credit

27,000

25) Account Title Cash

Debit 20,000

Common Stock

Credit

20,000

26) Account Title Building

Debit 140,000

Notes Payable

Credit

140,000

27) Account Title Building

Debit 100,000

Notes Payable

Credit

100,000

28) Account Title Equipment

Debit 20,000

Cash

Credit

20,000

29) Account Title

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Debit

Credit 24

Equipment

15,000

Cash

15,000

30) Account Title Office Supplies

Debit 7,000

Accounts Payable

Credit

7,000

31) Account Title Office Supplies

Debit 7,500

Accounts Payable

Credit

7,500

32) Account Title Accounts Receivable

Debit 4,300

Service Revenue

Credit

4,300

33) Account Title Accounts Receivable

Debit 3,500

Service Revenue

Credit

3,500

34) Account Title Cash

Debit 3,300

Service Revenue

Credit

3,300

35) Account Title Cash

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Debit 2,400

Credit

Service Revenue

2,400

36) Account Title Salaries Expense

Debit 5,900

Cash

Credit

5,900

37) Account Title Salaries Expense

Debit 4,200

Cash

Credit

4,200

38) Account Title Dividends

Debit 2,400

Cash

Credit

2,400

39) Account Title Dividends Cash

Debit 2,000

Credit

2,000

40) Account Title Cash

Debit 5,100

Accounts Receivable

Credit

5,100

41) Account Title Cash Accounts Receivable

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Debit 4,000

Credit

4,000

42) Account Title Cash

Debit 6,200

Credit

Deferred Revenue

6,200

43) Account Title Cash

Debit 6,500

Credit

Deferred Revenue

6,500

44) Account Title Maintenance Expense

Debit 7,000

Cash

Credit

7,000

45) Account Title Maintenance Expense

Debit 5,400

Cash

Credit

5,400

46) Account Title Prepaid Insurance

Debit 16,000

Cash

Credit

16,000

47) Account Title Prepaid Insurance Cash

Debit 12,000

Credit

12,000

48)

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Transaction (a) (a)

Account Title Supplies

Debit 1,500

Accounts Payable (b)

(b)

Cash

1,500 3,000

Service Revenue (c)

(c)

Credit

Salaries Expense

3,000 1,700

Cash

1,700

49) Transaction (a)

Supplies

(a)

Accounts Payable (b)

(b)

Account Title

Cash

Debit 1,200

1,200 2,500

Service Revenue (c)

(c)

Salaries Expense

Credit

2,500 1,100

Cash

1,100

50) Transaction (a) (a)

Account Title Accounts Receivable

Debit 13,000

Service Revenue (b)

(b)

Supplies

13,000 1,700

Accounts Payable (c)

(c)

Rent Expense

1,700 2,700

Cash (d)

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Cash

Credit

2,700 10,700

(c)

Accounts Receivable

10,700

51) Transaction (a)

Account Title Accounts Receivable

(a)

Service Revenue (b)

(b)

Supplies

Debit 12,000

12,000 1,500

Accounts Payable (c)

(c)

Rent Expense

1,500 2,000

Cash (d)

(c)

Credit

2,000

Cash

10,000

Accounts Receivable

10,000

52) Transaction (a) (a)

Account Title Supplies

Debit 8,000

Accounts Payable (b)

(b)

Salaries Expense

8,000 1,000

Cash (c)

(c)

1,000

Accounts Receivable

5,400

Service Revenue (d)

(c)

Accounts Payable

5,400 8,000

Cash (e)

Credit

8,000

No Entry

53) Transaction

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Account Title

Debit

Credit

(a) (a)

Supplies

8,200

Accounts Payable (b)

(b)

Salaries Expense

8,200 920

Cash (c)

(c)

920

Accounts Receivable

5,300

Service Revenue (d)

(c)

Accounts Payable

5,300 8,200

Cash (e)

8,200

No Entry

54) Transaction (a) (a)

Account Title Cash

Debit 28,000

Common Stock (b)

No Entry.

(c)

Prepaid Rent

(c)

28,000

3,540

Cash (d)

(c)

Equipment

3,540 5,400

Cash (e)

(c)

Supplies

5,400 1,600

Accounts Payable (f)

(c)

Cash

1,600 7,900

Service Revenue (g)

(c)

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Salaries Expense Cash

Credit

7,900 5,300 5,300

(h) (c)

Accounts Payable

1,600

Cash (i)

(c)

1,600

Advertising Expense

890

Cash (j)

(c)

890

Utilities Expense

1,500

Cash

1,500

55) Transaction (a)

Account Title Cash

(a)

Common Stock (b)

No Entry

(c)

Prepaid Rent

(c)

Debit 20,000

20,000

3,000

Cash (d)

(c)

Equipment

3,000 5,400

Cash (e)

(c)

Supplies

5,400 1,800

Accounts Payable (f)

(c)

Cash

1,800 7,800

Service Revenue (g)

(c)

Salaries Expense

7,800 5,200

Cash (h)

(c)

Accounts Payable

5,200 1,800

Cash (i)

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Advertising Expense

Credit

1,800 800

(c)

Cash (j)

(c)

800

Utilities Expense

1,300

Cash

1,300

56)Requirement 1 $10,600 − $8,200 + $5,000 = $7,400. Requirement 2 Postings on the left side (or debit side) of the Accounts Payable Taccount represent decreases to accounts payable, such as making a payment on the account. Requirement 3 Postings on the right side (or credit side) of the Accounts Payable Taccount represent increases to accounts payable, such as purchasing office supplies on account. 57)Requirement 1 $10,200 − $8,800 + $4,500 = $5,900. Requirement 2 Postings on the left side (or debit side) of the Accounts Payable Taccount represent decreases to accounts payable, such as making a payment on the account. Requirement 3 Postings on the right side (or credit side) of the Accounts Payable Taccount represent increases to accounts payable, such as purchasing office supplies on account. 58) Cash Debit

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Credit

Balance

4,800

a. d. Balance

15,000 6,600 11,700

11,200 3,500

b. c.

59) Cash Debit

Credit

Balance

4,200

a. d. Balance

10,000 6,200 5,200

11,500 3,700

b. c.

60) Trial Balance Debit Cash

$6,600

Accounts Receivable

3,500

Prepaid Insurance

1,300

Credit

Accounts Payable

$2,200

Deferred Revenue

1,600

Common Stock

6,900

Retained Earnings

2,000

Dividends

1,900

Service Revenue

7,600

Salaries Expense

2,900

Utilities Expense

3,200

Maintenance Expense

900

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Totals

$20,300

Debit

Credit

61) Trial Balance

Cash

$6,200

Accounts Receivable

3,400

Prepaid Insurance

1,200

Accounts Payable

$1,900

Deferred Revenue

1,200

Common Stock

6,200

Retained Earnings

1,600

Dividends

1,200

Service Revenue

7,100

Salaries Expense

2,200

Utilities Expense

3,000

Maintenance Expense

800

Totals

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$18,000

CHAPTER 2 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) External transactions are transactions the company conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank. ⊚ true ⊚ false

2) Internal transactions are events that affect the financial position of the company but do not include an exchange with a separate economic entity. ⊚ true ⊚ false

3) A list of all account names used to record transactions of a company is referred to as a Taccount. ⊚ true ⊚ false

A source document provides information related to external transactions. ⊚ true ⊚ false

5) After recording each transaction, total assets must equal total liabilities plus stockholders' equity. ⊚ true ⊚ false

6) If a transaction causes total assets of the company to increase by $2,000, then liabilities plus stockholders' equity also increases by $2,000. ⊚ true ⊚ false

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7) If a transaction causes total assets of the company to increase by $5,000 and total liabilities to increase by $3,000, then stockholders' equity increases by $8,000. ⊚ true ⊚ false

Borrowing cash from the bank causes assets to increase and liabilities to increase. ⊚ true ⊚ false

Purchasing equipment using cash causes total assets to increase. ⊚ true ⊚ false

10)

Providing services to customers for cash causes stockholders' equity to increase. ⊚ true ⊚ false

11) Paying employees' salaries for the current month causes no change to stockholders' equity. ⊚ true ⊚ false

12)

Paying dividends to its stockholders causes a company's stockholders' equity to decrease. ⊚ true ⊚ false

13) Selling common stock for cash causes assets to increase and stockholders' equity to decrease. ⊚ true ⊚ false

14)

Purchasing office supplies on account causes assets to increase and liabilities to increase.

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⊚ ⊚

true false

15) Providing services to customers on account causes assets to increase and stockholders' equity to increase. ⊚ true ⊚ false

16) Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders' equity to increase. ⊚ true ⊚ false

17) Paying for one year of rent in advance causes one asset to increase and another asset to decrease, so there is no effect on the accounting equation. ⊚ true ⊚ false

18) Purchasing supplies on account increases the balance of the Accounts Receivable account. ⊚ true ⊚ false

19)

Amounts owed from customers are recorded in the Accounts Receivable account. ⊚ true ⊚ false

20)

The two components of stockholders' equity are Debits and Credits. ⊚ true ⊚ false

21)

Revenues have the effect of increasing retained earnings.

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⊚ ⊚

true false

22)

Expenses have the effect of decreasing retained earnings. ⊚ true ⊚ false

23)

Receiving cash in advance from customers increases the Service Revenue account. ⊚ true ⊚ false

24)

Deferred Revenue is a liability account. ⊚ true ⊚ false

25)

Liability accounts increase with a debit and decrease with a credit. ⊚ true ⊚ false

26)

Liability accounts increase with a credit and decrease with a debit. ⊚ true ⊚ false

27)

Common Stock increases with a credit and decreases with a debit. ⊚ true ⊚ false

28)

Revenue accounts increase with a debit and decrease with a credit. ⊚ true ⊚ false

29)

Expense accounts increase with a debit and decrease with a credit.

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⊚ ⊚

true false

30)

The Dividends account increases with a credit and decreases with a debit. ⊚ true ⊚ false

31)

A debit to an account balance always results in the balance increasing. ⊚ true ⊚ false

32)

A credit to an account balance always results in the balance decreasing. ⊚ true ⊚ false

33)

A journal provides a chronological record of all transactions affecting a firm. ⊚ true ⊚ false

34)

Every accounting transaction includes at least one debit and one credit. ⊚ true ⊚ false

35)

For each transaction, the total debit amounts must equal the total credit amounts. ⊚ true ⊚ false

36)

Issuing common stock for cash is recorded with a debit to Common Stock. ⊚ true ⊚ false

37)

Borrowing cash from the bank is recorded with a debit to Cash.

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⊚ ⊚

38)

true false

Purchasing supplies is recorded with a credit to Supplies. ⊚ true ⊚ false

39) Paying employees' salaries for the current period is recorded with a debit to Salaries Expense. ⊚ true ⊚ false

40)

Providing services to customers is recorded with a debit to Service Revenue. ⊚ true ⊚ false

41)

The general ledger includes all accounts used to record the company's transactions. ⊚ true ⊚ false

42) The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called journalizing. ⊚ true ⊚ false

43) After posting transactions to the general ledger accounts, the sum of the accounts with debit balances should equal the sum of the accounts with credit balances. ⊚ true ⊚ false

44) A trial balance is a list of all accounts and their balances at a particular date, showing that assets equal liabilities.

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⊚ ⊚

45)

true false

If total debits equal total credits in the trial balance, then all balances are correct. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 46) Which of the following is not part of measuring external transactions? A) Using source documents to analyze accounts affected B) Recording transactions C) Making payments on all amounts owed D) Analyzing transactions for their effect on the accounting equation

47)

External events include all of the following except: A) Paying rent. B) Purchasing equipment. C) Using office supplies. D) Collecting an account receivable.

48) The full set of procedures used to accomplish the measurement/communication process of financial accounting is referred to as the: A) Trial balance. B) Accounting cycle. C) Chart of accounts. D) General ledger.

49) Which step in the process of measuring external transactions involves assessing the equality of total debits and total credits for the period?

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A) Use source documents to determine accounts affected by the transaction. B) Prepare a trial balance. C) Analyze the impact of the transaction on the accounting equation. D) Post the transaction to the T-account in the general ledger.

50) Which step in the process of measuring external transactions involves determining the effect on assets, liabilities, and stockholders’ equity? A) Use source documents to determine accounts affected by the transaction. B) Prepare a trial balance. C) Analyze the impact of the transaction on the accounting equation. D) Post the transaction to the T-account in the general ledger.

51) Which of the following typically is considered a source document for gathering information about a transaction? A) Trial balance B) Income statement C) Sales invoice D) General ledger

52)

Which of the following best describes a purpose of source documents?

A) Provide information related to external transactions, such as date and amount B) Used by accountants to record transactions in specific accounts C) Keep a record of transactions between the company and its vendors, customers, and other parties with whom the company conducts business D) All of the other answers provide a correct statement

53) A(n) _______________ summarizes all transactions related to a particular item over a period of time.

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A) Debit B) Account C) Chart of accounts D) Source document

54)

A list of all account names used to record transactions of a company is referred to as the: A) Chart of accounts. B) Income statement. C) General journal. D) Balance sheet.

55) For each transaction recorded in an accounting system, the basic equation that must be maintained at all times is: A) Assets = Liabilities + Stockholders' Equity. B) Cash Increases = Cash Decreases. C) Revenues = Expenses + Dividends. D) Assets = Liabilities.

56)

The equation which shows a company’s resources equal claims to those resources is: A) Revenues − Expenses = Net Income. B) Cash Increases − Cash Decreases = Change in Cash. C) Common Stock + Retained Earnings = Stockholders’ Equity. D) Assets = Liabilities + Stockholders' Equity.

57) The equation that shows assets equal liabilities plus stockholders’ equity signifies that a company:

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A) Is able to pay its obligations as they come due. B) Is profitable. C) Has resources equal to claims to those resources. D) All of the other answers provide a correct statement.

58)

The following amounts are reported in the ledger of Harmony Company:

Assets Liabilities Retained Earnings

$76,000 42,000 10,000

What is the balance in the Common Stock account? A) $24,000 B) $52,000 C) $34,000 D) $66,000

59)

The following amounts are reported in the ledger of Harmony Company:

Assets Liabilities Retained Earnings

$80,000 36,000 12,000

What is the balance in the Common Stock account? A) $44,000 B) $32,000 C) $48,000 D) $42,000

60) When a company pays employees' salaries for the current period, how will the basic accounting equation be affected? Version 1

A) Stockholders' equity decreases B) Revenues decrease C) Expenses decrease D) Liabilities decrease

61) When a company pays dividends to stockholders, what is the effect on the company's accounts? A) Cash decreases and Dividends increase. B) Cash increases and Dividends decrease. C) Cash decreases and Common Stock decreases. D) Cash increases and Common Stock increases.

62) Receiving cash from customers before services are performed affects which of the following accounts? A) Prepaid Assets B) Service Revenue C) Deferred Revenues D) Accounts Receivable

63) When the company pays stockholders a dividend, what is the effect on the accounting equation for that company? A) Decrease stockholders' equity and increase assets. B) Increase liabilities and increase assets. C) Decrease assets and decrease liabilities. D) Decrease assets and decrease stockholders' equity.

64) Pumpkin Incorporated sold $500 in pumpkins to a customer on account on January 1. On January 11, Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting equation from the collection of cash? Version 1

A) No net effect to the accounting equation. B) Decrease assets and increase liabilities. C) Increase assets and increase liabilities. D) Decrease assets and decrease liabilities.

65) A company receives a $50,000 cash deposit from a customer on October 15, but will not provide services until November 20. Which of the following statements is true? A) The company records service revenue on October 15. B) The company records cash collection on November 20. C) The company records deferred revenue on October 15. D) The company records nothing on October 15.

66)

Which of the following would increase assets and increase liabilities? A) Provide services to customers on account. B) Purchase office supplies on account. C) Pay dividends to stockholders. D) Receive a utility bill for the current month. Plan to pay bill beginning of next month.

67)

Receiving cash from an account receivable: A) Increases revenue and decreases an asset. B) Decreases a liability and increases an asset. C) Increases an asset and increases revenue. D) Increases one asset and decreases another asset.

68)

An expense has what effect on the accounting equation?

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A) Decrease liabilities B) Decrease stockholders' equity C) Increase assets D) No effect

69)

Revenues have what effect on the accounting equation? A) Increase liabilities B) Decrease assets C) Increase stockholders' equity D) No effect

70)

Investments by stockholders have what effect on the accounting equation? A) Assets increase and liabilities increase. B) Expenses increase and liabilities increase. C) Assets increase and revenues increase. D) Assets increase and stockholders' equity increases.

71)

Which of the following is not possible when recording a transaction? A) Liabilities increase and assets decrease. B) Stockholders' equity increases and assets increase. C) One asset increases and another asset decreases. D) Stockholders' equity decreases and assets decrease.

72)

Purchasing office supplies on account will: A) Not change assets. B) Increase assets and decrease liabilities. C) Increase assets and increase liabilities. D) Increase assets and increase stockholders' equity.

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73)

Providing services and receiving cash will: A) Increase assets and increase stockholders' equity. B) Increase assets and increase liabilities. C) Decrease assets and increase liabilities. D) Decrease liabilities and increase stockholders' equity.

74) When a company provides services on account, the accounting equation would be affected as follows: A) Assets increase. B) Revenues increase. C) Assets increase and liabilities decrease. D) Assets increase and stockholders' equity increases.

75)

Borrowing cash from the bank would have what effect on the accounting equation? A) Assets increase and stockholders’ equity increases. B) Assets increase and liabilities increase. C) Liabilities increase and stockholders’ equity decreases. D) Liabilities decrease and stockholders’ equity increases.

76) Paying salaries to employees for the current period would have what effect on the accounting equation? A) Liabilities increase and stockholders’ equity decreases. B) Assets decrease and liabilities decrease. C) Assets decrease and stockholders’ equity decreases. D) Liabilities decrease and stockholders’ equity increases.

77) Providing services to customers for cash would have what effect on the accounting equation?

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A) Total assets increase; total stockholders’ equity increases. B) Total assets increase; total liabilities decrease. C) Total liabilities decrease; total stockholders’ equity increases. D) Total liabilities increase; total stockholders’ equity decreases.

78) Paying for supplies previously purchased would have what effect on the accounting equation? A) Assets decrease and stockholders’ equity decreases. B) Assets increase and liabilities increase. C) Liabilities decrease and stockholders’ equity increases. D) Assets decrease and liabilities decrease.

79)

If a company provides services on account, which of the following is true? A) Expenses increase. B) Liabilities increase. C) Stockholders' equity increases. D) Assets decrease.

80)

When a payment is made on an account payable: A) Assets and stockholders' equity decrease. B) Assets and liabilities decrease. C) Liabilities and revenues decrease. D) Assets and expenses decrease.

81)

Purchasing office equipment on account has what impact on the accounting equation?

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A) Stockholders' equity decreases and assets increase. B) Liabilities increase and assets increase. C) Assets decrease and liabilities decrease. D) Assets increase and stockholders' equity increases.

82)

Purchasing supplies for cash has what effect on the accounting equation? A) Increase assets. B) Decrease stockholders' equity. C) Decrease liabilities. D) No net effect.

83) On January 1, Brad Incorporated sold $30,000 in products to a customer on account. Then on January 10, Brad collected the cash on that account. What is the impact on Brad's accounting equation from the collection of cash on January 10? A) No net effect on the accounting equation. B) Assets increase and liabilities decrease. C) Assets decrease and liabilities decrease. D) Assets increase and stockholders' equity increases.

84) On September 10, MFP Company paid employee salaries of $7,000 owed to its employees last month. What are the effects of this transaction on the accounting equation? A) Expenses increase and liabilities increase. B) Assets decrease and liabilities decrease. C) Assets decrease and expenses decrease. D) Expenses decrease and liabilities decrease.

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85) Following are transactions of Schiller, Incorporated, a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries.

What was the total amount of Schiller’s liabilities following these six transactions? A) $12,300. B) $27,300. C) $22,600. D) $15,500.

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86) Following are transactions of Schiller, Incorporated, a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries.

How many of these transactions decreased Schiller’s total assets? A) One B) Two C) Three D) Four

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87) Following are transactions of Schiller, Incorporated, a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries.

How many of these transactions increased Schiller’s liabilities? A) One B) Two C) Three D) Four

88)

Consider the following transactions:

Issued common stock for cash. Purchased equipment by signing a note payable. Paid rent for the current month. Collected cash from customers on account. How many of these transactions increased the company's total assets? A) One B) Two C) Three D) Four

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89)

How many of the following transactions would increase total assets in the current period?

• Collect cash from customer prior to providing service. • Provide services to customer and receive cash at time of service. • Provide services on account to customer. • Collect cash from customer for services provided on account. A) One B) Two C) Three D) Four

90) How many of the following transactions would increase total liabilities in the current period? • Pay for advertising that will not occur until the following period. • Collect cash from customer prior to providing service. • Incur, but not pay, utilities cost in the current period. • Order supplies that have not yet been received. A) One B) Two C) Three D) Four

91) How many of the following transactions would increase total stockholders’ equity in the current period? • Pay dividends to stockholders. • Delay payment on supplies purchased until the following period. • Provide services on account to customers. • Borrow cash from a local bank.

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A) One B) Two C) Three D) Four

92) How many of the following transactions would decrease total stockholders’ equity in the current period? • Pay dividends to stockholders. • Delay payment on supplies purchased until the following period. • Provide services on account to customers. • Borrow cash from a local bank. A) One. B) Two. C) Three. D) Four.

93) Assume that Sallisaw Sideboards, Incorporated had a retained earnings balance of $10,000 on April 1, and that the company had the following transactions during April. Issued common stock for cash, $5,000. Provided services to customers on account, $2,000. Provided services to customers in exchange for cash, $900. Purchased equipment and paid cash, $4,300. Paid April rent, $800. Paid employees' salaries for April, $700. What was Sallisaw's retained earnings balance at the end of April? A) $11,400. B) $12,100. C) $16,400. D) Some other amount.

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94)

Consider the following transactions:

Issued common stock for cash. Purchased equipment by signing a note payable. Provided services to customers on account. Collected cash from customers on account. How many of these transactions increased the company's total liabilities? A) One. B) Two. C) Three. D) Four.

95)

Which of the following transactions causes a decrease in stockholders' equity? A) Pay dividends to stockholders. B) Obtain cash by borrowing from a local bank. C) Provide services to customers on account. D) Purchase office equipment for cash.

96)

How many of the following events would require an expense to be recorded?

Ordering office supplies. Hiring a receptionist. Paying employees' salaries for the current month. Receiving, but not paying, a current utility bill. Paying for insurance in advance. A) One B) Two C) Three D) Four

97)

Which of the following is not possible for a business transaction?

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A) Increase assets and decrease revenue. B) Decrease assets and increase expenses. C) Increase liabilities and increase expenses. D) Decrease liabilities and increase revenue.

98) Which of the following transactions would cause a decrease in both assets and stockholders' equity? A) Paying insurance premium for the next two years. B) Purchasing office equipment on account. C) Paying advertising for the current month. D) Providing services to customers on account.

99) When a company issues common stock for cash, what is the effect on the accounting equation for the company? A) Assets increase and liabilities increase. B) Assets increase and stockholders' equity increases. C) Assets decrease and liabilities decrease. D) Liabilities decrease and stockholders' equity increases.

100) If the liabilities of a company increased by $55,000 during a month and the stockholders' equity decreased by $21,000 during that same month, did assets increase or decrease and by how much? A) $34,000 increase B) $55,000 increase C) $34,000 decrease D) $76,000 increase

101) Which of the following transactions would cause an increase in both the assets and liabilities of a company?

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A) Pay for the current month's rent B) Pay for inventory purchased 90 days ago C) Purchase a building by issuing a note payable D) Provide services on account

102) When a company pays cash for equipment, what is the effect on the accounting equation for that company? A) Increase assets and increase liabilities. B) Decrease assets and decrease liabilities. C) No net change. D) Increase assets and increase stockholders' equity.

103) "Record revenue when goods or services are provided to customers" is the definition of which principle in accounting? A) Trial balance B) Debits and credits C) Revenue recognition D) Accounting equation

104)

Which of the following is possible for a particular business transaction? A) Increase assets and decrease liabilities. B) Decrease one asset and increase another asset. C) Decrease assets and increase stockholders' equity. D) Decrease liabilities and increase expenses.

105)

Which of the accounts are decreased on the debit side and increased on the credit side?

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A) Liabilities, stockholders' equity, and revenues B) Dividends, liabilities, and assets C) Expenses, dividends, and stockholders' equity D) Assets, dividends, and expenses

106)

Which of the following is true about a "debit"?

I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents an increase to assets. III. It represents a decrease to liabilities. IV. It is on the right side of a T-account. A) I and II. B) IV only. C) I, II, and III. D) I, II, III, and IV.

107)

Which of the following is true about a "credit"?

I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents a decrease to assets. III. It represents an increase to liabilities. IV. It is on the right side of a T-account. A) I and II. B) IV only. C) I, II, and III. D) I, II, III, and IV.

108)

Assets normally carry a _______ balance and are shown in the ______________.

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A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet

109)

Revenues normally carry a _______ balance and are shown in the ______________. A) Debit; Statement of stockholders' equity B) Credit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet

110)

Dividends normally carry a _______ balance and are shown in the ______________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet

111)

Expenses normally carry a _______ balance and are shown in the ______________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet

112)

Liabilities normally carry a _______ balance and are shown in the ______________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet

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113)

Which of the following accounts normally has a debit balance? A) Accounts Payable B) Deferred Revenue C) Service Revenue D) Salaries Expense

114)

Which of the following accounts would normally have a credit balance? A) Accounts Payable, Service Revenue, Common Stock. B) Salaries Payable, Deferred Revenue, Delivery Expense. C) Income Tax Payable, Service Revenue, Dividends. D) Cash, Repairs and Maintenance Expense, Dividends.

115)

Which of the following accounts would normally have a debit balance? A) Accounts Payable, Service Revenue, Common Stock. B) Salaries Payable, Deferred Revenue, Utilities Expense. C) Income Tax Payable, Service Revenue, Dividends. D) Cash, Delivery Expense, Dividends.

116) Which of the following accounts would normally have a debit balance and appear in the balance sheet? A) Accounts Receivable. B) Deferred Revenue. C) Salaries Expense. D) Dividends.

117)

Which of the following accounts normally has a credit balance?

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A) Salaries Expense B) Accounts Payable C) Land D) Prepaid Rent

118) An increase to an asset account is shown with a ______________. An increase to a liability account is shown with a ______________. A) Debit; Debit B) Credit; Debit C) Debit; Credit D) Credit; Credit

119) An increase to an expense account is shown with a ______________. An increase to a revenue account is shown with a ______________. A) Debit; Debit B) Debit; Credit C) Credit; Debit D) Credit; Credit

120) An increase to an asset account is shown with a ______________. A decrease to an asset account is shown with a ______________. A) Debit; Debit B) Credit; Debit C) Debit; Credit D) Credit; Credit

121) Which of the following types of accounts are increased with a debit and decreased with a credit?

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A) Liabilities, stockholders' equity, and revenues B) Dividends, liabilities, and assets C) Expenses, dividends, and stockholders' equity D) Assets, dividends, and expenses

122)

Consider the following list of accounts:

Cash Service Revenue Salaries Expense Accounts Payable Equipment Retained Earnings Utilities Expense Accounts Receivable Common Stock Dividends How many of these accounts have a normal debit balance? A) Four B) Five C) Six D) Seven

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123)

Consider the following list of accounts:

Accounts Payable Cash Prepaid Rent Common Stock Salaries Payable Equipment Supplies Rent Expense How many of these accounts have a normal credit balance? A) Two B) Three C) Four D) Five

124)

Consider the following accounts:

Utilities Expense Accounts Payable Service Revenue Common Stock How many of these accounts are increased with debits? A) One B) Two C) Three D) Four

125)

Which one of the following accounts will normally have a credit balance?

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A) Dividends B) Salary Expense C) Supplies D) Common Stock

126)

Consider the following accounts:

Dividends Insurance Expense Cash Service Revenue How many of these accounts are increased with credits? A) One B) Two C) Three D) Four

127) When viewing a company’s accounting records, the terms "debit" and "credit" would typically be seen in which location? A) Financial statements B) Source documents C) Chart of accounts D) Journal

128)

Franzetti Law Offices has the following source document from one of its suppliers:

Description Legal paper Ink cartridge

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Allen Office Supplies Quantity Price per unit 100 $15 40 $30

Total $1,500 $1,200

$2,700

Invoice Number: #127874 Date of purchase: January 17, 2024 Payment due: 30 days from date of purchase What should Franzetti record on the date of the purchase? A) Debit Cash; Credit Accounts Receivable for $2,700 B) Debit Supplies; Credit Accounts Payable for $2,700 C) Debit Accounts Payable; Credit Cash for $2,700 D) Debit Accounts Receivable; Credit Sales Revenue for $2,700

129) is:

The term commonly used in accounting to describe the format for recording a transaction

A) Chart of accounts. B) Trial balance. C) General ledger. D) Journal entry.

130) Which of the following is the appropriate debit/credit format for recording a business transaction? A A B. B. C. C. D. D.

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Credit Name

Credit Amount

Debit Name

Debit Amount

Debit Name

Credit Amount

Credit Name

Debit Name

Debit Amount

Credit Name

Credit Amount

Credit Name

Debit Amount

Debit Name

Credit Amount

A) Option A B) Option B C) Option C D) Option D

131)

The following statements pertain to recording transactions. Which of them are true?

I. For each journal entry, total debits must equal total credits. II. It is possible to have multiple debits or credits in one journal entry. III. Assets are always listed first in journal entries. IV. Some journal entries will have debits only. A) I only. B) I and II. C) I, II, and IV. D) II, III, and IV.

132)

Which of the following is not a possible journal entry? A) Credit assets; Debit expenses. B) Debit assets; Debit stockholders' equity. C) Credit revenues; Debit assets. D) Debit expenses; Credit liabilities.

133)

Providing services on account would be recorded with a: A) Debit to Service Revenue. B) Credit to Accounts Receivable. C) Credit to Accounts Payable. D) Debit to Accounts Receivable.

134) Xenon Corporation borrows $75,000 from First Bank. Xenon Corporation records this transaction with a: Version 1

A) Debit to Investments. B) Credit to Retained Earnings. C) Credit to Notes Payable. D) Credit to Interest Expense.

135) Childers Service Company provides services to customers totaling $3,300, for which it billed the customers. How would the transaction be recorded? A) Debit Service Revenue $3,300, credit Accounts Receivable $3,300 B) Debit Accounts Receivable $3,300, credit Cash $3,300 C) Debit Accounts Receivable $3,300, credit Service Revenue $3,300 D) Debit Cash $3,300, credit Service Revenue $3,300

136) Childers Service Company provides services to customers totaling $3,000, for which it billed the customers. How would the transaction be recorded? A) Debit Cash $3,000, credit Service Revenue $3,000 B) Debit Accounts Receivable $3,000, credit Service Revenue $3,000 C) Debit Accounts Receivable $3,000, credit Cash $3,000 D) Debit Service Revenue $3,000, credit Accounts Receivable $3,000

137) A company received a bill for newspaper advertising services, $460. The bill will be paid in 10 days. How would the transaction be recorded today? A) Debit Advertising Expense $460, credit Cash $460 B) Debit Accounts Payable $460, credit Cash $460 C) Debit Accounts Payable $460, credit Advertising Expense $460 D) Debit Advertising Expense $460, credit Accounts Payable $460

138) A company received a bill for newspaper advertising services, $400. The bill will be paid in 10 days. How would the transaction be recorded today?

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A) Debit Advertising Expense $400, credit Accounts Payable $400 B) Debit Accounts Payable $400, credit Advertising Expense $400 C) Debit Accounts Payable $400, credit Cash $400 D) Debit Advertising Expense $400, credit Cash $400

139)

When a company pays utilities of $1,810 in cash, the transaction is recorded as: A) Debit Cash $1,810, credit Utilities Expense $1,810. B) Debit Utilities Payable $1,810, credit Cash $1,810. C) Debit Utilities Expense $1,810, credit Cash $1,810. D) Debit Utilities Expense $1,810, credit Utilities Payable $1,810.

140)

When a company pays utilities of $1,800 in cash, the transaction is recorded as: A) Debit Utilities Expense $1,800, credit Utilities Payable $1,800. B) Debit Utilities Payable $1,800, credit Cash $1,800. C) Debit Cash $1,800, credit Utilities Expense $1,800. D) Debit Utilities Expense $1,800, credit Cash $1,800.

141) Assume that cash is paid for rent to cover the next year. The appropriate debit and credit would be: A) Debit Rent Expense, credit Cash. B) Debit Prepaid Rent, credit Rent Expense. C) Debit Prepaid Rent, credit Cash. D) Debit Cash, credit Prepaid Rent.

142) Summer Leasing received $11,000 from a customer to cover 24 months of rent in advance. How should Summer record this transaction?

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A) Debit Rent Expense; credit Cash B) Debit Cash; credit Service Revenue C) Debit Cash; credit Deferred Revenue D) Debit Prepaid Rent; credit Rent Expense

143) Summer Leasing received $12,000 from a customer to cover 24 months of rent in advance. How should Summer record this transaction? A) Debit Prepaid Rent; credit Rent Expense B) Debit Cash; credit Deferred Revenue C) Debit Cash; credit Service Revenue D) Debit Rent Expense; credit Cash

144) Stylion, Incorporated performed cleaning services for its customers for cash. How should Stylion record this transaction? A) Debit Service Revenue, credit Cash B) Debit Cash, credit Service Revenue C) Debit Cash, credit Accounts Receivable D) Debit Accounts Receivable, credit Service Revenue

145) Assume that $17,300 cash is paid for insurance to cover the next year. The appropriate debit and credit would be: A) Debit Prepaid Insurance $17,300, credit Cash $17,300. B) Debit Insurance Expense $17,300, credit Prepaid Insurance $17,300. C) Debit Prepaid Insurance $17,300, credit Insurance Expense $17,300. D) Debit Cash $17,300, credit Prepaid Insurance $17,300.

146) Assume that $18,000 cash is paid for insurance to cover the next year. The appropriate debit and credit would be:

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A) Debit Insurance Expense $18,000, credit Prepaid Insurance $18,000. B) Debit Prepaid Insurance $18,000, credit Insurance Expense $18,000. C) Debit Prepaid Insurance $18,000, credit Cash $18,000. D) Debit Cash $18,000, credit Prepaid Insurance $18,000.

147) Which of the following would be used to record providing services to customers for $1,000 on account? A) Debit Accounts Receivable $1,000, credit Service Revenue $1,000 B) Debit Service Revenue $1,000, credit Cash $1,000 C) Debit Cash $1,000, credit Accounts Receivable $1,000 D) Debit Service Revenue $1,000, credit Accounts Receivable $1,000

148) Which of the following would be used to record the issuance of common stock in exchange for $5,000 cash? A) Debit Cash $5,000, credit Service Revenue $5,000 B) Debit Cash $5,000, credit Common Stock $5,000 C) Debit Cash $5,000, credit Dividends $5,000 D) Debit Common Stock $5,000, credit Cash $5,000

149) Which of the following would be used to record the purchase of equipment for $10,000 cash? A) Debit Cash $10,000, credit Equipment $10,000 B) Debit Equipment $10,000, credit Notes Payable $10,000 C) Debit Equipment $10,000, credit Cash $10,000 D) Debit Notes Payable $10,000, credit Equipment $10,000

150) Schooner Incorporated purchased equipment by signing a note payable. How would this transaction be recorded?

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A) Debit Equipment, credit Cash B) Debit Cash, credit Notes Payable C) Debit Notes Payable, credit Equipment D) Debit Equipment, credit Notes Payable

151) When a company pays $2,400 dividends to its stockholders, how would the transaction be recorded? A) Debit Dividends; credit Accounts Payable B) Debit Dividends; credit Cash C) Debit Retained Earnings; credit Dividends D) Debit Cash; credit Dividends

152) When a company pays $2,500 dividends to its stockholders, how would the transaction be recorded? A) Debit Cash; credit Dividends B) Debit Retained Earnings; credit Dividends C) Debit Dividends; credit Cash D) Debit Dividends; credit Accounts Payable

153) Daniel Dino Restaurant owes employees' salaries of $15,000. How would this transaction be recorded? A) Debit Salaries Expense, credit Cash B) Debit Salaries Payable, credit Cash C) Debit Salaries Expense, credit Salaries Payable D) Debit Salaries Payable, credit Salaries Expense

154) Jerome purchased a building for his business by signing a note to be repaid over the next ten years. Which of the following describes how to record this transaction?

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A) Debit assets, credit liabilities B) Debit assets, credit stockholders' equity C) Debit liabilities, credit assets D) Debit expenses, credit liabilities

155)

Incurring an expense for advertising on account would be recorded by: A) Debiting a liability account. B) Crediting an asset account. C) Debiting an expense account. D) Debiting an asset account.

156) Tyler Incorporated receives $150,000 from investors in exchange for shares of its common stock. Tyler Incorporated records this transaction with a: A) Debit to Investments. B) Credit to Retained Earnings. C) Credit to Common Stock. D) Credit to Service Revenue.

157) The owner of an office building should report rent collected in advance as a debit to Cash and a credit to: A) A liability. B) An asset other than Cash. C) Revenue. D) Stockholders' equity.

158) Clement Company paid an account payable related to a previous utility bill of $1,000. How would this transaction be recorded on the payment date?

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A) Debit Cash $1,000, credit Accounts Payable $1,000 B) Debit Utilities Expense $1,000, credit Cash $1,000 C) Debit Cash $1000, credit Utilities Expense $1000 D) Debit Accounts Payable $1,000, credit Cash $1,000

159) Clement Company paid an account payable related to a previous utility bill of $1,000. How would this transaction be recorded on the payment date? A) Debit Accounts Payable $1,000, credit Cash $1,000 B) Debit Cash $1,000, credit Accounts Payable $1,000 C) Debit Utilities Expense $1,000, credit Cash $1,000 D) Debit Cash $1,000, credit Utilities Expense $1,000

160) On July 7, Saints Incorporated received $10,300 in cash from a customer for services to be provided on October 10. Which of the following describes how the transaction should be recorded on July 7? A) Debit Cash $10,300, credit Deferred Revenue $10,300 B) Debit Accounts Receivable $10,300, credit Service Revenue $10,300 C) Debit Cash $10,300, credit Service Revenue $10,300 D) Debit Deferred Revenue $10,300, credit Cash $10,300

161) On July 7, Saints Incorporated received $10,000 in cash from a customer for services to be provided on October 10. Which of the following describes how the transaction should be recorded on July 7? A) Debit Cash $10,000, credit Service Revenue $10,000 B) Debit Accounts Receivable $10,000, credit Service Revenue $10,000 C) Debit Cash $10,000, credit Deferred Revenue $10,000 D) Debit Deferred Revenue $10,000, credit Cash $10,000

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162) On December 1, Bears Lawn Maintenance, Incorporated signed a contract with a retailer to supply maintenance for the next calendar year. How should this transaction be recorded on December 1? A) Debit Cash, credit Service Revenue B) Debit Cash, credit Accounts Receivable C) Debit Accounts Receivable, credit Service Revenue D) No transaction should be recorded on December 1

163)

Sooner purchased office supplies on account. How should this transaction be recorded? A) Debit Supplies, Credit Cash B) Debit Cash, Credit Accounts Payable C) Debit Accounts Payable, Credit Supplies D) Debit Supplies, Credit Accounts Payable

164) Tomlin & Company provides music for special occasions. On January 14, the Smith family hired Tomlin for an upcoming family wedding for an agreed-upon fee of $10,000. The wedding was scheduled for May 23. As part of the agreement, the Smiths paid Tomlin half of the fee at the end of April with the remaining amount due by the end of June. How would Tomlin record the receipt of the final payment in June? A) Credit to Accounts Receivable B) Credit to Service Revenue C) Credit to Cash D) Debit to Deferred Revenue

165) Boslet, Incorporated wanted to expand the size of its warehouse in order to generate more profits. The company decided to purchase the building adjacent to its existing warehouse. The company pays for the building by borrowing from the bank. How should this purchase be recorded?

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A) Debit Cash; credit Notes Payable B) Debit Buildings; credit Cash C) Debit Buildings; credit Notes Payable D) Debit Cash and Buildings; credit Notes Payable

166) On July 5, Harris Company purchased supplies from the hardware store for $600 on account. On July 10, Harris receives a bill from the hardware store as a reminder about the account balance. On July 17, Harris pays the account in full. How does Harris record the transaction on July 17? Transaction A. A.

Account Title Supplies

Debit 600

Accounts Payable B.

Accounts Payable

600 600

Supplies C.

Cash

600 600

Accounts Payable D.

Accounts Payable Cash

Credit

600 600 600

A) Option A B) Option B C) Option C D) Option D

167) On July 31, Pelham, Incorporated received $5,000 cash from a customer who previously purchased Pelham's products on account. What entry should Pelham record at the time it receives cash?

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A) Debit Accounts Receivable, $5,000; credit Cash, $5,000 B) Debit Cash, $5,000; credit Accounts Receivable, $5,000 C) Debit Cash, $5,000; credit Accounts Payable, $5,000 D) Debit Cash, $5,000; credit Service Revenue, $5,000

168) A transaction is initially recorded in the ______, and then subsequently posted to the general ______. A) Debit; Credit B) Statement; Account C) Journal; Ledger D) Chart; Statement

169)

An account balance represents:

A) A chart showing the list of all accounts used to record transactions. B) The aggregation of the individual debits and credits posted to an account over a period of time. C) All transactions that affect net income for the period. D) The equality of debits and credits in the accounting records.

170)

Posting is the process of:

A) Analyzing the impact of the transaction on the accounting equation. B) Obtaining information about external transactions from source documents. C) Transferring the debit and credit information from the journal to individual accounts in the general ledger. D) Listing all accounts and their balances at a particular date.

171)

A debit in a journal entry is always posted to the general ledger as a(n):

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A) Increase. B) Credit. C) Decrease. D) Debit.

172)

Posting transactions to T-accounts involves:

A) Analyzing source documents to determine the effects of transactions on the company's accounts. B) Listing all accounts and their balances at a particular date to ensure that debits equal credits. C) Preparing a chronological record of all transactions affecting the company. D) Transferring debit and credit information from the journal to the accounts in the general ledger.

173)

Below is the company's Cash T-account.

Cash Debit Beginning Balance

Credit 1,200 5,200 3,100

Ending Balance

3,300

The $3,100 amount could represent which of the following? A) Purchase of supplies on account B) Ending balance of cash C) Payment for salaries D) Collection from customers

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174)

Below is the company's Cash T-account.

Cash Debit Beginning Balance

Credit 1,200 5,200 3,100

Ending Balance

3,300

The $5,200 amount could represent which of the following? A) Purchase of supplies on account B) Ending balance of cash C) Payment for salaries D) Collection from customers

175)

The figure below is a depiction of a T-account. Account Debit

Credit 1,700 1,200

Beginning Balance

800 3,300

Ending Balance

Which of the following statements is correct?

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A) The account could be a liability account. B) During the period, a journal entry was recorded that included a credit to the account for $800. C) The amount reported to stockholders at the end of the period for this account is $3,300. D) All of the other answers provide a correct statement.

176) Following are transactions of Schiller, Incorporated, a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries.

What was the balance of Schiller’s Cash account following these six transactions? A) $29,800 B) $19,300 C) $17,800 D) $22,400

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177) The Accounts Payable account has a beginning balance of $10,500 and the company purchased $48,000 of supplies on account during the month. The ending balance was $18,600. How much did the company pay to creditors during the month?

A) $58,500 B) $66,600 C) $39,900 D) $48,000

178) The Accounts Payable account has a beginning balance of $12,000 and the company purchased $50,000 of supplies on account during the month. The ending balance was $10,000. How much did the company pay to creditors during the month? A) $50,000 B) $52,000 C) $60,000 D) $62,000

179) On March 3, Cobra Incorporated purchased a desk for $330 on account. On March 22, Cobra purchased another desk for $470 also on account, and then on March 24, Cobra paid $430 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)? A) $330 B) $140 C) $800 D) $470

180) On March 3, Cobra Incorporated purchased a desk for $450 on account. On March 22, Cobra purchased another desk for $500 also on account, and then on March 24, Cobra paid $400 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)?

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A) $50 B) $450 C) $500 D) $950

181) The Accounts Receivable account has a beginning balance of $10,000 and the company provides services of $50,000 on account during the month. The ending balance was $12,000. How much did the company receive from customers during the month? A) $50,000 B) $52,000 C) $48,000 D) $62,000

182)

A trial balance can best be explained as a list of:

A) The income statement accounts used to calculate net income. B) Revenue, expense, and dividend accounts used to show the balances of the components of retained earnings. C) The balance sheet accounts used to show the equality of the accounting equation. D) All accounts and their balances at a particular date.

183)

A trial balance represents the:

A) Source documents used to determine the effects of transactions on the company's accounts. B) List of all accounts and their balances at a particular date to ensure that debits equal credits. C) Chronological record of all transactions affecting the company. D) Process of transferring debit and credit information from the journal to the accounts in the general ledger.

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184)

Lithuanian Motors has the following balance sheet accounts:

Land Equipment Salaries Payable Notes Payable Supplies Cash Common Stock Retained Earnings Accounts Payable Prepaid Rent

$170,000 66,000 ? 88,000 14,000 26,000 100,000 40,000 ? 12,000

If the company has total assets of $288,000, what is the balance of the company's Salaries Payable account? A) $15,000 B) $25,000 C) $12,000 D) Cannot be determined given the information provided

185)

Finnish Motors has the following balance sheet accounts:

Land Equipment Salaries Payable Notes Payable Supplies Cash Common Stock Retained Earnings Accounts Payable Prepaid Rent

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$150,000 90,000 12,000 99,000 10,000 25,000 40,000 100,000 ? ?

If the company has total liabilities and stockholders' equity of $290,000, what is the balance of the company's Prepaid Rent account? A) $15,000 B) $25,000 C) $12,000 D) $39,000

186)

Finnish Motors has the following balance sheet accounts:

Land Equipment Salaries Payable Notes Payable Supplies Cash Common Stock Retained Earnings Accounts Payable Prepaid Rent

$150,000 90,000 12,000 99,000 10,000 25,000 40,000 100,000 ? ?

If the company has total assets of $290,000, what is the balance of the company's Accounts Payable account? A) $15,000 B) $25,000 C) $12,000 D) $39,000

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 187) Describe a company’s external transactions and give two examples.

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188)

Describe the six steps in the measurement process for external transactions.

189)

Explain what it means that external transactions have a dual effect.

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Answer Key Test name: Chap 02_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE This is referred to as a chart of accounts. 4) TRUE 5) TRUE 6) TRUE 7) FALSE Stockholders’ equity increases by $2,000. 8) TRUE 9) FALSE One asset (Equipment) goes up; another asset (Cash) goes down. There is no change to total assets. 10) TRUE 11) FALSE Salaries expense would reduce stockholders' equity. 12) TRUE 13) FALSE Stockholders' equity increases. 14) TRUE 15) TRUE 16) FALSE Assets increase and liabilities increase. 17) TRUE 18) FALSE

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The balance of Accounts Payable increases. 19) TRUE 20) FALSE The two components of stockholders' equity are Common Stock and Retained Earnings. 21) TRUE 22) TRUE 23) FALSE Receiving cash in advance from customers increases the Deferred Revenue account. 24) TRUE 25) FALSE Liability accounts increase with a credit and decrease with a debit. 26) TRUE 27) TRUE 28) FALSE Revenue accounts increase with a credit and decrease with a debit. 29) TRUE 30) FALSE The Dividends account increases with a debit and decreases with a credit. 31) FALSE A debit increases assets, dividends, and expenses, but decreases liabilities, stockholders' equity, and revenues. 32) FALSE A credit decreases assets, dividends, and expenses, but increases liabilities, stockholders' equity, and revenues. 33) TRUE 34) TRUE 35) TRUE Version 1

36) FALSE Issuing common stock for cash is recorded with a credit to Common Stock. 37) TRUE 38) FALSE Purchasing supplies is recorded with a debit to Supplies. 39) TRUE 40) FALSE Providing services to customers is recorded with a credit to Service Revenue. 41) TRUE 42) FALSE This process is called posting. 43) TRUE 44) FALSE The trial balance shows that total debits equal total credits. 45) FALSE A trial balance could contain offsetting errors where the balance of one account is misstated in one direction but the balance of another account (with the same type of debit or credit balance) is misstated in the other direction. 46) C 47) C 48) B 49) B 50) C 51) C 52) D 53) B 54) A Version 1

55) A 56) D 57) C 58) A Assets ($76,000) = Liabilities ($42,000) + Stockholders' Equity ($24,000 + 10,000) 59) B Assets ($80,000) = Liabilities ($36,000) + Stockholders’ Equity ($32,000 + $12,000) 60) A 61) A 62) C 63) D 64) A 65) C 66) B 67) D 68) B 69) C 70) D 71) A 72) C 73) A 74) D 75) B 76) C 77) A 78) D 79) C 80) B Version 1

81) B 82) D 83) A 84) B 85) A Liabilities = ($12,000 + $300) = $12,300. 86) A Transaction Number 6. 87) B Transactions Number 2 and Number 5. 88) B (1) Issued common stock for cash, and (2) purchased equipment by signing a note payable. 89) C (1) Collect cash from customer prior to providing service, (2) provide services to customer and receive cash at time of service, and (3) provide services on account to customer. 90) B (1) Collect cash from customer prior to providing service, and (2) incur, but not pay, utilities cost in the current period. 91) A Provide services on account to customers. 92) A Pay dividends to stockholders. 93) A Beginning retained earnings $10,000 + Net income $1,400 − Dividends $0 = Ending retained earnings $11,400. Net Income = Revenue ($2,000 + $900) − Expenses ($800 + $700) = $1,400. 94) A Purchased equipment by signing a note payable. Version 1

95) A 96) B (1) Paying employee salaries for the current month, and (2) receiving, but not paying, a current utility bill. 97) A 98) C 99) B 100) A Increase in Liabilities ($55,000) − Decrease in Stockholders' Equity ($21,000) = Increase in Assets ($34,000). 101) C One asset (building) and one liability (notes payable) increases. 102) C 103) C 104) B 105) A 106) C 107) D 108) D 109) B 110) A 111) B 112) C 113) D 114) A 115) D 116) A 117) B 118) C 119) B Version 1

120) C 121) D 122) C Cash, Salaries Expense, Equipment, Utilities Expense, Accounts Receivable, Dividends. 123) B Accounts Payable, Common Stock, Salaries Payable. 124) A Utilities Expense. 125) D 126) A Service Revenue. 127) D 128) B 129) D 130) C 131) B 132) B A debit (or increase) to assets along with a decrease (or debit) to stockholders’ equity would cause the accounting equation to be out of balance. 133) D 134) C 135) C 136) B 137) D 138) A 139) C 140) D 141) C Version 1

142) C 143) B 144) B 145) A 146) C 147) A 148) B 149) C 150) D 151) B 152) C 153) C 154) A 155) C 156) C 157) A Receiving cash in advance causes an asset (cash) and a liability (deferred revenue) to increase. An increase to a liability account is recorded with a credit. 158) D 159) A 160) A 161) C 162) D 163) D 164) A 165) C 166) D 167) B 168) C Version 1

169) B 170) C 171) D 172) D 173) C 174) D 175) D 176) C Cash = ($15,000 − $1,200 + $14,000 − $10,000) = $17,800. 177) C $10,500 + $48,000 − $18,600 = $39,900. 178) B $12,000 + $50,000 − $10,000 = $52,000. 179) C $330 + $470 = $800 180) D $450 + $500 = $950 181) C $10,000 + $50,000 − $12,000 = $48,000. 182) D 183) B 184) D Total liabilities + Stockholders' equity = ($288,000) = Accounts Payable (?) + Salaries Payable (?) + Notes Payable ($88,000) + Common Stock ($100,000) + Retained Earnings ($40,000); therefore, with two unknowns there is not enough information to solve the problem. 185) A Total assets ($290,000) = Land ($150,000) + Equipment ($90,000) + Supplies ($10,000) + Cash ($25,000) + Prepaid Rent (?); therefore, Prepaid Rent = $15,000. Version 1

186) D Total liabilities and stockholders’ equity ($290,000) = Salaries Payable ($12,000) + Notes Payable ($99,000) + Common Stock ($40,000) + Retained Earnings ($100,000) + Accounts Payable (?); therefore, Accounts Payable = $39,000. 187) External transactions are transactions between the company and a separate company or individual. Examples include purchasing office supplies on account or borrowing money from a bank. 188) The six steps include:1. (1) Use source documents to identify accounts affected by an external transaction, 2. (2) analyze the impact of the transaction on the accounting equation, 3. (3) assess whether the transaction results in a debit or credit to the account balances, 4. (4) record the transaction in a journal using debits and credits, 5. (5) post the transaction to the general ledger, and 6. (6) prepare a trial balance. 189) Dual effect refers to each transaction having at least two effects on the accounting equation. Either an economic event increases (decreases) one side of the equation and also increases (decreases) the other side of the equation by the same amount, or the economic event increases one element and decreases another element by an equal amount, both on the same side of the accounting equation.

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CHAPTER 3: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match each term associated with accrual-basis and cash-basis accounting with its most appropriate description. 1.A) A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in June. 2.B) A company receives cash from customers in May and performs services in June. The revenue is recorded in May. 3.C) A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in May. 4.D) Formal concept which states that sales of products or services are recorded in the period they are provided to customers. 5.E) Informal concept in accounting which states that expenses are recorded in the same period as the revenues they help to generate. 6.F) A company receives cash from customers in May and performs services in June. The revenue is recorded in June. Cash-basis expense Accrual-basis expense Cause-and-effect Accrual-basis revenue Revenue recognition principle Cash-basis revenue

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2) Match each type of adjusting entry with its definition. 1.A) Record a revenue in the current period that will be collected in cash in a future period. 2.B) Record an expense in the current period that will be paid in cash in a future period. 3.C) Receive cash in the current period that will be recorded as a revenue in a future period. 4.D) Pay cash (or have an obligation to pay cash) in the current period that will be recorded as an expense in a future period. Deferred revenue Accrued expense Accrued revenue Prepaid expense

3) Match each term related to financial statements with its description. 1.A) A list of accounts showing total assets equal total liabilities plus total stockholders' equity. 2.B) The distinction between current and long-term activities. 3.C) A list of all accounts and their balances after adjusting entries have been prepared. 4.D) A list of accounts showing total revenues minus total expenses equal net income. 5.E) A statement showing the change in the balance of common stock and retained earnings for the period. Statement of stockholders' equity Adjusted trial balance Classified Balance sheet Income statement

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4) Match each term related to closing entries with its description. 1.A) Revenues, expenses, and dividends. 2.B) List of permanent accounts and their balances. 3.C) List of permanent and temporary accounts and their balances. 4.D) Assets, liabilities, and stockholders' equity. 5.E) Transfer of temporary balances to retained earnings. Temporary accounts Post-closing trial balance Closing entries Adjusted trial balance Permanent accounts

5) For each transaction below, calculate the amount of revenue to be recorded in the current period using accrual-basis accounting: 1.a) Performed $27,000 of services during the month and received full cash payment from customers at the time of service. 2.b) Performed $5,000 of services during the month and billed customers. Customers are expected to pay next month. 3.c) Received $17,000 cash from customers for services to be provided next month.

6) For each transaction below, calculate the amount of revenue to be recorded in the current period using accrual-basis accounting: 1.a) Performed $24,000 of services during the month and received full cash payment from customers at the time of service. 2.b) Performed $9,000 of services during the month and billed customers. Customers are expected to pay next month. 3.c) Received $12,000 cash from customers for services to be provided next month.

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7) For each transaction below, calculate the amount of expense to be recorded in the current period using accrual-basis accounting: 1.a) Paid $4,400 on account for supplies purchased last period. All supplies were used last month. 2.b) Paid $5,900 cash for advertising in the current period. 3.c) Employees worked in the current period but will not be paid until the following period, $4,200.

8) For each transaction below, calculate the amount of expense to be recorded in the current period using accrual-basis accounting: 1.a) Paid $3,500 on account for supplies purchased last period. All supplies were used last month. 2.b) Paid $5,000 cash for advertising in the current period. 3.c) Employees worked in the current period but will not be paid until the following period, $4,500.

9) A company receives $2,000 cash from customers for services to be provided next month. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.

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10) A company receives $2,500 cash from customers for services to be provided next month. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.

11) A company performs $3,000 of services during the month and bills customers. The customers are expected to pay next month. Record the customer billing using (a) accrual-basis accounting and (b) cash-basis accounting.

12) A company performs $2,800 of services during the month and bills customers. The customers are expected to pay next month. Record the customer billing using (a) accrual-basis accounting and (b) cash-basis accounting.

13) A company performs $5,300 of services during the month and receives full cash payment from customers at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting. Version 1

14) A company performs $4,200 of services during the month and receives full cash payment from customers at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.

15) A company pays $1,300 cash to employees for work performed during the month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

16) A company pays $1,700 cash to employees for work performed during the month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

17) A company receives a $600 utility bill for the current month but does not plan to pay the bill until early next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis accounting.

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18) A company receives a $700 utility bill for the current month but does not plan to pay the bill until early next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis accounting.

19) A company pays $1,300 on account for supplies purchased last month. All supplies were used last month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

20) A company pays $1,200 on account for supplies purchased last month. All supplies were used last month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

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21) A company maintains its records using cash-basis accounting. During the year, the company received cash from customers, $33,000, and paid cash for salaries, $26,000. At the beginning of the year, customers owe the company $3,100. By the end of the year, customers owe $5,200. At the beginning of the year, the company owes salaries of $3,200. At the end of the year, the company owes salaries of $5,200. Determine cash-basis net income and accrual-basis net income for the year.

22) A company maintains its records using cash-basis accounting. During the year, the company received cash from customers, $34,000, and paid cash for salaries, $24,000. At the beginning of the year, customers owe the company $3,000. By the end of the year, customers owe $5,000. At the beginning of the year, the company owes salaries of $4,000. At the end of the year, the company owes salaries of $5,000. Determine cash-basis net income and accrual-basis net income for the year.

23) The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2024: Selected Data as of December 31, 2024 Customers billed in 2024 for services provided in 2024 Cash collections in 2024 for accounts billed in 2023 Cash collections in 2024 for accounts billed in 2024 Cash paid for supplies purchased in 2024 Supplies remaining at the end of 2024 Cash paid for salaries in 2024 Cash paid for annual rent on March 1, 2024

$ 470,000 27,000 220,000 17,000 2,200 14,000 22,000

Calculate the amount of revenues and expenses for 2024 under cash-basis accounting.

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24) The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2024: Selected Data as of December 31, 2024 Customers billed in 2024 for services provided in 2024 Cash collections in 2024 for accounts billed in 2023 Cash collections in 2024 for accounts billed in 2024 Cash paid for supplies purchased in 2024 Supplies remaining at the end of 2024 Cash paid for salaries in 2024 Cash paid for annual rent on March 1, 2024

$ 400,000 20,000 300,000 12,000 2,000 10,000 18,000

Calculate the amount of revenues and expenses for 2024 under cash-basis accounting.

25) The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2024: Selected Data as of December 31, 2024 Customers billed in 2024 for services provided in 2024 Cash collections in 2024 for accounts billed in 2023 Cash collections in 2024 for accounts billed in 2024 Supplies at the beginning of 2024 Cash paid for supplies purchased in 2024 Supplies remaining at the end of 2024 Cash paid for salaries in 2024 Cash paid for annual rent on March 1, 2024

$ 430,000 21,000 300,000 0 14,000 2,500 11,000 18,000

Calculate the amount of revenues and expenses for 2024 under accrual-basis accounting. Version 1

26) The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2024: Selected Data as of December 31, 2024 Customers billed in 2024 for services provided in 2024 Cash collections in 2024 for accounts billed in 2023 Cash collections in 2024 for accounts billed in 2024 Supplies at the beginning of 2024 Cash paid for supplies purchased in 2024 Supplies remaining at the end of 2024 Cash paid for salaries in 2024 Cash paid for annual rent on March 1, 2024

$ 400,000 20,000 300,000 0 12,000 2,000 10,000 18,000

Calculate the amount of revenues and expenses for 2024 under accrual-basis accounting.

27) At the beginning of the period, a company reports a balance in office supplies of $350. During the period, the company purchases an additional $3,700 of office supplies for cash. By the end of the period, only $850 of office supplies remain. Record the period-end adjusting entry.

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28) At the beginning of the period, a company reports a balance in office supplies of $500. During the period, the company purchases an additional $3,500 of office supplies for cash. By the end of the period, only $700 of office supplies remain. Record the period-end adjusting entry.

29) Suppose a company rents office space for one year, paying $36,000 ($3,000/month) in advance on September 1. Record the adjusting entry on December 31.

30) Suppose a company rents office space for one year, paying $12,000 ($1,000/month) in advance on September 1. Record the adjusting entry on December 31.

31) A company purchases one year of flood insurance in advance on May 1, paying $51,000 ($4,250/month). Record the adjusting entry on December 31.

32) A company purchases one year of flood insurance in advance on May 1, paying $24,000 ($2,000/month). Record the adjusting entry on December 31. Version 1

33) A company purchases new equipment for $60,000 cash on August 1, 2024. At the time of purchase, the equipment is expected to be used in operations for four years (48 months) and have no resale or scrap value at the end of the four years. The company depreciates the equipment evenly over the 48 months ($1,250/month). Record the adjusting entry for depreciation on December 31, 2024.

34) A company purchases new equipment for $24,000 cash on August 1, 2024. At the time of purchase, the equipment is expected to be used in operations for four years (48 months) and have no resale or scrap value at the end of the four years. The company depreciates the equipment evenly over the 48 months ($500/month). Record the adjusting entry for depreciation on December 31, 2024.

35) Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $5,000 ($1,250/month). Record Rent-A-Car's adjusting entry on December 31.

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36) Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $4,000 ($1,000/month). Record Rent-A-Car's adjusting entry on December 31.

37) A company pays its employees $9,100 every two weeks ($650/day). The current twoweek pay period ends on December 26, 2024, and employees are paid $9,100. The next twoweek pay period ends on January 9, 2025, and employees will be paid $9,100. Record the adjusting entry on December 31, 2024.

38) A company pays its employees $5,600 every two weeks ($400/day). The current twoweek pay period ends on December 26, 2024, and employees are paid $5,600. The next twoweek pay period ends on January 9, 2025, and employees will be paid $5,600. Record the adjusting entry on December 31, 2024.

39) A company borrows $28,000 with 9% interest on October 1, 2024. This amount plus interest is due on September 30, 2025. Record the adjusting entry on December 31, 2024.

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40) A company borrows $20,000 with 8% interest on October 1, 2024. This amount plus interest is due on September 30, 2025. Record the adjusting entry on December 31, 2024.

41) A company lends $60,000 with 9% interest on May 1, 2024. This amount plus interest is due on April 30, 2025. Record the adjusting entry on December 31, 2024.

42) A company lends $30,000 with 10% interest on May 1, 2024. This amount plus interest is due on April 30, 2025. Record the adjusting entry on December 31, 2024.

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43) Prepare adjusting journal entries, as needed, for the following items. 1.(a) The Supplies account shows a balance of $550, but a count of supplies reveals only $230 on hand at year-end. 2.(b) The company initially records the payments of all insurance premiums as prepaid insurance. The unadjusted trial balance at year-end shows a balance of $540 in Prepaid Insurance. A review of insurance policies reveals that $120 of insurance is unexpired. 3.(c) Employees work Monday through Friday, and salaries of $3,100 per week are paid each Friday. The company's year-end falls on Tuesday. 4.(d) At year-end, the company received a utility bill for December's electricity usage of $210 that will be paid in early January.

44) Prepare adjusting journal entries, as needed, for the following items. 1.(a) The Supplies account shows a balance of $500, but a count of supplies reveals only $200 on hand at year-end. 2.(b) The company initially records the payments of all insurance premiums as prepaid insurance. The unadjusted trial balance at year-end shows a balance of $500 in Prepaid Insurance. A review of insurance policies reveals that $100 of insurance is unexpired. 3.(c) Employees work Monday through Friday, and salaries of $2,500 per week are paid each Friday. The company's year-end falls on Tuesday. 4.(d) At year-end, the company received a utility bill for December's electricity usage of $200 that will be paid in early January.

45) A company reports the following amounts: Assets = $6,900; Liabilities = $2,700; Stockholders' equity = $4,200; Dividends = $750; Revenues = $6,300; and Expenses = $2,100. What amount is reported for net income?

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46) A company reports the following amounts: Assets = $6,000; Liabilities = $2,000; Stockholders' equity = $4,000; Dividends = $500; Revenues = $5,000; and Expenses = $3,000. What amount is reported for net income?

47) For each of the following accounts, indicate whether the account is shown in the income statement or the balance sheet: Accounts

Financial Statement

1. Rent Expense 2. Accounts Payable 3. Service Revenue 4. Common Stock 5. Accounts Receivable 6. Retained Earnings

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48) For each of the following accounts, indicate whether the account is shown in the income statement or the balance sheet: Accounts

Financial Statement

1. Service Revenue 2. Common Stock 3. Salaries Expense 4. Deferred Revenue 5. Accounts Payable 6. Cash

49)

The adjusted trial balance for Tom's Wiring at December 31, 2024 is presented below: Debit

Cash Supplies

Credit

$ 62,000 45,000

Accounts Payable

$ 2,000

Salaries Payable

4,000

Common Stock

40,000

Retained Earnings

32,000

Service Revenue

210,000

Salaries Expense

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140,000

Advertising Expense

23,000

Rent Expense

18,000

Totals

$ 288,000

Prepare an income statement for Tom’s Wiring for the year ended December 31, 2024.

50)

The adjusted trial balance for Tom's Wiring at December 31, 2024 is presented below: Debit

Cash Supplies

Credit

$ 62,000 45,000

Accounts Payable

$ 2,000

Salaries Payable

4,000

Common Stock

40,000

Retained Earnings

32,000

Service Revenue

210,000

Salaries Expense

140,000

Advertising Expense

23,000

Rent Expense

18,000

Totals

$ 288,000

Prepare a classified balance sheet for Tom's Wiring as of December 31, 2024.

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51)

The adjusted trial balance for Cortez Company at December 31, 2024 is presented below: Accounts

Cash Accounts receivable

Debit $ 15,000

Credit

151,000

Prepaid rent

9,000

Supplies

32,000

Equipment

350,000

Accumulated depreciation

$ 134,000

Accounts payable

16,000

Salaries payable

3,600

Interest payable

1,500

Notes payable (due in two years)

33,000

Common stock

200,000

Retained earnings

204,000

Dividends

20,000

Service revenue

320,000

Salaries expense

170,000

Advertising expense

79,000

Rent expense

10,000

Depreciation expense

32,000

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Interest expense

2,100

Utilities expense

42,000

Totals

$ 912,100

Prepare an income statement for Cortez Company for the year ended December 31, 2024.

52)

The adjusted trial balance for Cortez Company at December 31, 2024 is presented below:

Cash

Accounts

Debit $ 11,000

Accounts receivable

150,000

Prepaid rent

5,000

Supplies

25,000

Equipment

300,000

Accumulated depreciation

Credit

$ 135,000

Accounts payable

20,000

Salaries payable

4,000

Interest payable

1,000

Notes payable (due in two years)

30,000

Common stock

200,000

Retained earnings

50,000

Dividends Service revenue

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20,000 400,000

Salaries expense

180,000

Advertising expense

70,000

Rent expense

15,000

Depreciation expense

30,000

Interest expense

2,000

Utilities expense

32,000

Totals

$ 840,000

Prepare an income statement for Cortez Company for the year ended December 31, 2024.

53)

The adjusted trial balance for Cortez Company at December 31, 2024 is presented below: Accounts

Cash Accounts receivable

Debit $ 21,000 159,000

Prepaid rent

7,000

Supplies

32,000

Equipment

400,000

Accumulated depreciation

Credit

$ 127,000

Accounts payable

16,000

Salaries payable

3,800

Interest payable

1,100

Notes payable (due in two years)

30,000

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Common stock

160,000

Retained earnings

240,500

Dividends

23,000

Service revenue

410,000

Salaries expense

181,000

Advertising expense

75,000

Rent expense

13,000

Depreciation expense

33,000

Interest expense

2,400

Utilities expense

42,000

Totals

$ 988,400

Prepare a classified balance sheet for Cortez Company as of December 31, 2024.

54)

The adjusted trial balance for Cortez Company at December 31, 2024 is presented below: Accounts

Cash Accounts receivable

Debit $ 11,000 150,000

Prepaid rent

5,000

Supplies

25,000

Equipment

300,000

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Credit

Accumulated depreciation

$ 135,000

Accounts payable

20,000

Salaries payable

4,000

Interest payable

1,000

Notes payable (due in two years)

30,000

Common stock

200,000

Retained earnings

50,000

Dividends

20,000

Service revenue

400,000

Salaries expense

180,000

Advertising expense

70,000

Rent expense

15,000

Depreciation expense

30,000

Interest expense

2,000

Utilities expense

32,000

Totals

$ 840,000

Prepare a classified balance sheet for Cortez Company as of December 31, 2024.

55) The December 31, 2024 post-closing trial balance for Secure Corporation is presented below: Accounts

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Debit

Credit

Cash

$ 23,000

Accounts receivable

23,200

Prepaid insurance

4,100

Supplies

210,000

Investments (long-term)

58,000

Land

46,000

Buildings

278,000

Accumulated depreciation

82,000

Accounts payable

37,900

Notes payable, due 2025

62,000

Interest payable

14,000

Notes payable, due 2034

122,000

Common stock

220,000

Retained earnings

104,400

Totals

$ 642,300

Prepare a classified balance sheet for Secure Corporation at December 31, 2024.

56) The December 31, 2024 post-closing trial balance for Secure Corporation is presented below: Accounts Cash

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Debit $ 18,500

Credit

Accounts receivable

26,500

Prepaid insurance

4,500

Supplies

100,000

Investments (long-term)

55,000

Land

45,000

Buildings

277,500

Accumulated depreciation

80,000

Accounts payable

37,500

Notes payable, due 2025

65,000

Interest payable

10,000

Notes payable, due 2034

120,000

Common stock

150,000

Retained earnings

64,500

Totals

$ 527,000

Prepare a classified balance sheet for Secure Corporation at December 31, 2024.

57) The following account balances appear in the 2024 adjusted trial balance of Diamond Corporation: Common Stock, $21,000; Retained Earnings, $8,000; Dividends, $2,000; Service Revenue, $30,000; Salaries Expense, $13,000; and Utilities Expense, $7,000. No common stock was issued during the year. Prepare the statement of stockholders' equity for the year ended December 31, 2024.

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58) The following is selected financial information for Osmond Dental Laboratories for 2024 and 2025:

Retained earnings, January 1 Net income Dividends Common stock

2024

2025

$ 50,000 30,000 12,000 71,000

? 51,000 24,000 ?

Osmond issued 4,000 shares of additional common stock in 2025 for $26,000. There were no other stock transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2025.

59) The following is selected financial information for Osmond Dental Laboratories for 2024 and 2025:

Retained earnings, January 1 Net income Dividends Common stock

2024

2025

$ 53,000 37,000 15,000 70,000

? 42,000 18,000 ?

Osmond issued 2,000 shares of additional common stock in 2025 for $20,000. There were no other stock transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2025.

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60)

The adjusted trial balance for Eagle Company at December 31, 2024 is presented below: Accounts

Cash

Debit $ 9,000

Prepaid rent

24,000

Land

400,000

Credit

Accounts payable

$ 13,000

Salaries payable

19,000

Common stock

250,000

Retained earnings

43,000

Dividends

11,000

Service revenue

340,000

Salaries expense

160,000

Rent expense

27,000

Utilities expense

34,000

Totals

$ 665,000

Prepare the closing entries for Eagle Company for the year ended December 31, 2024.

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61)

The adjusted trial balance for Eagle Company at December 31, 2024 is presented below: Accounts

Cash

Debit $ 8,000

Prepaid rent

18,000

Land

415,000

Credit

Accounts payable

$ 10,000

Salaries payable

14,000

Common stock

250,000

Retained earnings

64,000

Dividends

10,000

Service revenue

350,000

Salaries expense

190,000

Rent expense

21,000

Utilities expense

26,000

Totals

$ 688,000

Prepare the closing entries for Eagle Company for the year ended December 31, 2024.

62)

The adjusted trial balance for Cortez Company at December 31, 2024 is presented below:

Cash

Accounts

Debit $ 16,000

Accounts receivable

168,000

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Credit

Prepaid rent

9,000

Supplies

27,000

Equipment

360,000

Accumulated depreciation

$ 130,000

Accounts payable

15,000

Salaries payable

3,500

Interest payable

2,000

Notes payable (due in two years)

27,000

Common stock

200,000

Retained earnings

132,200

Dividends

24,000

Service revenue

440,000

Salaries expense

180,000

Advertising expense

71,000

Rent expense

16,000

Depreciation expense

35,000

Interest expense

2,700

Utilities expense

41,000

Totals

$ 949,700

Prepare the closing entries for Cortez Company for the year ended December 31, 2024.

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63)

The adjusted trial balance for Cortez Company at December 31, 2024 is presented below: Accounts

Cash

Debit $ 11,000

Accounts receivable

150,000

Prepaid rent

5,000

Supplies

25,000

Equipment

300,000

Accumulated depreciation

Credit

$ 135,000

Accounts payable

20,000

Salaries payable

4,000

Interest payable

1,000

Notes payable (due in two years)

30,000

Common stock

200,000

Retained earnings

50,000

Dividends

20,000

Service revenue

400,000

Salaries expense

180,000

Advertising expense

70,000

Rent expense

15,000

Depreciation expense

30,000

Interest expense

2,000

Utilities expense

32,000

Totals

$ 840,000

Prepare the closing entries for Cortez Company for the year ended December 31, 2024.

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64) The year-end adjusted trial balance included the following account balances: Cash, $7,000; Equipment, $27,000; Accounts payable, $5,000; Common stock, $22,000; Retained earnings, $7,000; Dividends, $5,000; Service revenue, $17,000; Salaries expense, $8,000; and Utilities expense, $4,000. Prepare the post-closing trial balance, assuming closing entries have been posted to the respective accounts.

65) The year-end adjusted trial balance included the following account balances: Cash, $5,000; Equipment, $25,000; Accounts payable, $7,000; Common stock, $15,000; Retained earnings, $6,000; Dividends, $1,000; Service revenue, $18,000; Salaries expense, $9,000; and Utilities expense, $6,000. Prepare the post-closing trial balance, assuming closing entries have been posted to the respective accounts.

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Answer Key Test name: Chap 03_6e_Spiceland_Problem Material 1)Cash-basis expense C Accrual-basis expense A Cause-and-effect E Accrual-basis revenue F Revenue recognition principle D Cash-basis revenue B 2)Deferred revenue C Accrued expense B Accrued revenue A Prepaid expense D 3)Statement of stockholders' equity E Adjusted trial balance C Classified B Balance sheet A Income statement D 4)Temporary accounts A Post-closing trial balance B Closing entries E Adjusted trial balance C Permanent accounts D 5)(a) 27,000; (b) 5,000; (c) $0. Transaction (c) represents a liability (Deferred Revenue), since services have not yet been provided to customers.

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6)(a) $24,000; (b) $9,000; (c) $0. Transaction (c) represents a liability (Deferred Revenue), since services have not yet been provided to customers. 7)(a) $0; (b) 5,900. (c) 4,200. Transaction (a) represents the payment of a liability for expenses incurred in a previous period. 8)(a) $0; (b) $5,000; (c) $4,500. Transaction (a) represents the payment of a liability for expenses incurred in a previous period. 9) Transaction (a) (a)

Account Title Cash

Debit 2,000

Deferred Revenue (b)

(b)

Cash

Credit

2,000 2,000

Service Revenue

2,000

10) Transaction (a) (a)

Account Title Cash

Debit 2,500

Deferred Revenue (b)

(b)

Cash

Credit

2,500 2,500

Service Revenue

2,500

11) Transaction (a)

Account Title Accounts Receivable

(a)

Service Revenue

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Debit 3,000

Credit

3,000

(b)

No Entry

12) Transaction (a) (a)

Account Title Accounts Receivable

Debit 2,800

Service Revenue (b)

Credit

2,800

No Entry

13) Transaction (a)

Cash

(a)

Service Revenue (b)

(b)

Account Title

Cash

Debit 5,300

Credit

5,300 5,300

Service Revenue

5,300

14) Transaction (a) (a)

Account Title Cash

Debit 4,200

Service Revenue (b)

(b)

Cash

Credit

4,200 4,200

Service Revenue

4,200

15) Transaction (a)

Account Title Salaries Expense

(a)

Cash (b)

(b)

Salaries Expense Cash

Debit 1,300

Credit

1,300 1,300 1,300

16) Version 1

Transaction (a) (a)

Account Title Salaries Expense

Debit 1,700

Cash (b)

(b)

Salaries Expense

Credit

1,700 1,700

Cash

1,700

17) Transaction (a)

Account Title Utilities Expense

(a)

Utilities Payable (b)

Debit 600

Credit

600

No Entry

18) Transaction (a) (a)

Account Title Utilities Expense

Debit 700

Utilities Payable (b)

Credit

700

No Entry

19) Transaction (a)

Account Title Accounts Payable

(a)

Cash (b)

(b)

Supplies Expense

Debit 1,300

Credit

1,300 1,300

Cash

1,300

20) Transaction (a) (a)

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Account Title Accounts Payable Cash

Debit 1,200

Credit

1,200

(b) (b)

Supplies Expense

1,200

Cash

1,200

21) Cash-Basis Net Income Revenues Expenses

Impact of Adjusting Entries +$ 2,100 + 2,000

$ 33,000 26,000

Accrual-Basis Net Income

$ 7,000

$ 35,100 28,000 $ 7,100

22) Cash-Basis Net Income Revenues Expenses

$34,000 24,000

Impact of Adjusting Entries +$2,000 +1,000

$10,000

Accrual-Basis Net Income $36,000 25,000 $11,000

23)Cash-basis revenues = $27,000 + $220,000 = $247,000. Cash-basis expenses = $17,000 + $14,000 + $22,000 = $53,000. 24) Cash-basis revenues = $20,000 + $300,000 = $320,000. Cash-basis expenses = $12,000 + $10,000 + $18,000 = $40,000. 25)Accrual-basis revenues = $430,000 Accrual-basis expenses = ($14,000 − $2,500) + $11,000 + [($18,000/12 months) = $1,500 × 10 months] = $37,500. 26)Accrual-basis revenues = $400,000. Accrual-basis expenses = ($12,000 − $2,000) + $10,000 + [($18,000/12 months) = $1,500 × 10 months] = $35,000. 27) Account Title Supplies Expense

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Debit $3,200

Credit

Supplies

$3,200

Supplies expense = $350 + $3,700 − $850 = $3,200. 28) Account Title Supplies Expense

Debit 3,300

Supplies

Credit

3,300

Supplies expense = $500 + $3,500 − $700 = $3,300. 29) Account Title Rent Expense

Debit 12,000

Prepaid Rent

Credit

12,000

Rent expense = $3,000 × 4 months = $12,000. 30) Account Title Rent Expense

Debit 4,000

Prepaid Rent

Credit

4,000

Rent expense = $1,000 × 4 months = $4,000. 31) Account Title Insurance Expense Prepaid Insurance

Debit 34,000

Credit

34,000

Insurance expense = $4,250 × 8 months = $34,000 32) Version 1

Account Title Insurance Expense

Debit 16,000

Credit

Prepaid Insurance

16,000

Insurance expense = $2,000 × 8 months = $16,000. 33) Account Title Depreciation Expense

Debit 6,250

Accumulated Depreciation

Credit

6,250

Depreciation expense = $1,250 × 5 months = $6,250. 34) Account Title Depreciation Expense

Debit 2,500

Accumulated Depreciation

Credit

2,500

Depreciation expense = $500 × 5 months = $2,500. 35) Account Title Deferred Revenue

Debit 3,750

Credit

Service Revenue

3,750

Service revenue = $1,250 × 3 months = $3,750. 36) Account Title Deferred Revenue Service Revenue

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Debit 3,000

Credit

3,000

Service revenue = $1,000 × 3 months = $3,000. 37) Account Title Salaries Expense

Debit 3,250

Credit

Salaries Payable

3,250

Salaries expense = $650 × 5 days days (December 27 − December 31) = $3,250. 38) Account Title Salaries Expense

Debit 2,000

Credit

Salaries Payable

2,000

Salaries expense = $400 × 5 days (December 27 − December 31) = $2,000. 39) Account Title Interest Expense

Debit 630

Credit

Interest Payable

630

Interest expense = $28,000 × 9% × 3/12 = $630 40) Account Title Interest Expense

Debit 400

Credit

Interest Payable

400

Interest expense = $20,000 × 8% × 3/12 = $400 41) Version 1

Account Title Interest Receivable

Debit 3,600

Credit

Interest Revenue

3,600

Interest revenue = $60,000 × 9% × 8/12 = $3,600. 42) Account Title Interest Receivable

Debit 2,000

Credit

Interest Revenue

2,000

Interest revenue = $30,000 × 10% × 8/12 = $2,000. 43) Transaction (a)

Account Title Supplies Expense

(a)

Supplies (b)

(b)

Insurance Expense

Debit 320

Credit

320 420

Prepaid Insurance (c)

(c)

Salaries Expense

420 1,240

Salaries Payable (d)

(d)

Utilities Expense

1,240 210

Utilities Payable

210

Salaries Expense = $3,100 (weekly salary) / 5 (days per week) × 2 (Monday and Tuesday before year-end) = $1,240 44) Transaction (a)

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Account Title Supplies Expense

Debit 300

Credit

(a)

Supplies (b)

300

Insurance Expense

(b)

400

Prepaid Insurance (c)

400

Salaries Expense

(c)

1,000

Salaries Payable (d)

1,000

Utilities Expense

(d)

200

Utilities Payable

200

Salaries Expense = $2,500 (weekly salary) / 5 (days per week) × 2 (Monday and Tuesday before year-end) = $1,000 45)Net income = Revenues ($6,300) − Expenses ($2,100) = $4,200. 46)Net income = Revenues ($5,000) − Expenses ($3,000) = $2,000. 47) Accounts

Financial Statement

1. Rent Expense

Income Statement

2. Accounts Payable

Balance Sheet

3. Service Revenue

Income Statement

4. Common Stock

Balance Sheet

5. Accounts Receivable

Balance Sheet

6. Retained Earnings

Balance Sheet

48) Accounts

Financial Statement

1. Service Revenue

Income Statement

2. Common Stock

Balance Sheet

3. Salaries Expense

Income Statement

4. Deferred Revenue

Balance Sheet

5. Accounts Payable

Balance Sheet

6. Cash

Balance Sheet

49) Version 1

Tom's Wiring Income Statement For the year ended December 31, 2024 Service Revenue

$ 210,000

Salaries Expense

140,000

Advertising Expense

23,000

Rent Expense

18,000

Total Expenses

181,000

Net income

$ 29,000

50) Tom's Wiring Balance Sheet As of December 31, 2024 Current assets: Cash Supplies

$ 62,000 45,000

Total assets

$ 107,000

Liabilities and Stockholders' Equity: Current liabilities: Accounts payable

2,000

Salaries payable

4,000

Total liabilities

6,000

Stockholders' equity:

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Common stock

40,000

Retained earnings (1)

61,000

Total stockholders' equity

101,000

Total liabilities and stockholders' equity

$ 107,000

(1) Beginning Retained earnings ($32,000) + Net income ($29,000) = $61,000. 51) Cortez Company Income Statement For the year ended December 31, 2024 Service revenue

$ 320,000

Salaries expense

170,000

Advertising expense

79,000

Rent expense

10,000

Depreciation expense

32,000

Interest expense

2,100

Utilities expense

42,000

Total expenses

335,100

Net income (loss)

$ (15,100)

52) Cortez Company Income Statement For the year ended December 31, 2024

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Service revenue

$ 400,000

Salaries expense

180,000

Advertising expense

70,000

Rent expense

15,000

Depreciation expense

30,000

Interest expense

2,000

Utilities expense

32,000

Total expenses

329,000

Net income

$ 71,000

53) Cortez Company Balance Sheet As of December 31, 2024 Assets Current assets: Cash

$ 21,000

Accounts receivable

159,000

Prepaid rent

7,000

Supplies

32,000

Total current assets

$ 219,000

Long-term assets: Equipment

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400,000

Less: Accumulated depreciation

(127,000)

Total long-term assets

273,000

Total assets

$ 492,000

Liabilities and Stockholders' Equity Current liabilities: Accounts payable

16,000

Salaries payable

3,800

Interest payable

1,100

Total current liabilities

20,900

Notes payable

30,000

Total liabilities

50,900

Stockholders' equity: Common stock

160,000

Retained earnings

281,100

Total stockholders' equity Total liabilities and stockholders' equity

441,100 $ 492,000

Beginning Retained earnings ($240,500) + Net income ($63,600) − Dividends ($23,000) = $281,100 54) Cortez Company Balance Sheet As of December 31, 2024

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Assets Current assets: Cash

$ 11,000

Accounts receivable

150,000

Prepaid rent

5,000

Supplies

25,000

Total current assets

$ 191,000

Long-term assets: Equipment Less: Accumulated depreciation

300,000 (135,000)

Total long-term assets

165,000

Total assets

$ 356,000

Liabilities and Stockholders' Equity Current liabilities: Accounts payable

20,000

Salaries payable

4,000

Interest payable

1,000

Total current liabilities

25,000

Notes payable

30,000

Total liabilities

55,000

Stockholders' equity:

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Common stock

200,000

Retained earnings

101,000

Total stockholders' equity

301,000

Total liabilities and stockholders' equity

$ 356,000

Beginning Retained earnings ($50,000) + Net income ($71,000) − Dividends ($20,000) = $101,000 55) Secure Corporation Balance Sheet At December 31, 2024 Assets Current assets: Cash

$ 23,000

Accounts receivable

23,200

Supplies

210,000

Prepaid insurance

4,100

Total current assets

$ 260,300

Long-term assets: Investments (long-term)

58,000

Land

46,000

Buildings

278,000

Less: Accumulated depreciation

(82,000)

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Total long-term assets

242,000

Total assets

560,300 Liabilities and Stockholders' Equity

Current liabilities: Accounts payable

$ 37,900

Notes payable

62,000

Interest payable

14,000

Total current liabilities

113,900

Long-term liabilities: Notes payable

62,000

Total liabilities

175,900

Stockholders' equity: Common stock

220,000

Retained earnings

104,400

Total stockholders' equity

324,400

Total liabilities and stockholders' equity

$ 560,300

56) Secure Corporation Balance Sheet At December 31, 2024 Assets Current assets: Cash

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$ 18,500

Accounts receivable

26,500

Supplies

100,000

Prepaid insurance

4,500

Total current assets

$ 149,500

Long-term assets: Investments (long-term)

55,000

Land

45,000

Buildings

277,500

Less: Accumulated depreciation

(80,000)

Total long-term assets

242,500

Total assets

447,000 Liabilities and Stockholders' Equity

Current liabilities: Accounts payable

$ 37,500

Notes payable

65,000

Interest payable

10,000

Total current liabilities

112,500

Long-term liabilities: Notes payable

120,000

Total liabilities

232,500

Stockholders' equity: Common stock

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150,000

Retained earnings

64,500

Total stockholders' equity

214,500

Total liabilities and stockholders' equity

$ 447,000

57) Diamond Corporation Statement of Stockholders' Equity For the Year Ended December 31, 2024 Common Retained Stock Earnings Balance, January 1, 2024 Issuance of common stock

$ 21,000 0

$ 8,000

Total Stockholders' Equity $ 29,000 0

Net income for 2024

10,000

Less: Dividends

(2,000)

$ 16,000

$ 37,000

Balance, December 31, 2024

$ 21,000

Net Income is $10,000 ($30,000 − $13,000 − $7,000). 58) Osmond Dental Laboratories Statement of Stockholders' Equity For the Year Ended December 31, 2025 Common Retained Stock Earnings Balance, January 1, 2025 Issuance of common stock

$ 71,000 26,000

Net income for 2025 Less: Dividends Balance, December 31, 2025

$ 97,000

$ 68,000

Total Stockholders' Equity $ 139,000 26,000

51,000

(24,000)

$ 95,000

$ 192,000

Retained earnings = $50,000 + $30,000 − $12,000 = $68,000 Version 1

59) Osmond Dental Laboratories Statement of Stockholders' Equity For the Year Ended December 31, 2025 Common Retained Stock Earnings Balance, January 1, 2025 Issuance of common stock

$ 70,000 20,000

Net income for 2025 Less: Dividends Balance, December 31, 2025

$ 90,000

$ 75,000

Total Stockholders' Equity $ 145,000 20,000

42,000

(18,000)

$ 99,000

$ 189,000

Retained earnings = $53,000 + $37,000 − $15,000 = $75,000 60) Transaction (a)

Account Title Service Revenue

(a)

Retained Earnings (b)

Retained Earnings

Debit 340,000

Credit

340,000 221,000

(b)

Salaries Expense

160,000

(b)

Rent Expense

27,000

(b)

Utilities Expense

34,000

Retained Earnings

11,000

Dividends

11,000

61) Transaction (a) (a)

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Account Title Service Revenue Retained Earnings

Debit 350,000

Credit

350,000

(b)

Retained Earnings

237,000

(b)

Salaries Expense

190,000

(b)

Rent Expense

21,000

(b)

Utilities Expense

26,000

Retained Earnings

10,000

Dividends

10,000

62) Transaction (a) (a)

Account Title Service Revenue

Debit 440,000

Retained Earnings (b)

Retained Earnings

Credit

440,000 345,700

(b)

Salaries Expense

180,000

(b)

Advertising Expense

7,10,00

(b)

Rent Expense

16,000

(b)

Depreciation Expense

35,000

(b)

Interest Expense

41,000

(b)

Utilities Expense

2,700

Retained Earnings

24,000

Dividends

24,000

63) Transaction (a) (a)

Account Title Service Revenue

Debit 400,000

Retained Earnings (b)

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Retained Earnings

Credit

400,000 329,000

(b)

Salaries Expense

180,000

(b)

Advertising Expense

70,000

(b)

Rent Expense

15,000

(b)

Depreciation Expense

30,000

(b)

Interest Expense

2,000

(b)

Utilities Expense

32,000

Retained Earnings

20,000

Dividends

20,000

64) Accounts Cash Equipment

Debit $ 7,000

Credit

7,000

Accounts payable

5,000

Common stock

22,000

Retained earnings

7,000

Totals

$ 34,000

Ending Retained Earnings = Beginning Retained Earnings ($7,000) + Revenues ($17,000) − Expenses ($8,000 + $4,000) − Dividends ($5,000) = $7,000. 65) Accounts Cash Equipment Accounts payable

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Debit $ 5,000

Credit

25,000 7,000

Common stock

15,000

Retained earnings

8,000

Totals

$ 30,000

Ending Retained Earnings = Beginning Retained Earnings ($6,000) + Revenues ($18,000) − Expenses ($9,000 + $6,000) − Dividends ($1,000) = $8,000.

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CHAPTER 3 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Accrual-basis accounting involves recording revenues at the time goods and services are provided to customers and recording expenses at the time costs are used in running the company. ⊚ ⊚

true false

2) Revenues are recorded at the time cash is received from customers for goods and services. ⊚ true ⊚ false

3) If a company provides services to a customer in the current year, but does not collect cash from the customer until the following year, the company should report the revenue in the current year. ⊚ ⊚

true false

4) Jones Corporation provides services to a customer on June 17, but the customer does not pay for the services until August 12. Under accrual-basis accounting, Jones Corporation should record the revenue on August 12. ⊚ ⊚

true false

5) Costs used in business operations to help generate revenues are reported as expenses in those periods. ⊚ ⊚

true false

6) According to the concept of expense recognition under accrual-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the current year. Version 1

⊚ ⊚

true false

7) In the balance sheet, we report equipment at current book value, which equals its original cost “net of” accumulated depreciation. ⊚ ⊚

true false

8) Under both accrual-basis and cash-basis accounting, all revenues and expenses are eventually recorded for the same amount. ⊚ true ⊚ false

9) Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting of assets, liabilities, revenues, and expenses in the income statement. ⊚ ⊚

true false

10) Under cash-basis accounting, if a company provides services to a customer in the current year, but does not collect cash until the following year, the company should report the revenue in the current year. ⊚ true ⊚ false

11)

Cash-basis accounting is not part of generally accepted accounting principles (GAAP). ⊚ ⊚

true false

12) Adjusting entries involve recording events that have occurred but have not yet been recorded by the end of the period. ⊚ true ⊚ false

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13)

Adjusting entries should be prepared after financial statements are prepared. ⊚ true ⊚ false

14) Because adjusting entries update balances for the recognition of assets, liabilities, revenues, and expenses, they are a necessary part of cash-basis accounting. ⊚ true ⊚ false

15) Prepaid expenses involve the payment of cash (or an obligation to pay cash) for the purchase of an asset before the cost is used in running the company. ⊚ ⊚

16)

true false

Deferred revenues occur when cash is received after the revenue is recorded. ⊚ true ⊚ false

17) Accrued expenses involve the payment of cash before recording an expense and a liability. ⊚ true ⊚ false

18) Accrued revenues occur when a company provides goods and services and therefore generates the right to receive cash from a customer. ⊚ ⊚

true false

19) When a prepaid expense has been recorded during the period, the adjusting entry at the end of the period includes recognizing an expense and adjusting the balance of a liability account. Version 1

⊚ ⊚

true false

20) The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net income. ⊚ true ⊚ false

21)

The Supplies account is an example of an accrued expense. ⊚ true ⊚ false

22) Suppose Simeon Company begins the year with $1,000 in supplies, purchases an additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The yearend adjusting entry includes Supplies Expense of $7,200. ⊚ true ⊚ false

23) When a deferred revenue has been recorded during the period, the adjusting entry at the end of the period includes recognizing a revenue and adjusting the balance of an asset account. ⊚ true ⊚ false

24) The adjusting entry for a deferred revenue has the effects of reducing liabilities and increasing net income. ⊚ true ⊚ false

25) On November 1, 2024, a company receives $1,800 for services to be provided evenly over the next six months. The December 31, 2024, adjusting entry for the company would include a credit to Deferred Revenue for $600. ⊚ ⊚

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true false

26) The adjusting entry at the end of the period to recognize an accrued expense includes an expense account and a liability account. ⊚ true ⊚ false

27) The adjusting entry for an accrued expense has the effects of decreasing net income and decreasing liabilities. ⊚ true ⊚ false

28) On December 31, 2024, employees who earn $500 per day have worked eight days and will be paid on January 6, 2025. The adjusting entry on December 31, 2024, includes a debit to Salaries Expense for $4,000. ⊚ true ⊚ false

29) At December 31, 2024, a company has received, but not paid, its December utility bill for $250. The amount of utility expense for December 2024 equals $250. ⊚ true ⊚ false

30) The adjusting entry at the end of the period to recognize an accrued revenue includes a liability account and a revenue account. ⊚ true ⊚ false

31) The adjusting entry for an accrued revenue has the effects of increasing assets and increasing net income. ⊚ true ⊚ false

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32) Adjusting entries are unnecessary for transactions that do not involve revenue or expense activities, such as selling common stock or paying dividends. ⊚ true ⊚ false

33) Adjusting entries are not necessary when cash is received at the same time revenues are recorded. ⊚ true ⊚ false

34) Adjusting entries are not necessary when cash is paid at the same time expenses are incurred. ⊚ true ⊚ false

35) A post-closing trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. ⊚ true ⊚ false

36) An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. ⊚ true ⊚ false

37)

An adjusted trial balance is prepared before adjusting entries. ⊚ true ⊚ false

38)

Once the adjusted trial balance is complete, the income statement can be prepared. ⊚ true ⊚ false

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39) A classified balance sheet separates assets into current and long-term, and separates liabilities into current and long-term. ⊚ true ⊚ false

40)

Current assets are assets that provide a benefit to a company for more than one year. ⊚ ⊚

41)

Long-term assets are assets that provide a benefit to a company for more than one year. ⊚ ⊚

42)

true false

Current liabilities are liabilities that are due within one year of the balance sheet date. ⊚ ⊚

43)

true false

Long-term liabilities are liabilities due in more than one year. ⊚ true ⊚ false

44) Long-term asset categories include long-term investments; property, plant, and equipment; and intangible assets. ⊚ true ⊚ false

45)

The components of retained earnings include assets, expenses, and dividends. ⊚ true ⊚ false

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46) Closing entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the Common Stock account. ⊚ true ⊚ false

47) The closing entry for revenue accounts includes a debit to Retained Earnings and a credit to all revenue accounts. ⊚ true ⊚ false

48) The closing entry for expense accounts includes a debit to Retained Earnings and a credit to all expense accounts. ⊚ true ⊚ false

49) The closing entry for dividends includes a debit to the Dividends account and a credit to Retained Earnings. ⊚ true ⊚ false

50) If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000. ⊚ true ⊚ false

51) If the beginning balance of Retained Earnings equals $12,000, the ending balance of Retained Earnings equals $15,000, and dividends for the year equal $1,000, then net income for the year equals $4,000. ⊚ true ⊚ false

52) After closing entries are posted to the accounts in the general ledger, all asset and liability accounts have a balance of zero.

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⊚ ⊚

true false

53) After closing entries are prepared, the balance of Retained Earnings is updated to reflect the activity in the revenue, expense, and dividend accounts for the period. ⊚ true ⊚ false

54) The post-closing trial balance is a list of accounts and their balances at a particular date after the account balances have been updated for closing entries. ⊚ true ⊚ false

55) The post-closing trial balance does not include any assets or liabilities, because these accounts all have zero balances after closing entries. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 56) The accounting basis that helps to measure and report assets, liabilities, revenues, and expenses in a way that clearly reflects the ability of a company to generate value for its owners is referred to as: A) Cash-basis. B) Accrual-basis. C) Profit-basis. D) Reporting-basis.

57) The accounting basis that records economic events that affect assets, liabilities, revenues, and expenses as they occur is referred to as ____ accounting:

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A) Cash-basis B) Profit-basis C) Accrual-basis D) Reporting-basis

58)

Under accrual-basis accounting: A) Revenue should be recorded in the period the cash is received. B) Revenue should be recorded in the period goods and services are provided. C) Revenue should be recorded in the balance sheet. D) Revenue is a component of common stock.

59) Which accounting principle states that a company should "record revenues when they provide goods and services to customers?" A) Valuation B) Revenue recognition C) Conservatism D) Materiality

60) A company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. This company is using: A) Cash-basis accounting. B) Accrual-basis accounting. C) The recording principle. D) The entity assumption.

61) Which of the following provides a description of the relation between revenues and expenses for financial reporting purposes?

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A) Valuation consequences B) Equal dollar amounts C) Cause-and-effect D) Comparability of transactions

62) Air France collected cash on February 4 from the sale of a ticket to a customer on January 26. The flight took place on April 5. According to the revenue recognition principle, in which month should Air France have recorded this revenue? A) January B) February C) April D) Evenly in each of the three months

63) A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle? A) November B) December C) Evenly in each of the two months D) One-third in November and two-thirds in December

64) A company received an order from a customer in June for services to be provided. Those services were provided in July, and the customer paid the full amount in August. According to the revenue recognition principle, in which month should the company record revenue? A) June B) July C) August D) Evenly over the three months

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65) A company orders office supplies in June. Those supplies are received and paid for in July. The supplies are used in August. In which month should the company record supplies expense? A) June B) July C) August D) Evenly over the three months

66) A company orders office supplies in June. Those supplies are received and used in July. The supplies are paid for in August. In which month should the company record supplies expense? A) June B) July C) August D) Evenly over the three months

67) In November, a company hires three temporary employees that are scheduled to work only the month of December. Those employees work during December, and they are then paid their full salaries in January. In which month should the company record salaries expense? A) November B) December C) January D) Evenly over the three months

68) The accounting basis that records revenues when cash is received and expenses when cash is paid is referred to as: A) Cash-basis. B) Accrual-basis. C) Realization-basis. D) Reporting-basis.

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69)

The following events pertain to Jasper Corporation:

May 1 May 5 May 8 May 9

Jasper purchased office supplies of $3,000 on account. The office supplies were shipped to Jasper. Jasper used these office supplies for a one-time event. Jasper paid $3,000 cash for the office supplies purchased on May 1.

Using cash-basis accounting, on which date should Jasper record supplies expense? A) May 1 B) May 5 C) May 8 D) May 9

70) A company provided $1,500 of services to customers during the month of May. The customers paid in June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income? A) (1) No effect, (2) No effect, (3) Increase B) (1) No effect, (2) No effect, (3) No effect C) (1) Increase, (2) Increase, (3) Increase D) (1) Increase, (2) Increase, (3) No effect

71) A company purchased $400 of office supplies on account during May. All the supplies were used in May, and the account was paid during June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrualbasis net income? A) (1) No effect, (2) No effect, (3) Decrease B) (1) Decrease, (2) Decrease, (3) No effect C) (1) Decrease, (2) Decrease, (3) Decrease D) (1) Decrease, (2) No effect, (3) No effect

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72) A company paid $900 to workers during May. Of this amount, $600 was for work performed in April, while the other $300 was for work performed during May. What would the impact of this transaction be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income? A) (1) No effect, (2) No effect, (3) Decrease B) (1) Decrease, (2) Decrease, (3) No effect C) (1) Decrease, (2) Decrease, (3) Decrease D) (1) Decrease, (2) No effect, (3) No effect

73) Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting? A) Received $600 from customers for services to be provided in May B) Paid $1,800 for a six-month insurance policy covering the period July 1—December 31 C) Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas Sun newspaper D) Received $300 from customers for services performed in March

74) Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting? A) Purchased $500 of office supplies on account (supplies were used in May and paid for in May) B) Paid $1,800 for a six-month insurance policy covering the period July 1—December 31 C) Paid $700 for an advertisement that appeared in the May 17 edition of the Las Vegas Sun newspaper D) Received $300 from customers for services performed in March

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75)

The following events pertain to Bills Company:

December 28, 2024 December 30, 2024 January 4, 2025 January 11, 2025

Bills was contacted by a customer for possible accounting and tax services. Bills signed a formal agreement with the customer to provide accounting and tax services in 2025. The customer paid $1,000 in advance for the services to be provided by Bills Company. Bills provided accounting and tax services to the customer.

Using cash-basis accounting, on which date should Bills Company record revenue for the accounting and tax services? A) December 30, 2024 B) December 31, 2024 C) January 4, 2025 D) January 11, 2025

76) When a company provides services on account, which of the following would be recorded using cash-basis accounting? A) Debit to Cash B) Debit to Service Revenue C) Credit to Deferred Revenue D) No entry would be recorded

77)

The following events pertain to Bills Company:

December 28, 2024 December 30, 2024 January 4, 2025

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January 11, 2025

Bills provided accounting and tax services to the customer.

Using accrual-basis accounting, on which date should Bills Company record revenue for the accounting and tax services? A) December 30, 2024 B) December 31, 2024 C) January 4, 2025 D) January 11, 2025

78)

Consider the following transactions:

The company uses supplies purchased in the previous period, $1,500. The company pays cash for rent in advance, $6,000. The company repays a loan to the bank, $10,000 (ignore any interest cost). The amount of accrual-basis expense is _____ while the amount of cash-basis expense is _____. A) $6,000; $11,500 B) $6,000; $16,000 C) $1,500; $16,000 D) $1,500; $6,000

79)

A company has the following three events in December:

December 1 - Pay last month's rent (November), $500. December 15 - Pay rent for the current month (December), $500. December 31 - Pay rent for the following year, $6,000. How much would be recorded as Rent Expense for the month of December using accrual-basis accounting?

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A) $6,500 B) $7,000 C) $1,000 D) $500

80)

A company has the following transactions:

Pay employees' salaries for the current period. Pay rent in advance. Pay dividends to stockholders in the current period. Receive (but do not pay) a utility bill. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using accrual-basis accounting? A) 1 B) 2 C) 3 D) 4

81)

A company has the following transactions:

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A) 1 B) 2 C) 3 D) 4

82)

The primary difference between accrual-basis and cash-basis accounting is:

A) Under accrual-basis accounting, an attempt is made to record economic events as they occur, regardless of when cash is received or paid. B) Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting. C) Accrual-basis accounting is not part of generally accepted accounting principles (GAAP). D) Adjusting entries are only a necessary part of cash-basis accounting.

83)

When the amount of interest receivable decreases during an accounting period: A) Accrual-basis revenues exceed cash collections from borrowers. B) Accrual-basis net income exceeds cash-basis net income. C) Accrual-basis revenues are less than cash collections from borrowers. D) Accrual-basis expenses are less than cash payments to borrowers.

84) When the balance of the Deferred Revenue account decreases during an accounting period: A) Accrual-basis revenues exceed cash collections from customers. B) Accrual-basis expenses exceed cash collections from customers. C) Accrual-basis revenues are less than cash collections from customers. D) Accrual-basis net income is less than cash-basis net income.

85)

Which transaction would not be recorded under cash-basis accounting?

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A) Providing services to customers for cash B) Paying one year of rent in advance C) Paying salaries to employees D) Purchasing supplies on account

86)

Which of the following statements are correct?

For accrual-basis accounting: 1. (1) record revenues when providing goods and services to customers. 2. (2) record expenses when cash is paid.

For cash-basis accounting:1. (3) record revenue when cash is received. 2. (4) record expenses when benefit is received.

A) (1) and (4) B) (2) and (3) C) (1) and (3) D) (2) and (4)

87) On July 1, 2024, Rents-A-Lot Incorporated paid $72,000 for 36 months of advance rent on its warehouse. What would be the amount of rent expense in the 2025 financial statements for Rents-A-Lot under both cash-basis and accrual-basis accounting? A) Cash-basis = $24,000; Accrual-basis = $24,000 B) Cash-basis = $72,000; Accrual-basis = $12,000 C) Cash-basis = $0; Accrual-basis = $24,000 D) Cash-basis = $0; Accrual-basis = $12,000

88)

The following information pertains to Sooner Company:

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May 1 May 2 May 8 May 15 May 20

Customer ordered an installation service to be done by Sooner Company on May 15. Customer paid cash for the installation job to be done on May 15. The Sooner Company purchased installation supplies on account for the job. The installation job was started and completed. Amount owed for supplies purchased on May 8 is paid.

Assuming that Sooner Company uses cash-basis accounting, when would the company record the expense related to the supplies? A) May 2 B) May 8 C) May 15 D) May 20

89) May 1 May 2 May 8 May 15 May 20

The following information pertains to Sooner Company: Customer ordered an installation service to be done by Sooner Company on May 15. Customer paid cash for the installation job to be done on May 15. The Sooner Company purchased installation supplies on account for the job. The installation job was started and completed. Amount owed for supplies purchased on May 8 is paid.

Assuming that Sooner Company uses accrual-basis accounting, when would the company record the expense related to the supplies? A) May 2 B) May 8 C) May 15 D) May 20

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90)

Consider the following events for Fountain Incorporated:

January 1 January 7 January 9 January 12 January 13

Fountain purchases gasoline for $200 on account. Fountain advertises lawn mowing services for $100 per lawn. Fountain signs up 8 customers who pay a total of $800 cash. Fountain mows the lawns of the 8 customers and all gasoline purchased on January 1 is used. Fountain pays for the gasoline purchased on January 1.

Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services? A) January 1 B) January 7 C) January 9 D) January 12

91)

Consider the following events for Fountain Incorporated:

January 1 January 7 January 9 January 12 January 13

Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline? A) January 1 B) January 7 C) January 12 D) January 13

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92)

Consider the following events for Fountain Incorporated:

January 1 January 7 January 9 January 12 January 13

Under cash-basis accounting, what is the appropriate day to record the expenses related to the gasoline? A) January 1 B) January 9 C) January 12 D) January 13

93)

Consider the following events for Sophia Incorporated:

April 5 April 6 April 12 April 21 April 23

Sophia purchases volleyballs for $200 on account. Sophia advertises a sand volleyball camp for $20 a person. Thirty people sign up for the camp paying a total of $600. Sophia hosts the sand volleyball camp. Sophia pays for the volleyballs purchased on April 5.

Under accrual-basis accounting, what is the appropriate day to record the revenues from the sand volleyball camp? A) April 5 B) April 6 C) April 12 D) April 21

94)

Consider the following events for Sophia Incorporated:

April 5

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Sophia purchases volleyballs for $200 on account.

April 6 April 12 April 21 April 23

Sophia advertises a sand volleyball camp for $20 a person. Thirty people sign up for the camp paying a total of $600. Sophia hosts the sand volleyball camp. Sophia pays for the volleyballs purchased on April 5.

Under accrual-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp? A) April 5 B) April 12 C) April 21 D) April 23

95)

Consider the following events for Sophia Incorporated:

April 5 April 6 April 12 April 21 April 23

Under cash-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp? A) April 5 B) April 12 C) April 21 D) April 23

96)

Consider the following events for Sophia Incorporated:

April 5 April 6 April 12 April 21 April 23

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Under cash-basis accounting, what is the appropriate day to record the revenues related to the sand volleyball camp? A) April 5 B) April 12 C) April 21 D) April 23

97)

Which one of the following best describes the characteristics of adjusting entries? A) Adjusting entries reduce the balance of revenue, expense, and dividend accounts to

zero. B) Adjusting entries update balances for the recognition of cash flows. C) Adjusting entries update balances for the recognition of investments from and distributions to stockholders. D) Adjusting entries update the balances of assets and liabilities (and their related revenues and expenses).

98)

Examples of adjusting entries could include all of the following except: A) Recording interest earned in the current period, but not yet received. B) Recording the expiration of prepaid insurance. C) Recording unpaid taxes. D) Recording the purchase of office supplies.

99)

Which of the following regarding adjusting entries is correct?

A) Adjusting entries are recorded for all external transactions. B) Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current period. C) Adjusting entries are needed because we use accrual-basis accounting. D) After adjusting entries, all temporary accounts should have a balance of zero.

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100)

Adjusting entries are primarily needed for: A) Cash-basis accounting. B) Accrual-basis accounting. C) Current value accounting. D) Manual accounting systems.

101)

Which of the following is true about adjusting entries? A) They are necessary due to the conservatism principle. B) They can be done at the beginning or end of the accounting period. C) They zero the balance of all income statement accounts. D) They are a necessary part of accrual-basis accounting.

102)

Prepayments occur when:

A) Cash payment (or an obligation to pay cash) occurs before the cost is used in running the business. B) Sales are delayed pending credit approval. C) Customers are unable to pay the full amount due when goods are delivered. D) Cash payment occurs after the cost is used in running the company and liability is recorded.

103)

Making insurance payments in advance is an example of: A) A prepaid expense transaction. B) A deferred revenue transaction. C) An accrued expense transaction. D) An accrued revenue transaction.

104)

Deferred revenues refer to:

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A) Customers paying cash in advance of the good or service to be provided. B) Revenue being recorded prior to cash collection from the customer. C) Revenue being recorded at the same time the cash is collected from the customer. D) Cash being collected from the customer after the revenue is recorded.

105)

An accrued expense occurs when:

A) Cash payment (or an obligation to pay cash) occurs before the cost is used in running the business. B) An expense is recorded at the same time as the cash payment. C) An expense is recorded before the payment of cash. D) Cash is paid but an expense is never recorded.

106)

An accrued revenue represents: A) Customers paying cash in advance of the good or service to be provided. B) Revenue being recorded prior to the collection of cash from the customer. C) Revenue being recorded at the same time the cash is collected from the customer. D) Cash being collected from the customer prior to the revenue being recorded.

107)

Making rent payments in advance is an example of a(n): A) Accrued revenue. B) Accrued expense. C) Deferred revenue. D) Prepaid expense.

108) A gym offers one-year memberships for $99 and requires customers to pay the full amount of cash at the beginning of the membership period. For the gym, this is an example of a(n):

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A) Accrued expense. B) Accrued revenue. C) Prepaid expense. D) Deferred revenue.

109) Receiving a utility bill for costs in the current period but delaying payment until the following period is an example of a(n): A) Accrued expense. B) Accrued revenue. C) Prepaid expense. D) Deferred revenue.

110)

Providing goods or services to customers on account is an example of a(n): A) Accrued expense. B) Accrued revenue. C) Prepaid expense. D) Deferred revenue.

111)

An example of an adjusting entry would not include: A) Recording interest earned in the current period, but not yet received. B) Recording the expiration of prepaid rent. C) Recording unpaid salaries. D) Recording the purchase of office supplies.

112) The adjusting entry required when goods or services are provided to a customer for amounts previously recorded as Deferred Revenues includes:

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A) A debit to a liability. B) A debit to an asset. C) A credit to a liability. D) A credit to an asset.

113)

The adjusting entry required to record accrued expenses includes: A) A credit to Cash. B) A debit to an asset. C) A credit to an asset. D) A credit to liability.

114)

Adjusting entries: A) Often include the Cash account. B) Usually are recorded at the beginning of the accounting period. C) Always involve at least one income statement account and one balance sheet account. D) Adjust the balance of revenue and expense accounts to zero.

115) On July 1, 2024, Charlie Company paid $18,000 to Rent-An-Office for rent covering 18 months from July 2024 through December 2025. What adjusting entry should Charlie Company record on December 31, 2024? A) Debit Rent Expense and credit Cash for $18,000 B) Debit Rent Expense and credit Prepaid Rent for $18,000 C) Debit Prepaid Rent and credit Rent Expense for $6,000 D) Debit Rent Expense and credit Prepaid Rent for $6,000

116) Allen Incorporated took out a one-year, 8%, $100,000 loan on March 31, 2024. Interest is due upon maturity of the loan. What adjusting entry, if any, should Allen Incorporated record on December 31, 2024?

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A) Debit Interest Expense and credit Interest Payable for $6,000 B) Debit Interest Expense and credit Interest Payable for $2,000 C) No adjusting entry is necessary D) Debit Interest Expense and credit Interest Payable for $8,000

117) On May 1, 2024, Dooley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjusting entry, if any, should Dooley record on December 31, 2024? A) Debit Interest Expense and credit Interest Payable for $5,000 B) Debit Interest Expense and credit Interest Payable for $10,000 C) Debit Interest Expense and credit Interest Payable for $15,000 D) No adjusting entry is necessary

118) On May 1, 2024, Dooley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjusting entry, if any, should Prime Bank record on December 31, 2024? A) Debit Interest Receivable and credit Interest Revenue for $5,000 B) Debit Interest Receivable and credit Interest Revenue for $10,000 C) Debit Interest Receivable and credit Interest Revenue for $15,000 D) No adjusting entry is necessary

119)

Which of the following is a possible adjusting entry? A) Debit Cash, credit Accounts Payable B) Debit Service Revenue, credit Cash C) Debit Salaries Expense, credit Salaries Payable D) Debit Utilities Expense, credit Retained Earnings

120) When a company makes an end-of-period adjusting entry that includes a credit to Prepaid Rent, the debit is usually made to:

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A) Cash. B) Rent Expense. C) Rent Payable. D) Rent Receivable.

121) When a company makes an end-of-period adjusting entry, which includes a debit to Supplies Expense, the usual credit entry is made to: A) Accounts Payable. B) Supplies. C) Cash. D) Retained Earnings.

122)

Which of the following would not typically be used as an adjusting entry? A) Debit Rent Expense and credit Prepaid Rent B) Debit Cash and credit Deferred Revenue C) Debit Interest Expense and credit Interest Payable D) Debit Deferred Revenue and credit Service Revenue

123) Savory Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200 premium to prepaid insurance. At its December 31 year-end, Savory Foods would record which of the following adjusting entries? A) Debit Insurance Expense and credit Prepaid Insurance for $1,750 B) Debit Prepaid Insurance and credit Insurance Expense for $1,750 C) Debit Insurance Expense and credit Accounts Payable for $4,200 D) Debit Insurance Expense and credit Prepaid Insurance for $2,450

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124) At the beginning of the year, a company had a balance in its prepaid insurance account of $48,400. During the year, $86,000 was paid for insurance. At the end of the year, after adjusting entries were recorded, the balance in the prepaid insurance account was $42,000. Insurance expense for the year would be: A) $92,400. B) $86,000. C) $134,400. D) $6,400.

125) A company purchased $270,000 in supplies during the year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. For what amount was the adjusting entry to supplies expense? A) $300,000 B) $280,000 C) $260,000 D) $240,000

126) A company receives a utility bill each month for services received. The company's policy is to pay the utility bill within 30 days of receipt. On December 31, 2024, the company receives a utility bill of $4,200 for the month of December and plans to pay the bill by January 30, 2025. What adjusting entry, if any, will the company record on December 31, 2024? A) Debit Utilities Expense and credit Cash for $4,200 B) Debit Utilities Expense and credit Utilities Payable for $4,200 C) Debit Utilities Payable and credit Utilities Expense for $4,200 D) No adjusting entry is necessary at the end of the year

127) A company owes employee salaries of $16,000 at the end of the year. These salaries will be paid in the following year. What adjusting entry, if any, does the company need to record at the end of the year?

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A) Debit Salaries Expense and credit Cash for $16,000 B) Debit Salaries Expense and credit Salaries Payable for $16,000 C) Debit Salaries Payable and credit Salaries Expense for $16,000 D) No adjusting entry is necessary at the end of the year

128) The employees of Custom Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000 (or $3,200 per weekday). The current pay period ends on Friday, January 3. Custom Clothes is now preparing financial statements for the year ended December 31. What is the adjusting entry to record accrued salaries at the end of the year? A) Debit Salaries Payable and credit Salaries Expense for $22,400 B) Debit Salaries Expense and credit Salaries Payable for $6,400 C) Debit Salaries Expense and credit Salaries Payable for $9,600 D) Debit Salaries Expense and credit Salaries Payable for $22,400

129) A company has a policy of paying salaries for contract labor on the 15th of the month following the labor services received. In December 2024, the company recorded $15,000 paid in salaries for labor services received in November 2024. In addition, labor services received in December 2024 were $12,000 and will be paid by the company on January 15, 2025. What adjusting entry will the company record on December 31, 2024? A) Debit Salaries Expense and credit Salaries Payable for $27,000 B) Debit Salaries Expense and credit Cash for $15,000 C) Debit Salaries Expense and credit Salaries Payable for $12,000 D) Debit Salaries Expense and credit Salaries Payable for $3,000

130) FastFlix sells one-year online subscriptions for viewing classic movies. Customers are required to pay for the subscription at the beginning of the subscription period. On April 1, 2024, total sales of one-year subscriptions are $12,000. What adjusting entry does FastFlix need to record on December 31, 2024?

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A) Debit Deferred Revenue and credit Service Revenue for $9,000 B) Debit Deferred Revenue and credit Service Revenue for $12,000 C) Debit Service Revenue and credit Deferred Revenue for $9,000 D) Debit Service Revenue and credit Deferred Revenue for $12,000

131) On September 1, 2024, Greenwood Gaming sold 400 one-year subscriptions to its online gaming website for $90 each. The total amount received was credited to Deferred Revenue. What would be the required adjusting entry at December 31, 2024? A) Debit Deferred Revenue and credit Service Revenue for $36,000 B) Debit Service Revenue and credit Deferred Revenue for $24,000 C) Debit Deferred Revenue and credit Service Revenue for $24,000 D) Debit Deferred Revenue and credit Service Revenue for $12,000

132) During the year, Maiden Company paid salaries of $23,600. In addition, $9,800 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following? A) Debit to Salaries Expense for $33,400 B) Credit to Salaries Payable for $9,800 C) Credit to Salaries Expense of $9,800 D) Debit to Salaries Payable for $23,600

133) During the year, Maiden Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following? A) Debit to Salaries Expense for $32,000 B) Credit to Salaries Expense of $8,000 C) Debit to Salaries Payable for $24,000 D) Credit to Salaries Payable for $8,000

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134) At the beginning of December, Coastal Corporation had $1,600 in supplies on hand. During the month, supplies purchased amounted to $3,900, but by the end of the month the supplies balance was only $1,400. What is the appropriate month-end adjusting entry? A) Debit Cash $1,400, credit Supplies $1,400 B) Debit Supplies $4,100, credit Supplies Expense $4,100 C) Debit Supplies Expense $4,100, credit Supplies $4,100 D) Debit Cash $4,100, credit Supplies $4,100

135) At the beginning of December, Coastal Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry? A) Debit Cash $4,200, credit Supplies $4,200 B) Debit Supplies $4,200, credit Supplies Expense $4,200 C) Debit Supplies Expense $4,200, credit Supplies $4,200 D) Debit Cash $800, credit Supplies $800

136) On October 1, 2024, a company purchases equipment for $72,000. The equipment is expected to be used for the next four years (48 months), and have no resale or scrap value at the end of the four years. What adjusting entry should the company record on December 31, 2024? A) Debit Depreciation Expense and credit Cash for $72,000 B) Debit Depreciation Expense and credit Accumulated Depreciation for $72,000 C) Debit Equipment and credit Depreciation Expense for $4,500 D) Debit Depreciation Expense and credit Accumulated Depreciation for $4,500

137) On October 1, 2024, a company purchases equipment for $72,000. The equipment is expected to be used for the next four years (48 months), and have no resale or scrap value at the end of the four years. What adjusting entry should the company record on December 31, 2025?

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A) Debit Depreciation Expense and credit Accumulated Depreciation for $13,500 B) Debit Depreciation Expense and credit Accumulated Depreciation for $18,000 C) Debit Depreciation Expense and credit Accumulated Depreciation for $22,500 D) Debit Depreciation Expense and credit Accumulated Depreciation for $4,500

138) On November 1, 2024, a company signs a one-year contract to provide services. The agreement specifies payments of $4,500 to be received at the end of every three months for a total of $18,000 over the entire year ($1,500 per month). No entry is made on November 1, 2024, at the time the contract is signed. The first payment will be received on January 31, 2025. What adjusting entry does the company need to record at the end of the year on December 31, 2024? A) Debit Accounts Receivable and credit Service Revenue for $15,000 B) Debit Service Revenue and credit Accounts Receivable for $12,000 C) Debit Accounts Receivable and credit Service Revenue for $3,000 D) Debit Accounts Receivable and credit Service Revenue for $18,000

139) A company provides maintenance services to customers. The company's policy is to provide services and then bill customers on the 10th of the following month. In December 2024, the company provided services of $14,000 and plans to bill customers on January 10, 2025. What adjusting entry, if any, will the company record on December 31, 2024? A) Debit Accounts Receivable and credit Deferred Revenue for $14,000 B) Debit Accounts Receivable and credit Service Revenue for $14,000 C) Debit Service Revenue and credit Accounts Receivable for $14,000 D) No adjusting entry is necessary at the end of the year.

140) Prior to adjusting entries, Prepaid Rent had a balance of $8,300. The following year-end adjusting entry was made by the company: Account Title Rent Expense Prepaid Rent

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Debit 6,800

Credit

6,800

What balance would be shown for Prepaid Rent in the adjusted trial balance? A) $1,500 B) $6,800 C) $8,300 D) $15,100

141) Prior to adjusting entries, Salaries Expense had a balance of $22,300. The following yearend adjusting entry was made by the company: Account Title Salaries Expense Salaries Payable

Debit 4,400

Credit

4,400

What balance would be shown for Salaries Expense in the adjusted trial balance? A) $4,400 B) $17,900 C) $22,300 D) $26,700

142) On November 1, $4,800 of rent on equipment for the next six months was paid and charged to Prepaid Rent. At the end of the year, the financial statements would report: A) Rent Expense, $4,800; Prepaid Rent $0 B) Rent Expense, $1,600; Prepaid Rent $3,200 C) Rent Expense, $1,600; Prepaid Rent $4,800 D) Rent Expense, $3,200; Prepaid Rent $1,600

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143) Jeannie’s Apples opened for business on January 1, 2024, and paid for two insurance policies effective on that date. The liability policy was $57,600 for 18 months, and the crop damage policy was $14,400 for a two-year term. What was the balance in Jeannie’s Prepaid Insurance account as of December 31, 2024? A) $45,600 B) $26,400 C) $7,200 D) $72,000

144) Jeannie’s Apples opened for business on January 1, 2024, and paid for two insurance policies effective on that date. The liability policy was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Jeannie’s Prepaid Insurance account as of December 31, 2024? A) $9,000 B) $18,000 C) $30,000 D) $48,000

145) FastFlix sells one-year online subscriptions for viewing classic movies. Customers are required to pay for the subscription at the beginning of the subscription period. On April 1, 2024, total sales of one-year subscriptions are $12,000. What is the adjusted balance of Deferred Revenue on December 31, 2024? A) $9,000 B) $3,000 C) $0 D) $12,000

146) A list of all accounts and their balances after updating account balances for adjusting entries is referred to as a(n):

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A) Trial balance. B) Adjusted trial balance. C) Post-closing trial balance. D) Accounting trial balance.

147)

An adjusted trial balance is a: A) List of all accounts and their balances after adjusting entries. B) List of all accounts and their balances before adjusting entries. C) List of all accounts and their balances after closing entries. D) Trial balance adjusted for cash-basis accounting.

148) Consider the adjusting entry process at the end of the accounting period. 1. Record adjusting entries in the journal. 2. Prepare an adjusted trial balance. 3. Determine which accounts need to be adjusted and prepare adjusting entries. 4. Post the adjusting entries to the appropriate accounts in the general ledger.

Place the actions above in the proper order. A) 1, 4, 3, 2 B) 1, 2, 4, 3 C) 3, 4, 2, 1 D) 3, 1, 4, 2

149) The adjusted trial balance should be prepared ______ the financial statements are prepared in order to prove the ______ of the debits and credits.

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A) after; equality B) before; accuracy C) before; equality D) after; accuracy

150) Which of the following trial balances shows account balances that incorporate current year deferrals and accruals? A) Adjusted trial balance B) Final trial balance C) Unadjusted trial balance D) Cash-basis trial balance

151) A company’s accountant is trying to prepare an adjusted trial balance from the list of accounts below.

Cash Retained Earnings Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Supplies Dividends Accounts Payable Common Stock

$ 12,000 31,000 2,000 15,000 68,000 40,000 10,000 4,000 3,000 5,000 38,000

What is the total amount of the debit column in the adjusted trial balance? A) $114,000 B) $86,000 C) $81,000 D) $11,000

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152) A company’s accountant is trying to prepare an adjusted trial balance from the list of accounts below.

Cash Retained Earnings Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Supplies Dividends Accounts Payable Common Stock

$ 12,000 31,000 2,000 15,000 68,000 40,000 10,000 4,000 3,000 5,000 38,000

What is the total amount of the credit column in the adjusted trial balance? A) $111,000 B) $81,000 C) $114,000 D) $86,000

153)

Which of the following is true about an income statement? A) It reports activity for a period of time. B) It does not include dividends paid. C) It reports revenues and expenses. D) All of the other answers are true.

154)

Which of the following best describes the information reported in the income statement?

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A) The portion of profits paid in cash to stockholders B) The current resources available to pay current obligations C) The difference between total revenues and total expenses equals net income. D) The extent to which cash inflows exceed cash outflows

155) The following table contains financial information for Dillon Incorporated before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

$ 13,900 5,900 2,600 5,600 65,100 28,500 20,900 5,000 3,500 67,200 19,800

What is Dillon's net income? A) $7,000 B) $8,000 C) $2,500 D) $2,000

156) The following table contains financial information for Dillon Incorporated before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue

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$ 12,000 4,500 2,000 4,500 65,000 30,000 41

Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

20,000 3,000 5,000 68,000 8,000

What is Dillon's net income? A) $3,500 B) $2,500 C) $5,000 D) $5,500

157) If a company incorrectly records a prepayment as an expense instead of an asset, how will this error affect net income in the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine.

158) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine.

159)

The statement of stockholders' equity includes which of the following for the period?

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A) Details of a company's profitability that represents stockholders' claims. B) Changes in stockholders' equity accounts. C) Inflows and outflows of cash that benefit stockholders. D) Current assets available to pay current liabilities to reduce risk to stockholders.

160)

The statement of stockholders' equity includes: A) Net income from the income statement. B) The amount of stock issued in the current period. C) Dividends declared to stockholders in the current period. D) All of the other answers are correct.

161) In the statement of stockholders' equity, Retained Earnings had a beginning balance of $25,000. During the period, the company reports a net income of $10,000 and a dividend of $4,000. The ending balance in the Retained Earnings account is: A) $10,000. B) $35,000. C) $39,000. D) $31,000.

162) In the statement of stockholders' equity, Retained Earnings had a beginning balance of $60,000. During the period, the company reports a net loss of $10,000 and net cash outflows of $15,000. No dividends were declared or paid. The ending balance in the Retained Earnings account is: A) $60,000. B) $35,000. C) $50,000. D) $45,000.

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163) In the statement of stockholders' equity, the balance of Retained Earnings increased by $32,000. The company declared a dividend of $10,000 during the year. What was the net income for the year? A) $10,000 B) $32,000 C) $42,000 D) $22,000

164)

A classified balance sheet: A) Shows only current assets and current liabilities. B) Shows changes in assets, liabilities, revenues, and expenses. C) Contains confidential information. D) Shows subtotals for current assets and current liabilities.

165)

Which financial statement provides information for a point in time only? A) Statement of cash flows B) Income statement C) Statement of stockholders' equity D) Balance sheet

166)

Current assets include: A) Assets that must be paid for within 12 months. B) Assets that will be used up or converted to cash within 12 months. C) Assets that will be used for many years. D) Any assets that were purchased for cash.

167)

With respect to current assets, liquidity refers to:

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A) How quickly the asset can be converted to cash. B) The magnitude of the asset's account balance. C) Whether cash was paid for the asset at the time of acquisition. D) The accuracy of the balance being reported.

168)

The following financial information is from Shovels Construction Company:

Accounts Payable Buildings Cash Accounts Receivable Sales Tax Payable Retained Earnings Supplies Notes Payable (due in 18 months) Interest Payable Common Stock

$ 13,900 89,000 11,500 11,000 3,200 46,600 41,500 26,000 1,500 61,800

What is the amount of current assets, assuming the accounts above reflect normal activity? A) $64,000 B) $153,000 C) $125,800 D) $22,500

169)

The following financial information is from Shovels Construction Company:

Accounts Payable Buildings Cash Accounts Receivable Sales Tax Payable Retained Earnings Supplies Notes Payable (due in 18 months) Interest Payable

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$ 15,000 80,000 10,500 9,500 4,500 47,500 40,000 35,000 3,000 45

Common Stock

35,000

What is the amount of current assets, assuming the accounts above reflect normal activity? A) $20,000 B) $60,000 C) $140,000 D) $175,000

170)

Consider the following items:

Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue Buildings Notes Payable (due in six months) Equipment How many of the items listed above are generally long-term assets? A) Two B) Three C) Four D) Five

171) Resources owned by the company that will provide a benefit for more than one year are called: A) Current assets. B) Current liabilities. C) Long-term assets. D) Revenues.

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172) as:

Long-term productive assets used in the normal course of business are typically classified

A) Current assets. B) Investments. C) Intangible assets. D) Property, plant, and equipment.

173)

Patents, copyrights, franchises, and trademarks are examples of: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant, and equipment.

174)

A current liability is defined as: A) An amount borrowed less than one year ago. B) An amount due to an employee. C) An amount due within one year of the balance sheet date. D) A small amount due.

175)

An advantage of a classified balance sheet is that it is easy to see: A) If the company is likely to be profitable in future periods. B) If the company is profitable in the current period. C) If current assets are large enough to pay current liabilities. D) If dividends have been paid to stockholders.

176)

Which of the following current liabilities does not involve the future payment of cash?

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A) Interest Payable B) Deferred Revenue C) Accounts Payable D) Salaries Payable

177)

The Deferred Revenue account is shown in which statement? A) Income statement B) Statement of cash flows C) Balance sheet D) Statement of stockholders' equity

178) The following financial information is from Mustang Company. All debt is due within one year unless stated otherwise. Retained Earnings Supplies Equipment Accounts Receivable Deferred Revenue Accounts Payable Common Stock Notes Payable (due in 18 months) Interest Payable Cash

$ 60,700 38,100 73,400 8,800 4,500 14,100 23,700 35,000 5,100 22,800

What is the amount of current liabilities? A) $14,100 B) $23,700 C) $19,200 D) $58,700

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179) The following financial information is from Mustang Company. All debt is due within one year unless stated otherwise. Retained Earnings Supplies Equipment Accounts Receivable Deferred Revenue Accounts Payable Common Stock Notes Payable (due in 18 months) Interest Payable Cash

$ 52,000 37,000 72,000 8,600 6,000 15,000 25,000 35,000 7,000 22,400

What is the amount of current liabilities? A) $63,000 B) $28,000 C) $45,600 D) $22,000

180)

Which of the following are reported as stockholders' equity in a classified balance sheet? A) Debits and Credits B) Revenues and Expenses C) Common Stock and Retained Earnings D) Assets and Liabilities

181) The following table contains financial information for Dillon Incorporated before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue

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$ 12,900 6,200 3,500 4,800 65,600 29,700 49

Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

20,600 4,000 4,700 66,600 16,600

What is the amount of Dillon's total assets? A) $84,700 B) $154,800 C) $88,200 D) $22,600

182) The following table contains financial information for Dillon Incorporated before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of Dillon's total assets? A) $81,500 B) $82,500 C) $68,500 D) $83,500

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183) The following table contains financial information for Dillon Incorporated before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of Dillon's total liabilities? A) $5,000 B) $78,500 C) $68,500 D) $83,500

184) The following table contains financial information for Dillon Incorporated before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

$ 12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of Dillon's total stockholders' equity?

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A) $5,000 B) $78,500 C) $68,500 D) $83,500

185) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect total assets for the current year? A) Total assets will be too low. B) Total assets will be correct. C) Total assets will be too high. D) Not possible to determine.

186) Providing services to customers on account would affect the balances reported in which financial statement(s)? A) Income statement B) Statement of stockholders' equity C) Balance sheet D) All of the financial statements in the other answer choices would be affected.

187) true?

If a company incorrectly records Service Revenue too high, which of the following is

A) Net income in the income statement is overstated. B) Retained earnings in the statement of stockholders' equity is overstated. C) Total stockholders' equity in the balance sheet is overstated. D) All of the other answers are correct.

188) When a company owes employee salaries at the end of the period but fails to make an adjusting entry for that amount owed, which of the following is true?

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189)

Current assets in a classified balance sheet are typically listed in order of: A) Operational functionality. B) Lowest to highest amount. C) Importance to the company’s profitability. D) Liquidity.

190)

The liquidity of an asset in a classified balance sheet refers to: A) The dollar magnitude of the asset. B) How quickly the asset can be converted to cash. C) The length of time for which the company has owned the asset. D) The likelihood that the asset will help to increase the company’s profitability.

191)

Which of the following describes the purpose(s) of closing entries? A) Adjust the balances of asset and liability accounts for unrecorded activity during the

period. B) Transfer the balances of permanent accounts to Retained Earnings. C) Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. D) Transfer the balances of temporary accounts to Common Stock.

192)

The primary purpose of closing entries is to:

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A) Prove the equality of the debit and credit entries in the general journal. B) Ensure that all assets and liabilities are stated at their proper amounts. C) Update the balance of Retained Earnings and prepare revenue, expense, and dividend accounts for next period's transactions. D) Ensure that adjusting entries balance.

193)

The closing process includes which of the following? A) Closing the balance of the retained earnings account to zero. B) Closing the balance of only the dividends account to zero. C) Closing the balances of only revenue and expense accounts to zero. D) Closing the balances of revenue, expense and dividend accounts to zero.

194)

The purpose of closing entries is to transfer: A) Accounts Receivable to Retained Earnings when an account is fully paid. B) Balances in temporary accounts to a permanent account. C) Inventory to Cost of Goods Sold when merchandise is sold. D) Assets and liabilities when operations are discontinued.

195)

Which of the following is a permanent account? A) Dividends B) Service Revenue C) Advertising Expense D) Retained Earnings

196)

Which of the following is true concerning temporary and permanent accounts?

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A) Cash is a temporary account. B) Permanent accounts represent activity over the entire life of the company. C) Permanent accounts must be closed at the end of every reporting period. D) Temporary accounts represent activity over the previous three years.

197) The following table contains financial information for Fisher Incorporated before closing entries: Cash Common Stock Supplies Advertising Expense Accounts Payable Service Revenue Salaries Expense Prepaid Rent Dividends Equipment

$ 23,000 34,000 4,000 2,000 20,000 30,000 3,000 4,000 3,000 45,000

How many of the above accounts are permanent? A) Three B) Four C) Five D) Six

198)

Permanent accounts would not include: A) Dividends. B) Salaries Payable. C) Prepaid Rent. D) Deferred Revenue.

199)

Permanent accounts would not include:

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A) Accounts Payable. B) Office Supplies. C) Service Revenue. D) Common Stock.

200)

Temporary accounts would not include: A) Deferred Revenue. B) Advertising Expense. C) Service Revenue. D) Dividends.

201) Of the following six accounts, which ones have temporary balances? 1. (1) Service Revenue 2. (2) Dividends 3. (3) Salaries Expense 4. (4) Common Stock 5. (5) Retained Earnings 6. (6) Cash

A) (1), (2), and (3) B) (4), (5), and (6) C) (2), (4), and (5) D) (1), (3), and (5)

202)

Which of the following accounts willnot be included in closing entries?

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A) Prepaid Insurance B) Service Revenue C) Utilities Expense D) Retained Earnings

203) When a company prepares closing entries, which one of the following is not a correct closing entry? A) Debit Retained Earnings; credit Salaries Expense B) Debit Dividends; credit Retained Earnings C) Debit Service Revenue; credit Retained Earnings D) All of the other answers are incorrect.

204)

The ending balance of Retained Earnings can best be described as the amount of: A) Cash received from stockholders over the life of the company. B) Net income over the life of the company not paid to owners in the form of dividends. C) Dividends paid over the life of the company. D) Net income over the life of the company.

205) The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $6.9 million from the beginning of the year. The company declared a dividend of $1.7 million during the year. What was the amount of net income during the year? A) $6.9 million B) $1.7 million C) $5.2 million D) $8.6 million

206) The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the amount of net income during the year?

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A) $1.9 million B) $3.2 million C) $4.5 million D) $1.3 million

207) The Retained Earnings account had a beginning credit balance of $26,050. During the period, the business had a net loss of $12,550, and the company paid dividends of $8,700. The ending balance in the Retained Earnings account is: A) $29,900 B) $13,500 C) $38,600 D) $4,800

208) The Retained Earnings account had a beginning credit balance of $26,000. During the period, the business had a net loss of $12,000, and the company paid dividends of $8,000. The ending balance in the Retained Earnings account is: A) $6,000 B) $30,000 C) $22,000 D) $14,000

209) In the first three years of operations, Lindsey Corporation reported net income (loss) of $(150,000), $100,000, and $250,000. At the end of the third year, Lindsey Corporation has a balance of $120,000 in its Retained Earnings account. What is the total amount of dividends Lindsey Corporation paid over the three years? A) $130,000 B) $120,000 C) $80,000 D) $380,000

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210) For the first three years of operations, the company reports net income of $1,000, $2,000, and $3,000, and pays dividends of $500, $1,000, and $1,000. What is the balance of Retained Earnings at the end of the third year? A) $2,000 B) $2,500 C) $3,500 D) $6,000

211)

The closing entry for expenses includes a debit to: A) Dividends and a credit to all expense accounts. B) Retained Earnings and a credit to all expense accounts. C) Revenues and a credit to Retained Earnings. D) Revenues and a credit to all expense accounts.

212)

Which of the following is a possible closing entry? A) Debit Cash, credit Service Revenue. B) Debit Cash, credit Retained Earnings. C) Debit Service Revenue, credit Retained Earnings. D) Debit Dividends, credit Retained Earnings.

213)

Frosty Incorporated has the following balances on December 31 prior to closing entries:

Revenues Retained Earnings, January 1 Cash Expenses Accounts Payable Dividends Supplies

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$ 40,700 8,900 7,600 24,700 3,900 1,500 19,700

Based upon the balances above, how will Retained Earnings change as a result of the closing entries? A) Increase of $15,500 B) Increase of $14,500 C) Increase of $17,500 D) Increase of $16,500

214)

Frosty Incorporated has the following balances on December 31 prior to closing entries:

Revenues Retained Earnings, January 1 Cash Expenses Accounts Payable Dividends Supplies

$ 35,000 10,000 7,000 23,000 4,000 1,000 18,000

Based upon the balances above, how will Retained Earnings change as a result of the closing entries? A) Increase of $11,000 B) Increase of $13,000 C) Increase of $12,000 D) Increase of $14,000

215)

A list of all accounts and their balances after posting closing entries is referred to as a(n): A) Trial balance. B) Adjusted trial balance. C) Post-closing trial balance. D) Accounting trial balance.

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216)

A post-closing trial balance is a: A) List of all accounts and their balances after adjusting entries. B) List of all accounts and their balances before adjusting entries. C) List of all accounts and their balances after closing entries. D) Trial balance adjusted for cash-basis accounting.

217)

Which one of the following accounts would not have a balance after closing entries? A) Deferred Revenue B) Supplies C) Prepaid Rent D) Dividends

218)

Which of the following accounts is (are) listed in a post-closing trial balance? A) Prepaid Rent B) Accounts Payable C) Salaries Expense D) Two of these three accounts would be included in a post-closing trial balance

219)

Which of the following statements is true regarding the post-closing trial balance?

A) The post-closing trial balance will be distributed to investors and other stakeholders along with the financial statements. B) The post-closing trial balance is a report prepared before the adjusting entries are posted and the financial statements are prepared to prove that debits equal credits. C) The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. D) The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period.

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 220) Describe when revenues and expenses are recorded under accrual-basis accounting. Describe each of the following: 1. (1) revenue recorded before cash is received, 2. (2) revenue recorded after cash is received, 3. (3) expense recorded before cash is paid, and 4. (4) expense recorded after cash is paid.

221) Describe the primary differences between the recording of revenues and expenses under accrual-basis accounting versus cash-basis accounting.

222)

Describe what is meant by deferred revenues and give two examples.

223)

Describe what is meant by prepaid expenses and give two examples.

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224)

What is an accrued expense? Give two examples.

225) What is the difference between permanent accounts and temporary accounts and why does an accounting system have both types of accounts?

226)

What are the purposes of closing entries?

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Answer Key Test name: Chap 03_6e_Spiceland 1) TRUE 2) FALSE Revenues are recorded at the time goods and services are provided to customers. This may be at the same time as cash is received, but likely is not since many customers either prepay (cash flows before) or pay on account (cash flows after). 3) TRUE 4) FALSE Under accrual-basis accounting, revenue should be recorded at the time goods or services are provided to the customer (June 17). 5) TRUE 6) TRUE 7) TRUE 8) TRUE 9) TRUE 10) FALSE Under cash-basis accounting, we record revenues when we receive cash. 11) TRUE 12) TRUE 13) FALSE Adjusting entries should be prepared before financial statements are prepared. 14) FALSE Adjusting entries are a necessary part of accrual-basis accounting.

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15) TRUE 16) FALSE Deferred revenues occur when cash is received in advance of the services to be provided. 17) FALSE Accrued expenses involve the payment of cash after recording an expense and a liability. 18) TRUE 19) FALSE The adjusting entry includes recognizing an expense and adjusting the balance of an asset account. 20) TRUE 21) FALSE The Supplies account is an example of a prepaid expense. 22) FALSE Supplies Expense = beginning ($1,000) + purchases ($5,500) − ending ($700). 23) FALSE The adjusting entry includes recognizing a revenue and adjusting the balance of a liability account (Deferred Revenue). 24) TRUE 25) FALSE The adjusting entry would involve a debit to Deferred Revenue and a credit to Service Revenue for $600. 26) TRUE 27) FALSE The adjusting entry has the effect of increasing (rather than decreasing) liabilities. 28) TRUE Version 1

29) TRUE 30) FALSE The adjusting entry includes an asset account and a revenue account. 31) TRUE 32) TRUE 33) TRUE 34) TRUE 35) FALSE The post-closing trial balance is a list of all accounts and their balances at a particular date after we have updated account balances for closing entries. 36) TRUE 37) FALSE The adjusted trial balance is prepared after adjusting entries. 38) TRUE 39) TRUE 40) FALSE Current assets are assets that provide a benefit to a company within the year. Long-term assets are assets that provide a benefit for more than one year. 41) TRUE 42) TRUE 43) TRUE 44) TRUE 45) FALSE The components of retained earnings include revenues, expenses, and dividends. 46) FALSE Balances of temporary accounts are transferred to Retained Earnings. Version 1

47) FALSE The closing entry for revenue accounts includes a debit to all revenue accounts and a credit to Retained Earnings. 48) TRUE 49) FALSE The closing entry for dividends includes a debit to Retained Earnings and a credit to the Dividends account. 50) FALSE Ending Retained Earnings = beginning Retained Earnings ($10,000) + net income ($6,000) − dividends ($2,000) = $14,000. 51) TRUE 52) FALSE After closing entries are prepared, all revenue, expense, and dividend accounts have a balance of zero. 53) TRUE 54) TRUE 55) FALSE The post-closing trial balance does not include any revenues, expenses, or dividends, because these accounts all have zero balances after closing entries. 56) B 57) C 58) B 59) B 60) B 61) C 62) C 63) A 64) B 65) C Version 1

66) B 67) B 68) A 69) D 70) A 71) A 72) C 73) C 74) A 75) C 76) D 77) D 78) D 79) D 80) C The three accrual-basis expenses include paying employees' salaries for the current period, receiving a utility bill, and using supplies previously purchased. 81) B The two cash-basis expenses are paying employees' salaries for the current period and paying rent in advance. 82) A 83) C A decrease in interest receivable indicates cash was collected without a related revenue recorded, making cash received greater than revenues recorded. 84) A A decrease in revenue collected in advance (Deferred Revenue) means that services were provided without a related cash collection, making revenues recorded greater than cash collected. Version 1

85) D Under cash-basis accounting, we record revenues when we receive cash, and we record expenses when we pay cash. Purchasing supplies on account does not involve cash. 86) C 87) C No cash is paid in 2025, so cash-basis rent expense equals $0. The monthly rent costs equal $2,000 ($72,000/36 months) per month, so the accrual-basis rent expense for 2025 equals $24,000 ($2000 × 12 months). 88) D Cash-basis expenses are recorded at the time cash is paid. 89) C Accrual-basis expenses are recorded at the time they help to produce revenue. 90) D Accrual-basis revenues are recorded when services are provided. 91) C Accrual-basis expenses are recorded at the time they help to produce revenue. 92) D Cash-basis expenses are recorded at the time cash is paid. 93) D Accrual-basis revenues are recorded when services are provided. 94) C Accrual-basis expenses are recorded at the time they help to produce revenue. 95) D Cash-basis expenses are recorded at the time cash is paid. 96) B Version 1

Cash-basis revenues are recorded at the time cash is received. 97) D 98) D 99) C 100) B 101) D 102) A 103) A 104) A 105) C 106) B 107) D 108) D 109) A 110) B 111) D 112) A 113) D 114) C 115) D 2024 Rent Expense = ($18,000/18 months) × 6 months = $6,000. 116) A $100,000 × 8% × 9/12 = $6,000. 117) B $250,000 × 6% × 8/12 = $10,000. 118) B $250,000 × 6% × 8/12 = $10,000. 119) C 120) B 121) B Version 1

122) B 123) A $4,200/12 months = $350 per month. $350 × 5 months = $1,750 124) A $48,400 + $86,000 − $42,000 = $92,400. 125) C $56,000 + $270,000 − $66,000 = $260,000. 126) B 127) B 128) D $3,200 × 7 days = $22,400. 129) C 130) A $12,000/12 months = $1,000. $1,000 × 9 months = $9,000. 131) D $90/12 months = $7.50 per month. $7.50 × 4 months × 400 subscriptions = $12,000 132) B 133) D 134) C Beginning supplies ($1,600) + purchases ($3,900) − ending supplies ($1,400) = $4,100. 135) C Beginning supplies ($2,000) + purchases ($3,000) − ending supplies ($800) = $4,200 136) D 2024 Depreciation Expense = ($72,000/48 months) × 3 months = $4,500 137) B 2025 Depreciation Expense = ($72,000/48 months) × 12 months = $18,000 Version 1

138) C $1,500 per month x 2 months = $3,000. 139) B 140) A $8,300 − $6,800 = $1,500. 141) D $22,300 + $4,400 = $26,700. 142) B $4,800/6 months = $800 per month. $800 × 2 months = $1,600 (Rent Expense). Four months ($3,200 = $800 × 4 months) of Prepaid Rent remain. 143) B Prepaid liability insurance: $57,600 × 6/18 = $19,200. Prepaid crop insurance: $14,400 × 12/24 = $7,200. $19,200 + $7,200 = $26,400. 144) B Prepaid liability insurance: $36,000 × 6/18 = $12,000. Prepaid crop insurance: $12,000 × 12/24 = $6,000. $12,000 + $6,000 = $18,000. 145) B $12,000 (April 1) − $9,000 (year-end adjustment)* = $3,000 * $12,000 × 9 months / 12 months = $9,000 146) B 147) A 148) D 149) C 150) A 151) A

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Cash ($12,000) + Prepaid Rent ($2,000) + Salaries Expense ($15,000) + Equipment ($68,000) + Miscellaneous Expense ($10,000) + Supplies ($4,000) + Dividends ($3,000) = $114,000 152) C Retained Earnings ($31,000) + Service Revenue ($40,000) + Accounts Payable ($5,000) + Common Stock ($38,000) = $114,000. 153) D 154) C 155) D Revenues ($28,500) − Expenses ($5,600 + $20,900) = $2,000. 156) D Revenues ($30,000) − Expenses ($4,500 + $20,000) = $5,500 157) A Incorrectly recording a prepayment as an expense instead of an asset will understate assets and overstate expenses. The overstatement of expenses will understate net income. 158) C Incorrectly recording cash received for services to be provided in the future with a credit to Service Revenue will understate liabilities (Deferred Revenue) and overstate revenues (Service Revenue). The overstatement of revenues will overstate net income. 159) B 160) D 161) D Beginning Retained Earnings ($25,000) + Net Income ($10,000) − Dividends ($4,000) = Ending Retained Earnings. 162) C Beginning Retained Earnings ($60,000) − Net Loss ($10,000) = Ending Retained Earnings. 163) C Version 1

Increase in Retained Earnings ($32,000) = Net Income − Dividends ($10,000). 164) D 165) D 166) B 167) A 168) A Cash ($11,500), Accounts Receivable ($11,000), and Supplies ($41,500) are normally current assets. 169) B Cash ($10,500), Accounts Receivable ($9,500), and Supplies ($40,000) are normally current assets. 170) B Long-term assets include Land, Buildings, and Equipment. 171) C 172) D 173) C 174) C 175) C 176) B 177) C 178) B Deferred Revenue ($4,500), Accounts Payable ($14,100), and Interest Payable ($5,100) are normally current liabilities. 179) B Deferred Revenue ($6,000), Accounts Payable ($15,000), and Interest Payable ($7,000) are normally current liabilities. 180) C 181) C

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Assets include Cash ($12,900), Supplies ($6,200), Prepaid Rent ($3,500), and Equipment ($65,600). 182) D Assets include Cash ($12,000), Supplies ($4,500), Prepaid Rent ($2,000), and Equipment ($65,000). 183) A Liabilities include Accounts Payable ($5,000). 184) B Total stockholders' equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500. Total stockholders' equity = $68,000 + $10,500 = $78,500. 185) B The debit to Cash is correct, so assets will be correct. On the other hand, the credit should be to a liability (Deferred Revenue) instead of to Service Revenue, so total liabilities will be understated and revenues and net income will be overstated. 186) D 187) D 188) D 189) D 190) B 191) C 192) C 193) D 194) B 195) D 196) B 197) D Version 1

Permanent accounts include Cash, Common Stock, Supplies, Accounts Payable, Prepaid Rent, and Equipment. 198) A 199) C 200) A 201) A 202) A 203) B 204) B 205) D Increase in Retained Earnings ($6.9 million) = Net Income − Dividends ($1.7 million). Net Income = $6.9 million + $1.7 million = $8.6 million. 206) C Increase in Retained Earnings ($3.2 million) = Net Income − Dividends ($1.3 million). Net Income = $3.2 million + $1.3 million = $4.5 million. 207) D Beginning Retained Earnings ($26,050) − Net Loss ($12,550) − Dividends ($8,700) = Ending Retained Earnings ($4,800). 208) A Beginning Retained Earnings ($26,000) − Net Loss ($12,000) − Dividends ($8,000) = Ending Retained Earnings ($6,000). 209) C Beginning Retained Earnings ($0) + Net Income (Loss) [$(150,000) + $100,000 + $250,000] − Ending Retained Earnings ($120,000) = Dividends ($80,000). 210) C

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Beginning Retained Earnings ($0) + Net Income ($1,000 + $2,000 + $3,000) − Dividends ($500 + $1,000 + $1,000) = Ending Retained Earnings ($3,500) 211) B 212) C 213) B Revenues ($40,700) – Expenses ($24,700) − Dividends ($1,500) = $14,500. 214) A Revenues ($35,000) − Expenses ($23,000) − Dividends ($1,000) = $11,000. 215) C 216) C 217) D 218) D Prepaid Rent and Accounts Payable. 219) C

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220)Under accrual-basis accounting, revenues are recorded at the time a company provides goods and services to its customers. Expenses generally are recorded as costs of running the business are incurred to help produce revenues. In other words, costs used in business operations to help generate revenues are reported as expenses in those periods. 1. (1) When a company provides good or services on account, revenue is recorded immediately, even though cash is not collected from the customer until a later time. 2. (2) When customers pay cash for goods or services in advance of the services to be provided, revenue is not recorded. A liability account called Deferred Revenue is booked instead. Revenue is recorded later when the company actually provides the services. 3. (3) When a company incurs a cost in business operations to help generate revenues, an expense is recorded immediately, even though cash is not paid until a later time. 4. (4) When a company prepays for expenses that will be used in the future to run the business, an expense is not recorded. An asset account is booked instead. The expense is recorded later when the company uses that cost in running the business. 221)The difference between accrual-basis accounting and cash-basis accounting is timing. Under accrual-basis accounting, we record revenues when we provide goods and services to customers, and we record expenses when costs are used in company operations. Under cash-basis accounting, we record revenues when we receive cash, and we record expenses when we pay cash. Cash-basis accounting is not allowed for financial reporting purposes for most major companies.

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222)Deferred revenues arise when a company receives cash in advance from customers, but products and services won’t be provided until a later period. Examples include payments received in advance of the subscription period by an online gaming site, rent payments received in advance of the rental period by a property leasing firm, or insurance payments received in advance of the coverage period by a car insurance company. A liability exists because there is still an obligation to provide the service after the cash has been received. 223)Prepaid expenses arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period. Examples include supplies, insurance, or rent paid in advance. 224)Accrued expenses occur when a company has used costs in the current period, but the company hasn’t yet paid cash for those costs. Examples include interest payable and salaries payable. 225) Permanent accounts represent assets, liabilities, and stockholders' equity at a point in time. Temporary accounts represent changes in retained earnings caused by changes in dividend, revenue and expense accounts. The temporary accounts are closed out periodically to facilitate measuring income over a period of time, but the permanent account balances are carried forward from period to period. 226) Closing entries serve two purposes: (1) to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account and (2) to reduce the balances of these temporary accounts to zero to prepare them for measuring activity in the next period. Closing entries increase retained earnings by the amount of revenues for the period and decrease retained earnings by the amount of expenses and dividends for the period.

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CHAPTER 4: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match each provision of the Sarbanes-Oxley Act with its description. 1.A) PCAOB establishes standards related to the preparation of audited financial reports. 2.B) Management must document the effectiveness of procedures that could affect financial reporting. 3.C) Lead audit partners are required to change every five years. 4.D) Audit firm cannot provide a variety of other services to its client, such as consulting. 5.E) Company management must personally certify the financial statements. Corporate executive accountability Auditor rotation Oversight board Nonaudit services Internal control

2) Match each term associated with components of internal control with its definition. 1.A) Procedures for maintaining separation of duties. 2.B) Transfer of data from lower managers to top executives for accurate financial reporting. 3.C) Routine activities that are meant to continually observe internal control activities. 4.D) Overall attitude of the company with respect to internal controls. 5.E) Formal policies to evaluate internal and external threats to achieving company objectives. Risk assessment Control activities Information and communication Control environment Monitoring

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Match each term associated with cash and cash controls with its definition.

1.A) Matches the balance of cash in the bank account with the balance of cash in the company's own records. 2.B) Minor amount of cash kept on hand. 3.C) Withdraws funds directly from the user's account at the time of use. 4.D) Short-term investments that have a maturity date no longer than three months from the date of purchase. 5.E) Allows users to purchase items without having to pay cash immediately. Credit card Bank reconciliation Cash equivalent Debit card Petty cash

Match each term related to bank reconciliations with its description.

1.A) Cash receipts received by the company but not yet recorded by the bank. 2.B) Checks written to the company that are returned by the bank as not having adequate funds. 3.C) Money earned on the average daily balance of the checking account. 4.D) Fees imposed by the bank to the company for providing routine services. 5.E) The company recorded a deposit twice. 6.F) Checks written by the company but not yet recorded by the bank. Checks outstanding NSF checks from customers Company error Deposits outstanding Bank service fees Interest revenue

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Match each type of cash flow with its description.

1.A) Pay dividends to stockholders. 2.B) Pay salaries to employees. 3.C) Issue common stock. 4.D) Receive payment from customers. 5.E) Purchase equipment. 6.F) Sell office building. Cash outflow from financing activities Cash outflow from investing activities Cash inflow from investing activities Cash inflow from financing activities Cash outflow from operating activities Cash inflow from operating activities

6) Match each type of cash flow with its description. 1.A) Pay cash for utilities. 2.B) Receive cash in advance from customers. 3.C) Issue common stock. 4.D) Purchase building. 5.E) Sell land. 6.F) Repay amount borrowed from bank. Cash outflow from financing activities Cash outflow from operating activities Cash inflow from investing activities Cash inflow from financing activities Cash outflow from investing activities Cash inflow from operating activities

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7) A company had the following sales transactions: 1.Total debit card sales = $240,000. 2.Total credit card sales = $490,000. 3.Total cash sales = $900,000. 4.Total check sales = $160,000. There is a charge of 3% on all credit card transactions. Required: Calculate total sales revenue recorded for the year.

8) A company had the following sales transactions: 1.Total debit card sales = $200,000. 2.Total credit card sales = $400,000. 3.Total cash sales = $800,000. 4.Total check sales = $100,000. There is a charge of 2% on all credit card transactions. Required: Calculate total sales revenue recorded for the year.

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9) A company had the following transactions: 1.Paid $190 for office supplies using a debit card. 2.Purchased office equipment costing $610 using a credit card. 3.Paid this month's utilities bill of $430 by issuing a check. Required: Record each transaction.

10) A company had the following transactions: 1.Paid $150 for office supplies using a debit card. 2.Purchased office equipment costing $700 using a credit card. 3.Paid this month's utilities bill of $400 by issuing a check. Required: Record each transaction.

11) Indicate whether the firm should add or subtract each item below from its balance of cash or the bank's balance of cash in preparing a bank reconciliation. Reconciliation Items

Bank Balance

Company Balance

1. Checks outstanding 2. NSF checks from customers 3. Deposit recorded twice by company 4. Interest earned 5. Deposits outstanding

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6. Bank service fees

12) A company's general ledger shows a cash balance of $4,560. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,820, bank service fees of $160, and interest earned of $19. Required: Calculate the reconciled company’s cash balance.

13) A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Required: Calculate the reconciled company’s cash balance.

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14) A company's general ledger shows a cash balance of $2,310. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,780, note receivable collected by the bank on the company's behalf of $1,700, and interest earned of $27. The company also finds an error by the bank of an additional deposit of $140. Required: Calculate the reconciled company’s cash balance.

15) A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note receivable collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Required: Calculate the reconciled company’s cash balance.

16) A company's bank statement shows a cash balance of $4,240. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $4,450, deposits outstanding of $1,230, an NSF check from a customer in the amount of $350, and service fee of $59. Required: Calculate the reconciled bank’s cash balance.

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17) A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, an NSF check from a customer in the amount of $300, and service fee of $50. Required: Calculate the reconciled bank’s cash balance.

18) A company's bank statement shows a cash balance of $4,190. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,130, an NSF check from a customer in the amount of $260, interest earned of $32, service fee of $46, and a check for $150 recorded twice by the company. Required: Calculate the reconciled bank’s cash balance.

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19) A company's bank statement shows a cash balance of $4,170. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, an NSF check from a customer in the amount of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Required: Calculate the reconciled bank’s cash balance.

20) A company's Cash account shows a balance of $3,490 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($390), a customer's note receivable collected by the bank ($2,000), and interest earned ($160). Required: Record the necessary journal entry(ies) to adjust the company’s balance for cash.

21) A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Required: Record the necessary journal entry(ies) to adjust the company’s balance for cash.

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22) A company's Cash account shows a balance of $5,690 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,330), bank service fees ($40), an NSF check from a customer ($230), a customer's note receivable collected by the bank ($520), and interest earned ($67). Required: Record the necessary journal entry(ies) to adjust the company’s balance for cash.

23) A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Required: Record the necessary journal entry(ies) to adjust the company’s balance for cash.

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24) Peterson Company's general ledger shows a cash balance of $7,680 on May 31. May cash receipts of $1,320, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check from a customer for $140 and a service fee of $90. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,820. The bank statement shows a balance of $7,950 on May 31. Required: Prepare a bank reconciliation to calculate the correct balance of cash on May 31.

25) Peterson Company's general ledger shows a cash balance of $7,850 on May 31. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check from a customer for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Required: Prepare a bank reconciliation to calculate the correct balance of cash on May 31.

26)

Madison Company's cash ledger reports the following for the month ending March 31.

Deposits:

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Date

Amount

3/4 3/11

$1,600 1,200

Checks:

Number

Date

Amount

541 542

3/2 3/8

$5,000 600

Cash receipts:

3/18

4,200

543

3/12

2,800

3/25

3,900

544

3/19

1,700

3/26 to 3/31

2,700

545

3/27

500

$13,600

546

3/28

900

547

3/30

1,600 $13,100

Amount Balance on March 1 Receipts Disbursements Balance on March 31

$6,300 13,600 (13,100) $6,800

Information from March's bank statement and company records reveals the following additional information: a.The ending cash balance recorded in the bank statement is $8,246. b.Cash receipts of $2,700 from 3/26 - 3/31 are outstanding. c.Checks 545 and 547 are outstanding. d.The deposit on 3/11 included an NSF check from a customer in the amount of $460 that did not clear the bank. e.Check 543 was written for $3,400 for office supplies in March. The bank properly recorded the check for this amount. f.An electronic funds transfer (EFT) for March rent was made on March 4 for $1,250. g.Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $58. h.Last year, one of Madison's top executives borrowed $4,100 from Madison. On March 24, the executive paid $4,370 ($4,100 borrowed amount plus $270 interest) directly to the bank in payment for the borrowing. i.The bank charged the following service fees: $34 for NSF check, $12 for an electronic funds transfer (EFT) for rent payment, and $26 for collection of the loan amount from the executive. Required: 1.Prepare a bank reconciliation to calculate the correct balance of cash on March 31. 2.Record the necessary journal entry(ies) to adjust Madison Company’s balance for cash.

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27)

Madison Company's cash ledger reports the following for the month ending March 31.

Deposits:

Cash receipts:

Date

Amount

Number

Date

Amount

3/4 3/11

$1,200 1,200

541 542

3/2 3/8

$5,100 800

3/18

3,700

543

3/12

2,200

3/25

3,400

544

3/19

1,100

3/26 to 3/31

2,100

545

3/27

200

$11,600

546

3/28

600

547

3/30

1,300

Checks:

$11,300 Amount Balance on March 1 Receipts Disbursements Balance on March 31

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$5,400 11,600 (11,300) $5,700

Information from March's bank statement and company records reveals the following additional information: a.The ending cash balance recorded in the bank statement is $6,790. b.Cash receipts of $2,100 from 3/26 - 3/31 are outstanding. c.Checks 545 and 547 are outstanding. d.The deposit on 3/11 included an NSF check from a customer in the amount of $400 that did not clear the bank. e.Check 543 was written for $2,800 for office supplies in March. The bank properly recorded the check for this amount. f.An electronic funds transfer (EFT) for March rent was made on March 4 for $1,500. g.Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $50. h.Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the executive paid $4,200 ($4,000 borrowed amount plus $200 interest) directly to the bank in payment for the borrowing. i.The bank charged the following service fees: $30 for NSF check, $10 for an electronic funds transfer (EFT) for rent payment, and $20 for collection of the loan amount from the executive. Required: 1.Prepare a bank reconciliation to calculate the correct balance of cash on March 31. 2.Record the necessary journal entry(ies) to adjust Madison Company’s balance for cash.

28) A company establishes a petty cash fund for $450. By the end of the month, employees had made the following expenditures from the fund: supplies, $135; fuel for deliveries, $128; postage, $76; miscellaneous, $37. Required: Record the journal entry to recognize employee expenditures from the petty cash fund.

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29) A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Required: Record the journal entry to recognize employee expenditures from the petty cash fund.

30) A company establishes a $400 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. In addition, the company has issued credit cards for more substantial employee purchases. These credit cards are issued to authorized managers. At the end of August, the following employee purchases have been made: Petty Cash Fund Delivery fees Plumbing maintenance Postage Flowers for the office

$ 130 72 49 58 $ 309

Credit Cards Equipment $ 1,500 Advertising 650 Supplies 430

$ 2,580

Required: Record the establishment of the petty cash fund on August 3, employee expenditures related to the petty cash fund on August 31, and employee expenditures related to credit cards on August 31.

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31) A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. In addition, the company has issued credit cards for more substantial employee purchases. These credit cards are issued to authorized managers. At the end of August, the following employee purchases have been made: Petty Cash Fund Delivery fees Plumbing maintenance Postage Flowers for the office

$ 100 70 40 50 $ 260

Credit Cards Equipment $ 1,400 Advertising 750 Supplies 360

$ 2,510

32) A company provides services on account during the current year totaling $400,000. By the end of the year, $320,000 of this amount had been received. In addition, $90,000 was received on account from customers for services provided in the prior year. Required: Determine the amount of operating cash flows the company will report as received from customers in the current year.

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33) A company provides services on account during the current year totaling $400,000. By the end of the year, $350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Required: Determine the amount of operating cash flows the company will report as received from customers in the current year.

34) During the current year, a company provides services on account for $130,000. By the end of the year, $57,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $53,000; office supplies, $17,000; and utilities, $23,000. Required: Determine the amount of operating cash flows the company will report in the current year.

35) During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities, $20,000. Required: Determine the amount of operating cash flows the company will report in the current year.

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36) During the current year, a company purchases equipment for $320,000, paying $55,000 immediately and promising to pay the remainder within 30 days after the end of the year. Required: Determine the amount of investing cash flows the company will report in the current year.

37) During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Required: Determine the amount of investing cash flows the company will report in the current year.

38) At the beginning of the current year, a company issued stock for $150,000 and borrowed $55,000 from the bank. By the end of the year, the company had provided services of $89,000 for cash, paid employee salaries of $39,000, and paid utilities of $13,000. Required: Determine the amount of financing cash flows the company will report in the current year.

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39) At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Required: Determine the amount of financing cash flows the company will report in the current year.

40) During the year, a company issues common stock for $54,000 and repays previously borrowed amounts of $83,000. In addition, the company pays dividends of $5,100 to stockholders. Required: Determine the amount of financing cash flows the company will report in the current year.

41) During the year, a company issues common stock for $50,000 and repays previously borrowed amounts of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Required: Determine the amount of financing cash flows the company will report in the current year.

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42) Consider the following transactions: 1.Pay employees' salaries. 2.Repay borrowing to the bank. 3.Purchase equipment with note payable. 4.Provide services to customers on account. 5.Pay dividends to stockholders. 6.Collect cash from customers for services provided. 7.Purchase supplies on account. 8.Pay for supplies purchased in transaction 7 above. Required: For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write 'No Cash.'

43) A company had the following transactions during the year: 1.Paid rent for the next two years, $8,900. 2.Purchased office supplies on account, $3,200. 3.Purchased equipment, paying $12,000 cash and issuing a note payable for $5,000. 4.Borrowed from the bank, $6,900. 5.Paid employee salaries, $7,400. 6.Paid $1,800 on account related to transaction 2 above. 7.Paid dividends to stockholders, $2,800. 8.Sold land for $10,900 that was purchased in a prior year for $7,900. 9.Collected cash from customers for services provided, $25,100. Required: Calculate cash flows from operating activities, investing activities, and financing activities.

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44) A company had the following transactions during the year: 1.Paid rent for the next two years, $8,000. 2.Purchased office supplies on account, $2,400. 3.Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000. 4.Borrowed from the bank, $6,000. 5.Paid employee salaries, $7,200. 6.Paid $2,000 on account related to transaction 2 above. 7.Paid dividends to stockholders, $2,800. 8.Sold land for $10,000 that was purchased in a prior year for $7,500. 9.Collected cash from customers for services provided, $25,700. Required: Calculate cash flows from operating activities, investing activities, and financing activities.

45) Below is a summary of all the transactions of Sampson Consulting for the month of April 2024. Cash Transactions Cash collections from: Customers Sale of unused office furniture Borrowing from the bank Cash payments for: Employee salaries Office building Utilities expense Office supplies Dividends to stockholders Advertising expense Noncash Transactions Services to customers on account Purchase supplies on account Issue note payable for equipment

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$ 52,900 11,800 63,000

(22,100) (74,000) (2,200) (2,100) (4,200) (9,800) $ 11,200 5,700 23,600

Required: Prepare a statement of cash flows for the month of April, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of April is $15,400.

46) Below is a summary of all the transactions of Sampson Consulting for the month of April 2024. Cash Transactions Cash collections from: Customers Sale of unused office furniture Borrowing from the bank Cash payments for: Employee salaries Office building Utilities expense Office supplies Dividends to stockholders Advertising expense Noncash Transactions Services to customers on account Purchase supplies on account Issue note payable for equipment

$ 52,600 11,300 60,000

(22,500) (74,600) (2,600) (1,800) (4,000) (9,800) $ 11,800 5,800 23,700

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Answer Key Test name: Chap 04_6e_Spiceland_Problem Material 1)Corporate executive accountability E Auditor rotation C Oversight board A Nonaudit services D Internal control B 2)Risk assessment E Control activities A Information and communication B Control environment D Monitoring C 3) Credit card E Bank reconciliation A Cash equivalent D Debit card C Petty cash B 4)Checks outstanding F NSF checks from customers B Company error E Deposits outstanding A Bank service fees D Interest revenue C

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5) Cash outflow from financing activities A Cash outflow from investing activities E Cash inflow from investing activities F Cash inflow from financing activities C Cash outflow from operating activities B Cash inflow from operating activities D 6) Cash outflow from financing activities F Cash outflow from operating activities A Cash inflow from investing activities E Cash inflow from financing activities C Cash outflow from investing activities D Cash inflow from operating activities B 7) $240,000 + $490,000 + $900,000 + $160,000 = $1,790,000 8) $200,000 + $400,000 + $800,000 + $100,000 = $1,500,000 9) Transaction 1.

Account Title Supplies

Cash

(Pay for office supplies) 2.

Equipment

Accounts Payable

(Purchase equipment using credit card) Utilities Expense

3. 3.

Cash

(Pay utilities bill)

Debit 190

Credit

190

610 610

430 430

10) Version 1

Transaction 1.

Account Title Supplies

Cash

(Pay for office supplies) 2.

Debit 150

150

Equipment

700

Accounts Payable

(Purchase equipment using credit card) Utilities Expense

3. 3.

Cash

(Pay utilities bill)

Credit

700

400 400

11) Reconciliation Items

Bank Balance

1. Checks outstanding

Subtract

Company Balance

2. NSF checks from customers

Subtract

3. Deposit recorded twice by company

Subtract

4. Interest earned 5. Deposits outstanding 6. Bank service fees

Add Add Subtract

12)$4,560 − $160 + $19 = $4,419. 13)$4,570 − $110 + $15 = $4,475. 14) $2,310 + $1,700 + $27 = $4,037. 15) $2,380 + $1,000 + $20 = $3,400. 16)$4,240 − $4,450 + $1,230 = $1,020. 17)$4,230 − $3,880 + $1,230 = $1,580. Version 1

18) $4,190 − $2,130 = $2,060. 19) $4,170 − $2,110 = $2,060. 20) Transaction 1. 1.

Account Title Cash

Debit 2,160

Notes Receivable

2,000

Interest Revenue

160

(Record note collected and interest earned) Service Fees Expense

Accounts Receivable

390

Cash

(Record bank service fees and NSF check from customer)

Credit

440

21) Transaction 1. 1.

Account Title Cash

Debit 1,100

Notes Receivable

1,000

Interest Revenue

100

(Record note collected and interest earned) Service Fees Expense

Accounts Receivable

300

Cash

(Record bank service fees and NSF check from customer)

Credit

350

22) Transaction

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Account Title

Debit

Credit 27

1. 1.

Cash

587

Notes Receivable

520

Interest Revenue

(Record note collected and interest earned) Service Fees Expense

Accounts Receivable

230

Cash

(Record bank service fees and NSF check from customer)

270

23) Transaction 1. 1.

Account Title Cash

Debit 560

Notes Receivable

500

Interest Revenue

(Record note collected and interest earned) Service Fees Expense

Accounts Receivable

150

Cash

(Record bank service fees and NSF check from customer)

Credit

190

24)

Bank's Cash Balance Per bank statement Deposits outstanding Checks outstanding

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Peterson Company Bank Reconciliation May 31 Company's Cash Balance $7,950 +1,320 −1,820

Per general ledger Service fee NSF check from customer

$7,680 −90 −140 28

Bank balance per reconciliation

$7,450

Company balance per reconciliation

$7,450

25)

Bank's Cash Balance Per bank statement Deposits outstanding Checks outstanding Bank balance per reconciliation

Peterson Company Bank Reconciliation May 31 Company's Cash Balance $7,990 +1,250 −1,640 $7,600

Per general ledger Service fee NSF check from customer Company balance per reconciliation

$7,850 −50 −200 $7,600

26)

Bank's Cash Balance Per bank statement Deposits outstanding Checks outstanding

Madison Company Bank Reconciliation March 31 Company's Cash Balance $8,246 +2,700 −2,100

Per general ledger NSF check from customer Company error EFT for rent payment Interest on account

+4,100

Interest on note

+270

Service fees

−72

$8,846

Transaction 1.

Account Title

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+58

Note collected

Bank balance per reconciliation Cash

$6,800 −460 −600 −1,250

Company balance per reconciliation Debit 4,428

$8,846 Credit

Notes Receivable

4,100

Interest Revenue

328

(Record note collected and interest earned) Accounts Receivable

460

Supplies

600

Rent Expense

Service Fees Expense

Cash

(Record NSF check from customer, check correction for supplies, automatic rent payment, and bank service fees)

1,250 72 2,382

27)

Bank's Cash Balance Per bank statement Deposits outstanding Checks outstanding

Madison Company Bank Reconciliation March 31 Company's Cash Balance $6,790 +2,100 −1,500

Per general ledger NSF check from customer Company error EFT for rent payment Interest on account

+4,000

Interest on note

+200

Service fees

−60

$7,390

Transaction 1.

Account Title

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+50

Note collected

Bank balance per reconciliation Cash

$5,700 −400 −600 −1,500

Company balance per reconciliation

$7,390 Debit 4,250

Credit

Notes Receivable

4,000

Interest Revenue

250

(Record note collected and interest earned) Accounts Receivable

400

Supplies

600

Rent Expense

Service Fees Expense

Cash

(Record NSF check from customer, check correction for supplies, automatic rent payment, and bank service fees)

1,500 60 2,560

28) Transaction 1.

Account Title Supplies

Debit 135

Delivery Expense

128

Postage Expense

Miscellaneous Expense

Cash

(Recognize employee expenditures from the petty cash fund)

Credit

376

29) Transaction 1.

Supplies

Debit 150

Delivery Expense

120

Postage Expense

Miscellaneous Expense

Cash

(Recognize employee expenditures from the petty cash fund)

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Account Title

Credit

380

30) Date August 3

Account Title Petty Cash

August 3

Cash

August 3

(Establish the petty cash fund)

Debit 400

Credit

400

August 31 Delivery Expense

130

August 31

Repairs and Maintenance Expense

August 31

Postage Expense

August 31

Miscellaneous Expense

August 31

Cash

309

August 31

(Recognize employee expenditures from the petty cash fund) August 31 Equipment

1,500

August 31

Advertising Expense

650

August 31

Supplies

430

August 31

Accounts Payable

August 31

(Recognize employee expenditures with credit cards)

2,580

31) Date August 3

Account Title Petty Cash

August 3

Cash

August 3

(Establish the petty cash fund)

Debit 300

300

August 31 Delivery Expense

100

August 31

Repairs and Maintenance Expense

August 31

Postage Expense

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Credit

August 31

Miscellaneous Expense

August 31

Cash

(Recognize employee expenditures from the petty cash fund) August 31 Equipment

50 260

August 31

1,400

August 31

Advertising Expense

750

August 31

Supplies

360

August 31

Accounts Payable

August 31

(Recognize employee expenditures with credit cards)

2,510

32) $320,000 + $90,000 = $410,000 33) $350,000 + $75,000 = $425,000 34) $57,000 − $53,000 − $17,000 − $23,000 = $(36,000) 35) $60,000 − $50,000 − $10,000 − $20,000 = $(20,000) 36) $(55,000) 37) $(50,000) 38) $150,000 + $55,000 = $205,000 39) $100,000 + $50,000 = $150,000 40) $54,000 − $83,000 − $5,100 = $(34,100) 41) $50,000 − $75,000 − $5,000 = $(30,000) 42) 1. Operating. 2. Financing. 3. No Cash. 4. No Cash. 5. Financing. 6. Operating. 7. No Cash. 8. Operating.

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43) Operating cash flows = $25,100 − $8,900 − $7,400 − $1,800 = $7,000. Investing cash flows = $10,900 − $12,000 = $(1,100). Financing cash flows = $6,900 − $2,800 = $4,100. 44)Operating cash flows = $25,700 − $8,000 − $7,200 − $2,000 = $8,500. Investing cash flows = $10,000 − $12,000 = $(2,000). Financing cash flows = $6,000 − $2,800 = $3,200. 45) Sampson Consulting Statement of Cash Flows For the Month Ended April 30, 2024 Cash Flows from Operating Activities Cash inflows: From customers

$ 52,900

Cash outflows: For salaries

(22,100)

For advertising

(9,800)

For office supplies

(2,100)

For utilities

(2,200)

Net cash flows from operating activities

$ 16,700

Cash Flows from Investing Activities Sale of unused office furniture Purchase of office building Net cash flows from investing activities

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11,800 (74,000) (62,200)

Cash Flows from Financing Activities Borrowing from the bank

63,000

Payment of dividends

(4,200)

Net cash flows from financing activities

58,800

Net increase in cash

13,300

Cash at the beginning of the month

15,400

Cash at the end of the month

$ 28,700

46) Sampson Consulting Statement of Cash Flows For the Month Ended April 30, 2024 Cash Flows from Operating Activities Cash inflows: From customers

$ 52,600

Cash outflows: For salaries

(22,500)

For advertising

(9,800)

For office supplies

(1,800)

For utilities

(2,600)

Net cash flows from operating activities

$ 15,900

Cash Flows from Investing Activities Sale of unused office furniture Purchase of office building Net cash flows from investing activities

11,300 (74,600) (63,300)

Cash Flows from Financing Activities

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Borrowing from the bank

60,000

Payment of dividends

(4,000)

Net cash flows from financing activities

56,000

Net increase in cash

8,600

Cash at the beginning of the month

14,800

Cash at the end of the month

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$ 23,400

CHAPTER 4 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Managers of the company act as stewards or caretakers of the company's assets. ⊚ true ⊚ false

2) Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses. ⊚ true ⊚ false

3) In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley Act. ⊚ true ⊚ false

The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles. ⊚ true ⊚ false

5) The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. ⊚ true ⊚ false

6) Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients. ⊚ true ⊚ false

7) Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting.

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⊚ ⊚

true false

8) Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. ⊚ true ⊚ false

9) One benefit of internal control is greater reliance by investors on reported financial statements. ⊚ true ⊚ false

10) A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB). ⊚ true ⊚ false

11) The control environment refers to the overall top-to-bottom attitude of the company with respect to internal control. ⊚ true ⊚ false

12) Risk assessment identifies and analyzes internal and external threats to achieving a company’s objectives. ⊚ true ⊚ false

13) Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client. ⊚ true ⊚ false

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14) An example of separation of duties would be not allowing an employee who receives cash to also be responsible for depositing that cash in the bank account. ⊚ true ⊚ false

15) The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions. ⊚ true ⊚ false

16) Management needs to monitor the internal control system, just like any other system. Any control deficiencies spotted by employees should be reported immediately to management. ⊚ true ⊚ false

17) Separation of duties occurs when two or more people act in coordination to circumvent internal controls. ⊚ true ⊚ false

18)

Effective internal controls ensure a company's success and survival. ⊚ true ⊚ false

19) The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. ⊚ true ⊚ false

20) The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank accounts, such as checks received from customers. ⊚ true ⊚ false

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21) The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future. ⊚ true ⊚ false

22) The amount of cash reported in a company's balance sheet cannot include short-term investments. ⊚ ⊚

true false

23) Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit. ⊚ true ⊚ false

24)

Recording all cash receipts as soon as possible is considered a good internal control. ⊚ true ⊚ false

25) Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts. ⊚ true ⊚ false

26) Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale. ⊚ true ⊚ false

27) When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue.

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⊚ ⊚

true false

28) When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue. ⊚ true ⊚ false

29) When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank. ⊚ true ⊚ false

30) When a company pays for services received using a credit card, it should credit Accounts Payable. ⊚ true ⊚ false

31) Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control. ⊚ true ⊚ false

32) Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls. ⊚ true ⊚ false

33) Cryptocurrencies represent digital money that allows peer-to-peer transactions that require the need for a third-party bank or credit card company. ⊚ ⊚

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true false

34)

Retailers record cash sales when a customer uses a credit card. ⊚ ⊚

true false

35) Companies record cash sales when customers use debit cards, mobile payments, and electronic funds transfers. ⊚ ⊚

true false

36) A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records. ⊚ true ⊚ false

37) Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors. ⊚ true ⊚ false

38) An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check. ⊚ true ⊚ false

39) Cash receipts of the company that have not yet been recorded by the bank are referred to as checks outstanding. ⊚ true ⊚ false

40) Checks outstanding are checks the company has written that have not yet been recorded by the bank. Version 1

⊚ ⊚

true false

41) A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance. ⊚ true ⊚ false

42) A check outstanding will cause the bank's cash balance to be higher than the company's cash balance. ⊚ true ⊚ false

43) An NSF check from a customer is an example of a cash transaction that is initially recorded by the bank, and later by the company after notification. ⊚ ⊚

true false

44) Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification. ⊚ true ⊚ false

45) The final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank's cash balance. ⊚ true ⊚ false

46)

A petty cash fund represents cash on hand and is used to pay for minor purchases. ⊚ true ⊚ false

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47) A petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month). ⊚ true ⊚ false

48) A company's cash is reported in two financial statements—income statement and statement of cash flows. ⊚ true ⊚ false

49) A company’s cash balance is typically reported as a current asset in the balance sheet and information about the company’s cash receipts and cash payments during the period is reported in the statement of cash flows. ⊚ true ⊚ false

50) The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating activities, (2) investing activities, and (3) financing activities. ⊚ true ⊚ false

51) Investing activities include cash transactions involving revenue and expense events during the period. ⊚ true ⊚ false

52) Investing activities include cash investments in long-term assets and investment securities. ⊚ true ⊚ false

53)

Investing activities include transactions designed to raise cash or finance the business. ⊚ true ⊚ false

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54)

Only transactions involving cash affect a company's cash flows. ⊚ true ⊚ false

55) A company's ratio of cash to noncash assets is calculated as the total cash balance divided by all noncash assets. ⊚ true ⊚ false

56) Companies often have a high ratio of cash to noncash assets when they consistently pay cash dividends. ⊚ true ⊚ false

57) Typically, the more volatile the company's trend in operating cash flows, the higher the operating risk of the company. ⊚ true ⊚ false

58) An advantage of a high ratio of cash to noncash assets is that the company has funds to pay obligations as they become due. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 59) Occupational fraud:

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A) Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources. B) Occurs in only a few organizations and generally involves minor amounts. C) Will be prevented when companies employ an auditor. D) Is committed only by lower-level employees.

60)

The phrase "cooking the books" is commonly used to refer to the: A) Company's accounting records being thoroughly audited at the end of the year. B) Company's financial statements being presented in a deceptive form. C) Company's ability to provide timely financial information under operating pressure. D) Inclusion of a variety of information in the financial statements.

61)

Which of the following elements is part of the fraud triangle? A) Motivation. B) Rationalization. C) Opportunity. D) All of the other answers are elements of the fraud triangle.

62)

The three elements present in every fraud are commonly referred to as the: A) Triple threat B) Three-way manipulation C) Fraud triangle D) Three-alarm fire

63)

Which element of the fraud triangle do companies have the greatest ability to eliminate?

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A) Motivation B) Rationalization C) Opportunity D) Intelligence

64)

Fraudulent reporting by management could include: A) Fictitious revenues from a fake customer. B) Improper asset valuation. C) Mismatching revenues and expenses. D) All of the other answers could be involved in fraudulent reporting.

65) A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as: A) Corporate controls. B) Security controls. C) Internal controls. D) General controls.

66) What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others? A) Sarbanes-Oxley Act B) 1933 Securities Act C) 1934 Securities Exchange Act D) Regulation Fair Disclosure

67)

The Sarbanes-Oxley Act requires that companies must:

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A) Conduct customer surveys each year to ensure satisfaction with products and services. B) Document internal controls and assess their effectiveness each year. C) Pay taxes owed to the Internal Revenue Service by the tax filing date. D) Devise a budget each year to ensure cash outflows are not greater than cash inflows.

68)

Under the Sarbanes-Oxley Act, management is responsible for:

A) Analysts' having positive comments about the company's operations. B) The reliability of financial statements. C) Increasing the company's stock price. D) All of the other answers represent management responsibilities under the SarbanesOxley Act.

69)

Which of the following does not represent a major provision of the Sarbanes-Oxley Act? A) Nonaudit services B) Quarterly financial statements C) Auditor rotation D) Corporate executive accountability

70)

Under the provisions of the Sarbanes-Oxley Act, corporate executives: A) Have limited responsibility for financial statements. B) Must personally prepare the company's financial statements. C) Must personally certify the company's financial statements. D) Are not allowed to view the company's financial statements.

71) Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?

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A) Provide nonaudit services for their clients B) Audit public companies whose chief executives worked for the audit firm in the preceding year C) Be hired by company management D) Maintain working papers for at least seven years following an audit

72)

The Sarbanes-Oxley Act (SOX) mandates which of the following? A) Increased regulations related to auditor-client relations B) Increased regulations related to internal control C) Increased regulations related to corporate executive accountability D) All of the other answers represent mandates of the Sarbanes-Oxley Act

73)

Which of the following best describes the goal of internal controls? A) Ensuring the business is profitable B) Enhancing the health of employees C) Improving the accuracy and the reliability of financial information D) Ensuring the compliance with tax regulations

74)

Which of the following isnot a design feature of effective internal controls? A) Allow greater reliance by investors on reported financial statements B) Prevent fraudulent or errant financial reporting C) Ensure the company's price advantage over competitors D) Prevent misuse of company funds by employees

75)

A framework for designing an internal control system is provided by the:

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A) Committee of Sponsoring Organizations. B) Financial Accounting Standards Board. C) Securities and Exchange Commission. D) International Accounting Standards Board.

76) The component of internal control that includes the policies and procedures that help ensure that management's directives are being carried out is: A) Monitoring. B) Information and communication. C) Risk assessment. D) Control activities.

77) The component of internal control that identifies internal and external factors that could prevent a company's objectives from being achieved is: A) Monitoring. B) Information and communication. C) Risk assessment. D) Control activities.

78) The component of internal control that includes the formal procedures for reporting control deficiencies is: A) Monitoring. B) Information and communication. C) Risk assessment. D) Control activities.

79)

The components of internal control do not directly include:

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A) Risk assessment. B) Inflation adjustment. C) Monitoring. D) Control activities.

80)

Separation of duties refers to:

A) Making each manager personally responsible for his/her department. B) Keeping functions across different departments separate. C) Preventing top management and lower-level employees from interacting. D) Individuals who have physical responsibility for assets should not also have access to accounting records.

81)

What is the concept behind separation of duties in establishing internal controls?

A) The company's financial accountant should not share information with the company's tax accountant. B) Duties of middle-level managers should be clearly separated from those of top executives. C) Employee fraud is less likely to occur when access to assets and access to accounting records are separated. D) The external auditors of the company should have no contact with managers while the audit is taking place.

82)

Which of the following is not an example of preventive controls? A) Separation of duties B) Physical controls C) Proper authorization D) Reconciliations

83)

Which of the following is an example of detective controls?

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A) Separation of duties B) Physical controls C) Proper authorization D) Reconciliations

84) Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control? A) Separation of duties B) Physical controls C) Proper authorization D) Employee management

85) Giving only management the right to make purchases over a certain amount is an example of which preventive control? A) Separation of duties B) Physical controls C) Proper authorization D) Employee management

86) Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control? A) Separation of duties B) Physical controls C) Proper authorization D) Employee management

87) Allowing only certain individuals to have passwords to conduct online purchases is an example of which preventive control?

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A) Separation of duties B) Physical controls C) E-commerce controls D) Employee management

88) Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control? A) Separation of duties B) Reconciliations C) Performance reviews D) Employee management

89) Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control? A) Separation of duties B) Reconciliations C) Performance reviews D) Employee management

90) Having an independent party assess each year the adequacy of the company's internal control procedures is an example of which detective control? A) Separation of duties B) Reconciliations C) Performance reviews D) Audits

91) Which employees are the ones who must take final responsibility for the establishment and success of internal controls?

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A) Top executives B) Mid-level managers C) Lower-level employees D) All employees

92)

Which employees have an impact on the operation and effectiveness of internal controls? A) Upper management B) Mid-level managers C) Lower-level employees D) All employees

93)

The act of collusion refers to:

A) Top management and lower-level employees working together to share information necessary for effective internal controls. B) Two or more people acting in coordination to circumvent internal controls. C) Management working with an auditor to prevent occupational fraud. D) Middle-level managers taking full responsibility for effective internal controls.

94)

The asset most susceptible to theft is: A) Equipment. B) Accounts receivable. C) Building. D) Cash.

95)

Which of the following is considered cash for financial reporting purposes?

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A) Accounts receivable B) Investments with maturity dates greater than three months C) Checks received from customers D) Accounts payable

96)

Cash may not include: A) Foreign currency. B) Money orders. C) Accounts receivable. D) Undeposited customer checks.

97)

The balance of cash reported in the balance sheet includes which of the following? A) Balance of savings account B) Credit card sales C) Currency D) All of the other answer choices would be reported in the balance of cash

98) The term commonly used to refer to short-term investments that have a maturity date no longer than three months from the date of purchase is: A) Accounts receivable. B) Cash equivalents. C) Accounts payable. D) Notes receivable.

99)

Cash equivalents refer to:

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A) Short-term investments that have a maturity date no longer than three months from the date of purchase. B) Amounts receivable from customers that have a very high probability of collection. C) Short-term investments that have increased in value since the date of purchase, and therefore have generated additional cash for the company. D) The total amount of cash a company would have if all assets were sold.

100)

Common examples of cash equivalents include all of the following except: A) Money market funds. B) Treasury bills. C) Certificates of deposit. D) Accounts receivable.

101)

Which of the following sales would typically be reported as a cash sale? A) Sale in exchange for office supplies received B) Sale in exchange for equipment received C) Sale on account D) Sale with credit card

102)

Which of the following wouldnot be recorded as a cash sale? A) Customer who pays with a check B) Customer who pays with a debit card C) Customer who pays with a credit card D) A customer who buys on account

103)

Which of the following wouldnot represent good controls over cash receipts?

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A) Record all cash receipts as soon as possible. B) The employee that receives cash and checks should also deposit them in the bank. C) Open mail each day and make a list of checks received with the amount and payer's name. D) Verify cash receipts by comparing the bank deposit slip with the accounting records.

104)

Which of the following would not be considered good internal control for cash receipts?

A) Allowing customers to pay with a debit card. B) Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account. C) Recording cash receipts as soon as they are received. D) Allowing customers to pay with a credit card.

105)

When a sale is made to a customer who pays with a check, the company records: A) A debit to Cash. B) A debit to Accounts Payable. C) A debit to Accounts Receivable. D) No entry until the check clears the bank.

106)

When a sale is made to a customer who pays with a debit card, the company records: A) A debit to Accounts Payable. B) A debit to Accounts Receivable. C) A debit to Cash. D) No entry until the debit card transaction clears the bank.

107) The amount of revenue recorded at the time of a sale will be greatest when the customer pays with a:

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A) Check. B) Cash. C) Credit card. D) The recorded revenue will be the same regardless of the payment method.

108) McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 4% of the sale. When a customer uses a credit card to pay McGregor $1,800 for services provided, McGregor would: A) Debit Service Fee Expense for $72. B) Debit Cash for $1,800. C) Credit Service Revenue for $1,728. D) Credit Service Revenue for $1,872.

109) McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would: A) Debit Cash for $200. B) Credit Service Revenue for $194. C) Debit Service Fee Expense for $6. D) Credit Service Revenue for $206.

110) A customer makes a $2,500 purchase at Appliance World, paying with a credit card. Appliance World is charged a 4% fee by the credit card company. When recording this sale, Appliance World would: A) Debit Accounts Receivable for $2,500. B) Credit Deferred Revenue for $2,500. C) Credit Sales Revenue for $2,400. D) Credit Sales Revenue for $2,500.

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111) A customer makes a $2,000 purchase at Appliance World, paying with a credit card. Appliance World is charged a 2% fee by the credit card company. When recording this sale, Appliance World would: A) Debit Accounts Receivable for $2,000. B) Credit Sales Revenue for $2,000. C) Credit Sales Revenue for $1,960. D) Credit Deferred Revenue for $2,000.

112)

Which of the following would not represent good controls over cash disbursements? A) Make all disbursements, other than very small ones, by check, debit card, or credit

card. B) Require only one signature for checks, especially larger ones. C) Authorize all expenditures before purchase and verify the accuracy of the purchase itself. D) The employee who authorizes payment should not also be the employee who prepares the check.

113)

Which of the following would not represent good controls over cash disbursements?

A) Periodically verify amounts shown in the debit card and credit card statements against purchase receipts. B) The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases. C) Set maximum purchase limits on debit cards and credit cards. D) Employees responsible for making cash disbursements should also be in charge of cash receipts.

114) Which of the following wouldnot be one of the ways that companies collect payments from customers?

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A) Credit cards and debit cards B) Electronic funds transfers C) Mobile payments D) All of these answer choices describe ways that companies collect payments from customers.

115) Which of the following wouldnot be one of the ways that companies collect payments from customers? A) Crypto currencies B) Electronic funds transfers C) Prepaid cards D) All of these answer choices describe ways that companies collect payments from customers.

116)

A bank reconciliation reconciles the bank statement with the company's: A) Cash from operating activities. B) Net cash flow in the statement of cash flows. C) Cash account in the balance sheet. D) Net income in the income statement.

117)

What is the primary purpose of a bank reconciliation?

A) To ensure that debits equal credits for all cash transactions B) To ensure that customers are paying amounts owed on a timely basis C) To ensure the bank balance per reconciliation is equal to the company balance per reconciliation D) To ensure cash receipts are greater than cash disbursements

118) Which of the following items would cause the balance of cash in the bank statement to be different from the balance of cash in the accounting records?

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A) Interest earned on the bank balance that the company has not recorded B) Checks written by the company that have not cleared the bank C) Cash receipts by the company that have not been deposited in the bank D) All of the other answers would cause cash balances to differ

119) Which of the following items would cause the balance of cash in the bank statement to be different from the balance of cash in the accounting records? A) The company purchased supplies using a debit card B) The company has cash receipts that have been deposited in the bank C) The company deposited a customer check that was found by the bank to have insufficient funds D) The company wrote checks that have cleared the bank

120) Which of the following items would cause the balance of cash in the bank statement to be greater than the balance of cash in the accounting records? A) The company wrote checks that have not cleared the bank. B) The company purchased supplies using a debit card. C) The company has cash receipts that have not been deposited in the bank. D) The company deposited a customer check that was found by the bank to have insufficient funds.

121)

Which of the following is not a reason why a bank reconciliation is necessary? A) The company has transactions that the bank has not recorded. B) Petty cash has a low balance. C) The bank has transactions that the company has not recorded. D) Reconciliations provide a control over cash.

122) A good internal control system would require that the employee who handles cash must not be involved in:

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A) Reconciling the bank statement. B) The accounts payable function. C) Hiring decisions. D) Daily operations of the company.

123)

Which of the following is correct with respect to a bank reconciliation? A) Subtract interest earned from the bank's balance. B) Add service fee to the company's balance. C) Subtract the amount of a customer’s NSF check from the company's balance. D) Add deposits outstanding to the company's balance.

124) After preparing the bank reconciliation, an NSF check from a customer would result in which of the following when recording the adjustment to the company's cash balance? A) Debit to Service Fee Expense B) Credit to Accounts Payable C) Credit to Service Revenue D) Debit to Accounts Receivable

125) The following information pertains to a company's cash balance and bank reconciliation as of August 31: Company balance before reconciliation Checks outstanding Notes collected by the bank Service fee Deposits outstanding

$ 5,000 $ 2,500 $ 2,200 $ 50 $ 2,000

What is the correct cash balance for the company?

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A) $7,150 B) $5,150 C) $7,650 D) $7,250

126)

When preparing a bank reconciliation, a deposit outstanding would be: A) Added to the company's cash balance. B) Added to the bank's cash balance. C) Subtracted from the company's cash balance. D) Subtracted from the bank's cash balance.

127) Regarding a bank reconciliation, which one of the following is an item that is recorded by the company but not by the bank? A) Checks outstanding B) Interest earned C) Service fees D) NSF checks from customers

128)

Which of the following would not need to be accounted for in a bank reconciliation? A) Deposits recorded by the company but not the bank B) Interest recorded by the bank but not the company C) NSF checks from customers recorded by the bank but not by the company D) Checks written by the company and recorded by the bank

129) On May 31, Money Corporation's Cash account showed a balance of $13,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: Checks outstanding Deposits outstanding

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$ 2,950 2,600

NSF check from a customer Service fees

230 110

Error: Money Corporation wrote a check for $70 but recorded it incorrectly for $700. What is the amount of cash that should be reported in the company's balance sheet as of May 31? A) $12,660 B) $12,650 C) $11,890 D) $13,290

130) On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: Checks outstanding Deposits outstanding NSF check from a customer Service fees

$ 2,250 1,900 100 40

Error: Money Corporation wrote a check for $30 but recorded it incorrectly for $300. What is the amount of cash that should be reported in the company's balance sheet as of May 31? A) $9,860 B) $9,650 C) $10,130 D) $10,410

131) Cash transactions recorded by the bank but not yet recorded by the company include all of the followingexcept:

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A) Service fees. B) Interest earned. C) Checks outstanding. D) NSF checks from customers.

132) The following information was taken from a company’s bank reconciliation at the end of the year: Bank balance Checks outstanding Note collected by the bank Service fee Deposits outstanding NSF check from a customer

$ 9,200 7,400 1,400 23 4,100 410

What is the correct cash balance that should be reported in the company's balance sheet at the end of the year? A) $8,790 B) $5,900 C) $10,190 D) $5,877

133) The following information was taken from a company’s bank reconciliation at the end of the year: Bank balance Checks outstanding Note collected by the bank Service fee Deposits outstanding NSF check from a customer

$ 8,000 5,800 1,500 20 4,000 300

What is the correct cash balance that should be reported in the company's balance sheet at the end of the year?

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A) $10,200 B) $7,400 C) $6,200 D) $6,160

134)

Cash transactions that have been recorded by the company but not the bank include: A) NSF checks from customers. B) Interest earned. C) Service fees. D) Deposits outstanding.

135) After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with a: A) Credit to Notes Receivable. B) Credit to Cash. C) Debit to Notes Receivable. D) Credit to Accounts Receivable.

136) After preparing a bank reconciliation, the service fee charged by the bank would be recorded with a: A) Credit to Service Fees Expense. B) Debit to Cash. C) Credit to Service Fees Revenue. D) Debit to Service Fees Expense.

137) After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with a:

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A) Debit to Advertising Expense. B) Debit to Cash. C) Credit to Advertising Expense. D) No entry is needed.

138) The following data were obtained from the bank statement and from the process of reconciling the bank balance with the company’s cash balance: Bank service fees Deposit outstanding Interest earned on the bank account Checks outstanding

$ 20 $ 150 $ 10 $ 400

Which items should be deducted from and added to the bank balance in completing the reconciliation? A) Deduct checks outstanding; add service fees and deposit outstanding B) Deduct interest earned; add deposit outstanding C) Deduct checks outstanding; add deposit outstanding D) Deduct deposit outstanding; add checks outstanding

139) The balance in a company's Cash account on August 31 was $18,900, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check from a customer Note collected by bank for the company Deposits outstanding Bank service fees

$ 4,400 190 1,900 3,900 120

What is the amount of cash that should be reported in the company’s balance sheet as of August 31?

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A) $18,590 B) $20,490 C) $20,680 D) $18,400

140) The balance in a company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check from a customer Note collected by bank for the company Deposits outstanding Bank service fees

$ 4,300 140 1,200 1,800 60

What is the amount of cash that should be reported in the company’s balance sheet as of August 31? A) $20,700 B) $17,200 C) $18,700 D) $22,200

141) The balance shown in the August bank statement of a company was $22,300. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check from a customer Note collected by bank for the company Deposits outstanding Bank service fees

$ 4,700 140 1,500 2,100 60

What is the amount of cash that should be reported in the company’s balance sheet as of August 31?

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A) $16,200 B) $15,200 C) $19,700 D) $23,300

142) The balance shown in the August bank statement of a company was $23,200. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check from a customer Note collected by bank for the company Deposits outstanding Bank service fees

$ 4,300 140 1,200 1,800 60

What is the amount of cash that should be reported in the company’s balance sheet as of August 31? A) $20,700. B) $17,200. C) $18,700. D) $22,200.

143)

A company-issued debit card or credit card is often referred to as a: A) Budget care. B) Allowance card. C) Purchase card. D) Receipt card.

144)

A minor amount of cash kept on hand to pay for small purchases is referred to as a:

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A) Petty cash fund. B) Cash receipts fund. C) Cash payments fund. D) Cookie jar fund.

145) At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) Delivery (petty cash) Advertising (credit card) Equipment (credit card)

$ 50 $ 75 $ 1,100 $ 4,200

Accounting for these employee purchases would include a: A) Credit to Cash for $125. B) Debit to Accounts Payable for $5,300. C) Credit to Cash for $1,225. D) Credit to Accounts Payable for $5,425.

146) At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) Delivery (petty cash) Advertising (credit card) Equipment (credit card)

$ 50 $ 75 $ 1,100 $ 4,200

Accounting for these employee purchases would include a:

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A) Credit to Cash for $5,425. B) Credit to Accounts Payable for $5,300. C) Credit to Equipment for $4,200. D) Debit to Accounts Receivable for $5,300.

147)

Which of the following isnot involved in the replenishment of the petty cash fund?

A) Transactions related to vouchers will be recorded. B) Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund. C) Weekly payroll checks will be recorded. D) Management will withdraw cash from the bank and place it in the petty cash fund.

148) At the time a $500 petty cash fund is being replenished, the company's accountant finds vouchers totaling $400 and petty cash of $100. The vouchers include: postage, $100; business lunches, $150; delivery fees, $100; and office supplies, $50. Which of the following is not recorded when recognizing expenditures from the petty cash fund? A) Debit Cash, $400 B) Debit Supplies, $50 C) Debit Postage Expense, $100 D) Credit Cash, $400

149) At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling $350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund? A) Debit Postage Expense, $100 B) Debit Supplies, $25 C) Credit Cash, $350 D) Debit Cash, $350

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150)

Which of the following is correct regarding a petty cash fund? A) A petty cash fund represents cash on hand at the business for quick access. B) A petty cash fund is used for minor purposes. C) When cash from this fund is taken out, it should be replaced with a voucher. D) All of the answers are correct regarding a petty cash fund.

151) When accounting for employee purchases, effective internal controls could include which of the following? A) Credit card receipts are reconciled to credit card statements. B) Employees should be required to provide receipts and justification for those receipts on a timely basis. C) A separate employee reviews receipts and supporting documents to ensure all expenditures are made appropriately. D) All of the other answers represent effective internal controls.

152) When accounting for employee purchases, effective internal controls could include which of the following? A) Employees should be required to provide receipts and justification for those receipts every six months. B) Only those employees that need to make timely business expenditures should receive authorization. C) The same employee should review receipts and supporting documents to ensure all expenditures are made appropriately. D) To ensure timely expenditures, no pre-approval should be required for major purchases.

153)

A company's cash balance is reported in which two financial statements?

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A) Income statement and statement of cash flows B) Balance sheet and statement of cash flows C) Income statement and balance sheet D) Balance sheet and statement of stockholders' equity

154)

Which of the following best describes restricted cash? A) Cash to be collected from customers from sales on account B) Cash that is not available to be used for current operations C) Cash that has been borrowed from a bank with a high interest rate D) Dividends that are expected to be paid to common stockholders in the following year

155) A common example of restricted cash includes cash set aside by the company for the specific purpose of: A) Repaying debt in the future. B) Purchasing equipment in the future. C) Making investments in the future. D) All of the other answers represent examples of restricted cash.

156)

The statement of cash flows reports cash flows from the activities of: A) Operating, purchasing, and investing. B) Borrowing, paying, and investing. C) Financing, investing, and operating. D) Using, investing, and financing.

157)

Operating cash flows would exclude:

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A) Payment of employee salaries. B) Receipt of cash from customers. C) Payment of dividends. D) Payment for advertising.

158)

Cash flows from investing do not include cash flows from: A) Lending. B) The sale of equipment. C) Borrowing. D) The purchase of a building.

159)

Which of the following is not correct regarding the reporting of cash?

A) Cash is reported in both the balance sheet and the statement of cash flows. B) Cash flows from buying and selling investments and long-term productive assets are called operating cash flows. C) Cash flows from transactions with stockholders and creditors are called financing cash flows. D) Net cash flows reported in the statement of cash flows should equal the change in cash between balance sheets.

160)

Consider the following cash flow items:

Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Pay one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve investing activities? Version 1

A) Zero B) One C) Two D) Three

161)

Consider the following cash flow items:

Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Purchase one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve financing activities? A) Zero B) One C) Two D) Three

162)

Investing cash flows would include which of the following? A) Payment of cash dividends to stockholders B) Purchase of office supplies with cash C) Purchase of a building with cash D) Cash sales to customers

163)

Cash flows from investing activities do not include:

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A) Borrowing. B) The purchase of equipment. C) The sale of land. D) The purchase of a building.

164)

Payment of dividends to stockholders is considered a(n): A) Operating cash flow. B) Investing cash flow. C) Financing cash flow. D) Not a cash flow.

165)

Issuing common stock for cash is considered a(n): A) Operating cash flow. B) Investing cash flow. C) Financing cash flow. D) Not a cash flow.

166)

Cash flows from financing activities include: A) Lending. B) Salaries paid. C) The sale of land. D) Dividends paid.

167)

Providing services to customers on account is considered a(n): A) Operating cash flow. B) Investing cash flow. C) Financing cash flow. D) Not a cash flow.

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168) Consider the following list of transactions: 1. Repay borrowing from the bank, $2,000. 2. Pay employees’ salaries of $1,500. 3. Purchase equipment for cash, $10,000. 4. Provide services to customers for cash, $4,500. 5. Issue shares of common stock for cash, $5,000. 6. Pay utilities, $1,000. 7. Provide services to customers on account, $2,500. 8. Sell old delivery truck for cash, $4,000.

What amount would the company report for operating cash flows in the statement of cash flows? A) $5,000 B) $4,500 C) $1,000 D) $2,000

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169)

Consider the following list of transactions:

1. Repay borrowing from the bank, $2,000. 2. Pay employees’ salaries of $1,500. 3. Purchase equipment for cash, $10,000. 4. Provide services to customers for cash, $4,500. 5. Issue shares of common stock for cash, $5,000. 6. Pay utilities, $1,000. 7. Provide services to customers on account, $2,500. 8. Sell old delivery truck for cash, $4,000.

What amount would the company report for investing cash flows in the statement of cash flows? A) $(3,500) B) $(6,000) C) $(4,000) D) $(7,500)

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170)

Consider the following list of transactions:

What amount would the company report for financing cash flows in the statement of cash flows? A) $3,000 B) $6,000 C) $1,500 D) $4,500

171) A company might hold a large amount of cash relative to noncash assets for which of the following reasons? A) Part of its operations includes low-tax foreign jurisdictions. B) Operating risks are high. C) Dividends are not typically paid to shareholders. D) All of the other answers represent reasons for large cash holdings.

172) The company's ratio of cash to noncash assets increased in the current year from 20% to 30%? Which of the following represents the most likely reason for this increase?

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A) The company maintained operations only in the United States. B) The company declared a large dividend in the current year. C) Management forecasts additional operating volatility in future periods. D) The company acquired additional equipment and buildings for expansion of operations.

173)

A potential risk of a company with a high ratio of cash to noncash assets is: A) Creditors are less likely to lend money to the company. B) Management may not be pursuing higher capital spending and growth opportunities. C) The company likely will not be able to pay dividends in the near future. D) The company likely is paying higher taxes than it should be.

174) A company's lower ratio of cash to noncash assets most likely represents which characteristic of management? A) Greater willingness to take risk B) Lower ability to find profitable investment projects C) Greater caution to ensure funds are available to pay debt as it becomes due D) Greater willingness to be compensated with company stock than cash

175)

A company reports the following amounts: Cash $ 10,000

Total Assets $ 50,000

Total Liabilities $ 35,000

What is the ratio of cash to noncash assets? A) 75% B) 20% C) 25% D) 67%

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176)

Below are trends in operating cash flows for three companies.

Company 1 Company 2 Company 3

Year 1

Year 2

Year 3

Total

$ 100,000 100,000 90,000

$ 150,000 100,000 100,000

$ 50,000 100,000 110,000

$ 300,000 300,000 300,000

Based on an analysis of operating risk, which company's management is likely motivated to have the largest ratio of cash to noncash assets? A) Company 1 B) Company 2 C) Company 3 D) All companies are expected to have the same ratio.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 177) Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions.

178) What is internal control? Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO).

179) Explain the different types of cash, including cash equivalents, which would be reported as Cash in the balance sheet.

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180)

A company uses the following process for its cash receipts:

At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Required: Discuss the company's internal control procedures related to cash receipts.

181)

List the three steps performed to reconcile a bank account with a company’s cash balance.

182) Discuss internal controls related to the use of debit cards, credit cards, and petty cash for employee purchases.

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183) What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category.

184) What is the link between the balance sheet and the statement of cash flows? Describe the operating, investing, and financing sections of the statement of cash flows.

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Answer Key Test name: Chap 04_6e_Spiceland 1) TRUE 2) TRUE 3) TRUE 4) FALSE The Sarbanes-Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX. 5) TRUE 6) FALSE Auditors are prohibited from providing most nonaudit services, such as consulting, to their clients by the Sarbanes-Oxley Act. 7) TRUE 8) TRUE 9) TRUE 10) FALSE A framework for designing an internal control system is provided by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. 11) TRUE 12) TRUE 13) FALSE Separation of duties is where individuals who have physical responsibility for assets should not also have access to accounting records. 14) TRUE

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15) TRUE 16) TRUE 17) FALSE This is the act of collusion. 18) FALSE Effective internal controls improve the company's likelihood of success and survival, but do not provide a guarantee. 19) TRUE 20) TRUE 21) FALSE Accounts receivable is a separately reported asset from cash. 22) FALSE The balance of cash reported in a company's balance sheet does include short-term investments that have a maturity date no longer than three months from the date of purchase (referred to as cash equivalents). 23) TRUE 24) TRUE 25) FALSE These tasks should be performed each day. 26) TRUE 27) FALSE The debit should be to Cash. 28) TRUE 29) FALSE The credit is to the Cash account. 30) TRUE 31) FALSE A single employee should not perform both of these tasks. 32) TRUE 33) FALSE Version 1

Cryptocurrencies represent digital money that allows peer-to-peer transactions without the need for a third-party bank or credit card company. 34) TRUE The credit card company deposits cash in the company’s bank for the amount of the sale, less the service fee. 35) TRUE Debit cards, mobile payments and electronic funds transfers are also recorded as cash receipts and often include service fees. 36) TRUE 37) TRUE 38) FALSE This is an example of a timing difference. 39) FALSE These are referred to as deposits outstanding. 40) TRUE 41) FALSE The company's balance will be higher. 42) TRUE 43) TRUE 44) FALSE Interest earned is initially recorded by the bank. 45) FALSE The cash balance needs to be updated for items used to reconcile the company's cash balance. 46) TRUE 47) TRUE 48) FALSE Cash is reported in the balance sheet and in the statement of cash flows. Version 1

49) TRUE 50) TRUE 51) FALSE These are operating activities. 52) TRUE 53) FALSE These are financing activities. 54) TRUE 55) TRUE 56) FALSE Cash dividends represent the return of cash to stockholders and therefore reduce the balance of cash. 57) TRUE 58) TRUE 59) A 60) B 61) D 62) C 63) C 64) D 65) C 66) A 67) B 68) B 69) B 70) C 71) D 72) D 73) C 74) C Version 1

75) A 76) D 77) C 78) A 79) B 80) D 81) C 82) D 83) D 84) B 85) C 86) D 87) C 88) B 89) C 90) D 91) A 92) D 93) B 94) D 95) C 96) C 97) D The amount of cash held by a company is reported in its balance sheet. This amount includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts. 98) B 99) A 100) D Version 1

101) D 102) D 103) B 104) B 105) A 106) C 107) D 108) A 109) C 110) D 111) B 112) B 113) D 114) D 115) D 116) C 117) C 118) D 119) C 120) A 121) B 122) A 123) C 124) D 125) A Cash = $5,000 + $2,200 − $50 = $7,150 126) B 127) A 128) D 129) D Version 1

Cash balance = $13,000 − $230 − $110 + $630 = $13,290 130) C Cash balance = $10,000 − $100 − $40 + $270 = $10,130. 131) C 132) B Bank balance ($9,200) + deposits outstanding ($4,100) − checks outstanding ($7,400) = $5,900 133) C Bank balance ($8,000) + deposits outstanding ($4,000) − checks outstanding ($5,800) = $6,200 134) D 135) A 136) D 137) D 138) C 139) B Book balance ($18,900) + note collected ($1,900) − NSF check ($190) − bank service fees ($120) = $20,490. 140) A Book balance ($19,700) + note collected ($1,200) − NSF check ($140) − bank service fees ($60) = $20,700 141) C Bank balance ($22,300) + deposits outstanding ($2,100) − checks outstanding ($4,700) = $19,700 142) A Bank balance ($23,200) + deposits outstanding ($1,800) − checks outstanding ($4,300) = $20,700. 143) C 144) A 145) A Version 1

146) B 147) C 148) A 149) D 150) D 151) D 152) B 153) B 154) B 155) D 156) C 157) C 158) C 159) B 160) B Purchase equipment to be used in operations. 161) C (1) Pay amount owed to bank for previous borrowing and (2) Sell common stock to investors. 162) C 163) A 164) C 165) C 166) D 167) D 168) D $4,500 − $1,500 − $1,000 = $2,000 169) B $4,000 − $10,000 = $(6,000) 170) A Version 1

$5,000 − $2,000 = $3,000 171) D 172) C 173) B 174) A 175) C $10,000/($50,000 − $10,000) = 25% 176) A 177)Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the SarbanesOxley Act. Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits. The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control.

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178)Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. 1.Control Environment - overall top-to-bottom attitude of the company with respect to internal controls. 2.Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives. 3.Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets. 4.Monitoring - Continuous observation of the internal control system. 5.Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports. 179)Cash includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received. In addition, when a company sells products or services to customers who use credit cards or debit cards, the cash to be collected from those sales is nearly always included in the total cash balances immediately. Cash equivalents are short-term investments that have a maturity date no longer than three months from the date of purchase. Common examples of such investments are money market funds, Treasury bills, and certificates of deposit. 180)Cash should be recorded and deposited daily. The employee recording cash receipts should not also be the employee making the deposit. The bank reconciliation should be prepared monthly by a person with no other cash responsibilities.

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181)Reconciling the bank account involves the following three steps: 1.Reconcile the bank’s cash balance. 2.Reconcile the company’s cash balance. 3.Update the company’s Cash account by recording items identified in step 2. 182)● Employees should be required to provide receipts and justification for those receipts on a timely basis. ● A separate employee reviews receipts and supporting documents to ensure all expenditures are made appropriately. ● Credit card receipts are reconciled to credit card statements, just like we reconciled checks and debit card transactions to the bank statement. ● Spending limits are placed on employees who are authorized to use a company credit card or have access to company cash. Major expenditures require pre-approval through formal purchasing procedures. ● Only those employees that need to make timely business expenditures should receive authorization. 183)The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers and cash payments for operating expenses. Investing activities include purchasing and selling long-term assets or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends.

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184)The balance sheet reports the final balance of cash at the end of the reporting period. The statement of cash flows reports inflows and outflows of cash during the reporting period. The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet. Operating activities include cash transactions involving revenue and expense events during the period. Investing activities include cash investments in long-term assets and investment securities. Financing activities include transactions designed to raise cash or finance the business.

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CHAPTER 5: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match each term related to net revenues with its description. 1.A) Sales allowances 2.B) Contra revenues 3.C) Net revenues 4.D) Sales discounts 5.E) Trade discounts 6.F) Sales returns Total revenues less contra revenues. Reduction in revenue because the product or service is sold below the listed price. Reduction in revenue because the customer brings back products to the company after the sale. Reduction in revenue because of some deficiency in the company's good or service. Reduction in revenue when the customer pays within a specified period. Accounts with balances opposite of revenue.

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2) Match each term related to the allowance method for uncollectible accounts with its description. 1.A) No effect 2.B) Allowance method 3.C) Allowance for uncollectible accounts 4.D) Accounts receivable 5.E) Bad debt expense 6.F) Net accounts receivable 7.G) Increase 8.H) Decrease The account used to record sales on account to customers. The procedure required for financial reporting purposes to account for uncollectible accounts. The difference between total accounts receivable and the estimate of future bad debts. The effect on total assets when estimating future bad debts. The account to credit when estimating future bad debts. The effect on total expenses when estimating future bad debts. The account to debit when estimating future bad debts. The effect on total liabilities when estimating future bad debts.

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3) Match each term related to the comparison between the allowance method and direct write-off method for uncollectible accounts with its description. 1.A) Direct write-off method 2.B) Allowance method 3.C) Bad debt expense 4.D) No effect 5.E) Allowance for uncollectible accounts 6.F) Decrease 7.G) Increase 8.H) Accounts receivable The procedure commonly used for financial reporting purposes to account for uncollectible accounts. The procedure commonly used for tax reporting purposes to account for uncollectible accounts. The account to credit when writing off an actual bad debt under the allowance method. The account to debit when writing off an actual bad debt under the direct write-off method. The account to debit when writing off an actual bad debt under the allowance method. The effect on total expenses when writing off an actual bad debt under the direct write-off method. The effect on total assets when estimating future bad debts under the allowance method. The effect on total expenses when estimating future bad debts under the direct write-off method.

4) Match each account with its description. 1.A) Cash 2.B) Interest receivable 3.C) Notes receivable 4.D) Accounts receivable 5.E) Interest revenue Informal credit arrangements with trade customers. Account to debit when interest accrues at the end of the year. Account to credit when interest accrues at the end of the year. Formal signed credit arrangements between a creditor and a debtor. Account to debit when receivables and interest are collected.

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5) Match each term related to receivables analysis with its description. 1.A) Increase 2.B) Decrease 3.C) Receivables turnover ratio 4.D) More 5.E) Average collection period 6.F) Less 7. The approximate number of days the average accounts receivable balance is outstanding. An increase in the receivables turnover ratio generally indicates the company manages its receivables ________ efficiently. Reducing the length of time in which customers are required to pay will typically ________ the receivables turnover ratio. The number of times during a year that the average accounts receivable balance is collected. An increase in the average collection period indicates the company manages its receivables ________ efficiently. Allowing riskier customers to purchase goods or services on account will typically ________ the receivables turnover ratio.

6) A company offers a 25% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $7,200 (not including the trade discount) on account.

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7) A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.

8) On February 23, a company provides services on account to a customer for $4,900. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

9) On February 23, a company provides services on account to a customer for $4,500. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

10) Suppose Casey Title Company normally charges $600 for services related to selling a house. As part of a summer special, Casey offers customers a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue recognized by Casey on July 9.

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11) Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of a summer special, Casey offers customers a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue recognized by Casey on July 9.

12) On September 8, a company provides services on account to a customer for $1,600, terms 4/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.

13) On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.

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14) On October 22, a company provides services on account to a customer for $2,100, terms 3/11, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.

15) On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.

16) On August 12, a company provides services on account to a customer for $4,000. However, on August 16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $430. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.

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17) On August 12, a company provides services on account to a customer for $3,000. However, on August 16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.

18) A company reports the following amounts at the end of the year: Total sales revenue = $510,000; sales discounts = $14,000; sales returns = $31,000; sales allowances = $29,000. Compute net revenues.

19) A company reports the following amounts at the end of the year: Total sales revenue = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues.

20) A company reports the following amounts at the end of the year: Total sales revenue = $470,000; cash = $40,000; sales discounts = $15,000; accounts receivable = $27,000; sales returns = $21,000; operating expenses = $75,000; sales allowances = $33,000. Compute net revenues.

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21) A company reports the following amounts at the end of the year: Total sales revenue = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net revenues.

22) During 2024, its first year of operations, a company ends the year with accounts receivable of $100,000. The company estimates that 20% of accounts receivable will be uncollectible. Record the adjusting entry for uncollectible accounts on December 31, 2024.

23) During 2024, its first year of operations, a company provides services on account of $255,000. By the end of 2024, cash collections on these accounts total $138,000. The company estimates that 11% of accounts receivable will be uncollectible. Required: Record the adjusting entry for uncollectible accounts on December 31, 2024.

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24) During 2024, its first year of operations, a company provides services on account of $250,000. By the end of 2024, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Required: Record the adjusting entry for uncollectible accounts on December 31, 2024.

25) A company has the following adjusted balances on December 31, 2024: Accounts Receivable = $62,100; Allowance for Uncollectible Accounts = $6,600. Required: Calculate net accounts receivable.

26) A company has the following adjusted balances on December 31, 2024: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Required: Calculate net accounts receivable.

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27) A company has the following adjusted balances on December 31, 2024: Accounts Receivable = $78,000; Service Revenue = $480,000; Allowance for Uncollectible Accounts = $5,000; Cash = $25,000. Required: Calculate net accounts receivable.

28) A company has the following adjusted balances on December 31, 2024: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Required: Calculate net accounts receivable.

29) A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $28,000. Required: Record the write-off of the uncollectible accounts.

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30) A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $25,000. Required: Record the write-off of the uncollectible accounts.

31) At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,400. By the end of the year, actual bad debts total $24,600. Required: What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjusting entry)?

32) At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the end of the year, actual bad debts total $24,000. Required: What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjusting entry)?

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33) On March 13, a company writes off a customer's account of $3,700. On June 3, the customer unexpectedly pays the $3,700 balance. Using the allowance method, record the writeoff on March 13 and the cash collection on June 3.

34) On March 13, a company writes off a customer's account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the writeoff on March 13 and the cash collection on June 3.

35) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $240 (credit) before any year-end adjusting entry. The balance of Accounts Receivable is $15,600. The company estimates that 13% of accounts receivable will not be collected over the next year. Required: Record the adjusting entry for uncollectible accounts.

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36) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjusting entry. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Required: Record the adjusting entry for uncollectible accounts.

37) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,400 (credit) before any year-end adjustment. The balance of Accounts Receivable is $200,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Required: Record the adjusting entry for uncollectible accounts.

38) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Required: Record the adjusting entry for uncollectible accounts.

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39) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,500 ( debit) before adjustment. The balance of Accounts Receivable is $171,000. The company estimates that 8% of accounts receivable will not be collected over the next year. Required: Record the adjusting entry for uncollectible accounts.

40) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (debit) before adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Required: Record the adjusting entry for uncollectible accounts.

41)

A company reports the following amounts at the end of the year (before adjustment):

Credit sales for the year

$ 127,000

Accounts receivable

39,000

Allowance for uncollectible accounts

2,500 (credit)

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Required: 1.Record the adjusting entry for uncollectible accounts using the percentage-of-receivables method, assuming the company estimates 11% of receivables will not be collected. 2.Record the adjusting entry for uncollectible accounts using the percentage-of-credit-sales method, assuming the company estimates 4% of credit sales will not be collected.

42)

A company reports the following amounts at the end of the year (before adjustment):

Credit sales for the year

$ 120,000

Accounts receivable

36,000

Allowance for uncollectible accounts

1,500 (credit)

Required: 1.Record the adjusting entry for uncollectible accounts using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected. 2.Record the adjusting entry for uncollectible accounts using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected.

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43) A company has the following accounts receivable and estimates of uncollectible accounts: 1.Accounts not yet due = $63,000; estimated uncollectible = 5%. 2.Accounts 1 to 30 days past due = $21,000; estimated uncollectible = 20%. 3.Accounts more than 30 days past due = $179,000; estimated uncollectible = 50%. Required: Compute the total estimated uncollectible accounts.

44) A company has the following accounts receivable and estimates of uncollectible accounts: 1.Accounts not yet due = $60,000; estimated uncollectible = 3% 2.Accounts 1 to 30 days past due = $20,000; estimated uncollectible = 20% 3.Accounts more than 30 days past due = $10,000; estimated uncollectible = 50% Required: Compute the total estimated uncollectible accounts.

45) At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1.Accounts not yet due = $86,000; estimated uncollectible = 3%. 2.Accounts 1 to 30 days past due = $26,000; estimated uncollectible = 25%. 3.Accounts more than 30 days past due = $8,000; estimated uncollectible = 55%. Required: Record the year-end adjusting entry for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $810 (credit).

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46) At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1.Accounts not yet due = $80,000; estimated uncollectible = 2%. 2.Accounts 1 to 30 days past due = $20,000; estimated uncollectible = 25%. 3.Accounts more than 30 days past due = $4,000; estimated uncollectible = 60%. Required: Record the year-end adjusting entry for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).

47) At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1.Accounts not yet due = $74,000; estimated uncollectible = 5%. 2.Accounts 1 to 30 days past due = $31,000; estimated uncollectible = 15%. 3.Accounts more than 30 days past due = $9,000; estimated uncollectible = 65%. Record the year-end adjusting entry for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,800 (debit).

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48) At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1.Accounts not yet due = $70,000; estimated uncollectible = 4%. 2.Accounts 1 to 30 days past due = $30,000; estimated uncollectible = 15%. 3.Accounts more than 30 days past due = $5,000; estimated uncollectible = 40%. Record the year-end adjusting entry for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).

49) A company has the following balances on December 31, 2024, before any year-end adjustments: Accounts Receivable = $86,000; Allowance for Uncollectible Accounts = $2,000 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below: Age Group Not yet due 0 to 30 days past due 31 to 90 days past due More than 90 days past due Total

Amount Receivable $ 45,000 25,000 10,000 6,000 $ 86,000

Estimated Percent Uncollectible 4% 20% 55% 85%

Required: Record the adjustment for uncollectible accounts on December 31, 2024.

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50) A company has the following balances on December 31, 2024, before any year-end adjustments: Accounts Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below: Age Group Not yet due 0 to 30 days past due 31 to 90 days past due More than 90 days past due Total

Amount Receivable $ 48,000 18,000 10,000 4,000 $ 80,000

Estimated Percent Uncollectible 5% 15% 40% 80%

Required: Record the adjustment for uncollectible accounts on December 31, 2024.

51)

Calculate the missing amount for each of the following notes receivable. Face Value $12,000 $24,000 $40,000 (d)

52)

Annual Interest rate 4% 6% (c) 6%

Fraction of the Year 9 months (b) 5 months 9 months

Interest (a) $360 $833 $500

Calculate the missing amount for each of the following notes receivable. Face Value $15,000

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Annual Interest rate 4%

Fraction of the Year 8 months

Interest (a) 20

$25,000 $30,000 (d)

8% (c) 6%

(b) 4 months 6 months

$500 $500 $600

53) On February 1, 2024, a company loans one of its employees $25,000 and accepts a ninemonth, 9% note receivable. Required: Calculate the amount of interest revenue the company will recognize in 2024.

54) On February 1, 2024, a company loans one of its employees $20,000 and accepts a ninemonth, 8% note receivable. Required: Calculate the amount of interest revenue the company will recognize in 2024.

55) On July 1, 2024, a company loans one of its employees $23,000 and accepts a ninemonth, 9% note receivable. Required: Calculate the amount of interest revenue the company will recognize in 2024 and 2025.

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56) On July 1, 2024, a company loans one of its employees $20,000 and accepts a ninemonth, 8% note receivable. Required: Calculate the amount of interest revenue the company will recognize in 2024 and 2025.

57) On April 1, 2024, a company loans one of its suppliers $56,000 and accepts a 26-month, 11% note receivable. Required: Calculate the amount of interest revenue the company will recognize in 2024, 2025, and 2026.

58) On April 1, 2024, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note receivable. Required: Calculate the amount of interest revenue the company will recognize in 2024, 2025, and 2026.

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59) On April 14, a company lends $10,000 cash to one of its employees and accepts a sixmonth, 12% note in return. Required: Record the journal entry for the acceptance of the note receivable.

60) On April 14, a company lends $10,000 cash to one of its employees and accepts a sixmonth, 12% note in return. Required: Record the journal entry for the acceptance of the note receivable.

61) On April 1, a company provides services to one of its customers for $13,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Required: Record the acceptance of the note receivable on April 1 and the cash collection on October 1.

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62) On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Required: Record the acceptance of the note receivable on April 1 and the cash collection on October 1.

63) On May 1, 2024, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 7% note. Required: Record the acceptance of the note on May 1, 2024, the adjusting entry on December 31, 2024, and the cash collection on May 1, 2025.

64) On May 1, 2024, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 6% note. Required: Record the acceptance of the note on May 1, 2024, the adjusting entry on December 31, 2024, and the cash collection on May 1, 2025.

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65)

Below are amounts for two companies:

Company 1 Company 2

Beginning Ending Accounts Net Credit Sales Accounts Receivable (net) Receivable (net) $ 2,200 $ 1,900 $ 29,000 3,400 2,400 71,000

Required: 1.For each company, calculate the receivables turnover ratio. 2.Which company appears more efficient in collecting cash from sales?

66)

Below are amounts for two companies:

Company 1 Company 2

Beginning Ending Accounts Net Credit Sales Accounts Receivable (net) Receivable (net) $ 1,500 $ 1,200 $ 29,700 3,100 3,300 80,000

Required: 1.For each company, calculate the receivables turnover ratio. 2.Which company appears more efficient in collecting cash from sales?

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67) At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,700 ( credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $289,000. Required: Record the adjusting entry for the allowance for uncollectible accounts using the percentage-ofcredit-sales method.

68) At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Required: Record the adjusting entry for the allowance for uncollectible accounts using the percentage-ofcredit-sales method.

69) At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,500 ( debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $287,000. Required: Record the adjusting entry for the allowance for uncollectible accounts using the percentage-ofcredit-sales method.

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70) At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Required: Record the adjusting entry for the allowance for uncollectible accounts using the percentage-ofcredit-sales method.

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Answer Key Test name: Chap 05_6e_Spiceland_Problem Material 1)Total revenues less contra revenues. C Reduction in revenue because the product or service is sold below the listed price. E Reduction in revenue because the customer brings back products to the company after the sale. F Reduction in revenue because of some deficiency in the company's good or service. A Reduction in revenue when the customer pays within a specified period. D Accounts with balances opposite of revenue. B 2) The account used to record sales on account to customers. D The procedure required for financial reporting purposes to account for uncollectible accounts. B The difference between total accounts receivable and the estimate of future bad debts. F The effect on total assets when estimating future bad debts. H The account to credit when estimating future bad debts. C The effect on total expenses when estimating future bad debts. G The account to debit when estimating future bad debts. E The effect on total liabilities when estimating future bad debts. A

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3)The procedure commonly used for financial reporting purposes to account for uncollectible accounts. B The procedure commonly used for tax reporting purposes to account for uncollectible accounts. A The account to credit when writing off an actual bad debt under the allowance method. H The account to debit when writing off an actual bad debt under the direct write-off method. C The account to debit when writing off an actual bad debt under the allowance method. E The effect on total expenses when writing off an actual bad debt under the direct write-off method. G The effect on total assets when estimating future bad debts under the allowance method. F The effect on total expenses when estimating future bad debts under the direct write-off method. D 4) Informal credit arrangements with trade customers. D Account to debit when interest accrues at the end of the year. B Account to credit when interest accrues at the end of the year. E Formal signed credit arrangements between a creditor and a debtor. C Account to debit when receivables and interest are collected. A

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5) The approximate number of days the average accounts receivable balance is outstanding. E An increase in the receivables turnover ratio generally indicates the company manages its receivables ________ efficiently. D Reducing the length of time in which customers are required to pay will typically ________ the receivables turnover ratio. A The number of times during a year that the average accounts receivable balance is collected. C An increase in the average collection period indicates the company manages its receivables ________ efficiently. F Allowing riskier customers to purchase goods or services on account will typically ________ the receivables turnover ratio. B 6) Account Title Accounts Receivable

Debit 5,400

Service Revenue

Credit

5,400

Trade discount = $7,200 × 25% = $1,800. Sale price = $7,200 − $1,800 = $5,400. 7) Account Title Accounts Receivable

Debit 6,400

Service Revenue

Credit

6,400

Trade discount = $8,000 × 20% = $1,600. Sale price = $8,000 − $1,600 = $6,400. 8) Date

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Account Title

Debit

Credit

February 23

Accounts Receivable

February 23 March 4

4,900

Service Revenue Cash

March 4

4,900 4,900

Accounts Receivable

4,900

9) Date February 23

Account Title Accounts Receivable

February 23 March 4

Debit 4,500

Service Revenue Cash

March 4

Credit

4,500 4,500

Accounts Receivable

4,500

10) Date July 9 July 9

Account Title Cash

Debit 480

Service Revenue

Credit

480

Trade discount = $600 × 20% = $120. Sale price = $600 − $120 = $480. 11) Date July 9 July 9

Account Title Cash

Debit 400

Service Revenue

Credit

400

Trade discount = $500 × 20% = $100. Sale price = $500 − $100 = $400 12) Date September 8 September 8

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Account Title Accounts Receivable Service Revenue

Debit 1,600

Credit

1,600

September 15 September 15 September 15

Cash Sales Discounts

1,536 64

Accounts Receivable

1,600

Sales discounts = $1,600 × 4% = $64. 13) Date September 8 September 8 September 15 September 15 September 15

Account Title Accounts Receivable

Debit 1,500

Service Revenue Cash Sales Discounts

Credit

1,500 1,470 30

Accounts Receivable

1,500

Sales discounts = $1,500 × 2% = $30. 14) Date October 22 October 22 December 19 December 19

Account Title Accounts Receivable

Debit 2,100

Service Revenue Cash

Credit

2,100 2,100

Accounts Receivable

2,100

No sales discount of 3% is awarded because the customer did not pay within 11 days as set forth by the terms of the service agreement. 15) Date October 22

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Account Title Accounts Receivable

Debit 1,800

Credit

October 22 December 19 December 19

Service Revenue Cash

1,800 1,800

Accounts Receivable

1,800

No sales discount of 3% is awarded because the customer did not pay within 15 days as set forth by the terms of the service agreement. 16) Date August 12 August 12 August 16 August 16 August 20 August 20

Account Title Accounts Receivable

Debit 4,000

Service Revenue Sales Allowances

4,000 430

Accounts Receivable Cash

Credit

430 3,570

Accounts Receivable

3,570

17) Date August 12 August 12 August 16 August 16 August 20 August 20

Account Title Accounts Receivable

Debit 3,000

Service Revenue Sales Allowances

3,000 400

Accounts Receivable Cash

Credit

400 2,600

Accounts Receivable

2,600

18)Net revenues = $510,000 − $14,000 − $31,000 − $29,000 = $436,000. 19) Net revenues = $500,000 − $10,000 − $30,000 − $20,000 = $440,000. Version 1

20) Net revenues = $470,000 − $15,000 − $21,000 − $33,000 = $401,000. 21) Net revenues = $400,000 − $10,000 − $15,000 − $25,000 = $350,000. 22) Account Title Bad Debt Expense

Debit 20,000

Allowance for Uncollectible Accounts

Credit

20,000

Bad debt expense = $100,000 × 20% = $20,000. 23) Account Title Bad Debt Expense

Debit 12,870

Allowance for Uncollectible Accounts

Credit

12,870

Bad debt expense = ($255,000 − $138,000) × 11% = $12,870. 24) Account Title Bad Debt Expense

Debit 12,000

Allowance for Uncollectible Accounts

Credit

12,000

Bad debt expense = ($250,000 − $130,000) × 10% = $12,000. 25) Net accounts receivable = $62,100 − $6,600 = $55,500. 26) Net accounts receivable = $62,000 − $6,000 = $56,000. 27) Net accounts receivable = $78,000 − $5,000 = $73,000. 28) Net accounts receivable = $75,000 − $5,000 = $70,000. Version 1

29) Account Title Allowance for Uncollectible Accounts

Debit 28,000

Accounts Receivable

Credit

28,000

30) Account Title Allowance for Uncollectible Accounts

Debit 25,000

Accounts Receivable

Credit

25,000

31) −$2,200 (or $2,200 debit) 32) −$2,000 (or $2,000 debit) 33) Date March 13 March 13 June 3 June 3 June 3 June 3

Account Title Allowance for Uncollectible Accounts

Debit 3,700

Accounts Receivable Accounts Receivable Allowance for Uncollectible Accounts Cash

Credit

3,700 3,700 3,700 3,700

Accounts Receivable

3,700

34) Date March 13 March 13 June 3 June 3

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Account Title Allowance for Uncollectible Accounts

Debit 3,800

Accounts Receivable Accounts Receivable Allowance for Uncollectible Accounts

Credit

3,800 3,800 3,800

June 3 June 3

Cash

3,800

Accounts Receivable

3,800

35) Account Title Bad Debt Expense

Debit 1,788

Allowance for Uncollectible Accounts

Credit

1,788

Bad debt expense = ($15,600 × 13%) − $240 = $1,788. 36) Account Title Bad Debt Expense

Debit 1,300

Allowance for Uncollectible Accounts

Credit

1,300

Bad debt expense = ($15,000 × 10%) − $200 = $1,300. 37) Account Title Bad Debt Expense

Debit 17,600

Allowance for Uncollectible Accounts

Credit

17,600

Bad debt expense = ($200,000 × 10%) − $2,400 = $17,600. 38) Account Title Bad Debt Expense

Debit 7,000

Allowance for Uncollectible Accounts

Credit

7,000

Bad debt expense = ($180,000 × 5%) − $2,000 = $7,000. 39)

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Account Title Bad Debt Expense

Debit 16,180

Allowance for Uncollectible Accounts

Credit

16,180

Bad debt expense = ($171,000 × 8%) + $2,500 = $16,180. 40) Account Title Bad Debt Expense

Debit 11,000

Allowance for Uncollectible Accounts

Credit

11,000

Bad debt expense = ($180,000 × 5%) + $2,000 = $11,000. 41)1. Account Title Bad Debt Expense

Debit 1,790

Allowance for Uncollectible Accounts

Credit

1,790

Bad debt expense = ($39,000 × 11%) − $2,500 = $1,790 2. Account Title Bad Debt Expense

Debit 5,080

Allowance for Uncollectible Accounts

Credit

5,080

Bad debt expense = $127,000 × 4% = $5,080 42)1. Account Title Bad Debt Expense Allowance for Uncollectible Accounts

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Debit 2,100

Credit

2,100

Bad debt expense = ($36,000 × 10%) − $1,500 = $2,100 2. Account Title Bad Debt Expense

Debit 2,400

Allowance for Uncollectible Accounts

Credit

2,400

Bad debt expense = $120,000 × 2% = $2,400 43) Estimated uncollectible accounts = ($63,000 × 5%) + ($21,000 × 20%) + ($179,000 × 50%) = $96,850. 44) Estimated uncollectible accounts = ($60,000 × 3%) + ($20,000 × 20%) + ($10,000 × 50%) = $10,800 45) Account Title Bad Debt Expense

Debit 12,670

Allowance for Uncollectible Accounts

Credit

12,670

Bad debt expense = ($86,000 × 3%) + ($26,000 × 25%) + ($8,000 × 55%) − $810 = $12,670. 46) Account Title Bad Debt Expense Allowance for Uncollectible Accounts

Debit 8,100

Credit

8,100

Bad debt expense = ($80,000 × 2%) + ($20,000 × 25%) + ($4,000 × 60%) − $900 = $8,100. 47)

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Account Title Bad Debt Expense

Debit 16,000

Allowance for Uncollectible Accounts

Credit

16,000

Bad debt expense = ($74,000 × 5%) + ($31,000 × 15%) + ($9,000 × 65%) + $1,800 = $16,000. 48) Account Title Bad Debt Expense

Debit 10,500

Allowance for Uncollectible Accounts

Credit

10,500

Bad debt expense = ($70,000 × 4%) + ($30,000 × 15%) + ($5,000 × 40%) + $1,200 = $10,500. 49) Account Title Bad Debt Expense

Debit 15,400

Allowance for Uncollectible Accounts

Credit

15,400

Bad debt expense = ($45,000 × 4%) + ($25,000 × 20%) + ($10,000 × 55%) + ($6,000 × 85%) − $2,000 = $15,400. 50) Account Title Bad Debt Expense Allowance for Uncollectible Accounts

Debit 11,200

Credit

11,200

Bad debt expense = ($48,000 × 5%) + ($18,000 × 15%) + ($10,000 × 40%) + ($4,000 × 80%) − $1,100 = $11,200.

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51)$12,000 × 4% × 9/12 = (a); (a) = $360 $24,000 × 6% × (b)/12 = $360; (b) = 3 months $40,000 × (c) × 5/12 = $833; (c) = 5% (d) × 6% × 9/12 = $500; (d) = $11,111 52)$15,000 × 4% × 8/12 = (a); (a) = $400 $25,000 × 8% × (b)/12 = $500; (b) = 3 months $30,000 × (c) × 4/12 = $500; (c) = 5% (d) × 6% × 6/12 = $600; (d) = $20,000 53)$25,000 × 9% × 9/12 = $1,688 54)$20,000 × 8% × 9/12 = $1,200 55)2024: $23,000 × 9% × 6/12 = $1,035 2025: $23,000 × 9% × 3/12 = $518 56)2024: $20,000 × 8% × 6/12 = $800 2025: $20,000 × 8% × 3/12 = $400 57)2024: $56,000 × 11% × 9/12 = $4,620. 2025: $56,000 × 11% × 12/12 = $6,160. 2026: $56,000 × 11% × 5/12 = $2,567. 58)2024: $50,000 × 12% × 9/12 = $4,500. 2025: $50,000 × 12% × 12/12 = $6,000. 2026: $50,000 × 12% × 3/12 = $1,500. 59) Account Title Notes Receivable

Debit 10,000

Cash

Credit

10,000

60) Account Title Notes Receivable

Debit 10,000

Credit

Cash

10,000

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61)

Date April 1 April 1 October 1

Account Title Notes Receivable

Debit 13,000

Service Revenue

Credit

13,000

Cash

13,650

October 1

Notes Receivable

13,000

October 1

Interest Revenue

650

Interest revenue = $13,000 × 10% × 6 / 12 = $650. 62) Date April 1 April 1 October 1

Account Title Notes Receivable

Debit 12,000

Service Revenue Cash

Credit

12,000 12,600

October 1

Notes Receivable

12,000

October 1

Interest Revenue

600

Interest revenue = $12,000 × 10% × 6/12 = $600 63) Date May 1, 2024 May 1, 2024 December 31, 2024 December 31, 2024 May 1, 2025

Account Title Notes Receivable Cash Interest Receivable

Cash Notes Receivable

May 1, 2025

Interest Receivable

Credit

100,000 4,667

Interest Revenue

May 1, 2025

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Debit 100,000

4,667 107,000 100,000 4,667

May 1, 2025

Interest Revenue

2,333

Interest Revenue 2024 = $100,000 × 7% × 8/12 = $4,667. Interest Revenue 2025 = $100,000 × 7% × 4/12 = $2,333. 64) Date May 1, 2024 May 1, 2024

Account Title Notes Receivable Cash

December 31, 2024

Interest Receivable

December 31, 2024

Interest Revenue

May 1, 2025

Debit 100,000

Cash

Credit

100,000 4,000 4,000 106,000

May 1, 2025

Notes Receivable

100,000

May 1, 2025

Interest Receivable

4,000

May 1, 2025

Interest Revenue

2,000

Interest Revenue 2024 = $100,000 × 6% × 8/12 = $4,000 Interest Revenue 2025 = $100,000 × 6% × 4/12 = $2,000 65)1. Company 1 = $29,000 / [($2,200 + $1,900) /2] = 14.15 Company 2 = $71,000 / [($3,400 + $2,400) /2] = 24.48 2. Company 2 is more efficient. 66)1. Company 1 = $29,700/[($1,500 + $1,200)/2] = 22 Company 2 = $80,000/[($3,100 + $3,300)/2] = 25 2. Company 2 is more efficient. Version 1

67) Account Title Bad Debt Expense

Debit 8,670

Allowance for Uncollectible Accounts

Credit

8,670

Bad debt expense = $289,000 × 3% = $8,670. 68) Account Title Bad Debt Expense

Debit 8,400

Allowance for Uncollectible Accounts

Credit

8,400

Bad debt expense = $280,000 × 3% = $8,400. 69) Account Title Bad Debt Expense

Debit 8,610

Allowance for Uncollectible Accounts

Credit

8,610

Bad debt expense = $287,000 × 3% = $8,610. 70) Account Title Bad Debt Expense Allowance for Uncollectible Accounts

Debit 8,400

Credit

8,400

Bad debt expense = $280,000 × 3% = $8,400.

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CHAPTER 5 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) An invoice is a ledger that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms. ⊚ true ⊚ false

2) Credit sales transfer goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. ⊚ ⊚

true false

At the time of a credit sale, a company would record Accounts Receivable and Revenue. ⊚ ⊚

true false

4) A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable. ⊚ true ⊚ false

5) Accounts receivable represent the amounts owed to the company by its customers from the sale of goods or services on account. ⊚ ⊚

true false

Trade discounts represent a discount offered to the purchaser for quick payment. ⊚ true ⊚ false

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7) When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. ⊚ true ⊚ false

8) A sales discount represents a reduction, not in the selling price of a good or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. ⊚ true ⊚ false

9) A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. ⊚ true ⊚ false

10)

The Sales Discounts account is an example of a contra revenue account. ⊚ true ⊚ false

11)

The Sales Discounts account is an expense account. ⊚ true ⊚ false

12) Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed. ⊚ true ⊚ false

13) A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. ⊚ true ⊚ false

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14)

The Sales Returns account is an expense account. ⊚ true ⊚ false

15) If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. ⊚ true ⊚ false

16) Trade discounts, sales returns, sales allowances, and sales discounts are recorded in separate contra revenue accounts and subtracted when calculating net revenues. ⊚ ⊚

true false

17)

Accounts receivable are reported at the net amount expected to be collected. ⊚ true ⊚ false

18)

The net amount of accounts receivable is the full amount owed by customers. ⊚ true ⊚ false

19) Customers' accounts receivable we no longer expect to collect are referred to as uncollectible accounts (or bad debts). ⊚ true ⊚ false

20) The adjusting entry to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities.

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⊚ ⊚

true false

21) The adjusting entry for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. ⊚ ⊚

true false

22) The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. ⊚ true ⊚ false

23) Bad debt expense represents the cost of the estimated future bad debts and is reported as an expense on the income statement. ⊚ ⊚

true false

24) If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. ⊚ true ⊚ false

25) One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally records accounts receivable for the net amount expected to be collected. ⊚ true ⊚ false

26) The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable.

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⊚ ⊚

true false

27) Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets. ⊚ true ⊚ false

28) Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense. ⊚ true ⊚ false

29) Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable. ⊚ true ⊚ false

30) Under the allowance method, when a company collects cash from an account previously written off, total assets increase. ⊚ true ⊚ false

31) The aging method for estimating uncollectible accounts considers that a higher percentage of "older" accounts will not be collected compared to "newer" accounts. ⊚ true ⊚ false

32) A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. ⊚ true ⊚ false

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33) A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts may have been too high. ⊚ true ⊚ false

34) A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low. ⊚ true ⊚ false

35) The direct write-off method involves recording an adjusting entry at the end of each period to account for the possibility of future uncollectible accounts. ⊚ ⊚

true false

36) Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible. ⊚ true ⊚ false

37) The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. ⊚ true ⊚ false

38)

The direct write-off method violates the concept of timeliness. ⊚ true ⊚ false

39) Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.

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⊚ ⊚

true false

40) Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. ⊚ true ⊚ false

41)

Notes receivable typically arise from sales to customers. ⊚ true ⊚ false

42)

Notes receivable are assets and are reported in the balance sheet. ⊚ true ⊚ false

43) Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding. ⊚ true ⊚ false

44) A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000. ⊚ true ⊚ false

45) Accrued interest on a note receivable is interest earned by the end of the year but not yet received. ⊚ true ⊚ false

46) Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.

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⊚ ⊚

true false

47) Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period. ⊚ true ⊚ false

48) The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). ⊚ true ⊚ false

49) The receivables turnover ratio equals average accounts receivable divided by net credit sales. ⊚ true ⊚ false

50) A lower receivables turnover ratio generally indicates more effective management of accounts receivable by company managers. ⊚ true ⊚ false

51) The average collection period shows the approximate number of days the average accounts receivable balance is outstanding. ⊚ true ⊚ false

52) The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement. ⊚ true ⊚ false

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53) Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. ⊚ true ⊚ false

54) From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts). ⊚ true ⊚ false

55) From a balance sheet perspective, the percentage-of-receivables method is typically preferred over the percentage-of-credit-sales method because assets (net accounts receivable) are reported closer to the amount of cash we expect to collect. ⊚ true ⊚ false

56) The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 57) Which of the following best describes credit sales? A) Cash sales to customers that are new to the company B) Sales to customers using credit cards C) Sales to customers on account D) Sales with a high risk that the customer will return the product

58)

Credit sales are recorded as:

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A) Debit Cash, credit Deferred Revenue. B) Debit Service Revenue, credit Accounts Receivable. C) Debit Cash, credit Service Revenue. D) Debit Accounts Receivable, credit Service Revenue.

59) A company provides services on account. How will this transaction affect (1) assets, (2) stockholders' equity, and (3) revenues? A) (1) Increase, (2) No effect, (3) Increase B) (1) No effect, (2) Increase, (3) Increase C) (1) Increase, (2) Increase, (3) Increase D) (1) No effect, (2) No effect, (3) No effect

60)

Which of the following best describes accounts receivable?

A) The amounts owed by a company to its vendors for purchases of goods or services on account B) The amount of cash collected by a company from its customers from the sale of goods or services on account C) The amounts owed to a company by its customers from the sale of goods or services on account D) The amount of cash not expected to be collected by a company from its customers from the sale of goods or services on account (bad debts)

61) The amounts owed to a company by its customers from the sale of goods or services on account is commonly referred to as: A) Cash. B) Accounts receivable. C) Revenue. D) Accounts payable.

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62)

What is the primary disadvantage of extending credit to customers? A) Delay or failure to collect cash B) Lower profitability C) Lower revenues D) Reduced operating efficiency

63)

What is the likely advantage of extending credit to customers? A) Lower accounts receivable B) Increased sales C) Reduced amounts owed to creditors D) Fewer expenses

64) What is (are) the condition(s) that must exist for a sale and the related receivable to be recognized? A) Collection of cash is probable. B) The company must have collected cash from at least one previous sale to the customer. C) Goods or services have been provided to the customer. D) Two, but not all, of the answer choices describe conditions that must exist for a sale and the related receivable to be recognized.

65) When a company provides services on account, the transaction would affect the balance sheet by increasing: A) Deferred Revenue. B) Service Revenue. C) Accounts Receivable. D) Cash.

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66) When a company provides services on account, the transaction would affect the income statement by increasing: A) Deferred Revenue. B) Service Revenue. C) Accounts Receivable. D) Cash.

67)

Which of the following items are classified as receivables? A) Tax refund claims B) Amounts owed by customers C) Amounts loaned and expected to be collected D) All of the other answers are classified as receivables

68) When a company uses a trade discount to provide an incentive to larger customers to purchase from the company, it records the sales transaction at: A) The listed price of the product or service. B) With a contra revenue account. C) The listed price minus the trade discount. D) The listed price minus an estimate of the amount it will not collect from its customers.

69)

A trade discount results in: A) A contra revenue account being recorded. B) A contra asset being recorded. C) Customers delaying cash payment. D) Revenue being recorded for the discounted price.

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70) A company provided care to a patient worth $1,200. Because the patient was over the age of 65, the company granted the patient a 20% discount and the customer paid the correct amount in cash. How would the company record the service transaction? Transaction A. A.

Account Title Cash

Debit 960

Credit

Service Revenue B.

B. B.

960

Cash

960

Trade Discount

240

Service Revenue C.

Cash

1,200 1,200

Service Revenue D.

Cash

1,200 1,200

Trade Discount

240

Service Revenue

960

A) Option A B) Option B C) Option C D) Option D

71) When customers purchase goods on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a: A) Bad debt. B) Sales discount. C) Sales return. D) Sales allowance.

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72) Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers. During March, Garber provided $4,000 of plumbing services to Red Oak, Incorporated and $1,500 of services to Cyril, Incorporated. Each of these customers was granted credit terms of 2/10, n/30. If both customers paid for the plumbing services within the discount period, what was the amount of net revenues for these two transactions? A) $4,486 B) $4,606 C) $5,500 D) $4,312 E) $4,486 F) $4,606

73) On July 8, Angstrom, Incorporated sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Angstrom record on July 15? Transaction A. A.

Account Title Cash

Debit 60,000

Accounts Receivable B.

Cash

60,000 58,800

Accounts Receivable C.

C. C.

58,800

Cash

58,800

Sales Discounts

1,200

Accounts Receivable D.

Cash

Credit

60,000 60,000

Sales Discounts

1,200

Sales Revenue

58,800

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A) Option A B) Option B C) Option C D) Option D

74) On March 17, Jackal Lumber sold building materials to Frendo Limited for $15,000 with terms of 3/10, n/20. What amount did Jackal record as revenue on March 25 when Frendo paid for the building materials? A) $15,000 B) $14,550 C) $15,450 D) $0

75) A company collects a customer's account within the discount period. How will this transaction affect (1) assets, (2) stockholders' equity, and (3) net revenues? A) (1) Decrease, (2) Decrease, (3) Decrease B) (1) Increase, (2) Increase, (3) Increase C) (1) Increase, (2) Increase, (3) No effect D) (1) No effect, (2) No effect, (3) No effect

76) On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10? Transaction A. A.

Account Title Accounts Receivable

Debit 7,840

Sales Revenue B.

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Accounts Receivable Sales Revenue

Credit

7,840 8,000 8,000

Accounts Receivable

Sales Discounts

Sales Revenue D.

Accounts Receivable

7,840 160 8,000 8,000

Sales Discounts

160

Sales Revenue

7,840

A) Option A B) Option B C) Option C D) Option D

77) On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17? Transaction A. A.

Account Title Cash

Debit 7,840

Accounts Receivable B.

Cash Sales Discounts

7,840 7,840 160

Accounts Receivable C.

Cash Sales Revenue

8,000 7,840 160

Accounts Receivable D.

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Cash Accounts Receivable

Credit

8,000 8,000 8,000

A) Option A B) Option B C) Option C D) Option D

78) On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5? Transaction A. A.

Account Title Cash

Debit 7,840

Accounts Receivable B.

Cash Sales Discounts

7,840 7,840 160

Accounts Receivable C.

Cash Sales Revenue

8,000 7,840 160

Accounts Receivable D.

Cash Accounts Receivable

Credit

8,000 8,000 8,000

A) Option A B) Option B C) Option C D) Option D

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79) Oswego Clay Pipe Company provides services of $46,300 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12? Transaction A. A.

Account Title Accounts Receivable

Debit 45,837

Sales Revenue B.

Accounts Receivable

Sales Revenue

Sales Discounts C.

Accounts Receivable

45,837 46,300 45,837 463 46,300

Sales Revenue D.

Accounts Receivable

Sales Discounts

Sales Revenue

Credit

46,300 46,300 463 46,763

A) Option A B) Option B C) Option C D) Option D

80) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12? Transaction A. A.

Account Title Accounts Receivable

Debit 46,000

Sales Revenue B.

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Accounts Receivable

Credit

46,000 46,000

Sales Revenue

Sales Discounts C.

Accounts Receivable

45,540 460 45,540

Sales Revenue D.

Accounts Receivable

Sales Discounts

Sales Revenue

45,540 45,540 460 46,000

A) Option A B) Option B C) Option C D) Option D

81) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date? Transaction A. A.

Account Title Cash Sales Revenue

Debit 45,540 460

Accounts Receivable B.

Cash Sales Discounts

Accounts Receivable

Interest Revenue C.

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Cash Sales Discounts

Credit

46,000 46,000 460 46,000 460 45,540 460

Accounts Receivable D.

Cash

46,000 46,000

Accounts Receivable

Sales Revenue

45,540 460

A) Option A B) Option B C) Option C D) Option D

82) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date? Transaction A.

Account Title Cash

Debit 46,000

Credit

Accounts Receivable

45,540

Discounts Receivable

460

Cash

Accounts Receivable

Interest Revenue C.

Cash

46,000 45,540 460 46,000

Accounts Receivable D.

Cash

Accounts Receivable

Interest Revenue

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46,000 46,460 46,000 460

A) Option A B) Option B C) Option C D) Option D

83) Which of the following is recorded upon receipt of a payment on April 7, 2024, by a customer who pays a $900 invoice dated March 3, 2024, with terms 2/10, n/60? A) Debit Sales Discounts, $18 B) Credit Purchase Discounts, $18 C) Credit Accounts Receivable, $882 D) Debit Cash, $900

84) Gershwin Wallcovering, Incorporated shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a: A) Sales revenue. B) Sales discount. C) Sales return. D) Sales allowance.

85) Gershwin Wallcovering, Incorporated shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction as: A) Sales Revenue. B) Sales Discounts. C) Sales Returns. D) Sales Allowances.

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86) Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a: A) Sales revenue. B) Sales discount. C) Sales return. D) Sales allowance.

87) Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Tom's Textiles would record: A) A reduction in Sales Revenue. B) An increase in Sales Discounts. C) An increase in Sales Returns. D) An increase in Sales Allowances.

88) A company records a sales return from a credit customer. How will this transaction affect (1) assets, (2) stockholders' equity, and (3) net revenues? A) (1) Decrease, (2) Decrease, (3) Decrease B) (1) Decrease, (2) No effect, (3) Decrease C) (1) Decrease, (2) Decrease, (3) No effect D) (1) No effect, (2) No effect, (3) No effect

89) year:

A company had the following information taken from various accounts at the end of the

Sales discounts Deferred revenues Total revenues Purchase discounts Sales allowances Accounts receivable

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$ 41,000 32,000 459,000 15,000 35,000 205,000

What was the company's net revenues for the year? A) $368,000 B) $434,000 C) $383,000 D) $437,000

90)

A company has the following information:

Total revenues Sales returns and allowances Sales discounts Ending inventory

$860,000 50,000 30,000 100,000

What is the amount of net revenues for the company? A) $330,000 B) $230,000 C) $680,000 D) $780,000

91) A company reported the following amounts at the end of the year: total sales revenue = $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company's net revenues for the year? A) $489,000 B) $485,000 C) $477,000 D) $499,000

92) A company reported the following amounts at the end of the year: total sales revenue = $500,000; sales discounts = $10,000; sales allowances = $15,000; net revenues = $440,000. What amount did the company report for sales returns for the year?

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A) $35,000 B) $475,000 C) $25,000 D) $415,000

93) A company reported the following amounts at the end of the year: total sales revenue = $624,000; sales allowances = $6,000; sales returns = $22,000; net revenues = $588,000. What amount did the company report for sales discounts for the year? A) $28,000 B) $8,000 C) $16,000 D) $22,000

94) Which of the following amounts would be used to calculate net revenues for the current year? A) Total sales revenue for the current year B) Actual sales returns, allowances, and discounts for the current year C) Estimated sales returns, allowances, and discounts for the next year D) All of the other answer choices are correct.

95)

At the end of the current year, a company has the following amounts:

Sales returns Sales allowances Sales discounts

During the current year $ 7,200 12,500 2,400

Estimated for next year $ 8,300 9,100 2,600

For what amount would the company report sales returns in its current-year income statement?

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A) $7,200 B) $9,500 C) $15,500 D) $22,100

96) A company provides goods and services to customers during the year totaling $100,000. Also during the year, customers are granted discounts, returns, and allowances of $20,000. At the end of the year, the company estimates that an additional $5,000 in discounts, returns, and allowances will occur next year as a result of sales transactions this year. What is the amount of net revenues the company will report in its current-year income statement? A) $85,000 B) $75,000 C) $100,000 D) $80,000

97)

Accounts receivable are normally reported at the: A) Present value of future cash receipts. B) Current value plus accrued interest. C) Amount expected to be collected. D) Current value less expected collection costs.

98) The amount of cash that is actually expected to be collected on accounts receivable is referred to as: A) Net accounts receivable. B) Allowance for uncollectible accounts. C) Net income. D) Net revenue.

99) The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as the: Version 1

A) Balance sheet method. B) Sales method. C) Income statement method. D) Aging method.

100) The percentage-of-receivables method for accounting for uncollectible accounts focuses on the: A) Total credit sales for the year. B) Ratio of accounts receivable to sales. C) Net amount expected to be collected. D) Cash flows from sales.

101) Using a balance sheet approach to estimate bad debts involves calculating the desired ending balance in which account? A) Accounts receivable B) Allowance for uncollectible accounts C) Bad debt expense D) Credit sales

102)

The purpose of recording an allowance for uncollectible accounts is to: A) Record the sales returns and allowances. B) Report net sales conservatively. C) Report accounts receivable at the net amount expected to be collected. D) Report accounts receivable for the total amount of sales in the period.

103)

A company's adjusting entry for uncollectible accounts at year-end would include a:

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A) Debit to Bad Debt Expense. B) Credit to Accounts Receivable. C) Debit to Accounts Receivable. D) Debit to Allowance for Uncollectible Accounts.

104) One advantage of the allowance method for accounting for uncollectible accounts is that the company reports: A) Bad debt expense in the same period as the credit sale. B) Greater total sales to customers. C) Fewer returns by customers. D) Greater total cash collected from customers.

105)

The account "Allowance for Uncollectible Accounts" is classified as a(n): A) Liability account in the balance sheet. B) Contra revenue to credit sales in the income statement. C) Expense in the income statement. D) Contra asset to accounts receivable in the balance sheet.

106)

Allowance for Uncollectible Accounts is a(n): A) Expense account. B) Contra asset account. C) Contra revenue account. D) Liability account.

107) The normal balance of the account "Allowance for Uncollectible Accounts" is a _______ because _______.

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A) Debit; it is a contra account to Revenue (a credit account) B) Credit; it is a contra account to Accounts Receivable (a debit account) C) Debit; it is an expense in the income statement D) Credit; it is a contra account to Bad Debt Expense (a debit account)

108) Shupe, Incorporated estimates uncollectible accounts based on the percentage of accounts receivable not expected to be collected. What effect will recording the estimate of uncollectible accounts have on the balance sheet? A) Increase liabilities and decrease stockholders' equity B) Decrease assets and decrease liabilities C) Decrease assets and decrease stockholders' equity D) Increase assets and decrease stockholders' equity

109) Under the allowance method, which of the following does not change the balance of the Accounts Receivable account? A) Returns on credit sales. B) Collections on customer accounts. C) Bad debt expense adjusting entry. D) Write-offs.

110) At the end of its first year of operations, a company has accounts receivable of $250,000. The company expects to collect 90% of these accounts. The company’s year-end adjusting entry for uncollectible accounts would be: A) Debit Bad Debt Expense; Credit Accounts Receivable for $25,000. B) Debit Allowance for Uncollectible Accounts; Credit Bad Debt Expense for $25,000. C) Debit Bad Debt Expense; Credit Allowance for Uncollectible Accounts for $25,000. D) Debit Allowance for Uncollectible Accounts; Credit Accounts Receivable for $25,000.

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111) During its first year of operations, a company has credit sales of $250,000 and cash sales of $100,000. By the end of the year, cash collections on credit sales total $180,000, and the company estimates uncollectible accounts to be 6% of accounts receivable. The amount to record for the year-end adjusting entry for uncollectible accounts would be: A) $15,000. B) $4,200. C) $6,000. D) $10,200.

112) When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method? A) A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts B) A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense C) A debit to Bad Debt Expense and a credit to Accounts Receivable D) A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable

113)

Using the allowance method, writing off an actual bad debt would include a: A) Debit to Bad Debt Expense. B) Credit to Accounts Receivable. C) Debit to Accounts Receivable. D) Credit to Allowance for Uncollectible Accounts.

114) A company accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the balance sheet? A) Increases assets and increases stockholders' equity B) Decreases assets and decreases stockholders' equity C) Decreases assets and decreases liabilities D) No effect on the balance sheet

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115)

Which of the following transactions is recorded with a credit to Accounts Receivable? A) Sale of inventory on account B) Estimating the annual allowance for uncollectible accounts C) Estimating annual sales returns D) Writing off of bad debts

116) Laila, Incorporated accounts for bad debts using the allowance method. On June 1, Laila wrote off Andrew Green's $2,500 account. Based on Laila’s estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Laila's balance sheet at the time of the write-off? A) An increase to stockholders' equity and a decrease to liabilities B) No effect C) An increase to assets and an increase to stockholders' equity D) A decrease to assets and a decrease to stockholders' equity

117) At the beginning of 2024, the balance in a company’s Allowance for Uncollectible Accounts was $31,800. During 2024, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a: A) Debit to Bad Debt Expense. B) Credit to Accounts Receivable. C) Credit to the Allowance for Uncollectible Accounts. D) Debit to Bad Debt Expense; credit to the Allowance for Uncollectible Accounts.

118) The current year's beginning and ending balances for Allowance for Uncollectible Accounts is $23,000 and $27,000, respectively. If the amount of Bad Debt Expense for the year is $18,000, what is the amount written off for the year? A) $14,000 B) $10,000 C) $18,000 D) $22,000

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119)

Collections of accounts receivable that previously have been written off are credited to: A) A Gain account. B) Accounts Receivable. C) Bad Debt Expense. D) Retained Earnings.

120) A company collects cash on an account previously written off. How will this transaction affect (1) assets, (2) stockholders' equity, and (3) net income? A) (1) Increase, (2) Increase, (3) Decrease B) (1) Increase, (2) Increase, (3) Increase C) (1) Increase, (2) Decrease, (3) Increase D) (1) No effect, (2) No effect, (3) No effect

121) At December 31, Gill Company reported accounts receivable of $235,000 and an allowance for uncollectible accounts of $900 (credit) before adjustment. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 5% of accounts receivable. The amount of the adjusting entry for uncollectible accounts would be: A) $10,850. B) $11,750. C) $900. D) $9,560.

122) At December 31, Gill Company reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) before adjustment. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjusting entry for uncollectible accounts would be:

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A) $6,540. B) $7,800. C) $7,140. D) $7,740.

123) At December 31, Gill Company reported accounts receivable of $247,000 and an allowance for uncollectible accounts of $1,700 (debit) before adjustment. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjusting entry for uncollectible accounts would be: A) $7,410. B) $9,110. C) $5,710. D) $1,700.

124) At December 31, Gill Company reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) before adjustment. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjusting entry for uncollectible accounts would be: A) $6,540. B) $7,800. C) $7,140. D) $7,740.

125) At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $319,000 and in Allowance for Uncollectible Accounts of $690 (credit) before adjustment. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 4% of accounts receivable. Bad debt expense for the year should be:

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A) $12,760. B) $13,450. C) $12,070. D) $11,371.

126) At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (credit) before adjustment. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A) $6,220. B) $6,450. C) $5,250. D) $7,190.

127) At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $350,000 and in Allowance for Uncollectible Accounts of $1,080 (debit) before adjustment. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 5% of accounts receivable. Bad debt expense for the year should be: A) $19,081. B) $16,420. C) $1,080. D) $18,580.

128) At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (debit) before adjustment. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:

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A) $6,220. B) $6,450. C) $5,250. D) $7,190.

129) At the end of 2024, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjusting entry, dated December 31, 2024, to record its estimated uncollectible accounts included a: A) Credit to Allowance for Uncollectible Accounts of $12,000. B) Credit to Bad Debt Expense of $7,500. C) Debit to Allowance for Uncollectible Accounts of $7,500. D) Debit to Bad Debt Expense of $7,500.

130) At the end of 2024, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (debit) before adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjusting entry, dated December 31, 2024, to record its estimated uncollectible accounts included a: A) Credit to Allowance for Uncollectible Accounts of $12,000. B) Credit to Bad Debt Expense of $16,500. C) Debit to Allowance for Uncollectible Accounts of $16,500. D) Debit to Bad Debt Expense of $16,500.

131) At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (debit) before adjustment. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. After adjustment, the balance of Allowance for Uncollectible Accounts will be:

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A) $1,000. B) $16,000. C) $14,000. D) $15,000.

132) At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (credit) before adjustment. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. After adjustment, the balance of Allowance for Uncollectible Accounts will be: A) $1,000. B) $15,000. C) $16,000. D) $14,000.

133) At the end of the year, Markingson, Incorporated estimates future bad debts to be $6,500. The Allowance for Uncollectible Accounts has a credit balance of $2,500 before adjustment. What adjusting entry should Markingson record for the estimated bad debts at the end of the year? A) Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500 B) Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000 C) Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000 D) Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000

134) Suppose that the balance of a company's Allowance for Uncollectible Accounts was $6,200 (credit) at the end of the year, prior to adjustment. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of the year. What amount of bad debt expense would appear in the company's year-end income statement?

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A) $38,100 B) $105,700 C) $33,000 D) $50,500

135) Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance? A) The amount of cash collections from customers in the current year was less the amount of cash collections from customers in the prior year. B) The amount of actual uncollectible accounts in the current year was less than the estimate of uncollectible accounts recorded at the end of the prior year. C) The amount of credit sales in the current year was greater than the amount of credit sales recorded in the prior year. D) The amount of actual uncollectible accounts in the current year was greater than the estimate of uncollectible accounts recorded at the end of the prior year.

136) Suppose at the end of the year before any adjusting entries, a company has a balance in Allowance for Uncollectible Accounts of $5,000 (debit). During the year, the company reported the following amounts: Credit sales to customers = $550,000 Cash collections from customers = $540,000 Actual bad debts = $20,000 What was the balance of Allowance for Uncollectible Accounts at the beginning of the year? A) $10,000 B) $20,000 C) $15,000 D) $25,000

137) If the estimate of uncollectible accounts at the end of the current year is too high, which of the following is true in the following year?

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A) Cash collections from customers will be greater than expected. B) The balance of Allowance for Uncollectible Accounts will be a credit prior to any year-end adjusting entry. C) The amount reported for Bad Debt Expense will be less than the ending balance of Allowance for Uncollectible Accounts after the year-end adjusting entry is recorded. D) All of the other answers are true in the following year.

138) On December 31, 2024, a company had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $47,000 and $1,700, respectively. During 2025, the company wrote off $750 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $5,000 at December 31, 2025. Bad debt expense for 2025 would be: A) $7,450. B) $750. C) $3,550. D) $4,050.

139) On December 31, 2024, a company had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $48,400 and $940, respectively. During 2025, the company wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2025. Bad debt expense for 2025 would be: A) $320. B) $1,140. C) $820. D) $1,020.

140) On December 31, 2024, a company had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $69,000 and $1,275, respectively. During 2025, the company wrote off $2,450 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $5,250 at December 31, 2025. Bad debt expense for 2025 would be:

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A) $6,425. B) $1,275. C) $5,250. D) $4,075.

141) On December 31, 2024, a company had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2025, the company wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2025. Bad debt expense for 2025 would be: A) $1,280. B) $1,465. C) $1,420. D) $1,140.

142)

For accounts receivable, the longer an account is outstanding, the: A) Better the customer. B) More likely it will prove uncollectible. C) More likely the customer will return. D) Higher probability of it being collected.

143) The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the: A) Activity method. B) Realization method. C) Direct write-off method. D) Aging method.

144)

When using an aging method for estimating uncollectible accounts:

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A) Older accounts are considered less likely to be collected. B) The number of days the account is past due is not considered. C) Older accounts are considered more likely to be collected. D) No estimate of uncollectible accounts is recorded.

145) Compared to other methods of estimating uncollectible accounts, the aging of accounts receivable method tends to: A) Be more accurate. B) Result in the highest net income. C) Result in the lowest net income. D) Recognize bad debts earlier.

146) On December 31, 2024, a company has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before adjustment. The company also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts: Age Group (days past due) 0 to 30 31 to 60 61 to 90

Accounts Receivable $ 50,000 $ 20,000 $ 10,000

Estimated Percent Uncollectible 5% 10% 20%

What is the amount of bad debt expense to be reported in the financial statements for 2024 using the aging method? A) $6,500 B) $1,500 C) $5,000 D) $8,000

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147) A company had the following balances on December 31, 2024, before adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below: Age Group (days past due) Not yet due 0 to 30 31 to 60 More than 60

Accounts Receivable $ 50,000 $ 20,000 $ 18,000 $ 12,000

Estimated Percent Uncollectible 4% 8% 10% 40%

What amount of bad debt expense would the company report in its financial statements dated December 31, 2024? A) $10,200 B) $12,800 C) $15,300 D) $6,100

148)

A company creates the following accounts receivable aging report at the end of the year: Age

Amount

Less than 30 days 31 to 60 days More than 60 days

$ 6,000 $ 4,000 $ 2,000

Estimated Percent Uncollectible 5% 10% 25%

Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $500. The year-end adjusting entry would include a: A) Credit to Allowance for Uncollectible Accounts for $1,200. B) Debit to Bad Debt Expense for $700. C) Debit to Bad Debt Expense for $1,700. D) Debit to Bad Debt Expense for $1,200.

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149) A company recorded credit sales of $816,000, of which $580,000 is not yet due, $170,000 is past due for up to 180 days, and $66,000 is past due for more than 180 days. Under the aging of receivables method, the company expects it will not collect 6% of the amount not yet due, 20% of the amount past due for up to 180 days, and 27% of the amount past due for more than 180 days. The allowance account had a debit balance of $2,200 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A) $86,620 B) $34,800 C) $88,820 D) $101,720

150) A company recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables method, the company expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A) $29,000 B) $28,000 C) $27,000 D) $26,000

151) A company uses the aging of receivables method. During the year, the company recorded credit sales of $620,000. Before adjusting entries at year-end, the company has accounts receivable of $390,000, of which $58,000 is past due, and the allowance account had a credit balance of $2,900. The company expects it will not collect 5% of the amount not yet past due and 29% of the past due accounts. Which of the following adjusting entries will the company record at year-end? Transaction A. A.

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Account Title Bad Debt Expense Allowance for Uncollectible Accounts

Debit 33,420

Credit

33,420

Bad Debt Expense

Allowance for Uncollectible Accounts Bad Debt Expense

Allowance for Uncollectible Accounts Allowance for Uncollectible Accounts

36,320 36,320 30,520 30,520 30,520

Bad Debt Expense

30,520

A) Option A B) Option B C) Option C D) Option D

152) A company uses the aging of receivables method. During the year, the company recorded credit sales of $500,000. Before adjusting entries at year-end, the company has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. The company expects it will not collect 5% of the amount not yet past due and 20% of the past due accounts. Which of the following adjusting entries will the company record at year-end? Transaction A. A.

Account Title Bad Debt Expense

Allowance for Uncollectible Accounts Bad Debt Expense

Allowance for Uncollectible Accounts Allowance for Uncollectible Accounts

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Bad Debt Expense

Debit 22,500

Credit

22,500 25,000 25,000 20,000 20,000 20,000 20,000

A) Option A B) Option B C) Option C D) Option D

153)

The following information pertains to a company at the end of December:

Credit Sales

$ 20,000

Accounts Payable

10,000

Accounts Receivable

11,100

Allowance for Uncollectible Accounts Cash Sales

400 credit 20,000

The company uses the aging method and estimates it will not collect 7% of accounts receivable not yet due, 16% of receivables up to 30 days past due, and 48% of receivables greater than 30 days past due. The accounts receivable balance of $11,100 consists of $8,000 not yet due, $1,700 up to 30 days past due, and $1,400 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense? A) $272 B) $945 C) $1,104 D) $400

154)

The following information pertains to a company at the end of December:

Credit Sales

$ 60,000

Accounts Payable

10,000

Accounts Receivable

7,000

Allowance for Uncollectible Accounts Cash Sales

400 credit 20,000

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The company uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables up to 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 up to 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense? A) $400 B) $470 C) $870 D) $1,270

155)

The direct write-off method is used when: A) Uncollectible accounts are not anticipated or are immaterial. B) A company elects to use this method as one of several alternatives. C) A company has greater cash outflows than cash inflows. D) A company expects excessive sales returns.

156) Which method isnot allowed under generally accepted accounting principles (GAAP) for the purpose of accounting for uncollectible accounts? A) Allowance method B) Direct write-off method C) Aging method D) Percentage-of-receivables method

157) The direct write-off method is not normally an acceptable method for GAAP because it fails to report: A) Revenue from the sale of goods or services to customers. B) Cash collected from customers. C) Accounts receivable for the net amount expected to be collected. D) The amounts receivable from customers.

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158) The direct write-off method is generally not permitted for financial reporting purposes because: A) Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income. B) This method is primarily used for tax purposes. C) It is too difficult to accurately estimate future bad debts. D) Accounts receivable are not reported for the net amount expected to be collected.

159)

Which accounting concept does the direct write-off method violate? A) Total assets equal total liabilities plus total stockholders' equity B) Recording amount owed within one year as current liabilities C) Recognizing revenue when goods or services are provided to customers D) Timeliness in recognizing uncollectible accounts

160) If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false? A) An allowance account is not used. B) No adjusting entry is recorded at the end of the year to estimate future uncollectible accounts. C) Accounts receivable will be reported at the net amount expected to be collected. D) Bad debt expense is recorded at the time an actual bad debt is written-off.

161) Under the direct write-off method, what adjusting entry is recorded at the end of the year to account for possible future bad debts? A) Debit Bad Debt Expense B) Debit Allowance for Uncollectible Accounts C) Credit Accounts Receivable D) No adjusting entry is recorded

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162) Under the direct write-off method, what entry is recorded at the time an actual bad debt occurs? A) Debit Bad Debt Expense; credit Allowance for Uncollectible Accounts B) Debit Allowance for Uncollectible Accounts; credit Accounts Receivable C) Debit Bad Debt Expense; credit Accounts Receivable D) No entry is recorded

163)

The distinction between the direct write-off method and the allowance method is the: A) Year in which cash is collected from customers. B) Cumulative amount of bad debt expense reported across years. C) Customers to which goods or services are provided. D) Amount of bad debt expense reported in each year.

164)

The direct write-off method is an acceptable method for what purpose? A) Issuing financial statements to stockholders B) Tax reporting C) Compliance with generally accepted accounting principles (GAAP) D) Financial reporting

165)

The primary difference between a note receivable and an account receivable is: A) A note receivable cannot be classified as a current asset. B) Borrowers have the option of not paying a note receivable. C) An account receivable is more likely to be collected. D) A note receivable is evidenced by a written debt instrument.

166) A(n) ______ receivable is an informal credit arrangement with trade customers, whereas a(n) ______ receivable is a formal signed credit arrangement between a creditor and a debtor.

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A) Account; Note B) Revenue; Note C) Note; Account D) Allowance; Stock

167)

A note receivable is reported in the balance sheet: A) Always as a current asset. B) Always as a long-term asset. C) As either a current asset or long-term asset depending on the expected collection date. D) As a contra asset.

168) Suppose a customer is unable to pay its account on time, so the company accepts a sixmonth interest-bearing note receivable to replace the customer's account receivable. What effect will accepting the note receivable have on the company's financial statements at the time of acceptance? A) Total assets increase B) Total assets decrease C) No change in total assets D) Total revenues increase

169) Suppose a customer is unable to pay its account on time, so the company accepts a sixmonth interest-bearing note receivable to replace the customer's account receivable. Over the next six months, what effect will accepting the note receivable have on the company's financial statements? A) Total assets increase B) Total revenues increase C) Net income increases D) All of the other answer choices describe the financial statement effects that will occur.

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170) A company provided services for $80,000, accepting a 12% note for the services. This transaction would include a: A) Credit to Cash. B) Debit to Sales Discount. C) Debit to Notes Receivable. D) Credit to Notes Receivable.

171) On February 1, 2024, a company lends cash and accepts a $3,800 note receivable that offers 18% interest and is due in six months. How much interest revenue will the company report during 2024? (Do not round intermediate calculations.) A) $359 B) $342 C) $4,104 D) $684

172) On February 1, 2024, a company lends cash and accepts a $10,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will the company report during 2024? A) $1,200 B) $2,400 C) $1,000 D) $600

173) On February 1, 2024, a company lends cash and accepts a $5,000 note receivable that offers 10% interest and is due in six months. What would the company record on August 1, 2024, when the borrower pays the correct amount owed? (Do not round intermediate calculations.) Transaction A.

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Account Title Cash

Debit 5,000

Credit

Interest Revenue

250

Notes Receivable B.

Cash

5,250 5,000

Notes Receivable C.

Cash

5,000 5,250

Interest Revenue

250

Notes Receivable

5,000

D. D.

Cash

5,250

Notes Receivable

5,250

A) Option A B) Option B C) Option C D) Option D

174) On February 1, 2024, a company lends cash and accepts a $20,000 note receivable that offers 10% interest and is due in six months. What would the company record on August 1, 2024, when the borrower pays the correct amount owed? Transaction A. A.

Account Title Cash Interest Revenue

Debit 20,000 1,000

Notes Receivable B.

Cash

21,000 21,000

Notes Receivable C.

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Cash Interest Revenue

Credit

21,000 21,000 1,000

Notes Receivable D.

Cash Notes Receivable

20,000 22,000 22,000

A) Option A B) Option B C) Option C D) Option D

175) On September 1, 2024, Middleton Corporation lends cash and accepts a $2,800 note receivable that offers 6% interest and is due in six months. How much interest revenue will Middleton Corporation report during 2024? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.) A) $168 B) $56 C) $392 D) $448

176) On September 1, 2024, Middleton Corporation lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corporation report during 2024? A) $20 B) $40 C) $30 D) $60

177) On September 1, 2024, Middleton Corporation lends cash and accepts a $19,000 note receivable that offers 18% interest and is due in six months. How much interest revenue will Middleton Corporation report during 2025? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)

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A) $873 B) $1,167 C) $615 D) $570

178) On September 1, 2024, Middleton Corporation lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corporation report during 2025? A) $20 B) $40 C) $30 D) $60

179) On August 1, 2024, a company lends cash and accepts a $6,000 note receivable that offers 12% interest and is due in nine months. How would the company record the year-end adjusting entry to accrue interest in 2024? (Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Transaction A. A.

Interest Receivable

720 720 370

Interest Revenue D.

Interest Receivable Interest Revenue

Credit

370

Interest Revenue C.

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Debit 370

Interest Receivable B.

Account Title Interest Revenue

370 300 300

A) Option A B) Option B C) Option C D) Option D

180) On August 1, 2024, a company lends cash and accepts a $6,000 note receivable that offers 8% interest and is due in nine months. How would the company record the year-end adjusting entry to accrue interest in 2024? Transaction A. A.

Account Title Interest Revenue

Debit 360

Interest Receivable B.

Interest Receivable

360 480

Interest Revenue C.

Interest Receivable

480 360

Interest Revenue D.

Interest Receivable

Credit

360 200

Interest Revenue

200

A) Option A B) Option B C) Option C D) Option D

181) On July 1, 2024, a company lends cash and accepts a $9,000 note receivable that offers 10% interest and is due in nine months. How would the company record the transaction on April 1, 2025, when the borrower pays the correct amount owed? Assume the company has a December 31 year end. Transaction

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Account Title

Debit

Credit

Cash

9,675

Notes Receivable

9,000

Interest Revenue

675

Cash

9,675

Notes Receivable

9,000

Interest Revenue

225

Interest Receivable

450

Cash

Notes Receivable

Interest Receivable D.

Cash Notes Receivable

9,675 9,000 675 9,675 9,675

A) Option A B) Option B C) Option C D) Option D

182) On January 1, 2024, a company. lends $5,000 to an employee and accepts a 24-month, 10% note. At the end of 2024, what effect will the adjusting entry for accrued interest revenue have on the the company’s financial statements? A) Decreases assets B) Decreases revenue C) Increases expense D) Increases stockholders' equity

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183) On October 1, 2024, Heatherfield, Incorporated lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Heatherfield will report in its 2024 income statement? A) $750 B) $1,500 C) $4,500 D) $6,000

184) On October 1, 2024, Heatherfield, Incorporated lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Heatherfield will report in its 2025 income statement? A) $0 B) $1,500 C) $4,500 D) $6,000

185) On October 1, 2024, Heatherfield, Incorporated lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Heatherfield will report in its 2026 income statement? A) $0 B) $4,500 C) $6,000 D) $12,000

186) On September 1, 2024, a company accepts a $9,000, 12-month note receivable. For 2024, the company reports interest revenue of $240. How much interest revenue will the company report in its 2025 income statement?

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A) $240 B) $480 C) $720 D) The answer cannot be determined with the information given.

187) On August 1, 2024, a company accepts an $8,000, 9-month note receivable. For 2024, the company reports interest revenue of $200. What is the interest rate on the note? A) 5% B) 6% C) 7% D) 8%

188) On September 1, 2024, a company lends $50,000 to a customer with 10% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, but no other adjusting entries are recorded in 2024. At the end of 2024, which of the following is true? A) Assets are overstated. B) Revenues are understated. C) Expenses are understated. D) All amounts are accurately stated.

189) On September 1, 2024, a company lends $50,000 to a customer with 9% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, and the following year-end adjusting entry is recorded on December 31, 2024: Account Title Interest Receivable Interest Revenue

Debit 4,500

Credit

4,500

At the end of 2024, which of the following is true?

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A) Revenues are understated. B) Liabilities are understated. C) Assets are overstated. D) All amounts are accurately stated.

190) The amount of a company's receivables is influenced by several variables, including all of the following except: A) The level of credit sales. B) The nature of the good or service sold. C) The credit and collection policies. D) Dividend payments to stockholders.

191)

The formula for the receivables turnover ratio is: A) Average accounts receivable divided by average total assets. B) Net credit sales divided by average accounts receivable. C) Net credit sales divided by average total assets. D) Average accounts receivable divided by net credit sales.

192)

The receivables turnover ratio indicates:

A) How efficient the company is at managing sales and inventory. B) The relationship between sales and cost of goods sold. C) The number of times during a year that the average accounts receivables were collected. D) The relationship between cash sales and credit sales.

193)

An increase in a company's receivables turnover ratio typically means the company is:

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A) Having trouble paying debts as they become due. B) Less profitable. C) More effectively granting credit to and collecting cash from customers. D) Losing customers to its competitors.

194) At the beginning of the year, a company had accounts receivable of $220,000. At the end of the year, the company had accounts receivable of $340,000. During the year, the company had total sales of $1,000,000, 70% of which were credit sales. What is the receivables turnover ratio for the year? A) 2.50 B) 3.57 C) 2.94 D) 0.40

195)

A company reports the following information for the year:

Net credit sales Average accounts receivable Cash collections on credit sales

$ 100,000 14,000 86,000

What is the company's receivables turnover ratio? (Round your answer to 1 decimal place.) A) 7.1 B) 0.1 C) 6.1 D) 13.1

196)

A company reports the following information for the year:

Net credit sales Average accounts receivable Cash collections on credit sales

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$ 120,000 20,000 100,000

What is the company's receivables turnover ratio? A) 6.0 B) 5.0 C) 1.2 D) 0.2

197) A company reports net credit sales for the year of $312,000. The company's accounts receivable balance at the beginning of the year equaled $48,000 and the balance at the end of the year equaled $58,000. What is the receivables turnover ratio? (Round your answer to 1 decimal place.) A) 5.9 B) 5.4 C) 1.2 D) 6.5

198) A company reports net credit sales for the year of $240,000. The company's accounts receivable balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is the receivables turnover ratio? A) 12.0 B) 9.6 C) 8.0 D) 1.5

199) A company reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference? A) The company is selling to high-risk customers. B) The company has effective procedures related to selling goods on account. C) The company provides superior goods and services. D) The company allows customers too long to pay.

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200) A company's ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management's ability to: A) Collect cash from customers. B) Effectively market its goods and services. C) Generate profits for investors. D) Reduce costs of selling goods and services to customers.

201)

The formula for average collection period is: A) 365 days divided by the receivable turnover ratio. B) 365 days divided by net credit sales. C) 365 days divided by average accounts receivable. D) Net credit sales divided by average accounts receivable.

202) What is the most likely reason for a company to have an increase in average collection period? A) The company has incurred additional marketing expenses to attract customers. B) Customers are paying in a timelier manner. C) The company has tightened its credit policies for its customers. D) The company has become more lenient in its credit policies and is extending credit terms to maintain customers.

203)

A company has the following information:

Net credit sales = $400,000 Net income = $100,000 Average total assets = $80,000 Average accounts receivable = $20,000 What is the company's average collection period (rounded to the nearest whole day)?

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A) 73 days B) 18 days C) 9 days D) 5 days

204) The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as the: A) Balance sheet method. B) Method most used by companies. C) Income statement method. D) Percentage-of-receivables method.

205)

The income statement method for estimating bad debts uses a percentage of: A) Credit sales. B) Accounts receivable. C) Allowance for uncollectible accounts. D) Bad debt expense.

206) Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts? A) The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts. B) This method is referred to as the balance sheet method. C) This method does not allow for future uncollectible accounts. D) Under this method, bad debt expense is recorded at the time of an actual bad debt.

207)

Which of the following provides an accurate match?

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A) Percentage-of-receivables method––Assets are reported closer to the net amount of cash expected to be collected. B) Allowance method––Receivables are reported net of estimated uncollectible accounts. C) Percentage-of-credit-sales method––Revenues and expenses are better matched. D) All of the other answer choices provide accurate matches.

208)

The following information pertains to a company at the end of the year:

Credit Sales

$ 177,500

Accounts Payable

29,000

Accounts Receivable

35,500

Allowance for Uncollectible Accounts Cash Sales

1,400 debit 7,200

The company uses the percentage-of-credit-sales method and estimates that 6% of the credit sales are uncollectible. After the year-end adjusting entry, what amount of bad debt expense would the company report for the year? A) $10,650 B) $12,050 C) $13,150 D) $9,250

209)

The following information pertains to a company at the end of the year:

Credit Sales

$ 150,000

Accounts Payable

20,000

Accounts Receivable

30,000

Allowance for Uncollectible Accounts Cash Sales

800 debit 5,500

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The company uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjusting entry, what amount of bad debt expense would the company report for the year? A) $1,200 B) $2,200 C) $3,000 D) $3,800

210)

The following information pertains to a company at the end of the year:

Credit Sales

$ 89,000

Accounts Payable

12,300

Accounts Receivable

7,700

Allowance for Uncollectible Accounts Cash Sales

1,400 credit 28,000

The company uses the percentage-of-credit-sales method and estimates 2% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjusting entry? A) $3,180 B) $3,740 C) $1,780 D) $380

211)

The following information pertains to a company at the end of the year:

Credit Sales

$ 60,000

Accounts Payable

10,000

Accounts Receivable

7,000

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Allowance for Uncollectible Accounts Cash Sales

400 credit 20,000

The company uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjusting entry? A) $600 B) $1,000 C) $200 D) $1,200

212) Using the income statement method for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjusting entry for estimated uncollectible accounts will require a: A) Credit to Accounts Receivable for $2,000. B) Debit to Bad Debt Expense for $10,000. C) Debit to Allowance for Uncollectible Accounts for $10,000. D) Credit to Bad Debt Expense for $8,000.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 213) Give three examples of contra revenue accounts and the transactions with which they are associated.

214) Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes.

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215) What does it mean to report accounts receivable at the net amount expected to be collected?

216) Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable for financial reporting purposes?

217) Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?

218) How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?

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Answer Key Test name: Chap 05_6e_Spiceland 1) FALSE An invoice is a source document (rather than a ledger). 2) TRUE 3) TRUE 4) FALSE A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue. 5) TRUE 6) FALSE Trade discounts represent a reduction in the listed price of a good or service. 7) TRUE 8) TRUE 9) FALSE 2/10 indicates a 2% discount (or $20 in this example) if payment is made within 10 days. 10) TRUE 11) FALSE Sales Discounts is a contra revenue account. 12) TRUE 13) FALSE A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable. 14) FALSE Sales Returns is a contra revenue account.

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15) TRUE 16) FALSE Trade discounts reduce revenue directly, while sales returns, sales allowances, and sales discounts are recorded in separate contra revenue accounts and subtracted when calculating net revenues. 17) TRUE 18) FALSE The net amount is the amount we expect to collect from customers. It represents the difference between total accounts receivable and the allowance for uncollectible accounts. 19) TRUE 20) FALSE The adjusting entry has the effect of (1) reducing assets and (2) increasing expenses. An increase in expenses reduces net income and retained earnings. 21) TRUE 22) TRUE 23) TRUE 24) TRUE 25) FALSE This is generally an advantage of the allowance method. 26) TRUE 27) FALSE Writing off an account receivable has no effect on total assets. 28) FALSE Writing off an account receivable has no effect on expenses. 29) TRUE 30) FALSE

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Collecting cash on an account previously written off has no effect on total assets. 31) TRUE 32) FALSE Estimated uncollectible accounts = ($40,000 × 5%) + ($5,000 × 20%) = $3,000. 33) TRUE 34) TRUE 35) FALSE The direct write-off method records an adjusting entry on the date the account is known to be uncollectible. 36) TRUE 37) TRUE 38) TRUE 39) FALSE Under the direct write-off method, future uncollectible accounts are not estimated. 40) TRUE 41) FALSE Notes receivable typically arise from loans to other entities including affiliated companies; loans to stockholders and employees; and only occasionally from the sale of merchandise or services. 42) TRUE 43) TRUE 44) FALSE Interest = face value ($10,000) × annual interest rate (10%) × fraction of year (6/12) = $500. 45) TRUE 46) FALSE Version 1

Accrued interest increases assets and increases revenues. 47) TRUE 48) TRUE 49) FALSE The receivables turnover ratio equals net credit sales divided by average accounts receivable. 50) FALSE A higher receivables turnover ratio generally indicates more effective management of accounts receivable. 51) TRUE 52) FALSE This method is referred to as the income statement method because the estimate of bad debts is based on an income statement amount—credit sales. 53) FALSE Bad debt expense will typically differ between the two methods. 54) TRUE 55) TRUE 56) TRUE 57) C 58) D 59) C 60) C 61) B 62) A 63) B 64) D 65) C 66) B 67) D Version 1

68) C Because the company is entitled to receive only the discounted amount (that is, the listed price minus the trade discount), it records the sales transaction at this lower amount. 69) D 70) A 71) B 72) B 72) F 72) B 72) F Trade discount = $4,000 × 20% = $800 Sales revenue = ($4,000 − $800) + $1,500 = $4,700 Sales discount = $4,700 × 2% = $94 Net revenues = $4,700 − $94 = $4,606 73) C Sales discount = $600 × 100 printers × 2% = $1,200. 74) D No revenue recorded on March 25. The revenue would have been recorded on March 17. 75) A 76) B 77) B Sales discount = $8,000 × 2% = $160. 78) D No sales discount is awarded because payment is not received within 10 days. 79) C No further explanation details are available for this problem. 80) A Version 1

81) C $46,000 × 1% = $460; $46,000 − $460 = $45,540 82) C No discount is recorded because payment is made after 15 days. 83) D No discount is recorded because payment is made after 10 days. 84) D 85) D 86) C 87) C 88) A 89) C Net revenues = $459,000 − $41,000 − $35,000 = $383,000 90) D Net revenues = $860,000 − $50,000 − $30,000 = $780,000 91) C Net revenues = $550,000 − $12,000 − $44,000 − $17,000 = $477,000 92) A Sales returns = $500,000 − $440,000 − $10,000 − $15,000 = $35,000 93) B Sales discounts = $624,000 − $588,000 − $6,000 − $22,000 = $8,000 94) D 95) C Sales returns = $7,200 + $8,300 = $15,500 96) B Net revenues = $100,000 − $20,000 − $5,000 = $75,000 97) C 98) A 99) A 100) C Version 1

101) B 102) C 103) A 104) A 105) D 106) B 107) B 108) C 109) C 110) C 111) B ($250,000 − $180,000) × 6% = $4,200 112) D 113) B 114) D 115) D 116) B 117) B 118) A Beginning balance ($23,000) + Bad Debt Expense ($18,000) − Ending balance ($27,000) = Actual write-offs ($14,000) 119) B 120) D

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Two entries are recorded in this situation. The first entry simply reverses a portion of the previous entry that the company made to write off the account (debit Accounts Receivable and credit the Allowance for Uncollectible Accounts). The second entry records the collection of the account receivable (debit Cash and credit Accounts Receivable). In both entries, the amounts have offsetting effects on total assets. Therefore, collecting cash on an account previously written off also has no effect on total assets and no effect on stockholders’ equity or net income. 121) A ($235,000 × 5%) − $900 = $10,850 122) A ($238,000 × 3%) − $600 = $6,540 123) B ($247,000 × 3%) + $1,700 = $9,110 124) D ($238,000 × 3%) + $600 = $7,740 125) C ($319,000 × 4%) − $690 = $12,070 126) C ($311,000 × 2%) − $970 = $5,250 127) D ($350,000 × 5%) + $1,080 = $18,580 128) D ($311,000 × 2%) + $970 = $7,190 129) D Bad Debt Expense = $12,000 − $4,500 = $7,500 130) D Bad Debt Expense = $12,000 + $4,500 = $16,500 131) D ($300,000 × 5%) = $15,000 Version 1

132) B ($300,000 × 5%) = $15,000 133) B Bad Debt Expense = $6,500 − $2,500 = $4,000 134) A Bad Debt Expense = $44,300 − $6,200 = $38,100 135) D 136) C Beginning ($15,000) = Ending before adjustment (−$5,000) + Actual bad debts ($20,000) 137) D 138) D Bad debt expense = $5,000 − ($1,700 − $750) = $4,050 139) D Bad debt expense = $1,140 − ($940 − $820) = $1,020 140) A Bad debt expense = $5,250 − ($1,275 − $2,450) = $6,425 141) C Bad debt expense = $1,280 − ($1,325 − $1,465) = $1,420 142) B 143) D 144) A 145) A 146) D Estimated uncollectible = ($50,000 × 5%) + ($20,000 × 10%) + ($10,000 × 20%) = $6,500 Bad Debt Expense = $6,500 + $1,500 = $8,000 147) D

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Estimated uncollectible = ($50,000 × 4%) + ($20,000 × 8%) + ($18,000 × 10%) + ($12,000 × 40%) = $10,200 Bad debt expense = $10,200 − $4,100 = $6,100 148) C Estimated uncollectible = ($6,000 × 5%) + ($4,000 × 10%) + ($2,000 × 25%) = $1,200 Bad Debt Expense = $1,200 + $500 = $1,700 149) A ($580,000 × 6%) + ($170,000 × 20%) + ($66,000 × 27%) = $86,620. 150) D ($600,000 × 1%) + ($100,000 × 10%) + ($50,000 × 20%) = $26,000 151) C ($332,000 × 5%) + ($58,000 × 29%) − $2,900 = $30,520. 152) C ($250,000 × 5%) + ($50,000 × 20%) − $2,500 = $20,000 153) C Bad Debt Expense = ($8,000 × 7%) + ($1,700 × 16%) + ($1,400 × 48%) − $400 = $1,104 154) B Bad Debt Expense = ($3,500 × 2%) + ($2,000 × 10%) + ($1,500 × 40%) − $400 = $470 155) A 156) B 157) C 158) D 159) D 160) C 161) D 162) C 163) D Version 1

164) B 165) D 166) A 167) C 168) C 169) D 170) C 171) B Interest revenue = $3,800 × 18% × 6 / 12 = $342 172) D Interest revenue = $10,000 × 12% × 6 / 12 = $600 173) C Interest Revenue = $5,000 × 10% × 6 / 12 = $250 174) C Interest Revenue = $20,000 × 10% × 6 / 12 = $1,000. 175) B Interest revenue = $2,800 × 6% × 4 / 12 = $56 176) B Interest revenue = $1,000 × 12% × 4 / 12 = $40. 177) D Interest revenue = $19,000 × 18% × 2 / 12 = $570 178) A Interest revenue = $1,000 × 12% × 2 / 12 = $20 179) D Interest Revenue = $6,000 × 12% × 5 / 12 = $300. 180) D Interest revenue = $6,000 × 8% × 5 / 12 = $200. 181) B Interest Revenue (for 2025) = $9,000 × 10% × 3 / 12 = $225. Interest Receivable (from 2024) = $9,000 × 10% × 6 / 12 = $450. Version 1

182) D 183) B $100,000 × 6% × 3 / 12 = $1,500 184) D $100,000 × 6% × 12 / 12 = $6,000 185) B $100,000 × 6% × 9 / 12 = $4,500 186) B Interest revenue in 2025 = $240 × (8 months in 2025 / 4 months in 2024) = $480. There are twice as many months occurring in 2025 (8 months) as in 2024 (4 months) on the 12-month note, so interest revenue will be twice as much in 2025. 187) B Interest = $8,000 × Rate × 5 / 12 = $200; Rate = 6% 188) B 189) C 190) D 191) B 192) C 193) C 194) A [($1,000,000 × .70) / ($220,000 + $340,000) / 2] = 2.50 195) A Receivables turnover ratio = Net credit sales ($100,000) / Average accounts receivable ($14,000) = 7.1. 196) A Receivables turnover ratio = Net credits sales ($120,000) / Average accounts receivable ($20,000) = 6.0 197) A Version 1

Receivables turnover ratio = Net credits sales ($312,000) / Average accounts receivable [($48,000 + $58,000) / 2] = 5.9 198) B Receivables turnover ratio = Net credit sales ($240,000) / Average accounts receivable [($20,000 + $30,000) / 2] = 9.6 199) B 200) A 201) A 202) D 203) B Turnover ratio = $400,000 / $20,000 = 20 Collection period = 365 days / 20 = 18 days (rounded) 204) C 205) A 206) A 207) D 208) A Bad debt expense = $177,500 × 6% = $10,650 209) C Bad debt expense = $150,000 × 2% = $3,000 210) A Allowance for Uncollectible Accounts = $1,400 + ($89,000 × 2%) = $3,180 211) B Allowance for Uncollectible Accounts = $400 + ($60,000 × 1%) = $1,000 212) B

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213)(Note: Student answers will differ.) A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time. Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service. 214) Companies should account for uncollectible accounts receivable using the allowance method. Under the allowance method, accounts receivable are reported for the net amount expected to be collected. At the end of the current year, estimated future uncollectible accounts are reported in a contra asset account, reducing net accounts receivable. In other words, a company estimates future bad debts and records those estimates as an expense (bad debt expense) and a contra asset (the allowance for uncollectible accounts) in the current period. 215)Net accounts receivable is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts. Net accounts receivable is the amount reported in the balance sheet. 216)The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense. The direct write-off method makes no attempt to estimate future bad debts. Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs. Only the allowance method is allowed for financial reporting purposes.

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217)The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable. The percentageof-credit-sales method estimates future bad debts based on an income statement amount - credit sales. The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus). This is why the percentage-of-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. 218)The receivables turnover ratio equals net credit sales divided by average accounts receivable. The ratio shows the number of times during a year that the average accounts receivable balance is collected (or “turns over”). Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables.

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CHAPTER 6: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match each term with its description. 1.A) Raw materials 2.B) Work-in-process inventory 3.C) Merchandise inventory 4.D) Finished goods 5.E) Service companies 6.F) Manufacturing companies 7.G) Merchandising companies Products that have started the production process but are not yet complete at the end of the period. Companies that purchase inventories that are primarily in finished form for resale to customers. Inventory items for which the manufacturing process is complete. Cost of components that will become part of the finished product but have not yet been used in production. Companies that produce the inventories they sell, rather than buying them from suppliers in finished form. Companies that generate revenues by providing services to their customers rather than selling inventory. Inventory that has been purchased in its finished form but has not yet been sold to customers.

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2) Match each term used in a multiple-step income statement with its description. 1.A) Nonoperating expenses 2.B) Operating expenses 3.C) Net income 4.D) Sales revenue 5.E) Gross profit 6.F) Operating income 7.G) Income before income taxes 8.H) Cost of goods sold Amount recorded from the sale of products and services to customers. Amount of profit after including nonoperating revenues and expenses. Expenses arising from activities that are not part of a company's primary operations. Cost of inventory sold during the period. Profit from primary operations that is a key performance measure for predicting future profit. All revenues minus all expenses. Expenses arising from activities that are part of a company's primary operations. Profit most directly related to the sale of inventory.

3) Match each inventory method with its definition. 1.A) Weighted-average 2.B) LIFO 3.C) Specific identification 4.D) FIFO Assume inventory sold for the year includes the items that were purchased first. Ending inventory represents the actual units not sold during the year. Assume ending inventory for the year includes the items that were purchased first. Assume ending inventory for the year includes a random mixture of all goods available for sale.

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4) Match each term related to inventory methods with its description. 1.A) LIFO reserve 2.B) LIFO conformity rule 3.C) LIFO 4.D) Consistency 5.E) FIFO Results in higher ending inventory during periods of rising prices. LIFO must be used for financial reporting if elected for tax reporting. Additional amount of inventory a company would report if it used FIFO instead of LIFO. Once a company chooses an inventory method, it is not allowed to frequently change to another one. Best matches cost of inventory sold with its related revenue.

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5) Match each term related to recording inventory transactions with its description. 1.A) Sales revenue 2.B) Inventory 3.C) FOB destination 4.D) FOB shipping point 5.E) Perpetual inventory system 6.F) Freight-out 7.G) Periodic inventory system 8.H) Cost of goods sold 9.I) Freight-in Account to credit when inventory is sold. The amount to credit equals the selling price to customer. Recording inventory transactions as they occur. Record inventory purchases at the time inventory departs from the supplier. Account to debit when inventory is sold. Record inventory purchases at the time inventory arrives at the company. The cost of shipping inventory from suppliers. Calculate the balance of inventory once per period. Account to credit when inventory is sold. The amount to credit equals the original cost of inventory. The cost of shipping inventory to customers.

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6) Match each term related to inventory analysis with its description. 1.A) Increases 2.B) Inventory turnover ratio 3.C) Higher 4.D) Average days in inventory 5.E) Decreases 6.F) Gross profit ratio 7.G) Lower The number of times a firm sells its average inventory balance during a reporting period. If a company's cost of inventory decreases and its selling price remains the same, the gross profit ratio ________. The approximate length of time the average inventory is held. When a company purchases inventory at the end of the year and does not sell it, the inventory turnover ratio ________. Typically, the more specialized the inventory item, the ________ the gross profit ratio. A measure of the amount by which the sale of inventory exceeds its cost per dollar of sales. The less frequently a company sells its inventory, the ________ its inventory turnover ratio.

7) At the beginning of 2024, Dalston Incorporated reports inventory of $9,600. During 2024, the company purchases additional inventory for $27,000. At the end of 2024, the cost of inventory remaining is $7,800. Calculate cost of goods sold for 2024.

8) At the beginning of 2024, Dalston Incorporated reports inventory of $9,000. During 2024, the company purchases additional inventory for $25,000. At the end of 2024, the cost of inventory remaining is $8,000. Calculate cost of goods sold for 2024.

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For each company, calculate the missing amount. Company

Sales

Lennon Harrison McCartney Starr

$8,900 8,100 8,800 7,000

10)

Cost of Goods Sold (a) 3,600 3,400 1,400

Gross Profit $4,400 (b) 5,400 5,600

Operating Expenses $2,500 1,800 (c) 2,700

Net Income

Operating Expenses $3,000 2,000 (c) 3,000

Net Income

$1,900 2,700 1,200 (d)

For each company, calculate the missing amount. Company

Sales

Lennon Harrison McCartney Starr

$8,000 9,000 8,000 7,000

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Cost of Goods Sold (a) 3,000 3,000 2,000

Gross Profit $4,000 (b) 5,000 5,000

$1,000 4,000 2,000 (d)

11) Below are some of the items found in a multiple-step income statement: a.Sales revenue b.Net income c.Operating income d.Income before income taxes e.Gross profit Place these items in the order they would appear from first to last.

12) Beasley Incorporated reports the following amounts in its December 31, 2024, income statement. Sales revenue Interest expense Salaries expense Utilities expense

$330,000 Income tax expense 14,000 Cost of goods sold 36,000 Advertising expense 40,000

$37,000 125,000 20,000

Prepare a multiple-step income statement.

13) Beasley Incorporated reports the following amounts in its December 31, 2024, income statement. Sales revenue Interest expense Salaries expense Utilities expense

$300,000 Income tax expense 12,000 Cost of goods sold 35,000 Advertising expense 41,000

$38,000 125,000 24,000

Prepare a multiple-step income statement.

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14) During 2024, a company sells 21 units of inventory. The company has the following inventory purchase transactions for 2024: Date

Transaction

January 1 September 8

Beginning inventory Purchase

Number of Units 14 17

Unit Cost $52 54

Total Cost $728 918 $1,646

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses FIFO.

15) During 2024, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2024: Date January 1 September 8

Transaction Beginning inventory Purchase

Number of Units 15 10 25

Unit Cost $60 62

Total Cost $900 620 $1,520

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses FIFO.

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16) During 2024, a company sells 23 units of inventory. The company has the following inventory purchase transactions for 2024: Date

Transaction

January 1 September 8

Beginning inventory Purchase

Number of Units 17 12

Unit Cost $55 57

Total Cost $935 684 $1,619

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses LIFO.

17) During 2024, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2024: Date January 1 September 8

Transaction Beginning inventory Purchase

Number of Units 15 10

Unit Cost $60 62

Total Cost $900 620 $1,520

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses LIFO.

18) During 2024, a company sells 25 units of inventory. The company has the following inventory purchase transactions for 2024: Date January 1 September 8

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Transaction Beginning inventory Purchase

Number of Units 20 10

Unit Cost $55 22

Total Cost $1,100 220

$1,320

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses the weighted-average cost method.

19) During 2024, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2024: Date January 1 September 8

Transaction Beginning inventory Purchase

Number of Units 15 10

Unit Cost $60 62

Total Cost $900 620 $1,520

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses the weighted-average cost method.

20) During 2024, a company sells 250 units of inventory for $93 each. The company has the following inventory purchase transactions for 2024: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 62 165 181 408

Unit Cost $70 71 73

Total Cost $4,340 11,715 13,213 $29,268

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses FIFO.

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21) During 2024, a company sells 300 units of inventory for $85 each. The company has the following inventory purchase transactions for 2024: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 60 170 180

Unit Cost $71 72 74

410

Total Cost $4,260 12,240 13,320 $29,820

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses FIFO.

22) During 2024, a company sells 385 units of inventory for $93 each. The company has the following inventory purchase transactions for 2024: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 67 168 182 417

Unit Cost $68 70 73

Total Cost $4,556 11,760 13,286 $29,602

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses LIFO.

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23) During 2024, a company sells 400 units of inventory for $85 each. The company has the following inventory purchase transactions for 2024: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 60 180 190

Unit Cost $70 72 75

430

Total Cost $4,200 12,960 14,250 $31,410

Calculate ending inventory and cost of goods sold for 2024 assuming the company uses LIFO.

24) During 2024, a company sells 480 units of inventory for $89 each. The company has the following inventory purchase transactions for 2024: Date

Transaction

January 1 May 5 November 3

Beginning inventory Purchase Purchase

Number of Units 76 270 182

Unit Cost $71 72 74

528

Total Cost $5,396 19,440 13,468 $38,304

Calculate cost of goods sold and ending inventory for 2024 assuming the company uses the weighted-average cost method (round weighted-average unit cost to four decimals, if necessary).

25) During 2024, a company sells 500 units of inventory for $90 each. The company has the following inventory purchase transactions for 2024: Date January 1 May 5

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Transaction Beginning inventory Purchase

Number of Units 80 270

Unit Cost $79 80

Total Cost $6,320 21,600 12

November 3

Purchase

190

540

15,580 $43,500

Calculate cost of goods sold and ending inventory for 2024 assuming the company uses the weighted-average cost method (round weighted-average unit cost to four decimals, if necessary).

26) During 2024, a company sells 180 units of inventory for $56 each. The company has the following inventory purchase transactions for 2024: Date

Transaction

January 1 May 5 November 3

Beginning inventory Purchase Purchase

Number of Units 53 103 77

Unit Cost $46 45 44

233

Total Cost $2,438 4,635 3,388 $10,461

Actual sales by the company include its entire beginning inventory, 83 units of inventory from the May 5 purchase, and 44 units from the November 3 purchase. Calculate cost of goods sold and ending inventory for 2024 assuming the company uses specific identification.

27) During 2024, a company sells 200 units of inventory for $50 each. The company has the following inventory purchase transactions for 2024: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 50 100 80 230

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Unit Cost $39 38 37

Total Cost $1,950 3,800 2,960 $8,710

Actual sales by the company include its entire beginning inventory, 80 units of inventory from the May 5 purchase, and 70 units from the November 3 purchase. Calculate cost of goods sold and ending inventory for 2024 assuming the company uses specific identification.

28) For each item below, indicate whether FIFO or LIFO will generally result in a higher reported amount when inventory costs are rising versus falling. Inventory Costs

Higher Total Assets

Higher Cost of Goods Sold

Higher Net Income

Rising Falling

29) When inventory costs are rising, __________ generally results in a higher amount of reported net income.

30) When inventory costs are declining, __________ generally results in a lower amount of reported cost of goods sold.

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31) When inventory costs are declining, __________ generally results in a lower amount of reported inventory.

32) When inventory costs are rising, __________ generally results in a lower amount of reported cost of goods sold.

33) When inventory costs are declining, __________ generally results in a higher amount of reported net income.

34)

__________ is commonly referred to as the balance-sheet approach.

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35)

__________ is commonly referred to as the income-statement approach.

36) When inventory costs are rising, __________ generally results in a lower income tax obligation.

37) A company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 9, 2024, for $52,000 and then sells this inventory on account on March 7, 2024, for $76,000. Record the transactions for the purchase and sale of the inventory.

38) A company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 9, 2024, for $50,000 and then sells this inventory on account on March 7, 2024, for $70,000. Record the transactions for the purchase and sale of the inventory.

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39)

A company has the following transactions during March:

March 3 March 5 March 6 March 12 March 29

Purchases inventory on account for $3,100, terms 2/10, n/30. Pays freight costs of $220 on inventory purchased on March 3. Returns inventory with a cost of $600. Pays the full amount due on March 3 purchase. Sells all inventory purchased on March 3 (less those returned on March 6) for $5,400 on account.

Record all transactions, assuming the company uses a perpetual inventory system.

40)

A company has the following transactions during March:

March 3 March 5 March 6 March 12 March 29

Purchases inventory on account for $3,500, terms 2/10, n/30. Pays freight costs of $200 on inventory purchased on March 3. Returns inventory with a cost of $500. Pays the full amount due on March 3 purchase. Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account.

Record all transactions, assuming the company uses a perpetual inventory system.

41) A company reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory: Inventory

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Quantity

Cost per Unit

NRV per Unit

Ski Jackets Skis

12 27

$ 160 270

$ 140 210

Calculate the amount to be reported for ending inventory.

42) A company reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory: Inventory Ski Jackets Skis

Quantity 10 25

Cost per Unit $ 130 250

NRV per Unit $ 110 300

Calculate the amount to be reported for ending inventory.

43) A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory Item A Item B

Quantity 140 30

Cost $ 23 28

NRV $ 28 18

1.Calculate ending inventory under the lower of cost and net realizable value. 2.Record any necessary adjusting entry to inventory.

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44) A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory Item A Item B

Quantity 100 50

Cost $ 25 30

NRV $ 30 20

1.Calculate ending inventory under the lower of cost and net realizable value. 2.Record any necessary adjusting entry to inventory.

45) A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory Unit A Unit B Unit C Unit D

Quantity 12 20 14 17

Cost $ 33 50 21 18

NRV $ 35 47 25 17

Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory.

46) A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory Unit A Unit B Unit C Unit D

Quantity 10 18 12 15

Cost $ 30 43 23 18

NRV $ 32 40 27 17

Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory.

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47)

A company reports the following amounts for 2024:

Inventory (beginning) Inventory (ending) Purchases Purchase returns

$ 17,000 37,000 150,000 12,000

Calculate cost of goods sold, the inventory turnover ratio, and the average days in inventory for 2024.

48)

A company reports the following amounts for 2024:

Inventory (beginning) Inventory (ending) Purchases Purchase returns

$ 20,000 30,000 160,000 10,000

Calculate cost of goods sold, the inventory turnover ratio, and the average days in inventory for 2024.

49)

A company reports the following amounts at the end of the year:

Sales revenue Cost of goods sold Net income

$ 370,000 235,000 60,000

Compute the company's gross profit ratio.

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50)

A company reports the following amounts at the end of the year:

Sales revenue Cost of goods sold Net income

$ 300,000 225,000 50,000

Compute the company's gross profit ratio.

51) A company begins the year with inventory of $47,000 and ends the year with inventory of $56,000. During the year, the following amounts are recorded: Purchases Purchase returns Purchase discounts Freight-in

$ 300,000 28,000 18,000 31,000

Calculate cost of goods sold for the year.

52) A company begins the year with inventory of $50,000 and ends the year with inventory of $55,000. During the year, the following amounts are recorded: Purchases Purchase returns Purchase discounts Freight-in

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$ 210,000 25,000 15,000 40,000

Calculate cost of goods sold for the year.

53) A company uses a periodic system to record inventory transactions. The company purchases inventory on account on February 9, 2024, for $58,000 and then sells this inventory on account on March 7, 2024, for $74,000. Record the transactions for the purchase and sale of the inventory.

54) A company uses a periodic system to record inventory transactions. The company purchases inventory on account on February 9, 2024, for $50,000 and then sells this inventory on account on March 7, 2024, for $70,000. Record the transactions for the purchase and sale of the inventory.

55)

A company has the following transactions during March:

March 3 March 5 March 6 March 12 March 29

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Purchases inventory on account for $3,600, terms 2/10, n/30. Pays freight costs of $200 on inventory purchased on March 3. Returns inventory with a cost of $700. Pays the full amount due on March 3 purchase. Sells all inventory purchased on March 3 (less those returned on March 6) for $5,900 on account.

Record all transactions, including the month-end adjusting entry to cost of goods sold, assuming the company uses a periodic inventory system and has no beginning inventory.

56)

A company has the following transactions during March:

March 3 March 5 March 6 March 12 March 29

Record all transactions, including the month-end adjusting entry to cost of goods sold, assuming the company uses a periodic inventory system and has no beginning inventory.

57) A company understated its ending inventory balance by $9,000 in 2024. What impact will this error have on cost of goods sold and gross profit in 2024 and 2025?

58) A company understated its ending inventory balance by $8,000 in 2024. What impact will this error have on cost of goods sold and gross profit in 2024 and 2025?

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59) A company overstated its ending inventory balance by $5,000 in 2024. What impact will this error have on cost of goods sold and gross profit in 2024 and 2025?

60) A company overstated its ending inventory balance by $6,000 in 2024. What impact will this error have on cost of goods sold and gross profit in 2024 and 2025?

61) A company understated its ending inventory balance by $8,000 in 2024. What impact will this error have on total assets and retained earnings in 2024 and 2025 (ignoring tax effects)?

62) A company understated its ending inventory balance by $5,000 in 2024. What impact will this error have on total assets and retained earnings in 2024 and 2025 (ignoring tax effects)?

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63) A company overstated its ending inventory balance by $4,000 in 2024. What impact will this error have on total assets and retained earnings in 2024 and 2025 (ignoring tax effects)?

64) A company overstated its ending inventory balance by $9,000 in 2024. What impact will this error have on total assets and retained earnings in 2024 and 2025 (ignoring tax effects)?

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Answer Key Test name: Chap 06_6e_Spiceland_Problem Material 1) B G D A F E C 2) D G A H F C B E 3) D C B A 4) E B A D C 5) A E D H C I G B F 6) B A D E C F G 7) Beginning inventory + Purchases Cost of goods available for sale − Ending inventory Cost of goods sold

$ 9,600 27,000 36,600 7,800 $ 28,800

8) Beginning inventory + Purchases Cost of goods available for sale − Ending inventory Cost of goods sold

$ 9,000 25,000 34,000 8,000 $ 26,000

9) Company

Sales

Lennon Harrison McCartney Starr

$8,900 8,100 8,800 7,000

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Cost of Goods Sold $4,500 3,600 3,400 1,400

Gross Profita $4,400 4,500 5,400 5,600

Operating Expenses $2,500 1,800 4,200 2,700

Net Incomeb $1,900 2,700 1,200 2,900

Gross profit = Sales revenue − Cost of goods sold b Net income = Gross profit − Operating expenses 10) Company

Sales

Lennon Harrison McCartney Starr

$8,000 9,000 8,000 7,000

Cost of Goods Sold 4,000 3,000 3,000 2,000

Gross Profita $4,000 6,000 5,000 5,000

Operating Expenses $3,000 2,000 3,000 3,000

Net Incomeb $1,000 4,000 2,000 2,000

Gross profit = Sales revenue − Cost of goods sold b Net income = Gross profit − Operating expenses 11)a, e, c, d, b 12)

Sales revenue

Beasley Incorporated Multiple-Step Income Statement For the Year Ended December 31, 2024 $330,000

Cost of goods sold

125,000

Gross profit

$205,000

Salaries Expense

36,000

Utilities Expense

40,000

Advertising Expense

20,000

Total operating expenses

96,000

Operating income

109,000

Interest expense

14,000

Income before income taxes

95,000

Income tax expense

37,000

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Net income

$58,000

13)

Sales revenue

Beasley Incorporated Multiple-Step Income Statement For the Year Ended December 31, 2024 $300,000

Cost of goods sold

125,000

Gross profit

$175,000

Salaries Expense

35,000

Utilities Expense

41,000

Advertising Expense

24,000

Total operating expenses

100,000

Operating income

75,000

Interest expense

12,000

Income before income taxes

63,000

Income tax expense

38,000

Net income

$25,000

14)Ending inventory: Date September 8

Transaction Purchase

Number of Unit Cost Ending Units Inventory 10

$54

$540

Cost of goods sold: Date January 1 September 8

Transaction Beginning inventory Purchase

Number of Units 14 7 21

Unit Cost $52 54

Cost of Goods Sold $728 378 $1,106

15)Ending inventory: Version 1

Date September 8

Transaction

Number of Units

Unit Cost

Ending Inventory

$62

$310

Unit Cost $60 62

Cost of Goods Sold $900 310

Purchase

Cost of goods sold: Date January 1 September 8

Transaction

Number of Units 15 5

Beginning inventory Purchase

$1,210

16)Ending inventory: Date

Transaction

January 1

Number of Unit Cost Ending Units Inventory

Purchase

$55

$330

Cost of goods sold: Date

Transaction

January 1 September 8

Number of Units 11 12

Beginning inventory Purchase

Unit Cost $55 57

Cost of Goods Sold $605 684

$1,289

17)Ending inventory: Date September 8

Transaction

Number of Units

Unit Cost

Ending Inventory

$60

$300

Purchase

Cost of goods sold: Date January 1 September 8

Transaction Beginning inventory Purchase

Number of Units 10 10

Unit Cost $60 62

Cost of Goods Sold $600 620

$1,220

18) Weighted-average cost = $1,320 / 30 units = $44.0000/unit Ending inventory = 5 × $44.0000 = $220 Cost of goods sold = 25 × $44.0000 = $1,100

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19)Weighted-average cost = $1,520/25 units = $60.80/unit Ending inventory = 5 × $60.80 = $304 Cost of goods sold = 20 × $60.80 = $1,216 20)Ending inventory: Date

Transaction

November 3

Number of Unit Cost Ending Units Inventory

Purchase

158

$73

$11,534

Cost of goods sold: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 62 165 23

Unit Cost $70 71 73

Cost of Goods Sold $4,340 11,715 1,679

250

$17,734

21)Ending inventory: Date

Transaction

November 3

Purchase

Number of Unit Cost Ending Units Inventory 110

$74

$8,140

Cost of goods sold: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 60 170 70

Unit Cost $71 72 74

Cost of Goods Sold $4,260 12,240 5,180

300

$21,680

22)Ending inventory: Date November 3

Transaction Purchase

Number of Units

Unit Cost

Ending Inventory

$68

$2,176

Cost of goods sold: Date January 1 May 5 November 3

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Transaction Beginning inventory Purchase Purchase

Number of Units 35 168 182

Unit Cost $68 70 73

Cost of Goods Sold $2,380 11,760 13,286

385

$27,426

23)Ending inventory: Date November 3

Transaction

Number of Units

Unit Cost

Ending Inventory

$70

$2,100

Purchase

Cost of goods sold: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 30 180 190

Unit Cost $70 72 75

Cost of Goods Sold $2,100 12,960 14,250

400

$29,310

24) Weighted-average unit cost = $38,304/528 units = $72.5455/unit Cost of goods sold = 480 × $72.5455 = $34,822 (rounded) Ending inventory = 48 × $72.5455 = $3,482 (rounded) 25)Weighted-average unit cost = $43,500/540 units = $80.5556/unit Ending inventory = 40 × $80.5556 = $3,222 (rounded) Cost of goods sold = 500 × $80.5556 = $40,278 (rounded) 26)Ending inventory: Date May 5 November 3

Transaction Purchase Purchase

Number of Units 20 33

Unit Cost $45 44

Ending Inventory $900 1,452 $2,352

Cost of goods sold: Date January 1 May 5 November 3

Transaction Beginning inventory Purchase Purchase

Number of Units 53 83 44 180

Unit Cost $46 45 44

Cost of Goods Sold $2,438 3,735 1,936 $8,109

27)Ending inventory: Version 1

Date

Transaction

May 5 November 3

Number of Units 20 10

Purchase Purchase

Unit Cost $38 37

Ending Inventory $760 370

$1,130

Cost of goods sold: Date

Transaction

January 1 May 5 November 3

Beginning inventory Purchase Purchase

Number of Units 50 80 70

Unit Cost $39 38 37

Cost of Goods Sold $1,950 3,040 2,590

200

$7,580

28) Inventory Costs Rising Falling

Higher Total Assets FIFO LIFO

Higher Cost of Goods Sold LIFO FIFO

Higher Net Income FIFO LIFO

29) FIFO 30) LIFO 31) FIFO 32) FIFO 33) LIFO 34) FIFO 35) LIFO 36) LIFO 37) Date February 9, 2024

Version 1

Account Title Inventory

Debit 52,000

Credit

February 9, 2024 February 9, 2024 March 7, 2024

Accounts Payable

52,000

(Purchase inventory on account) Accounts Receivable

March 7, 2024

76,000

Sales Revenue

March 7, 2024

76,000

(Sell inventory on account)

March 7, 2024

Cost of Goods Sold

March 7, 2024

52,000

Inventory

March 7, 2024

52,000

(Record cost of inventory sold)

38) Date February 9, 2024

Account Title Inventory

February 9, 2024

Accounts Payable

February 9, 2024 March 7, 2024 March 7, 2024

70,000 70,000

(Sell inventory on account)

March 7, 2024

Credit

50,000

Sales Revenue

March 7, 2024

(Purchase inventory on account) Accounts Receivable

Debit 50,000

Cost of Goods Sold

50,000

Inventory

50,000

(Record cost of inventory sold)

39) Date March 3 March 3 March 3

Version 1

Account Title Inventory Accounts Payable

Debit 3,100

Credit

3,100

(Purchase inventory on account)

March 5 March 5 March 5 March 6 March 6 March 6 March 12

Inventory

220

Cash

220

(Pay freight-in charges) Accounts Payable Inventory

600

(Return inventory previously purchased on account) Accounts Payable

March 12

Inventory

March 12

Cash

2,450

(Pay on account with a 2% discount of $50)

March 12

($50 = ($3,100 − $600) × 2%)

March 29

Accounts Receivable

5,400

Sales Revenue

March 29

(Sell inventory on account)

March 29

Cost of Goods Sold

March 29

2,500 50

March 12

March 29

600

5,400

2,670

Inventory

2,670

March 29

(Record cost of inventory sold)

March 29

($2,670 = $3,100 + $220 − $600 − $50)

40) Date March 3 March 3 March 3 March 5

Version 1

Account Title Inventory

Debit 3,500

Accounts Payable

Credit

3,500

(Purchase inventory on account) Inventory

200

March 5 March 5 March 6 March 6 March 6 March 12

Cash

200

(Pay freight-in charges) Accounts Payable Inventory

500

(Return inventory previously purchased on account) Accounts Payable

March 12

Inventory

March 12

Cash

March 12

500

60 2,940

March 12

(Pay on account with a 2% discount of $60) ($60 = ($3,500 − $500) × 2%)

March 29

Accounts Receivable

March 29

5,000

Sales Revenue

5,000

March 29

(Sell inventory on account)

March 29

Cost of Goods Sold

March 29

3,000

3,140

Inventory

3,140

March 29

(Record cost of inventory sold)

March 29

($3,140 = $3,500 + $200 − $500 − $60)

41) Inventory Ski Jackets Skis

Quantity 12 27

Lower of Cost and NRV Ending Inventory $ 140 $ 1,680 210 5,670 $ 7,350

42) Inventory

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Quantity

Lower of Cost and NRV

Ending Inventory

Ski Jackets Skis

10 25

$ 110 250

$ 1,100 6,250 $ 7,350

43)1. Ending inventory = (140 × $23) + (30 × $18) = $3,760. 2. Write-down = $4,060 (total cost) − $3,760 (LCM) = $300. Account Title Cost of Goods Sold

Debit 300

Inventory

Credit

300

(Adjust inventory down to net realizable value)

44)1. Ending inventory = (100 × $25) + (50 × $20) = $3,500. 2. Write-down = $4,000 (total cost) − $3,500 (LCM) = $500. Account Title Cost of Goods Sold

Debit 500

Inventory

Credit

500

(Adjust inventory down to net realizable value)

45)Ending inventory = (12 × $33) + (20 × $47) + (14 × $21) + (17 × $17) = $1,919. Write-down = $1,996 (total cost) − $1,919 (LCM) = $77. Account Title Cost of Goods Sold Inventory

Version 1

Debit 77

Credit

(Adjust inventory down to net realizable value)

46)Ending inventory = (10 × $30) + (18 × $40) + (12 × $23) + (15 × $17) = $1,551. Write-down = $1,620 (total cost) − $1,551 (LCM) = $69. Account Title Cost of Goods Sold

Debit 69

Credit

Inventory

(Adjust inventory down to net realizable value)

47) Cost of goods sold = $17,000 + $150,000 − $12,000 − $37,000 = $118,000. Inventory turnover ratio = $118,000/[($17,000 + $37,000)/2] = 4.4 times. Average days in inventory = 365/4.4 = 83.0 days. 48)Cost of goods sold = $20,000 + $160,000 − $10,000 − $30,000 = $140,000. Inventory turnover ratio = $140,000 / [($20,000 + $30,000) / 2] = 5.6 times. Average days in inventory = 365 / 5.6 = 65.2 days. 49) Gross profit ratio = ($370,000 − $235,000)/$370,000 = 0.36 50) Gross profit ratio = ($300,000 − $225,000) / $300,000 = 0.25 51) Beginning inventory Add: Purchases Add: Freight-in Less: Purchase returns Less: Purchase discounts Cost of goods available for sale Less: Ending inventory

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$ 47,000 300,000 31,000 (28,000) (18,000) 332,000 (56,000)

Cost of goods sold

$ 276,000

52) Beginning inventory Add: Purchases Add: Freight-in Less: Purchase returns Less: Purchase discounts Cost of goods available for sale Less: Ending inventory

$ 50,000 210,000 40,000 (25,000) (15,000) 260,000 (55,000)

Cost of goods sold

$ 205,000

53) Date February 9, 2024 February 9, 2024 February 9, 2024 March 7, 2024 March 7, 2024 March 7, 2024

Account Title Purchases

Debit 58,000

Accounts Payable

Credit

58,000

(Purchase inventory on account) Accounts Receivable

74,000

Sales Revenue

74,000

(Sell inventory on account)

54) Date February 9, 2024 February 9, 2024 February 9, 2024 March 7, 2024 March 7, 2024 March 7, 2024

Account Title Purchases

Debit 50,000

Accounts Payable

Credit

50,000

(Purchase inventory on account) Accounts Receivable Sales Revenue

70,000 70,000

(Sell inventory on account)

55) Version 1

Date March 3 March 3 March 3 March 5 March 5 March 5 March 6 March 6 March 6 March 12

Account Title Purchases Accounts Payable

Freight-In

3,600

200

Cash

200

(Pay freight-in charges) Accounts Payable

700

Purchase Returns (Return inventory previously purchased on account) Accounts Payable Purchase Discounts

March 12

Cash

March 12

(Pay on account with a 2% discount of $58)

March 12

($58 = ($3,600 − $700) × 2%)

March 29

Accounts Receivable

700

2,900 58 2,842

5,900

Sales Revenue

5,900

March 29

(Sell inventory on account)

March 31

Cost of Goods Sold

3,042

March 31

Purchase Returns

700

March 31

Purchase Discounts

March 31

Inventory (ending)

March 31

Inventory (beginning)

March 31

Purchases

Version 1

Credit

(Purchase inventory on account)

March 12

March 29

Debit 3,600

0 3,600

March 31 March 29 March 29

Freight-In

200

(Close temporary accounts and record cost of goods sold) (Cost of goods sold = $3,600 + $200 − $700 − $58 = $3,042)

56) Date March 3 March 3 March 3 March 5 March 5 March 5 March 6 March 6 March 6 March 12

Account Title Purchases Accounts Payable

Freight-In

3,500

200

Cash

200

(Pay freight-in charges) Accounts Payable

500

Purchase Returns (Return inventory previously purchased on account) Accounts Payable Purchase Discounts

March 12

Cash

March 12

(Pay on account with a 2% discount of $60)

March 12

($60 = ($3,500 − $500) × 2%)

March 29

Accounts Receivable

500

3,000 60 2,940

5,000

Sales Revenue

March 29

(Sell inventory on account)

March 31

Cost of Goods Sold

Version 1

Credit

(Purchase inventory on account)

March 12

March 29

Debit 3,500

5,000

3,140

March 31

Purchase Returns

500

March 31

Purchase Discounts

March 31

Inventory (ending)

March 31

Inventory (beginning)

March 31

Purchases

3,500

March 31

Freight-In

200

March 29 March 29

(Close temporary accounts and record cost of goods sold) (Cost of goods sold = $3,500 + $200 − $500 − $60 = $3,140)

57)2024: Cost of goods sold is overstated by $9,000. Gross profit is understated by $9,000. 2025: Cost of goods sold is understated by $9,000. Gross profit is overstated by $9,000. 58)2024: Cost of goods sold is overstated by $8,000. Gross profit is understated by $8,000. 2025: Cost of goods sold is understated by $8,000. Gross profit is overstated by $8,000.

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59)2024: Cost of goods sold is understated by $5,000. Gross profit is overstated by $5,000. 2025: Cost of goods sold is overstated by $5,000. Gross profit is understated by $5,000. 60)2024: Cost of goods sold is understated by $6,000. Gross profit is overstated by $6,000. 2025: Cost of goods sold is overstated by $6,000. Gross profit is understated by $6,000. 61)2024: Total assets are understated by $8,000. Retained earnings is understated by $8,000. 2025: Total assets are stated correctly. Retained earnings is stated correctly. 62)2024: Total assets are understated by $5,000. Retained earnings is understated by $5,000. 2025: Total assets are stated correctly. Retained earnings is stated correctly.

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63)2024: Total assets are overstated by $4,000. Retained earnings is overstated by $4,000. 2025: Total assets are stated correctly. Retained earnings is stated correctly. 64)2024: Total assets are overstated by $9,000. Retained earnings is overstated by $9,000. 2025: Total assets are stated correctly. Retained earnings is stated correctly.

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CHAPTER 6 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Inventory is usually reported as a long-term asset in the balance sheet. ⊚ true ⊚ false

2) Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. ⊚ true ⊚ false

3) Merchandising companies purchase inventories that are primarily in finished form for resale to customers. ⊚ true ⊚ false

4) Cost of goods sold is the cost of inventory sold during the year and is an expense reported in the income statement. ⊚ ⊚

true false

5) If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending inventory of $20,000, cost of goods sold equals $70,000. ⊚ true ⊚ false

6) A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating income, income before income taxes, and net income. ⊚ true ⊚ false

Gross profit equals net sales of inventory less cost of goods sold.

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⊚ ⊚

true false

Sales revenue minus cost of goods sold is referred to as operating income. ⊚ true ⊚ false

9) Income before income taxes equals operating income plus nonoperating revenues less nonoperating expenses. ⊚ true ⊚ false

10) If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning inventory of $30,000, cost of goods sold equals $90,000. ⊚ true ⊚ false

11) Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand. ⊚ true ⊚ false

12) Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold. ⊚ true ⊚ false

13) Using the weighted-average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year. ⊚ true ⊚ false

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14) Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. ⊚ true ⊚ false

15)

For most companies, actual physical flow of their inventory follows LIFO. ⊚ true ⊚ false

16) During periods of rising costs, FIFO generally results in a higher ending inventory balance. ⊚ true ⊚ false

17)

During periods of rising costs, FIFO generally results in a higher cost of goods sold. ⊚ true ⊚ false

18)

During periods of rising costs, LIFO generally results in a higher cost of goods sold. ⊚ true ⊚ false

19) During periods of rising costs, LIFO generally results in a higher ending inventory balance. ⊚ true ⊚ false

20) Accountants often call FIFO the balance-sheet approach because the amount it reports for ending inventory better approximates the current cost of inventory. ⊚ true ⊚ false

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21) One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings. ⊚ true ⊚ false

22) The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting. ⊚ true ⊚ false

23) The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO. ⊚ true ⊚ false

24) Companies can choose which inventory cost method they prefer, even if the method does not match the actual physical flow of goods. ⊚ true ⊚ false

25) Companies are allowed to switch each year from one inventory cost method to another, depending on economic circumstances. ⊚ true ⊚ false

26) Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases account, which is a temporary account closed to cost of goods sold at the end of the period. ⊚ true ⊚ false

27) For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller ships the inventory.

Version 1

⊚ ⊚

true false

28) For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer once the seller ships the inventory. ⊚ true ⊚ false

29)

Freight-in is included in the cost of inventory. ⊚ true ⊚ false

30) At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory system. ⊚ true ⊚ false

31) Using LIFO, the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system. ⊚ true ⊚ false

32) When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value. ⊚ true ⊚ false

33) When the net realizable value of inventory falls below its cost, no adjusting entry is needed. ⊚ ⊚

Version 1

true false

34) The adjusting entry to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory. ⊚ ⊚

true false

35) The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting. ⊚ true ⊚ false

36)

The inventory turnover ratio equals cost of goods sold divided by average inventory. ⊚ true ⊚ false

37) Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory. ⊚ true ⊚ false

38) A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25. ⊚ true ⊚ false

39) The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. ⊚ true ⊚ false

40) Generally, a lower gross profit ratio reflects positively on a company's ability to manage its inventory. ⊚ true ⊚ false

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41) A periodic inventory system does not continually modify inventory amounts, but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand. ⊚ true ⊚ false

42) Overstating ending inventory in the current year causes net income in the current year to be overstated. ⊚ true ⊚ false

43) Understating ending inventory in the current year causes cost of goods sold in the current year to be understated. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 44) Companies that purchase inventories that are primarily in finished form for resale to customers are known as: A) Delivering companies. B) Service companies. C) Merchandising companies. D) Manufacturing companies.

45) One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for: A) Current assets. B) Inventory. C) Selling expenses. D) Deferred revenue.

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46) The cost of unsold inventory at the end of the year is classified as a(n) ______ in the ______. A) Asset; Balance sheet B) Expense; Income statement C) Liability; Balance sheet D) Revenue; Income statement

47)

What type of company purchases raw materials and makes goods to sell? A) Wholesaler B) Retailer C) Merchandiser D) Manufacturer

48)

A manufacturer's inventory consists of what type of inventory? A) Raw materials B) Finished goods C) Work-in-process D) All of the other answers are included in a manufacturer's inventory.

49) For a manufacturing company, the combination of the cost of raw materials, direct labor, and overhead for inventory that has not yet completed production is known as: A) Work-in-process. B) Finished goods. C) Inventory. D) Retail goods.

50)

Inventory does not include:

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A) Materials used in the production of goods to be sold. B) Assets intended to be sold in the normal course of business. C) Equipment used in the manufacturing of assets for sale. D) Assets currently in production for normal sales.

51) The cost of the goods that a company sold during a period is shown in its financial statements as ___________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as ____________. A) Cost of goods sold; inventory B) Goods on hand; inventory expense C) Inventory; cost of goods sold D) Sales revenue; cost of goods sold

52)

Cost of Goods Sold is a(n): A) Asset account. B) Revenue account. C) Expense account. D) Permanent equity account.

53)

The balance of the Cost of Goods Sold account at the end of the year represents: A) The cost of inventory not sold in the current year. B) The total sales revenue to customers. C) The cost of inventory sold in the current year. D) Total purchases of inventory for the year.

54) The cost of inventory sold during the current year is classified as a(n) ______ in the ______.

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A) Asset; Balance sheet B) Expense; Income statement C) Liability; Balance sheet D) Revenue; Income statement

55)

The largest expense on a retailer's income statement is typically: A) Salaries. B) Cost of goods sold. C) Income tax expense. D) Depreciation expense.

56)

Cost of goods sold equals: A) Beginning inventory − net purchases + ending inventory. B) Beginning inventory − accounts payable − net purchases. C) Net purchases + ending inventory − beginning inventory. D) Beginning inventory + net purchases − ending inventory.

57) A company has beginning inventory for the year of $14,500. During the year, the company purchases inventory for $140,000 and ends the year with $26,000 of inventory. The company will report cost of goods sold equal to: A) $151,500. B) $166,000. C) $128,500. D) $140,000.

58) A company has beginning inventory for the year of $12,000. During the year, the company purchases inventory for $150,000 and ends the year with $20,000 of inventory. The company will report cost of goods sold equal to:

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A) $150,000. B) $158,000. C) $142,000. D) $170,000.

59) A company has beginning inventory for the year of $19,400. During the year, the company purchases inventory for $235,000 and has cost of goods sold equal to $238,000. Ending inventory equals: A) $16,400. B) $19,500. C) $22,400. D) $19,400.

60) A company has beginning inventory for the year of $18,000. During the year, the company purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Ending inventory equals: A) $15,000. B) $18,000. C) $21,000. D) $19,000.

61) Beginning inventory is $40,000. Purchases of inventory during the year are $200,000. Ending inventory is $100,000. What is cost of goods sold? A) $340,000 B) $240,000 C) $260,000 D) $140,000

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62) Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of goods sold is $60,000. What is ending inventory? A) $20,000 B) $30,000 C) $10,000 D) $50,000

63) Purchases of inventory during the year were $450,000. At the end of the year, ending inventory is $200,000 and cost of goods sold is $400,000. What was beginning inventory? A) $250,000 B) $300,000 C) $150,000 D) $100,000

64) The type of income statement that classifies items as operating and nonoperating is the ______ income statement. A) Consolidated B) Multiple-step C) Classified D) Single-step

65) The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement. A) Single-step B) Subtotaled C) Multiple-step D) Classified

66) The primary distinction between operating activities and nonoperating activities in a multiple-step income statement is whether the activity is: Version 1

A) A large or small dollar amount. B) Part of primary business operations. C) Related to current versus long-term assets. D) Reported as a revenue or an expense.

67)

The distinction between operating and nonoperating income relates to: A) Current versus noncurrent. B) Primary versus peripheral activities of the reporting entity. C) Revenues versus expenses. D) Reliability of measurements.

68)

Which of the following items may be classified as nonoperating revenues and expenses? A) Interest expense B) Loss on the sale of equipment C) Interest revenue D) All of the other answers are classified as nonoperating revenues and expenses.

69)

Gross profit is calculated as net sales minus: A) Nonoperating expenses and income tax expense. B) Operating expenses. C) Cost of goods sold. D) All of the other answers are subtracted from net sales to calculate gross profit.

70) A company has net sales of $200,000, cost of goods sold of $120,000, selling expenses of $6,000, and nonoperating expenses of $2,000. What is the company's gross profit?

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A) $76,000 B) $80,000 C) $74,000 D) $72,000

71)

Given the information below, what is the gross profit?

Sales revenue Accounts receivable Ending inventory Cost of goods sold Sales returns

$ 305,000 53,000 114,000 240,000 29,000

A) $36,000 B) $162,000 C) $65,000 D) $39,000

72)

Given the information below, what is the gross profit?

Sales revenue Accounts receivable Ending inventory Cost of goods sold Sales returns

$ 320,000 50,000 100,000 250,000 20,000

A) $250,000 B) $70,000 C) $220,000 D) $50,000

73)

Given the information in the table below, what is the company's gross profit?

Sales revenue Accounts receivable

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$ 350,000 $ 280,000 14

Ending inventory Cost of goods sold Sales returns Sales discounts

$ 230,000 $ 180,000 $ 50,000 $ 20,000

A) $280,000 B) $170,000 C) $50,000 D) $100,000

74)

A company reports the following information for June:

Sales revenue Operating expenses Deferred revenues

$ 104,000 Income tax expense 22,000 Cost of goods sold 15,000 Nonoperating revenues

$ 11,000 65,000 12,000

What is the company's gross profit for June? A) $18,000 B) $39,000 C) $104,000 D) $17,000

75)

Operating income is calculated as net sales minus: A) Selling expenses. B) General and administrative expenses. C) Cost of goods sold. D) All of the other answers are subtracted from net sales to calculate operating income.

76) Which measure reflects profitability from primary operations and is a key performance measure for predicting the future profit-generating ability of a company?

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A) Gross profit B) Operating income C) Income before income taxes D) Net income

77)

Consider the following year-end information for a company:

Cost of goods sold Sales revenue Nonoperating expenses Operating expenses Income tax expense

$ 420,000 800,000 10,000 170,000 80,000

What amount will the company report for operating income? A) $200,000 B) $210,000 C) $380,000 D) $120,000

78)

A company reported the following amounts in its income statement:

Sales revenue Advertising expense Interest expense Salaries expense Utilities expense Income tax expense Cost of goods sold

$ 440,000 60,000 10,000 55,000 25,000 45,000 180,000

What is gross profit?

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A) $260,000 B) $180,000 C) $220,000 D) $120,000

79)

A company reported the following amounts in its income statement:

Sales revenue Advertising expense Interest expense Salaries expense Utilities expense Income tax expense Cost of goods sold

$ 440,000 60,000 10,000 55,000 25,000 45,000 180,000

What is operating income? A) $120,000 B) $260,000 C) $110,000 D) $65,000

80)

A company reported the following amounts in its income statement:

Sales revenue Advertising expense Interest expense Salaries expense Utilities expense Income tax expense Cost of goods sold

$ 440,000 60,000 10,000 55,000 25,000 45,000 180,000

What is net income?

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A) $120,000 B) $60,000 C) $110,000 D) $65,000

81) The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method. A) Weighted-average B) Specific identification C) Actual cost D) Matching unit

82) A company is most likely to utilize the specific identification method if its inventory consists of: A) Unique products. B) Very expensive products. C) A relatively small number of products. D) All of the other answers are reasons to utilize the specific identification method.

83) The inventory cost flow assumption that generally best matches the physical flow of inventory is: A) FIFO. B) LIFO. C) Weighted-average. D) Lower of cost and net realizable value.

84) The inventory cost flow assumption that results in a random mixture of goods being included in the balance of inventory and cost of goods sold is:

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A) FIFO. B) LIFO. C) Weighted-average. D) Lower of cost and net realizable value.

85) The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is: A) FIFO. B) LIFO. C) Weighted-average. D) Specific identification.

86)

The following information relates to inventory for Shoeless Joe Incorporated.

Date March 1 March 7 March 11 March 12

Transaction Beginning Inventory Purchase Sale Purchase

Quantity 20 15 25 20

Price $ 2 3 7 4

At what amount would Shoeless report ending inventory using FIFO cost flow assumptions? A) $55 B) $170 C) $110 D) $70

87)

The following information relates to inventory for Shoeless Joe Incorporated.

Date March 1 March 7 March 11 March 12

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Transaction Beginning Inventory Purchase Sale Purchase

Quantity 20 15 25 20

Price $ 2 3 7 4

At what amount would Shoeless report gross profit using a LIFO cost flow assumption with a periodic inventory system? A) $10 B) $80 C) $175 D) $120

88)

The following information relates to inventory for Shoeless Joe Incorporated.

Date March 1 March 7 March 11 March 12

Transaction Beginning Inventory Purchase Sale Purchase

Quantity 20 15 30 15

Price $ 2 3 7 6

At what amount would Shoeless report cost of goods sold using the weighted-average cost flow assumption with a periodic inventory system? A) $110 B) $73 C) $70 D) $105

89)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 440 360

Unit Cost $ 2.35 2.69

Capetown sold 640 units of inventory during the month. Ending inventory assuming FIFO would be: (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.)

Version 1

A) $376. B) $1,034. C) $430. D) $1,184.

90)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 500 400

Unit Cost $ 2.40 2.50

Capetown sold 700 units of inventory during the month. Ending inventory assuming FIFO would be: A) $500. B) $490. C) $470. D) $480.

91)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 500 400

Unit Cost $ 2.40 2.50

Capetown sold 700 units of inventory during the month. Cost of goods sold assuming FIFO would be: A) $1,730. B) $1,700. C) $1,720. D) $1,710.

92)

Inventory records for Capetown, Incorporated revealed the following:

Version 1

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 430 410

Unit Cost $ 2.14 2.67

Capetown sold 650 units of inventory during the month. Ending inventory assuming LIFO would be: (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.) A) $507. B) $407. C) $1,095. D) $920.

93)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 500 400

Unit Cost $ 2.40 2.50

Capetown sold 700 units of inventory during the month. Ending inventory assuming LIFO would be: A) $500. B) $490. C) $470. D) $480.

94)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 540 370

Unit Cost $ 2.33 2.58

Capetown sold 690 units of inventory during the month. Cost of goods sold assuming LIFO would be: (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.)

Version 1

A) $1,645. B) $1,700. C) $1,608. D) $1,304.

95)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 500 400

Unit Cost $ 2.40 2.50

Capetown sold 700 units of inventory during the month. Cost of goods sold assuming LIFO would be: A) $1,730. B) $1,700. C) $1,720. D) $1,710.

96)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 600 340

Unit Cost $ 2.39 2.66

Capetown sold 570 units of inventory during the month. What is the amount of ending inventory assuming weighted-average cost? (Round weighted-average unit cost to 4 decimals and round your final answer to the nearest whole dollar.) A) $920 B) $899 C) $1,000 D) $934

Version 1

97)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 500 400

Unit Cost $ 2.40 2.50

Capetown sold 700 units of inventory during the month. What is the amount of ending inventory assuming weighted-average cost? (Round weighted-average unit cost to 4 decimals and round your final answer to the nearest whole dollar.) A) $502 B) $490 C) $489 D) $480

98)

Inventory records for Capetown, Incorporated revealed the following:

Date

Transaction

April 1 April 20

Beginning Inventory Purchase

Number of Units 500 400

Unit Cost $ 2.40 2.50

Capetown sold 700 units of inventory during the month. What is the cost of goods sold assuming weighted-average cost? (Round weighted-average unit cost to 4 decimals and round your final answer to the nearest whole dollar.) A) $1,711 B) $1,700 C) $1,720 D) $1,708

99)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10

Version 1

Transaction Beginning Inventory Purchase

Number of Units 1,100 520

Unit Cost $ 7.30 7.80

March 16 March 23

Purchase Purchase

474 540

8.40 9.10

Eliza sold 1,970 units of inventory during the month. Ending inventory assuming FIFO would be: (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.) A) $9,487. B) $5,956. C) $8,030. D) $1,392.

100)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,000 600 800 600

Unit Cost $ 7.20 7.25 7.30 7.35

Eliza sold 2,300 units of inventory during the month. Ending inventory assuming FIFO would be: A) $5,140. B) $5,080. C) $5,060. D) $5,050.

101)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Version 1

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 920 530 740 590

Unit Cost $ 7.12 7.55 7.96 8.36

Eliza sold 1,850 units of inventory during the month. Cost of goods sold assuming FIFO would be: (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.) A) $12,586. B) $14,753. C) $15,466. D) $13,736.

102)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,000 600 800 600

Unit Cost $ 7.20 7.25 7.30 7.35

Eliza sold 2,300 units of inventory during the month. Cost of goods sold assuming FIFO would be: A) $16,800. B) $16,760. C) $16,540. D) $16,660.

103)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,000 600 800 600

Unit Cost $ 7.20 7.25 7.30 7.35

Eliza sold 2,300 units of inventory during the month. Ending inventory assuming LIFO would be:

Version 1

A) $5,040. B) $5,055. C) $5,075. D) $5,135.

104)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,000 600 800 600

Unit Cost $ 7.20 7.25 7.30 7.35

Eliza sold 2,300 units of inventory during the month. Cost of goods sold assuming LIFO would be: A) $16,800. B) $16,760. C) $16,540. D) $16,660.

105)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,000 600 800 600

Unit Cost $ 7.20 7.25 7.30 7.35

Eliza sold 2,300 units of inventory during the month. What is the ending inventory assuming weighted-average cost? (Round weighted-average unit cost to 4 decimals and round your final answer to the nearest whole dollar.)

Version 1

A) $5,087 B) $5,107 C) $5,077 D) $5,005

106)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,060 520 860 600

Unit Cost $ 7.13 7.32 7.40 7.67

Eliza sold 2,100 units of inventory during the month. What is the cost of goods sold assuming weighted-average cost? (Round the weighted-average unit cost to 4 decimals if necessary and round your final answer to nearest whole dollar.) A) $14,973 B) $15,372 C) $15,498 D) $15,425

107)

Inventory records for Eliza Company revealed the following:

Date March 1 March 10 March 16 March 23

Transaction Beginning Inventory Purchase Purchase Purchase

Number of Units 1,000 600 800 600

Unit Cost $ 7.20 7.25 7.30 7.35

Eliza sold 2,300 units of inventory during the month. What is the cost of goods sold assuming weighted-average cost? (Round the weighted-average unit cost to 4 decimals if necessary and round your final answer to nearest whole dollar.)

Version 1

A) $16,733 B) $17,408 C) $16,713 D) $16,089

108)

The following information pertains to inventory for a company:

March 1 March 3 March 9

Beginning inventory = 31 units @ $5.50 Purchased 14 units @ 3.50 Sold 22 units @ 8.60

What is the ending inventory balance, assuming the company uses FIFO? (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.) A) $99 B) $49 C) $22 D) $127

109)

The following information pertains to inventory for a company:

March 1 March 3 March 9

Beginning inventory = 30 units @ $5 Purchased 15 units @ $4 Sold 25 units @ $8

What is the ending inventory balance, assuming the company uses FIFO? A) $125 B) $100 C) $110 D) $85

110)

The following information pertains to inventory for a company:

March 1

Version 1

Beginning inventory = 29 units @ $5.40 29

March 3 March 9

Purchased 14 units @ 4.40 Sold 25 units @ 8.60

What is the cost of goods sold, assuming the company uses LIFO? (Do not round your intermediate calculations. Round your answer to the nearest dollar amount.) A) $135 B) $117 C) $110 D) $121

111)

The following information pertains to inventory for a company:

March 1 March 3 March 9

Beginning inventory = 30 units @ $5 Purchased 15 units @ $4 Sold 25 units @ $8

What is the cost of goods sold, assuming the company uses LIFO? A) $125 B) $100 C) $110 D) $85

112)

A company has the following inventory information for the year:

January 1 Beginning inventory = 100 units @ $10 March 15 Purchased 500 units @ $12 September 20 Purchased 800 units @ $15 Total sales for the year = 1,200 units The company reports cost of goods sold of $16,000. Which inventory cost method is the company using?

Version 1

A) FIFO B) LIFO C) Weighted-average D) The answer cannot be determined with the information given.

113)

Consider the following inventory transactions for September:

Beginning inventory Purchase on September 12 Purchase on September 23

15 21 12

units @ units @ units @

$ 2.60 $ 3.60 $ 4.30

For the month of September, the company sold 35 units. What is cost of goods sold under the weighted-average cost method? (Round the weighted-average unit cost to 4 decimals if necessary. Round your answer to the nearest dollar amount.) A) $94 B) $151 C) $121 D) $91

114)

Consider the following inventory transactions for September:

Beginning inventory Purchase on September 12 Purchase on September 23

15 units @ $ 3.00 20 units @ $ 3.50 10 units @ $ 4.00

For the month of September, the company sold 35 units. What is cost of goods sold under the weighted-average cost method? (Round the weighted-average unit cost to 4 decimals and round your final answer to the nearest whole dollar.) A) $121 B) $116 C) $124 D) $131

Version 1

115)

FIFO is considered a balance-sheet approach for reporting inventory because it: A) Better approximates the value of ending inventory. B) Always results in a lower amount of inventory being reported. C) Better approximates inventory cost necessary to generate revenue. D) Always results in a higher amount of inventory being reported.

116) Which inventory method is better described as having a balance-sheet focus and why is it considered as such? A) FIFO; better approximates the value of ending inventory B) LIFO; better approximates the value of ending inventory C) LIFO; better approximates inventory cost necessary to generate revenue D) FIFO; better approximates inventory cost necessary to generate revenue

117)

LIFO is considered an income-statement approach for reporting inventory because it: A) Always results in a higher amount of net income being reported. B) Better approximates the value of ending inventory. C) Better approximates inventory cost necessary to generate revenue. D) Always results in a lower amount of net income being reported.

118) Which inventory method is better described as having an income-statement focus and why is it considered as such? A) FIFO; better approximates the value of ending inventory B) LIFO; better approximates the value of ending inventory C) LIFO; better approximates inventory cost necessary to generate revenue D) FIFO; better approximates inventory cost necessary to generate revenue

119) Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue?

Version 1

A) FIFO B) LIFO C) Weighted-average D) Lower of cost and net realizable value

120)

The choice of inventory cost flow assumptions affects which of the following amounts? A) Inventory B) Cost of goods sold C) Gross profit D) All of the other answers are affected by the inventory cost flow assumption.

121) In a period when inventory costs are rising, the inventory method that most likely results in the highest ending inventory is: A) Lower of cost and net realizable value. B) Weighted-average cost. C) FIFO. D) LIFO.

122) In a period when inventory costs are falling, the lowest taxable income is most likely reported by using the inventory method of: A) Weighted-average. B) LIFO. C) Moving-average. D) FIFO.

123)

Which of the following is true regarding LIFO and FIFO?

Version 1

A) In a period of decreasing costs, LIFO results in lower total assets than FIFO. B) In a period of decreasing costs, LIFO results in lower net income than FIFO. C) In a period of rising costs, LIFO results in lower net income than FIFO. D) The amount reported for COGS is based on net realizable value of inventory if LIFO is used.

124)

During periods when inventory costs are rising, cost of goods sold will most likely be: A) Higher under FIFO than LIFO. B) Higher under FIFO than weighted-average cost. C) Lower under weighted-average cost than LIFO. D) Lower under LIFO than FIFO.

125) In a period of rising costs, which inventory valuation method would a company likely choose if they want to have the highest possible amount of inventory reported in the balance sheet? A) Weighted-average cost B) FIFO C) LIFO D) Straight-line

126)

During periods when inventory costs are rising, ending inventory will most likely be: A) Greater under LIFO than FIFO. B) Less under weighted-average cost than LIFO. C) Greater under weighted-average cost than FIFO. D) Greater under FIFO than LIFO.

127)

The LIFO conformity rule states that if LIFO is used for:

Version 1

A) One class of inventory, it must be used for all classes of inventory. B) Tax purposes, it must be used for financial reporting. C) One company in an affiliated group, it must be used by all companies in an affiliated group. D) Domestic companies, it must be used by foreign partners.

128)

The primary reason for the popularity of LIFO is that it gives: A) Better matching of physical flow and cost flow. B) A lower income tax obligation when inventory costs are rising. C) Simplified recordkeeping. D) A simpler method to apply.

129)

Which of the following is true concerning inventory cost flow assumptions? A) LIFO produces higher net income than FIFO in a period of rising costs. B) FIFO has an income-statement focus. C) LIFO has a balance-sheet focus. D) None of the other answers are true.

130)

Which of the following is incorrect regarding LIFO and FIFO? A) In a period of decreasing costs, FIFO will result in lower total assets than LIFO. B) In a period of increasing costs, net income will be greater under FIFO than LIFO. C) In a period of increasing costs, assets will be greater under LIFO than FIFO. D) In a period of decreasing costs, LIFO will result in greater net income than FIFO.

131) Which inventory cost flow assumption generally results in the highest reported amount for cost of goods sold when inventory costs are falling?

Version 1

A) FIFO B) LIFO C) Weighted-average cost D) Straight-line

132) The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the: A) FIFO adjustment. B) Inventory allowance. C) LIFO reserve. D) Net realizable value.

133) A company uses LIFO and reports ending inventory of $220,000. The company calculates its LIFO reserve to be $70,000. For what amount would the company report ending inventory if it instead had used FIFO? A) $220,000 B) $150,000 C) $290,000 D) $255,000

134) A company uses FIFO for internal recordkeeping but LIFO for reporting ending inventory. Ending inventory under FIFO is $80,000, and ending inventory under LIFO is $60,000. What is the company’s LIFO reserve? A) $20,000 B) $60,000 C) $80,000 D) $140,000

135) Which of the following considerations may influence a manager's choice of the inventory cost flow assumption for a company that experiences rising prices? Version 1

A) Compensation/bonus tied to reported income B) Meeting earnings targets C) Increase stock prices D) All of the other answers are considerations for the choice of inventory cost flow assumptions.

136) Which of the following accurately describes a company’s choice of inventory cost method? A) A company can choose which inventory method it prefers, even if the method does not match the actual physical flow of goods. B) Once a company chooses a method, it is not allowed to frequently change to another one. C) A company need not use the same method for all of its inventory. D) All of the other answers are correct.

137)

A perpetual inventory system measures cost of goods sold by: A) Estimating the amount of inventory sold. B) Adjusting the Inventory account for each purchase and sale. C) Counting inventory at the end of the period. D) Recording Cost of Goods Sold for all purchases of inventory.

138) Using a perpetual inventory system, the purchase of inventory on account increases the balance of which of the following accounts? A) Inventory B) Cost of Goods Sold C) Accounts Receivable D) Sales Revenue

139) Using a perpetual inventory system, the purchase of inventory on account will have what effect on the financial statements? Version 1

A) Increase expenses B) Increase revenues C) Increase assets D) Increase stockholders’ equity

140)

Using a perpetual inventory system, the sale of inventory on account is recorded with a: A) Debit to Cost of Goods Sold. B) Credit to Inventory. C) Credit to Sales Revenue. D) All of the other answers are recorded with the sale of inventory on account.

141) Using a perpetual inventory system, the sale of inventory on account will have what effect on the financial statements? A) Increase revenues B) Increase expenses C) Increase liabilities D) Two of the other answers are correct.

142) Beginning inventory is $142,000. During the period, a company has three purchases of inventory with a cost of $75,000, $80,000, and $56,000. Also during the period, inventory with a cost of $190,000 was sold to customers for $260,000. What is the ending balance of inventory? A) $163,000 B) $21,000 C) $93,000 D) $353,000

143)

Below is a T-account for inventory. Inventory

Version 1

Debit January 1 balance March 25 September 30 December 31 balance

Credit 25,000 58,000 62,000 72,000 69,000 ?

April 24 October 5

Which of the following is true? A) Inventory sold during the year had a cost of $131,000. B) The ending balance of inventory is $24,000. C) Inventory purchases during the year had a cost of $130,000. D) All of the other answer choices are correct.

144) In the first year of a company's operations, it uses FIFO for internal recordkeeping but LIFO for reporting ending inventory. Ending inventory under FIFO is $90,000, and ending inventory under LIFO is $80,000. The company's year-end LIFO adjusting entry would include: A) A debit to Inventory for $10,000. B) A debit to Cost of Goods Sold for $10,000. C) A debit to Inventory for $80,000. D) A credit to Cost of Goods Sold for $10,000.

145) In the first year of a company's operations, it uses FIFO for internal record keeping but LIFO for reporting ending inventory. Ending inventory under FIFO is $90,000, and ending inventory under LIFO is $80,000. The company's year-end LIFO adjusting entry will have what effect on the financial statements? A) Increase revenues B) Increase expenses C) Increase liabilities D) Increase assets

Version 1

146) Using a perpetual inventory system, the entry to record the return of inventory previously purchased on account includes a: A) Debit to Cost of Goods Sold. B) Debit to Inventory. C) Debit to Accounts Payable. D) Credit to Sales Returns.

147) Using a perpetual inventory system, the return of inventory previously purchased on account will have what effect on the financial statements? A) Decrease revenues B) Increase liabilities C) Decrease assets D) Increase expenses

148) Using a perpetual inventory system, payment during the discount period for inventory purchased previously on account will have what effect on the financial statements? A) Decrease stockholders’ equity B) Decrease assets C) Decrease expenses D) Decrease revenues

149) On May 1, a company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, the company pays for this inventory and records which of the following using a perpetual inventory system? Event 1. 1.

Account Title Accounts Payable

Debit 2,000

Cash 2.

Version 1

Accounts Payable

Credit

2,000 1,960

Inventory

Cash 3.

Accounts Payable

Inventory

Cash 4.

Cash

40 2,000 2,000 40 1,960 2,000

Accounts Payable

2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4

150) On May 1, a company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, the company pays for this inventory and records which of the following using a perpetual inventory system? Event 1. 1.

Account Title Accounts Payable

Debit 2,000

Cash 2.

Accounts Payable

Inventory

Cash 3.

Accounts Payable

Inventory

Cash 4.

Version 1

Cash

Credit

2,000 1,960 40 2,000 2,000 40 1,960 2,000

Accounts Payable

2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4

151) A company uses a perpetual inventory system. How should the company record the return of inventory previously purchased on account for $200? Event 1.

Account Title Inventory

Debit 200

Accounts Payable 2.

Accounts Payable

200 200

Inventory 3.

Purchase Returns

200 200

Accounts Payable 4.

Accounts Payable

Credit

200 200

Purchase Returns

200

A) Option 1 B) Option 2 C) Option 3 D) Option 4

152)

In a perpetual inventory system, the cash purchase of inventory is recorded as:

Version 1

A) Purchases. B) Cost of Goods Sold. C) Inventory. D) Accounts Payable.

153) In a perpetual inventory system, the entry at the time of a sale to record the cost of the inventory sold includes a: A) Debit to Accounts Receivable. B) Credit to Cost of Goods Sold. C) Debit to Cost of Goods Sold. D) Not recorded at the time of the sale.

154) A company sold inventory for $1,200 that was previously purchased for $700. The company records which of the following when it sells the inventory using a perpetual inventory system? A) No entry is required for cost of goods sold and inventory B) Debit Cost of Goods Sold $700; credit Inventory $700 C) Debit Cost of Goods Sold $1,200; credit Inventory $1,200 D) Debit Inventory $700; credit Cost of Goods Sold $700

155) A company sold inventory for $1,200 that was previously purchased for $700. The sale will have what effect on the financial statements? A) Increase revenues by $1,200 B) Increase stockholders’ equity by $500 C) Increase expenses by $700 D) All of the other answers are correct.

Version 1

156) Using a perpetual inventory system, how should a company record the sale of inventory costing $450 for $930 on account? Event 1.

Account Title Inventory

Cost of Goods Sold

Sales Revenue

930

Accounts Receivable

Sales Revenue

Cost of Goods Sold

930 930 930 450

Inventory

3. 3.

450

Inventory

450

Gain

480

Credit

450

Accounts Receivable

Debit 450

Sales Revenue

930

Accounts Receivable

930

Sales Revenues

450

Gain

480

A) Option 1 B) Option 2 C) Option 3 D) Option 4

157) Using a perpetual inventory system, how should a company record the sale of inventory costing $620 for $960 on account? Event

Version 1

Account Title

Debit

Credit

Inventory

620

Cost of Goods Sold

Sales Revenue

620 960

Accounts Receivable 2.

Accounts Receivable

Sales Revenue

Cost of Goods Sold

960 960 960 620

Inventory 3.

3. 3.

620

Inventory

620

Gain

340

Sales Revenue 4.

Accounts Receivable

960 960

Sales Revenues

620

Gain

340

A) Option 1 B) Option 2 C) Option 3 D) Option 4

158) A company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should the company record the purchase using a perpetual inventory system? Event 1. 1.

Version 1

Account Title Inventory Accounts Payable

Debit 2,000

Credit

2,000

Cost of Goods Sold

2,000

Deferred Revenue

1,000

Sales Revenue 3.

Cost of Goods Sold

3,000 2,000

Accounts Payable 4.

2,000

Cost of Goods Sold

2,000

Gain

1,000

Accounts Payable

3,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4

159)

Inventory sold FOB destination indicates that the: A) Seller holds title until the inventory is received at the buyer's location. B) Inventory has not yet been shipped. C) Inventory will not be shipped until payment has been received. D) Seller transfers title to the buyer once the inventory is shipped.

160)

Inventory sold FOB shipping point indicates that the: A) Seller holds title until the inventory is received at the buyer's location. B) Inventory has not yet been shipped. C) Inventory will not be shipped until payment has been received. D) Seller transfers title to the buyer once the inventory is shipped.

Version 1

161) If A sells to B, and B obtains title while goods are in transit, the goods were shipped _______. If C sells to D, and C maintains title until the goods arrive at D's door, then the goods were shipped _______. A) FOB shipping point; FOB destination B) FOB destination; FOB shipping point C) FOB destination; FOB destination D) FOB shipping point; FOB shipping point

162)

From the seller’s perspective, ending inventory is equal to the cost of items on hand plus: A) Items in transit sold FOB shipping point. B) Sales discounts. C) Items in transit sold FOB destination. D) Advertising expense.

163) Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company B record the sale of goods to Company A? A) May 12 B) May 14 C) May 19 D) May 17

164) Kelton Incorporated purchases inventory for $2,000 and incurs shipping costs of $100. To record this transaction, the company debits Inventory for $2,000, debits Selling Expenses for $100, and credits Cash for $2,100. Which of the following statements is correct? A) All accounts are accurately stated. B) Assets are understated. C) Net income is overstated. D) Revenues are understated.

Version 1

165) A company had sales revenue of $900,000 for the year. In addition, the following information is available related to the cost of the units sold: Total purchase cost Freight charges Purchase discounts Purchase returns Operating expenses

$ 480,000 10,000 25,000 50,000 200,000

What amount would the company report as gross profit? A) $285,000 B) $485,000 C) $420,000 D) $410,000

166) A company had sales revenue of $800,000 for the year. In addition, the following information is available related to the cost of the units sold: Gross profit Total purchase cost Freight charges Purchase returns Operating expenses Purchase discounts

$ 340,000 ? 20,000 80,000 150,000 40,000

What was the total purchase cost of the units sold? A) $310,000 B) $460,000 C) $410,000 D) $560,000

167) The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:

Version 1

A) FIFO. B) LIFO. C) Weighted-average. D) Each method always produces a different amount.

168)

The primary difference between the periodic and perpetual inventory systems is:

A) The reported amount of ending inventory is higher under the periodic system. B) The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period. C) The reported amount of sales revenue is higher under the periodic inventory system. D) The reported amount of cost of goods sold is higher under the perpetual inventory system.

169)

In accounting for inventory, net realizable value equals: A) Estimated selling price less expected returns by customers. B) Original purchase cost minus the estimated profit on the sale of inventory. C) Estimated selling price less any costs of completion, disposal, and transportation. D) Estimated cost to replace the inventory.

170) The lower of cost and net realizable value rule causes losses in the value of inventory to be recognized in the period when: A) The inventory is purchased. B) Cash collection from the customer fails to occur. C) The inventory is sold. D) The value of inventory declines below cost.

171)

The lower of cost and net realizable value method for inventory was developed to:

Version 1

A) Avoid reporting inventory at an amount that exceeds the benefits it provides. B) Provide an alternative to the FIFO, LIFO, and weighted-average methods. C) Prevent the company from selling the inventory below its original cost. D) Prevent the company from selling inventory to customers who are not likely to pay.

172)

A company has the following information for its inventories A, B, C, and D: Quantity

Historical Cost

Net Realizable Value

15 20 40 25

$20 35 25 50

$25 30 40 35

A B C D

The necessary adjusting entry associated with the lower of cost and net realizable value would be: Event 1.

Account Title Inventory

Debit 675

Cost of Goods Sold 2.

Cost of Goods Sold

675 675

Inventory 3.

Inventory

675 475

Cost of Goods Sold 4.

Cost of Goods Sold

Inventory

Credit

475 475 475

A) Option 1 B) Option 2 C) Option 3 D) Option 4

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173) On April 1, a company purchased two units of inventory, A and B. The cost of unit A was $625, and the cost of unit B was $585. On April 30, the company had not sold the inventory. The net realizable value of unit A was now $640 while the net realizable value of unit B was $500. The adjusting entry associated with the lower of cost and net realizable value on April 30 will be: Event 1.

Account Title Cost of Goods Sold

Debit 70

Inventory 2.

Inventory

70 70

Cost of Goods Sold 3.

Cost of Goods Sold

70 85

Inventory 4.

Inventory

Credit

85 85

Cost of Goods Sold

A) Option 1 B) Option 2 C) Option 3 D) Option 4

174) On April 1, a company purchased two units of inventory, A and B. The cost of unit A was $650, and the cost of unit B was $625. On April 30, the company had not sold the inventory. The net realizable value of unit A was now $685 while the net realizable value of unit B was $550. The adjusting entry associated with the lower of cost and net realizable value on April 30 will be: Event 1. 1.

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Account Title Cost of Goods Sold Inventory

Debit 40

Credit

Inventory

Cost of Goods Sold 3.

Cost of Goods Sold

Inventory 4.

Inventory

Cost of Goods Sold

A) Option 1 B) Option 2 C) Option 3 D) Option 4

175)

Consider the following information pertaining to a company's inventory:

Product Revolvers Spurs Hats

Quantity 16 29 15

Cost $ 124 29 57

Net Realizable Value $ 158 24 47

At what amount should the company report its inventory? A) $3,929 B) $3,385 C) $3,680 D) $3,477

176)

Consider the following information pertaining to a company's inventory:

Product Revolvers Spurs Hats

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Quantity 16 23 12

Cost Net Realizable Value $ 120 $ 150 27 22 56 40

At what amount should the company report its inventory? A) $3,213 B) $3,386 C) $2,996 D) $2,906

177) Under the principle of lower of cost and net realizable value, when a company has 10 units of inventory A with net realizable value of $50 and a cost of $60, what is the adjusting entry? A) Debit Inventory $100; credit Cost of Goods Sold $100 B) Debit Inventory $500; credit Cost of Goods Sold $500 C) Debit Cost of Goods Sold $100; credit Inventory $100 D) Debit Cost of Goods Sold $500; credit Inventory $500

178) A company has four types of products in its inventory. The company applies the rules under lower of cost and net realizable value to its inventory at the end of each year as shown below: Product A B C D

Quantity 15 10 20 15

Cost $ 7 15 8 11

Net Realizable Value $ 8 14 6 10

The year-end adjusting entry based upon the information above would include a: A) Debit to Cost of Goods Sold for $65. B) Credit to Inventory for $50. C) Debit to Inventory for $65. D) Debit to Cost of Goods Sold for $50.

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179) At the end of a reporting period, a company determines that its ending inventory has a cost of $300,000 and a net realizable value of $230,000. What would be the effect(s) of the adjusting entry to write down inventory to net realizable value? A) Decrease total assets B) Decrease net income C) Increase retained earnings D) Decrease total assets and net income

180) Using the information below, determine the ending inventory value applying the lower of cost and net realizable value. Inventory Item Cutlets Chops Shanks

Quantity 200 400 300

Cost $12 $16 $15

Net Realizable Value $14 $14 $12

A) $13,300 B) $12,000 C) $11,600 D) $13,700

181) What effect would an adjusting entry to record inventory at the lower of cost and net realizable value have on the company's financial statements? A) An increase to assets B) An increase to stockholders' equity C) A decrease to revenue D) An increase to expense

182) The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles?

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A) Matching principle B) Revenue recognition C) Conservatism D) Materiality

183) After evaluating the lower of cost and net realizable value of inventory, the accountant prepares a year-end adjusting entry. That adjusting entry would: A) Decrease the company's cost of goods sold. B) Reduce the company's stockholders' equity. C) Increase the company's inventory. D) Increase the company's total assets.

184)

The inventory turnover ratio is measured as: A) Cost of goods sold divided by average inventory. B) Average inventory divided by gross profit. C) Gross profit divided by net sales. D) Net sales divided by average inventory.

185)

The inventory turnover ratio measures: A) The portion of inventory that becomes obsolete each period. B) How many times the company purchases inventory during the current reporting

period. C) The times per period the average inventory balance is sold. D) How many days it takes to collect its sales of inventory sold on account.

186) A company's sales equal $60,000 and cost of goods sold equals $20,000. Its beginning inventory was $1,600 and its ending inventory is $2,400. The company's inventory turnover ratio equals:

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A) 5 times. B) 10 times. C) 20 times. D) 30 times.

187) A company's beginning inventory is $2,000 and its ending inventory is $1,000. The inventory turnover is 6 times. Cost of goods sold for the year must equal: A) $9,000. B) $6,000. C) $12,000. D) $18,000.

188) Truman Company sells a large number of common household items, while Stapleton sells a small number of expensive items. The two companies report the same dollar amount for ending inventory and gross profit for the year. Which of the following is most likely true? A) Truman has a higher inventory turnover ratio and higher gross profit ratio. B) Truman has a higher inventory turnover ratio, and Stapleton has a higher gross profit ratio. C) Truman has a higher inventory turnover ratio, and Stapleton has a lower gross profit ratio. D) Stapleton has a higher inventory turnover ratio and higher gross profit ratio.

189)

Consider the following inventory data for two companies:

Beginning inventory Ending inventory Purchases

Nichols Incorporated $ 120,000 80,000 240,000

Winters Incorporated $ 150,000 100,000 310,000

Which of these companies has the higher inventory turnover ratio?

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A) Nichols B) Winters C) The ratios are the same for both companies. D) The answer cannot be determined with the information given.

190)

The following balances come from the financial statements of a company:

Sales revenue Accounts receivable Beginning inventory Ending inventory Net purchases Sales returns Sales discount

$ 850,000 280,000 50,000 30,000 460,000 50,000 20,000

Given this information, what is the company's inventory turnover ratio and average days in inventory? A) 21.25 times; 17 days B) 28.33 times; 13 days C) 16.0 times; 23 days D) 12.0 times; 30 days

191) Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, which of the following is true of Company A compared to Company B? A) Company A's gross profit is lower and inventory turnover is lower. B) Company A's gross profit is higher and inventory turnover is higher. C) Company A's gross profit is higher and inventory turnover is lower. D) Company A's gross profit is lower and inventory turnover is higher.

192)

Anthony Corporation reported the following amounts for the year:

Net sales

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$ 296,000 57

Cost of goods sold Average inventory

138,000 50,000

Anthony's inventory turnover ratio is: A) 2.42. B) 2.76. C) 3.21. D) 2.14.

193)

Anthony Corporation reported the following amounts for the year:

Net sales Cost of goods sold Average inventory

$ 296,000 138,000 50,000

Anthony's average days in inventory is: (Round to the nearest whole day.) A) 170 days. B) 114 days. C) 132 days. D) 151 days.

194)

Anthony Corporation reported the following amounts for the year:

Net sales Cost of goods sold Average inventory

$ 296,000 138,000 50,000

Anthony's gross profit ratio is: A) 53.4%. B) 51.9%. C) 50.3%. D) 46.6%.

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195)

Consider the following inventory data:

Beginning inventory Ending inventory Purchases

$ 150,000 100,000 310,000

What is the average days in inventory for the year? A) 126.7 days B) 101.4 days C) 152.0 days D) 111.7 days

196)

The gross profit ratio measures: A) The ratio of net income to net sales. B) How quickly the company receives inventory from its suppliers. C) The amount by which the sale of inventory exceeds its cost per dollar of sales. D) How many times during the year a company sells its average inventory balance.

197)

Which of the following would increase the gross profit ratio?

A) The company reduces operating expenses. B) The cost of inventory increases. C) The number of units sold increases. D) The sales price of a product increases by a higher percentage than does its cost of goods sold.

198)

The gross profit ratio will typically be higher for companies that: A) Collect cash more quickly from customers. B) Purchase inventory more frequently during the year. C) Sell products that are more highly specialized. D) Sell a greater number of units.

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199)

A company reported the following data for its first year of operations:

Net sales Cost of goods sold Operating expenses Ending inventories

$ 2,800 1,680 880 820

What is the company's gross profit ratio? A) 80% B) 49% C) 40% D) 5%

200)

In a periodic inventory system, the purchase of inventory is debited to: A) Purchases. B) Cost of Goods Sold. C) Inventory. D) Accounts Payable.

201) Northwest Fur Company started the year with $96,000 of inventory on hand. During the year, $420,000 in inventory was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Northwest paid freight-in charges of $7,000. Inventory with an invoice amount of $4,800 was returned for credit. Cost of goods sold for the year was $370,000. What is ending inventory? A) $145,043 B) $144,048 C) $148,200 D) $50,000

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202) Northwest Fur Company started the year with $94,000 of inventory on hand. During the year, $400,000 in inventory was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Northwest paid freight-in charges of $7,500. Inventory with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. What is ending inventory? A) $112,490 B) $112,550 C) $116,500 D) $120,300

203)

A company reports the following amounts at the end of the year:

Sales revenue Beginning inventory Total purchases Freight charges Purchase discounts Purchase returns Ending inventory Operating expenses

$ 900,000 100,000 500,000 10,000 25,000 50,000 120,000 200,000

For what amount would the company report gross profit? A) $285,000 B) $485,000 C) $465,000 D) $400,000

204) On May 1, Davidson Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Davidson pays for this inventory and records which of the following using a periodic inventory system? Event 1. 1.

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Account Title Accounts Payable Cash

Debit 2,000

Credit

2,000

2. 2.

Accounts Payable Purchase Discounts

1,960 40

Cash 3.

Accounts Payable

Purchase Discounts

Cash 4.

Cash

2,000 2,000 40 1,960 2,000

Accounts Payable

2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4

205) On May 1, Davidson Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Davidson pays for this inventory and records which of the following using a periodic inventory system? Event 1. 1.

Account Title Accounts Payable

Debit 2,000

Cash 2.

Accounts Payable Purchase Discounts

2,000 1,960 40

Cash 3.

Accounts Payable

Purchase Discounts

Cash

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Credit

2,000 2,000 40 1,960

Cash

2,000

Accounts Payable

2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4

206) A company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should the company record the purchase using a periodic inventory system? Event 1.

Account Title Purchases

Debit 2,000

Accounts Payable 2.

2,000

Cost of Goods Sold

2,000

Deferred Revenue

1,000

Sales Revenue 3.

Cost of Goods Sold

3,000 2,000

Accounts Payable 4.

2,000

Cost of Goods Sold

2,000

Gain

1,000

Accounts Payable

Credit

3,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4

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207) A company uses a periodic inventory system. How should the company record the sale of inventory costing $620 for $960 on account? Event 1.

Account Title Cost of Goods Sold

Debit 620

Purchases

Accounts Receivable

Sales Revenue 2.

Accounts Receivable

620 960 960 960

Sales Revenue 3.

3. 3.

960

Purchases

620

Gain

340

Sales Revenue 4.

Accounts Receivable

Credit

960 960

Sales Revenues

620

Gain

340

A) Option 1 B) Option 2 C) Option 3 D) Option 4

208) A company uses a periodic inventory system. How should the company record the return of inventory previously purchased on account for $200? Event 1. 1.

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Account Title Inventory Accounts Payable

Debit 200

Credit

200

Accounts Payable

200

Inventory 3.

Purchase Returns

200 200

Accounts Payable 4.

Accounts Payable

200 200

Purchase Returns

200

A) Option 1 B) Option 2 C) Option 3 D) Option 4

209) In a periodic inventory system, the entry at the time of a sale to record the cost of inventory sold includes a: A) Debit to Accounts Receivable. B) Credit to Cost of Goods Sold. C) Debit to Cost of Goods Sold. D) Not recorded at this time of the sale.

210) A company sold inventory for $1,200 that was purchased for $700. The company records which of the following when it sells inventory using a periodic inventory system? A) No entry is required for cost of goods sold and inventory. B) Debit Cost of Goods Sold $700; credit Inventory $700 C) Debit Cost of Goods Sold $1,200; credit Inventory $1,200 D) Debit Inventory $700; credit Cost of Goods Sold $700

211) Suppose a company overstates its ending inventory for 2024. What effect will this have on the reported amount of cost of goods sold for 2024?

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A) Overstate cost of goods sold B) Understate cost of goods sold C) Have no effect on cost of goods sold D) Cannot be determined given the information provided

212) A company's correct ending balance for the inventory account at the end of 2024 should be $5,000, but the company incorrectly stated it as $3,000. In 2025, the company correctly recorded its ending balance of the inventory account. Which one of the following is true? A) Gross profit is overstated by $2,000 in 2024. B) Retained earnings are understated by $2,000 in 2025. C) Gross profit is overstated by $2,000 in 2025. D) Cost of goods sold is understated by $2,000 in 2024.

213) If a company overstates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true? A) Net income is overstated in year 2. B) Cost of goods sold is overstated in year 1. C) Net income is understated in year 1. D) Retained earnings is overstated in year 1.

214) If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true? A) Net income is overstated in year 1. B) Cost of goods sold is understated in year 2. C) Net income is understated in year 2. D) Retained earnings is understated in year 2.

215) If a company understates its count of ending inventory in Year 1, which of the following is true?

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A) Costs of goods sold is understated at the end of Year 1. B) Profit is correct in Year 2. C) The balance of retained earnings is overstated at the end of Year 1. D) The balance of retained earnings is correct at the end of Year 2.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 216) Explain the difference in the type of inventory and the flow of inventory for a manufacturing company versus a merchandising company.

217) How is inventory reported in the balance sheet? What does it represent? How is cost of goods sold reported in the income statement? What does it represent?

218) What is a multiple-step income statement? What information does it provide beyond "bottom-line" net income?

219) What are the three primary cost flow assumptions? How does the specific identification method differ from these three primary cost flow assumptions?

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220) What does it mean that FIFO has a balance-sheet focus and LIFO has an incomestatement focus?

221) What is meant by the assertion that the lower of cost and net realizable value for inventory is an example of conservatism in accounting?

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Answer Key Test name: Chap 06_6e_Spiceland 1) FALSE Inventory is typically reported as a current asset because companies expect to convert it to cash in the near term. 2) FALSE Cost of goods sold is an expense reported in the income statement and inventory is an asset reported in the balance sheet. 3) TRUE 4) TRUE 5) TRUE 6) TRUE 7) TRUE 8) FALSE Sales revenue minus cost of goods sold equals gross profit. 9) TRUE 10) FALSE Beginning Inventory ($30,000) + Purchases ($95,000) − Ending Inventory ($25,000) = Cost of Goods Sold ($100,000). 11) FALSE Companies can assume which inventory units are sold and still remain on hand using a variety of methods (FIFO, LIFO, and weighted-average cost). 12) TRUE 13) FALSE The average is a weighted-average cost which includes both beginning inventory and purchases and is equal to total cost of goods available for sale divided by the total number of units available for sale. Version 1

14) TRUE 15) FALSE Most often, the actual physical flow of goods follows FIFO. 16) TRUE 17) FALSE During periods of rising costs, FIFO generally results in a lower cost of goods sold. 18) TRUE 19) FALSE During periods of rising costs, LIFO generally results in a lower ending inventory balance. 20) TRUE 21) FALSE When inventory costs are rising, LIFO provides greater tax savings. 22) FALSE The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use it for financial reporting. 23) TRUE 24) TRUE 25) FALSE Once a company chooses an inventory cost method, it is not allowed to frequently change to another one. 26) FALSE The debit is to the Inventory account. 27) FALSE For FOB destination, title transfers once the inventory reaches the buyer (destination). 28) TRUE 29) TRUE 30) TRUE Version 1

31) FALSE The amount reported for ending inventory (or cost of goods sold) will differ. 32) FALSE Companies must report inventory at the lower of cost and net realizable value. 33) FALSE Companies are required to record an adjusting entry when net realizable value falls below cost. The adjusting entry has the effect of reducing assets and increasing expenses. 34) TRUE 35) TRUE 36) TRUE 37) TRUE 38) FALSE The inventory turnover ratio equals cost of goods sold ($2,000) divided by average inventory ($500), which equals 4.0 in this example. 39) TRUE 40) FALSE A higher ratio is generally a stronger signal about the company's successful management of inventory. 41) TRUE 42) TRUE 43) FALSE Understating ending inventory in the current year will cause cost of goods sold in the current year to be overstated. 44) C 45) B 46) A 47) D Version 1

48) D 49) A 50) C 51) A 52) C Cost of goods sold is the cost of inventory sold during the year and is an expense reported in the income statement. 53) C 54) B 55) B 56) D 57) C Cost of goods sold = beginning inventory ($14,500) + purchases ($140,000) − ending inventory ($26,000) = $128,500. 58) C Cost of goods sold = beginning inventory ($12,000) + purchases ($150,000) − ending inventory ($20,000) = $142,000. 59) A Ending inventory = beginning inventory ($19,400) + purchases ($235,000) − cost of goods sold ($238,000) = $16,400. 60) A Ending inventory = beginning inventory ($18,000) + purchases ($230,000) − cost of goods sold ($233,000) = $15,000. 61) D $40,000 + $200,000 − $100,000 = $140,000 62) A $30,000 + $50,000 − $60,000 = $20,000 63) C Beginning Inventory + $450,000 − $200,000 = $400,000 Beginning Inventory = $150,000 Version 1

64) B 65) C 66) B 67) B 68) D 69) C 70) B $200,000 − $120,000 = $80,000 71) A Sales revenue ($305,000) − Sales returns ($29,000) − Cost of goods sold ($240,000) = $36,000. 72) D Sales revenue ($320,000) − Sales returns ($20,000) − Cost of goods sold ($250,000) = $50,000. 73) D Net sales = $350,000 − $50,000 − $20,000 = $280,000. Gross profit = $280,000 − $180,000 = $100,000. 74) B Gross profit = $104,000 − $65,000 = $39,000. 75) D Operating income equals net sales minus cost of goods sold minus selling, general, and administrative expenses. 76) B 77) B Operating income = $800,000 − $420,000 − $170,000 = $210,000 78) A Gross profit = $440,000 − $180,000 = $260,000. 79) A Operating income = $440,000 − $180,000 − ($60,000 + $55,000 + $25,000) = $120,000. Version 1

80) D Net income = $440,000 − $180,000 − ($60,000 + $55,000 + $25,000) – $10,000 − $45,000 = $65,000. 81) B 82) D 83) A 84) C 85) B 86) C Ending inventory = ($3 × 10) + ($4 × 20) = $110. 87) B Sales revenue = $25 × 7 = $175. Cost of goods sold = ($4 × 20) + ($3 × 5) = $95. Gross profit = $175 − $95 = $80. 88) D Total cost = [($2 × 20) + ($3 × 15) + ($6 × 15)] = $175. Total units = 20 + 15 + 15 = 50. Weighted-average = $175 / 50 = $3.50. Cost of goods sold = $3.50 × 30 = $105. 89) C Ending inventory = 160 × $2.69 = $430. 90) A Ending inventory = 200 × $2.50 = $500. 91) B Cost of goods sold = (500 × $2.40) + (200 × $2.50) = $1,700. 92) B Ending inventory = 190 × $2.14 = $407. 93) D Ending inventory = 200 × $2.40 = $480. 94) B Version 1

Cost of goods sold = (370 × $2.58) + (320 × $2.33) = $1,700. 95) C Cost of goods sold = (400 × $2.50) + (300 × $2.40) = $1,720. 96) A Weighted-average cost = [(600 × $2.39) + (340 × $2.66)] / 940 = 2.4877. Ending inventory = 370 × $2.4877 = $920 (rounded). 97) C Weighted-average cost = [(500 × $2.40) + (400 × $2.50)] / 900 = $2.4444 Ending inventory = 200 × $2.4444 = $489 (rounded) 98) A Weighted-average cost = [(500 × $2.40) + (400 × $2.50)] / 900 = $2.4444 Cost of goods sold = 700 × $2.4444 = $1,711 (rounded) 99) B Ending inventory = (124 × $8.40) + (540 × $9.10) = $5,956. 100) A Ending inventory = (100 × $7.30) + (600 × $7.35) = $5,140. 101) D Cost of goods sold = (920 × $7.12) + (530 × $7.55) + (400 × $7.96) = $13,736. 102) D Cost of goods sold = (1,000 × $7.20) + (600 × $7.25) + (700 × $7.30) = $16,660. 103) A Ending inventory = 700 × $7.20 = $5,040. 104) B Cost of goods sold = (600 × $7.35) + (800 × $7.30) + (600 × $7.25) + (300 × $7.20) = $16,760. Version 1

105) A Weighted-average cost = [(1,000 × $7.20) + (600 × $7.25) + (800 × $7.30) + (600 × $7.35)] / 3,000 = $7.2667. Ending inventory = 700 × $7.2667 = $5,087 (rounded). 106) D Weighted-average cost = [(1,060 × $7.13) + (520 × $7.32) + (860 × $7.40) + (600 × $7.67)] / 3,040 = $7.3455. Cost of goods sold = 2,100 × $7.3455 = $15,425 (rounded). 107) C Weighted-average cost = [(1,000 × $7.20) + (600 × $7.25) + (800 × $7.30) + (600 × $7.35)] / 3,000 = $7.2667 Cost of goods sold = 2,300 × $7.2667 = $16,713 (rounded) 108) A Ending inventory = (14 × $3.50) + (9 × $5.50) = $99 109) D Ending inventory = (15 × $4) + (5 × $5) = $85 110) D Cost of goods sold = (14 × $4.40) + (11 × $5.40) = $121 111) C Cost of goods sold = (15 × $4) + (10 × $5) = $110 112) A Cost of goods sold (first 1,200 unit) = (100 × $10) + (500 × $12) + (600 × $15) = $16,000 113) C Weighted-average cost = [(15 × $2.60) + (21 × $3.60) + (12 × $4.30)] / 48 = $3.4625 Cost of goods sold = 35 × $3.4625 = $121 (rounded) 114) A

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Weighted-average cost = [(15 × $3.00) + (20 × $3.50) + (10 × $4.00)] / 45 = 3.4444 Cost of goods sold = 35 × $3.4444 = $121 (rounded) 115) A 116) A 117) C 118) C 119) B 120) D 121) C 122) D 123) C 124) C 125) B 126) D 127) B 128) B 129) D 130) C 131) A 132) C 133) C $220,000 + $70,000 = $290,000 134) A $80,000 − $60,000 = $20,000 135) D 136) D 137) B 138) A 139) C Version 1

140) D 141) D 142) A $142,000 + $75,000 + $80,000 + $56,000 − $190,000 = $163,000 143) D Inventory sold = ($62,000 + $69,000) = $131,000. Ending inventory = ($25,000 + $58,000 + $72,000) − ($62,000 + $69,000) = $24,000. Inventory purchases = ($58,000 + $72,000) = $130,000. 144) B 145) B 146) C 147) C 148) B 149) A There is no purchase discount because payment is not within the 10-day discount period. 150) C Purchase discount = $2,000 × 2% = $40. 151) B 152) C 153) C 154) B 155) D 156) B 157) B 158) A 159) A 160) D 161) A Version 1

162) C 163) D 164) B 165) B Cost of goods sold = $480,000 + $10,000 − $25,000 − $50,000 = $415,000 Gross profit = $900,000 − $415,000 = $485,000 166) D Gross profit = Sales revenue − Cost of goods sold $340,000 = $800,000 − Cost of goods sold Cost of goods sold = $460,000 Cost of goods sold = Total purchase cost + Freight-in − Purchase discounts − Purchase returns $460,000 = Total purchase cost + $20,000 − $40,000 − $80,000 Total purchase cost = $560,000 167) A 168) B 169) C 170) D 171) A 172) D Need to reduce inventory cost to the lower net realizable value for items B and D. (20 × $5) + (25 × $15) = $475. 173) C Need to reduce inventory cost to the lower net realizable value for unit B. $585 − $500 = $85 174) C Need to reduce inventory cost to the lower net realizable value for unit B. $625 − $550 = $75. 175) B Version 1

(16 × $124) + (29 × $24) + (15 × $47) = $3,385 176) D (16 × $120) + (23 × $22) + (12 × $40) = $2,906 177) C Need to reduce inventory cost to the lower net realizable value. 10 × $10 = $100 178) A Product B = ($15 − $14) × 10 = $10. Product C = ($8 − $6) × 20 = $40. Product D = ($11 − $10) ×15 = $15. Total adjustment to cost of goods sold = $10 + $40 + $15 = $65. 179) D 180) C Cutlets = $12 × 200 = $2,400 Chops = $14 × 400 = $5,600 Shanks = $12 × 300 = $3,600 Ending inventory = $2,400 + $5,600 + $3,600 = $11,600 181) D 182) C 183) B 184) A 185) C 186) B $20,000 / [($1,600 + $2,400) / 2] = 10 times 187) A $X / [($2,000 + $1,000) / 2] = 6 times $X = $9,000 188) B 189) B

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Nichols' cost of goods sold = $120,000 + $240,000 − $80,000 = $280,000. Nichols' inventory turnover ratio = $280,000 / [($120,000 + $80,000) / 2] = 2.80. Winters' cost of goods sold = $150,000 + $310,000 − $100,000 = $360,000. Winters' inventory turnover ratio = $360,000 / [($150,000 + $100,000) / 2] = 2.88. 190) D Cost of goods sold = $50,000 + $460,000 − $30,000 = $480,000 Inventory turnover ratio = $480,000 / [($50,000 + $30,000) / 2] = 12.0 Average days in inventory = 365 / 12.0 = 30 days (rounded) 191) C 192) B Inventory turnover ratio = $138,000 / $50,000 = 2.76 193) C Inventory Turnover Ratio = $138,000 / $50,000 = 2.76 Average days in inventory = 365 / 2.76 = 132 (rounded) 194) A Gross profit ratio = ($296,000 − $138,000) / $296,000 = 53.4% (rounded) 195) A Cost of goods sold = $150,000 + $310,000 – $100,000 = $360,000 Inventory turnover ratio = $360,000 / [($150,000 + $100,000) / 2] = 2.88 Average days in inventory = 365 / 2.88 = 126.7 days (rounded) 196) C 197) D 198) C 199) C Version 1

Gross Profit Ratio = ($2,800 − $1,680) / $2,800 = 0.40 200) A 201) B Ending Inventory = $96,000 + $420,000 + $7,000 − $4,800 − $4,152* − $370,000 = $144,048 *Purchase discounts = ($420,000 − $4,800) × 1% = $4,152 202) B Ending Inventory = $94,000 + $400,000 + $7,500 − $5,000 − $3,950* − $380,000 = $112,550 *Purchase discounts = ($400,000 − $5,000) × 1% = $3,950 203) B Cost of Goods Sold = $100,000 + ($500,000 + $10,000 − $25,000 − $50,000) − $120,000 = $415.000 Gross Profit = $900,000 − $415,000 − $485,000 204) A There is no purchase discount because payment is not within the 10-day discount period. 205) C Purchase discount = $2,000 × 2% = $40. 206) A 207) B 208) D 209) D 210) A 211) B 212) C 213) D 214) B 215) D

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216)Merchandising companies purchase inventories that are primarily in finished form for resale to customers. These companies may assemble, sort, repackage, redistribute, store, refrigerate, deliver, or install the inventory, but they do not manufacture it. They simply serve as intermediaries in the process of moving inventory from the manufacturer to the end user. Manufacturing companies manufacture the inventories they sell, rather than buying them in finished form from suppliers. Manufacturers have three types of inventory: (1) raw materials include the cost of components that have yet to be used in production; (2) workin-process refers to the products that have been started in production but are not yet complete at the end of the period, which includes raw materials, direct labor, and overhead; and (3) finished goods consists of items for which the manufacturing process is complete. 217) Inventory is reported as an asset in the balance sheet. The amount reported is the cost of inventory not sold at the end of the year. Cost of goods sold is an expense reported in the income statement. It is the cost of inventory sold during the year. 218)A multiple-step income statement reports multiple levels of profitability. Gross profit equals sales revenue minus cost of goods sold. Operating income equals gross profit minus operating expenses. Income before income taxes equals operating income plus nonoperating revenues and minus nonoperating expenses. Net income equals all revenues minus all expenses. 219)The three most common inventory cost flow assumptions are FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted-average cost. These methods provide assumptions as to which inventory units are sold, whereas the specific identification method matches or identifies each unit of inventory with its actual cost.

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220)Since FIFO assumes the first purchases sell first, the amount it reports for ending inventory (in the balance sheet) better approximates the current cost of inventory. LIFO assumes the last purchases are sold first, reporting the most recent inventory cost in cost of goods sold (in the income statement). Thus, LIFO more realistically matches the current costs of inventory needed to produce current revenues. 221)Firms are required to report the decreasing value of inventory, but not allowed to report the increasing value of inventory. Conservative accounting implies that there is more potential harm to users of financial statements if estimated gains turn out to be wrong than if estimated losses turn out to be wrong. Therefore, companies typically do not report estimated gains.

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CHAPTER 7: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match the term to the appropriate definition: Terms Addition Repairs and maintenance Capitalize Materiality Improvement Definitions A) Recording an expenditure as an asset. B) Expenses after acquisition that maintain a given level of benefits. C) The cost of replacing a major component of an asset. D) Occurs when we add a new major component to an existing asset. E) Large enough to influence an investor's or creditor's decision.

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Match the term to the appropriate definition:

Terms Declining-balance method Straight-line method Activity-based method Amortization Depletion Definitions A) Allocates an asset's cost based on its use. B) Allocates an equal amount of depreciation to each year of the asset's service life. C) Allocating the cost of an intangible asset over its service life. D) The process of recording expense for natural resources. E) An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.

Match the term to the appropriate definition:

Terms A) Franchise B) Patent C) Trademark D) Goodwill E) Copyright Definitions A) Payment for the exclusive right to use the company's name and to sell its products within a specified geographical area. B) An exclusive right to manufacture a product or to use a process. C) A word, slogan, or symbol that distinctively identifies a company, product, or service. D) An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. E) The purchase price of a company less the fair value of the net assets acquired.

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Match the term to the appropriate definition:

Terms Residual value Book value Accumulated depreciation Depreciation Service life Definitions A) A contra asset account representing the total depreciation recorded to date. B) Equal to the original cost of the asset minus the current balance in accumulated depreciation. C) Allocating the cost of a tangible asset over its service life. D) The amount the company expects to receive from selling the asset at the end of its service life. E) How long the company expects to receive benefits from the asset before disposing of it.

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Match the term to the appropriate definition:

Terms Impairment Profit margin Big bath Asset turnover Return on assets Definitions A) Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. B) Net income divided by net sales; indicates the earnings per dollar of sales. C) Net sales divided by average total assets; measures the sales per dollar of assets invested. D) Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). E) Recording all losses in one year to make a bad year even worse.

6) Soccer Wholesale purchased land and a warehouse for one price of $730,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: commission to sales agent, $47,800; title insurance, $3,500; and miscellaneous closing costs, $9,900. The warehouse is immediately demolished at a cost of $85,200 in anticipation of building a new warehouse. Required: Determine the amount Soccer Wholesale should report as the cost of the land.

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7) Soccer Wholesale purchased land and a warehouse for one price of $800,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: commission to sales agent, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Required: Determine the amount Soccer Wholesale should report as the cost of the land.

8) Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $430,000. Shipping costs totaled $14,200. Foundation work to house the centrifuge cost $9,700. An additional water line had to be run to the equipment at a cost of $3,600. Labor and testing costs totaled $4,900. Materials used up in testing cost $2,300. Required: 1. What is the total capitalized cost of the equipment? 2. How much of this amount should be expensed immediately?

9) Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. Required: 1. What is the total capitalized cost of the equipment? 2. How much of this amount should be expensed immediately?

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10)

Little King Sandwiches made the following expenditures related to its restaurant:

1. Replaced the heating and air-conditioning equipment at a cost of $15,000. 2. Remodeled the restaurant building. The total capitalized cost of the project was $150,000. 3. Performed annual building maintenance at a cost of $47,000. 4. Paid annual insurance premium on the property for the coming year, $7,700. 5. Purchased a new delivery truck, $22,500. 6. Landscaped the property and added outdoor lights, $9,000. Assume cash was paid for all expenditures. Required: Indicate the account to be debited for each of these expenditures.

11)

Suddenly Salad had the following expenditures related to developing its trademark:

General advertising costs Advertising specifically focused on the trademark Legal fees to register trademark Registration and design fees for the trademark Legal fees for successful defense of the new trademark

$ 310,000 119,000 50,900 30,100 31,100

Total

$ 541,100

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During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized. Required: 1. Which of the above costs should the company capitalize to the Trademark account in the balance sheet? 2. Which of the above costs should the company report as expense in the income statement?

12)

Suddenly Salad had the following expenditures related to developing its trademark:

$ 300,000 120,000 52,000 38,000 33,000 $ 543,000

13) New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $75,500 in cash. The book values and fair values of Red Rock's assets and liabilities were as follows: Book Value

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Fair Value

Current assets Property, plant, and equipment Other assets Current liabilities Long-term liabilities

$ 26,900 46,000 4,800 10,000 27,200

$ 26,800 54,800 5,400 15,600 20,200

Required: Calculate the amount paid for goodwill.

14) New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and fair values of Red Rock's assets and liabilities were as follows:

Current assets Property, plant, and equipment Other assets Current liabilities Long-term liabilities

Book Value

Fair Value

$ 24,000 44,000 4,000 16,000 24,000

$ 30,000 56,000 6,000 16,000 22,000

Required: Calculate the amount paid for goodwill.

15) Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) salaries for the repair technicians, $146,000; (2) remodeling of the executive offices, $89,300; (3) annual maintenance costs related to its machinery, $71,100; (4) improvement of the production line resulting in an increase in productivity, $37,800; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $37,200. Required: How should Western account for each of these expenditures?

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16) Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) salaries for the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. Required: How should Western account for each of these expenditures?

17) Taco Hut purchased equipment on May 1, 2024, for $18,000. Residual value at the end of an estimated eight-year service life is expected to be $2,000. Required: Calculate depreciation expense using the straight-line method for 2024 and 2025, assuming a December 31 year-end.

18) Taco Hut purchased equipment on May 1, 2024, for $15,000. Residual value at the end of an estimated eight-year service life is expected to be $3,000. Required: Calculate depreciation expense using the straight-line method for 2024 and 2025, assuming a December 31 year-end.

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19) China Dragon purchased new restaurant equipment on September 1, 2024, for $11,000. Residual value at the end of an estimated five-year service life is expected to be $1,100. Required: Calculate depreciation expense using the straight-line method for 2024 and 2025, assuming a December 31 year-end.

20) China Dragon purchased new restaurant equipment on September 1, 2024, for $8,000. Residual value at the end of an estimated five-year service life is expected to be $2,000. Required: Calculate depreciation expense using the straight-line method for 2024 and 2025, assuming a December 31 year-end.

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21) Mountain View Resorts purchased equipment at the beginning of 2024 for $37,000. Residual value at the end of an estimated four-year service life is expected to be $7,000. The machine operated for 2,400 hours in the first year and the company expects the machine to operate for a total of 9,000 hours over its four-year life. Required: Calculate depreciation expense for 2024, using each of the following depreciation methods: 1. Straight-line 2. Double-declining-balance 3. Activity-based

22) Mountain View Resorts purchased equipment at the beginning of 2024 for $40,000. Residual value at the end of an estimated four-year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four-year life. Required: Calculate depreciation expense for 2024, using each of the following depreciation methods: 1. Straight-line 2. Double-declining-balance 3. Activity-based

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23) Chubbyville purchases a delivery van for $22,000. Chubbyville estimates a four-year service life and a residual value of $2,200. During the four-year period, the company expects to drive the van 110,000 miles. Required: Calculate annual depreciation for the four-year life of the van using each of the following methods: (Round all amounts to the nearest dollar.) 1.Straight-line 2.Double-declining-balance 3.Activity-based (Actual miles driven each year were 18,000 miles in Year 1; 31,000 miles in Year 2; 21,000 miles in Year 3; and 24,000 miles in Year 4. Note that actual total miles of 94,000 fall short of expectations by 16,000 miles.)

24) Chubbyville purchases a delivery van for $23,500. Chubbyville estimates a four-year service life and a residual value of $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Required: Calculate annual depreciation for the four-year life of the van using each of the following methods. 1.Straight-line 2.Double-declining-balance 3.Activity-based (Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.)

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25) Burger Chef acquired a delivery truck on March 1, 2024, for $30,300. The company estimates a residual value of $1,100 and a four-year service life. It expects to drive the truck 73,000 miles. Actual mileage was 12,400 miles in 2024 and 13,500 miles in 2025. Calculate depreciation expense using the activity-based method for 2024 and 2025, assuming a December 31 year-end.

26) Burger Chef acquired a delivery truck on March 1, 2024, for $26,000. The company estimates a residual value of $2,000 and a six-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2024 and 16,000 miles in 2025. Calculate depreciation expense using the activity-based method for 2024 and 2025, assuming a December 31 year-end.

27) Strawberry Fields purchased a tractor at a cost of $37,000 and sold it two years later for $25,100. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $9,000 residual value. What was the gain or loss on the sale? Record the sale.

28) Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale.

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29) At the beginning of the year, Big Time Tires acquired a patent for $800,000 and a trademark for $240,000. Big Time Tires' policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would be reported in Big Time Tires' income statement for the first year related to these items?

30) At the beginning of the year, Big Time Tires acquired a patent for $800,000 and a trademark for $300,000. Big Time Tires' policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would be reported in Big Time Tires' income statement for the first year related to these items?

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31) On January 1, 2024, The Donut Stop purchased a patent for $83,000. At that time, the remaining legal life was 15 years, but the company estimated the patent would be useful for only five more years. In late December 2025, the company incurred legal fees of $22,000 in successfully defending the patent in an infringement suit. The successful defense did not change the company's estimate of the patent's useful life. The Donut Stop's year-end is December 31. Required: 1. Record (1) the purchase of the patent in 2024, (2) amortization in 2024, (3) the cost of legal fees in 2025, and (4) amortization in 2025 (for simplicity, assume no amortization for the legal fees is recorded in 2025 because the expenditures did not occur until late December). 2. What is the balance in the Patents account at the end of 2025?

32) On January 1, 2024, The Donut Stop purchased a patent for $80,000. At that time, the remaining legal life was 15 years, but the company estimated the patent would be useful for only five more years. In late December 2025, the company incurred legal fees of $25,000 in successfully defending the patent in an infringement suit. The successful defense did not change the company's estimate of the patent's useful life. The Donut Stop's year-end is December 31. Required: 1. Record (1) the purchase of the patent in 2024, (2) amortization in 2024, (3) the cost of legal fees in 2025, and (4) amortization in 2025 (for simplicity, assume no amortization for the legal fees is recorded in 2025 because the expenditures did not occur until late December). 2. What is the balance in the Patents account at the end of 2025?

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33) The Bomb Pop Corporation sold ice cream equipment for $17,600. The equipment was originally purchased for $40,000, and accumulated depreciation through the date of sale totaled $24,000. Required: 1. What was the gain or loss on the sale of the equipment? 2. Record the sale of the equipment.

34) The Bomb Pop Corporation sold ice cream equipment for $16,000. The equipment was originally purchased for $40,000, and accumulated depreciation through the date of sale totaled $25,000. Required: 1. What was the gain or loss on the sale of the equipment? 2. Record the sale of the equipment.

35) Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and gives up a piece of machinery. The fair value and book value of the machinery were $29,000 and $21,000 (original cost of $33,000 less accumulated depreciation of $12,000), respectively. Since the delivery truck was worth $34,000, Nate paid an additional $5,000 in cash to Lizzy. Required: Record the exchange for Nate's Hot Dogs.

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36) Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and gives up a piece of machinery. The fair value and book value of the machinery were $27,000 and $25,000 (original cost of $35,000 less accumulated depreciation of $10,000), respectively. Since the delivery truck was worth $32,000, Nate paid an additional $5,000 in cash to Lizzy. Required: Record the exchange for Nate's Hot Dogs.

37) New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $78,000. According to an independent appraisal, the old land currently is worth $114,000. New World Deli paid $11,000 in cash to complete the transaction. Required: Record the exchange.

38) New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $85,000. According to an independent appraisal, the old land currently is worth $110,000. New World Deli paid $15,000 in cash to complete the transaction. Required: Record the exchange.

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39) Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions): Allied Construction Sales Net income Total assets Axis Construction Sales Net income Total assets

2024 $54,000 3,600 28,000 2024 $92,000 3,800 52,000

2023 $48,000 3,100 28,000 2023 $77,000 4,700 60,000

Required: 1. Calculate Allied Construction's return on assets, profit margin, and asset turnover ratio for 2024. 2. Calculate Axis Construction's return on assets, profit margin, and asset turnover ratio for 2024. 3. Which company has the better profit margin and which company has the better asset turnover?

40) Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions): Allied Construction Sales Net income Total assets Axis Construction Sales

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2024 $48,283 2,809 30,869 2024 $77,349

2023 $46,927 3,105 27,767 2023 $90,837

Net income Total assets

4,395 44,324

5,761 52,263

41) ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. The company estimates the following: book value, $18.2 million; fair value, $12.4 million; sum of estimated future cash flows generated from the oil-drilling platform, $16.5 million. Required: What amount of impairment loss, if any, should ACME record?

42) ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. The company estimates the following: book value, $18.5 million; fair value, $12 million; sum of estimated future cash flows generated from the oil-drilling platform, $16 million. Required: What amount of impairment loss, if any, should ACME record?

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43) Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets for possible impairment. The relevant information for these assets is presented below: Book value Estimated total future cash flows Fair value

$4.0 million 5.5 million 3.4 million

Required: Determine the amount of the impairment loss, if any.

44) Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets for possible impairment. The relevant information for these assets is presented below: Book value Estimated total future cash flows Fair value

$4.5 million 5.0 million 3.5 million

Required: Determine the amount of the impairment loss, if any.

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45) On the first day of the year, China Express purchased land for $140,000. Prior to construction on the new building, the land had to be cleared of trees and brush. Costs incurred during the first year are listed below: Land clearing costs Architect fees (for new building) Legal fees for title investigation of land Property taxes on land (for the first year) Building construction costs

$ 5,000 30,000 1,000 2,500 440,000

Required: Determine the amounts that should be recorded in the Land and the Building accounts.

46) El Tapeti purchased equipment from Old World Deli. Old World Deli was closing its business and sold its restaurant equipment for $80,000. In addition to the purchase price, El Tapeti paid shipping costs of $2,000. Employees of El Tapeti installed the ovens; labor costs were $10,000. An outside contractor performed some of the electrical work for $2,200. El Tapeti incurred costs of $800 in testing the equipment. Required: 1. Prepare a schedule showing the amount at which the equipment should be recorded in El Tapeti’s equipment account. 2. Indicate where any amounts not included in the equipment account should be reported.

47) Nordic Outfitters purchased all the outstanding common stock of European Retail for $3,000,000 in cash. The book values and fair values of European Retail's assets and liabilities were:

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Book Value Receivables Property, plant, and equipment Intangible assets Liabilities Net assets

$ 250,000 2,000,000 200,000 (650,000) $1,800,000

Fair Value $ 250,000 2,400,000 500,000 (650,000) $2,500,000

Required: 1. Calculate the amount paid for goodwill. 2. Record Nordic Outfitters' acquisition of European Retail.

48) Lincoln Driving Academy purchased a used car to use in its driver's education program. Lincoln incurred the following expenses related to the car: 1. Painted the car and fixed a dent on the side of the car at a cost of $2,700. The repairs are considered extensive and increase future benefits. 2. Installed a passenger side brake to be used by the instructor if necessary. 3. Paid the annual registration fees of $120. 4. Performed annual maintenance and repairs at $400. 5. Overhauled the engine at a cost of $2,600, increasing the service life of the car by an estimated four years. Required: Indicate whether Lincoln should capitalize or expense each of these expenditures. How could Lincoln use expenditures like these to increase reported earnings?

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49) Diamond Autobody purchased new equipment for $90,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. During the four-year period, the company expects to use the equipment a total of 5,000 hours. Required: Prepare a depreciation schedule for the four-year life of the equipment using the following methods: 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual use per year was as follows: Year 1 2 3 4

50)

Hours Used 1,200 1,400 1,500 1,100

The Snack Stop had the following long-term asset balances as of January 1, 2025: Cost

Land Building Equipment Patent

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$ 90,000 600,000 200,000 80,000

Accumulated Depreciation 0 $(60,000) (72,000) (20,000)

Book Value $ 90,000 540,000 128,000 60,000

All of the assets were purchased at the beginning of 2023. The building is depreciated over a 20year service life using the straight-line method and estimating no residual value. The equipment is depreciated over a 10-year service life using the double-declining-balance method with an estimated residual value of $10,000. The patent is estimated to have an eight-year service life with no residual value and is amortized using the straight-line method. Depreciation and amortization have already been calculated for the first two years. Required: 1. For the year ended December 31, 2025, record depreciation expense for buildings and equipment. Land is not depreciated. 2. For the year ended December 31, 2025, record amortization expense for the patent. 3. Calculate the book value for each of the four long-term assets at December 31, 2025.

51) Murphy's Deli is in the process of closing its operations and sold its three-year-old restaurant equipment to Stan's Steakhouse for $80,000. The equipment originally cost $220,000 and had an estimated service life of five years and an estimated residual value of $20,000. Murphy's Deli uses straight-line depreciation for all equipment. Required: 1. Calculate the balance in the accumulated depreciation account at the end of the third year. 2. Calculate the book value of the equipment at the end of the third year. 3. What is the gain or loss on the sale of the equipment at the end of the third year? 4. Record the sale of the equipment at the end of the third year.

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52)

The following information relates to the intangible assets of University Hero:

1. A) On January 1, 2024, University Hero completed the purchase of Whole Grain Foods for $800,000 in cash. The fair value of the identifiable net assets of Whole Grain Foods was $625,000. 2. B) Included in the assets purchased from Whole Grain Foods was a patent valued at $75,000. The original legal life of the patent was 20 years. There are still eight years left on the patent, but University Hero estimates the patent will be useful for only three more years. 3. C) University Hero acquired a franchise on July 1, 2024, by paying an initial franchise fee of $100,000. The contractual life of the franchise is five years.

Required: 1. Record amortization expense for each of the intangible assets at December 31, 2024. 2. Prepare the intangible asset section of the December 31, 2024 balance sheet.

53) Reported below is selected financial information from two competing retail companies ($ in millions): Company A Net sales Net income Total assets Company B Net sales Net income Total assets

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2024 $405,607 13,400 163,429 2024 $64,948 2,214 44,106

2023 $378,799 12,731 163,514 2023 $63,367 2,849 44,560

Required: 1. Calculate the return on assets, profit margin, and asset turnover ratio for Company A for 2024. 2. Calculate the return on assets, profit margin, and asset turnover ratio for Company B for 2024. 3. Which company has the higher profit margin and which company has the higher asset turnover?

54) Kelli Davis is in the flower business. While business has been steady, she wonders if she should expand her business to include candy as well. Both flowers and candy fit well into her business model. Kelli provides the following projections of annual sales, net income, and average total assets for the flower business alone and for the business if both flowers and candy were sold. Flowers Only Net sales Net income Average total assets

$380,000 40,000 200,000

Flowers and Candy $500,000 60,000 250,000

Required: 1. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers only. 2. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers and candy. 3. Based on these ratios, what recommendation would you make?

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Answer Key Test name: Chap 07_6e_Spiceland_Problem Material 1)A) Capitalize B) Repairs and maintenance C) Improvement D) Addition E) Materiality 2)A) Activity-based method B) Straight-line method C) Amortization D) Depletion E) Declining-balance method 3)A) Franchise B) Patent C) Trademark D) Copyright E) Goodwill 4)A) Accumulated depreciation B) Book value C) Depreciation D) Residual value E) Service life 5)A) Return on assets B) Profit margin C) Asset turnover D) Impairment E) Big bath 6) Costs necessary to get the land ready for use: Version 1

Purchase price of land (and warehouse to be removed) Commission to sales agent Title insurance Closing costs Cost of removing the warehouse Total capitalized cost of the land

$ 730,000 47,800 3,500 9,900 85,200 $ 876,400

7)Costs necessary to get the land ready for use: Purchase price of land (and warehouse to be removed) Commission to sales agent Title insurance Closing costs Cost of removing the warehouse Total capitalized cost of the land

$ 800,000 48,000 3,000 8,000 80,000 $ 939,000

8)1 & 2. Purchase price Shipping costs Foundation work Water line Labor and testing Materials used in testing Total capitalized cost of equipment Immediately expensed

$ 430,000 14,200 9,700 3,600 4,900 2,300 $ 464,700 $ 0

9)1 & 2. Purchase price Shipping costs Foundation work Water line Labor and testing Materials used in testing Total capitalized cost of equipment Immediately expensed

$ 420,000 15,000 8,000 3,000 6,000 3,000 $ 455,000 $ 0

10)1. Equipment 2. Building 3. Maintenance Expense 4. Prepaid Insurance 5. Equipment 6. Land Improvements Version 1

11)1. Trademark account in the balance sheet: Legal fees to register trademark Registration and design fees for the trademark Legal fees for successful defense of the new trademark Total costs capitalized

$ 50,900 30,100 31,100 $ 112,100

2. Expense in the income statement: General advertising costs Advertising specifically focused on the trademark

$ 310,000 119,000

Total costs expensed

$ 429,000

12)1. Trademark account in the balance sheet: Legal fees to register trademark Registration and design fees for the trademark Legal fees for successful defense of the new trademark Total costs capitalized

$ 52,000 38,000 33,000 $ 123,000

2. Expense in the income statement: General advertising costs Advertising specifically focused on the trademark

$ 300,000 120,000

Total costs expensed

$ 420,000

13) Purchase price

$ 75,500

Less: Fair value of assets acquired Less: fair value of liabilities assumed Fair value of identifiable net assets

87,000 (35,800) 51,200

Goodwill

$ 24,300

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14) Purchase price

$ 68,000

Less: Fair value of assets acquired Less: fair value of liabilities assumed

92,000 (38,000)

Fair value of identifiable net assets Goodwill

54,000 $ 14,000

15)(1) Expense in the period incurred. (2) Capitalize and depreciate over the service life of the asset. (3) Expense in the period incurred. (4) Capitalize and depreciate over the service life of the asset. (5) Capitalize and depreciate over the service life of the asset. 16)(1) Expense in the period incurred. (2) Capitalize and depreciate over the service life of the asset. (3) Expense in the period incurred. (4) Capitalize and depreciate over the service life of the asset. (5) Capitalize and depreciate over the service life of the asset. 17)Year 2024: ($18,000 − $2,000) / 8 = $2,000 × 8 / 12 = $1,333 Year 2025: ($18,000 − $2,000) / 8 = $2,000 18)Year 2024: ($15,000 − $3,000) / 8 = $1,500 × 8 / 12 = $1,000 Year 2025: ($15,000 − $3,000) / 8 = $1,500 19) Year 2024: ($11,000 − $1,100) / 5 = $1,980 × 4 / 12 = $660 Year 2025: ($11,000 − $1,100) / 5 = $1,980 20) Year 2024: ($8,000 − $2,000) / 5 = $1,200 × 4 / 12 = $400 Year 2025: ($8,000 − $2,000) / 5 = $1,200 Version 1

21)1. ($37,000 − $7,000) / 4 = $7,500 2. $37,000 × 2 / 4 = $18,500 3. ($37,000 − $7,000) / 9,000 hours = $3.33 per hour × 2,400 hours = $7,992 22)1. ($40,000 − $8,000) / 4 = $8,000 2. $40,000 × 2 / 4 = $20,000 3. ($40,000 − $8,000) / 10,000 hours = $3.20 per hour × 2,200 hours = $7,040 23)1. Straight-line: Depreciation Expense = ($22,000 − $2,200) / 4 years = $4,950 per year 2. Double-declining-balance: Calculation Year

End of Year Amounts

Beginning × Depreciation = Depreciation Book Value Rate* Expense

Accumulated Depreciation

Book Value**

$22,000

0.50

$11,000

11,000

0.50

5,500

16,500

5,500

0.50

2,750

19,250

2,750

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2,750

550***

Total

19,800

2,200

$19,800

*2 / 4 years = 0.50 per year **$22,000 cost minus accumulated depreciation ***Amount needed to reduce book value to residual value. 3. Activity-based: Calculation

End of Year Amounts

× Depreciation = Depreciation Rate* Expense

Year

Miles Used

Accumulated Depreciation

Book Value**

18,000

0.18

$3,240

$18,760

31,000

0.18

5,580

8,820

13,180

21,000

0.18

3,780

12,600

9,400

24,000

0.18

4,320

16,920

5,080

Total

$16,920

*($22,000 – $2,200) / 110,000 miles = $0.18 / mile **$22,000 cost minus accumulated depreciation. 24)1. Straight-line: Depreciation expense = ($23,500 − $2,500) / 4 years = $5,250 per year 2. Double-declining-balance: Calculation Year

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End of Year Amounts

Beginning × Depreciation = Depreciation

Accumulated

Book

Book Value

Rate*

Expense

Depreciation

Value**

$23,500

0.50

$11,750

11,750

0.50

5,875

17,625

5,875

0.50

2,938

20,563

2,937

437***

21,000

2,500

Total

$21,000

*2 / 4 years = 0.50 per year **$23,500 cost minus accumulated depreciation ***Amount needed to reduce book value to residual value. 3. Activity-based: Calculation

End of Year Amounts

× Depreciation = Depreciation Rate* Expense

Year

Miles Used

24,000

0.20

26,000

3 4 Total

Accumulated Depreciation

Book Value**

$4,800

$18,700

0.20

5,200

10,000

13,500

22,000

0.20

4,400

14,400

9,100

25,000

0.20

5,000

19,400

4,100

$19,400

*($23,500 − $2,500) / 105,000 miles = $0.20 / mile **$23,500 cost minus accumulated depreciation.

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25)($30,300 − $1,100) / 73,000 miles = $0.40 / mile Year 2024: 12,400 miles × $0.40 = $4,960 2025: 13,500 miles × $0.40 = $5,400 26)($26,000 − $2,000) / 80,000 miles = $0.30 / mile Year 2024: 12,000 miles × $0.30 = $3,600 2025: 16,000 miles × $0.30 = $4,800 27) Sale amount

$25,100

Less: Cost of tractor Less: Accumulated Depreciation*

37,000 (11,200)

Book value

25,800

Loss on sale

($700)

*($37,000 − $9,000) / 5 years = $5,600 per year × 2 years = $11,200. Account Title Cash

Debit 25,100

Accumulated Depreciation

11,200

Loss Equipment

Credit

700 37,000

28) Sale amount

$25,000

Less:

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Cost of tractor

38,000

Less: Accumulated Depreciation*

(12,000)

Book value

26,000

Loss on sale

($1,000)

*($38,000 − $8,000) / 5 years = $6,000 per year × 2 years = $12,000. Account Title Cash

Debit 25,000

Accumulated Depreciation

12,000

Loss

1,000

Equipment

Credit

38,000

29) The patent would have amortization expense of $160,000 ($800,000 / 5 years). The trademark would not be amortized because it has an indefinite life. 30) The patent would have amortization expense of $160,000 ($800,000 / 5 years). The trademark would not be amortized because it has an indefinite life. 31)1. Date January 1, 2024 January 1, 2024 December 31, 2024 December 31, 2024 December 31, 2025 December, 2025 December 31, 2025

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Account Title Patents

Debit 83,000

Cash Amortization Expense

83,000 16,600

Patents ($83,000/5 years) Patents

16,600 22,000

Cash Amortization Expense

Credit

22,000 16,600

December 31, 2025

Patents

16,600

2. Patents Credit

Debit

83,000 16,600 22,000 16,600 71,800

32)1. Date January 1, 2024 January 1, 2024

Account Title Patents

Debit 80,000

Cash

December 31, 2024 December 31, 2024 December 31, 2025 December, 2025

Amortization Expense

80,000 16,000

Patents ($80,000/5 years) Patents

16,000 25,000

Cash

December 31, 2025 December 31, 2025

Amortization Expense Patents

Credit

25,000 16,000 16,000

2. Debit

Patents Credit 80,000 16,000 25,000 16,000 73,000

33)1. Sale amount

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$17,600

Less: Cost of the ice cream equipment

40,000

Less: Accumulated depreciation

(24,000)

Book value

16,000

Gain on sale

$1,600

2. Account Title Cash

Debit 17,600

Accumulated Depreciation

24,000

Credit

Equipment

40,000

Gain

1,600

34)1. Sale amount

$16,000

Less: Cost of the ice cream equipment

40,000

Less: Accumulated depreciation

(25,000)

Book value

15,000

Gain on sale

$1,000

2. Account Title Cash

Debit 16,000

Accumulated Depreciation

25,000

Credit

Equipment

40,000

Gain

1,000

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35) Account Title Delivery Truck ($29,000 + $5,000)

Debit 34,000

Accumulated Depreciation

12,000

Credit

Cash

5,000

Machinery

33,000

Gain on exchange

8,000

36) Account Title Delivery Truck ($27,000 + $5,000)

Debit 32,000

Accumulated Depreciation

10,000

Credit

Cash

5,000

Machinery

35,000

Gain on exchange

2,000

37) Account Title Land, new

Debit 125,000

Credit

Land, old

78,000

Cash

11,000

Gain on exchange

36,000

Fair value of the old land Cash paid to complete the purchase Fair value of the new land

$114,000 11,000 $125,000

38) Account Title Land, new

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Debit 125,000

Credit

Land, old

85,000

Cash

15,000

Gain on exchange

25,000

Fair value of the old land Cash paid to complete the purchase Fair value of the new land

$110,000 15,000 $125,000

39)1. Allied Construction: Net Income $3,600 Net Income $3,600 Sales $54,000

÷ ÷ ÷ ÷ ÷ ÷

Average Total Assets ($28,000 + $24,000)/2 Sales $54,000 Average Total Assets ($28,000 + $24,000)/2

= = = = = =

Return on Assets 13.85% Profit Margin 6.67% Asset Turnover 2.08 times

Average Total Assets ($52,000 + $60,000)/2 Sales $92,000 Average Total Assets ($52,000 + $60,000)/2

= = = = = =

Return on Assets 6.79% Profit Margin 4.13% Asset Turnover 1.64 times

2. Axis Construction: Net Income $3,800 Net Income $3,800 Sales $92,000

÷ ÷ ÷ ÷ ÷ ÷

3. Allied has a slightly better (higher) profit margin and a slightly better (higher) asset turnover resulting in a higher return on assets. 40)1. Allied Construction: Net Income $2,809 Net Income $2,809 Sales $48,283

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÷ ÷ ÷ ÷ ÷ ÷

Average Total Assets ($30,869 + $27,767)/2 Sales $48,283 Average Total Assets ($30,869 + $27,767)/2

= = = = = =

Return on Assets 9.6% Profit Margin 5.8% Asset Turnover 1.65 times

2. Axis Construction: Net Income $4,395 Net Income $4,395 Sales $77,349

÷ ÷ ÷ ÷ ÷ ÷

Average Total Assets ($44,324 + $52,263)/2 Sales $77,349 Average Total Assets ($44,324 + $52,263)/2

= = = = = =

Return on Assets 9.1% Profit Margin 5.7% Asset Turnover 1.60 times

3. Allied has a slightly better (higher) profit margin and a slightly better (higher) asset turnover resulting in a higher return on assets. 41)Step 1: Test for Impairment The long-term asset is impaired since future cash flows ($16.5 million) are less than book value ($18.2 million). Step 2: If Impaired, Record Loss The impairment loss is $5.8 million calculated as the amount by which book value ($18.2 million) exceeds fair value ($12.4 million). 42)Step 1: Test for Impairment The long-term asset is impaired since future cash flows ($16 million) are less than book value ($18.5 million). Step 2: If Impaired, Record Loss The impairment loss is $6.5 million calculated as the amount by which book value ($18.5 million) exceeds fair value ($12 million).

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43)Step 1: Test for Impairment The long-term asset is not impaired since future cash flows ($5.5 million) exceed book value ($4.0 million). Step 2: If Impaired, Record Loss Since the asset does not meet the first test for impairment, no impairment loss is recorded. 44)Step 1: Test for Impairment The long-term asset is not impaired since future cash flows ($5.0 million) exceed book value ($4.5 million). Step 2: If Impaired, Record Loss Since the asset does not meet the first test for impairment, no impairment loss is recorded. 45) Land Purchase price of land Land clearing costs

$ 140,000 5,000

Architect fees (for new building) Legal fees (for title investigation of land) Building construction costs Totals

Building

$ 30,000 1,000 440,000 $ 146,000

$ 470,000

Any property taxes for the current period after the purchase are not included and instead expensed as incurred. 46)1. Purchase price Shipping costs

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$ 80,000 2,000

Labor costs Electrical work Costs incurred in testing equipment

10,000 2,200 800

Total capitalized cost of equipment

$ 95,000

2. All amounts were included in the Equipment account. 47)1. Purchase price

$3,000,000

Less: Fair value of assets acquired

3,150,000

Less: Fair value of liabilities assumed

(650,000)

Fair value of identifiable net assets

2,500,000

Goodwill

$ 500,000

2. Account Title Receivables (at fair value) Property, plant, and equipment (at fair value) Intangible assets (at fair value) Goodwill (remaining purchase price) Liabilities (at fair value) Cash (at purchase price)

Version 1

Debit 250,000

Credit

2,400,000 500,000 500,000 650,000 3,000,000

48)1. Capitalize 2. Capitalize 3. Expense 4. Expense 5. Capitalize Lincoln could increase reported earnings by improperly recording expenses as assets. For example, Lincoln could record repairs and maintenance expense to the equipment (asset) account. This would lower expenses and increase earnings reported in the current year. 49)1. Diamond Autobody Depreciation Schedule-Straight-Line Calculation End of Year Amounts Year

Allocation × Depreciation = Depreciation Accumulated Book Base* Rate Expense Depreciation Value**

80,000

0.25

20,000

70,000

80,000

0.25

20,000

40,000

50,000

80,000

0.25

20,000

60,000

30,000

80,000

0.25

20,000

80,000

10,000

Total

80,000

*$90,000 − $10,000 = $80,000 **$90,000 cost minus accumulated depreciation. 2. Diamond Autobody Depreciation Schedule-Double-Declining-Balance Calculation End of Year Amounts Year

Version 1

Beginning × Depreciation = Depreciation

Accumulated

Book

Book Value

Rate*

Expense

90,000

0.50

45,000

0.50

22,500

67,500

22,500

0.50

11,250

78,750

11,250

0.50

1,250***

80,000

10,000

Total

Depreciation Value**

80,000

*2/4 years = 0.50 per year **$90,000 cost minus accumulated depreciation ***Amount needed to reduce book value to residual value. 3. Diamond Autobody Depreciation Schedule-Activity-Based Calculation End of Year Amounts Year

Hours × Depreciation Used Rate*

Depreciation Expense

Accumulated Depreciation

Book Value**

1,200

$16

19,200

70,800

1,400

$16

22,400

41,600

48,400

1,500

$16

24,000

65,600

24,400

1,100

$16

14,400***

80,000

10,000

Total 5,200

80,000

*$80,000/5,000 hours = $16/hour **$90,000 cost minus accumulated depreciation ***Amount needed to reduce book value to residual value. 50)1. Account Title

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Debit

Credit

Depreciation Expense ($600,000 / 20)

30,000

Accumulated Depreciation

30,000

(To record depreciation on the building) Account Title Depreciation Expense ($128,000 × 2 / 10)

Debit 25,600

Accumulated Depreciation

Credit

25,600

(To record depreciation on the equipment)

2. Account Title Amortization Expense ($80,000 / 8)

Debit 10,000

Patent

Credit

10,000

(To record amortization on the patent)

3. Book Value Land Building Equipment Patent

Land Building Equipment Patent

$ 90,000 510,000 102,400 50,000 THE SNACK STOP December 31, 2025 Cost Accumulated Depreciation $ 90,000 0 600,000 $(90,000) 200,000 (97,600) 80,000 (30,000)

Book Value $ 90,000 510,000 102,400 50,000

51)1. ($220,000 − $20,000)/5 years × 3 years = $120,000 2.

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Cost of the equipment Less: Accumulated depreciation Book value at the end of year 3

$220,000 (120,000) $100,000

3. Sale amount

$ 80,000

Less: Cost of the equipment Less: Accumulated depreciation

220,000 (120,000)

Book value at the end of year 3

100,000

Loss on sale

$ 20,000

4. Account Title Cash

Debit 80,000

Accumulated Depreciation

120,000

Loss on Sale

20,000

Equipment

Credit

220,000

(To record loss on sale)

52)1. Account Title Amortization Expense

Debit 25,000

Patent (To record amortization = $75,000/3 years) Account Title Debit Amortization Expense 10,000 Franchise

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Credit

25,000

Credit

10,000

(To record amortization = $100,000/5 years × 1/2 year)

Goodwill is not amortized. 2. University Hero Balance Sheet (Intangible Assets Section only) December 31, 2024 Intangible assets: Goodwill Patent Franchise

$ 175,000 50,000 90,000

Total intangible assets

$ 315,000

Patent = $75,000 − $25,000 = $50,000 Franchise = $100,000 − $10,000 = $90,000 Goodwill equals $175,000 which is the excess of the purchase price ($800,000) over the fair value of net assets acquired ($625,000). 53)1. Company A Net Income $13,400 Net Income $13,400 Net Sales $405,607

÷ ÷ ÷ ÷ ÷ ÷

Average Total Assets ($163,429 + $163,514)/2 Net Sales $405,607 Average Total Assets ($163,429 + $163,514)/2

= = = = = =

Return on Assets 8.2% Profit Margin 3.3% Asset Turnover 2.5 times

÷ ÷ ÷ ÷ ÷

Average Total Assets ($44,106 + $44,560)/2 Net Sales $64,948 Average Total Assets

= = = = =

Return on Assets 5.0% Profit Margin 3.4% Asset Turnover

2. Company B Net Income $2,214 Net Income $2,214 Net Sales

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$64,948

($44,106 + $44,560)/2

1.5 times

3. Company B has a slightly higher profit margin, while Company A has a much higher asset turnover (2.5 times vs. 1.5 times). The higher asset turnover results in a return on assets of 8.2% for Company A compared to only 5.0% for Company B. 54)1. Flowers only: 20.0%; 10.5%; 1.9 times Net Income $40,000 Net Income $40,000 Net Sales $380,000

÷ ÷ ÷ ÷ ÷ ÷

Average Total Assets $200,000 Net Sales $380,000 Average Total Assets $200,000

= = = = = =

Return on Assets 20.0% Profit Margin 10.5% Asset Turnover 1.9 times

= = = = = =

Return on Assets 24.0% Profit Margin 12.0% Asset Turnover 2.0 times

2. Flowers and Candy: 24.0%; 12.0%; 2.0 times Net Income $60,000 Net Income $60,000 Net Sales $500,000

÷ ÷ ÷ ÷ ÷ ÷

Average Total Assets $250,000 Net Sales $500,000 Average Total Assets $250,000

3. Go forward with the expansion plans to include the sale of candy. The return on assets, profit margin, and asset turnover are all higher with the additional sale of candy.

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CHAPTER 7 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Property, plant, and equipment are types of tangible assets. ⊚ true ⊚ false

2) We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use. ⊚ true ⊚ false

The term “capitalize” is used to describe recording an expenditure as an expense. ⊚ ⊚

4) land.

true false

Cash received from the sale of salvaged materials increases the total capitalized cost of ⊚ ⊚

true false

5) Land improvements are reported separately from the land itself because, unlike land, these assets have limited useful lives. ⊚ ⊚

true false

6) A basket purchase is the purchase of more than one asset at the same time for one purchase price. ⊚ true ⊚ false

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7) Natural resources are distinguished from other property, plant, and equipment by the fact that they are depleted. ⊚ true ⊚ false

Many intangible assets are not reported in the balance sheet at their estimated values. ⊚ ⊚

true false

9) Intangible assets have no physical substance and generally represent exclusive rights that provide benefits to owners. ⊚ ⊚

true false

10) We record a purchased intangible asset at its original cost plus all other costs necessary to get the asset ready for use. ⊚ ⊚

true false

11) Most of the costs associated with internally developed intangible assets are reported as intangible assets in the balance sheet. ⊚ ⊚

true false

12) Nearly all research and development costs incurred in developing a new product or process are expensed directly in the income statement. ⊚ ⊚

true false

13) International accounting standards allow firms to record development costs that benefit future periods as an intangible asset. Version 1

⊚ ⊚

true false

14) A trademark can be registered with the U.S. Patent and Trademark Office for a maximum of 20 years. ⊚ true ⊚ false

15) We expense internally generated intangibles, such as R&D and advertising costs, as we incur them. ⊚ ⊚

16)

true false

A patent is an exclusive right to a published work such as a song, film, or painting. ⊚ true ⊚ false

17) The balance of the Patent account is reduced from its original cost by the amount of amortization since the patent was purchased. ⊚ ⊚

true false

18) A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. ⊚ true ⊚ false

19) A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or service. ⊚ true ⊚ false

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20) When a firm advertises to make its trademark more valuable, it records the advertising costs as an intangible asset. ⊚ ⊚

21)

true false

The franchisee's initial fee is reported as an expense in the income statement. ⊚ true ⊚ false

22) We report goodwill as an intangible asset in the balance sheet only when one company acquires another company. ⊚ ⊚

true false

23) Goodwill is reported by the acquiring company for the amount that the fair value of the acquired company’s identifiable net assets exceeds the purchase price. ⊚ ⊚

true false

24) We capitalize repairs and maintenance expenditures because they maintain a given level of benefits. ⊚ true ⊚ false

25) If a firm successfully defends an intangible right, it should expense the litigation costs as incurred. ⊚ true ⊚ false

26) If the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as incurred because they provide no future benefit.

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⊚ ⊚

true false

27) Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. ⊚ true ⊚ false

28)

Depreciation in accounting records the decrease in value of an asset. ⊚ true ⊚ false

29)

Accumulated Depreciation is a liability account. ⊚ ⊚

true false

30) Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation. ⊚ true ⊚ false

31) The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records. ⊚ true ⊚ false

32)

The service life of an asset is always equal to the full life of the asset. ⊚ true ⊚ false

33) Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life.

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⊚ ⊚

true false

34) With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life. ⊚ true ⊚ false

35) When a change in estimate is required, the company changes depreciation in prior, current, and future years. ⊚ true ⊚ false

36) Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year. ⊚ true ⊚ false

37) Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years. ⊚ true ⊚ false

38)

In an activity-based depreciation method, we allocate an asset's cost based on its use. ⊚ true ⊚ false

39) Straight-line depreciation produces a lower net income than accelerated methods in the earlier years of an asset's life. ⊚ true ⊚ false

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40) Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for both financial reporting and tax reporting. ⊚ true ⊚ false

41) Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization. ⊚ true ⊚ false

42)

Goodwill is amortized over its estimated useful life. ⊚ true ⊚ false

43) Intangible assets with indefinite useful lives (i.e., goodwill and most trademarks) are not amortized. ⊚ ⊚

44)

We report a gain if we sell an asset for less than book value. ⊚ ⊚

45)

true false

We report a loss if we sell an asset for less than book value. ⊚ ⊚

true false

46) A more comparable measure of profitability than income is return on assets, which equals net income divided by average total assets. ⊚ true ⊚ false

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47)

Profit margin is net income divided by net sales. ⊚ true ⊚ false

48)

Asset turnover is net sales divided by ending total assets. ⊚ true ⊚ false

49)

Management must review all long-term assets for impairment on an annual basis. ⊚ ⊚

true false

50) Impairment occurs when the expected future cash flows (expected future benefits) generated for a long-term asset fall below its fair value. ⊚ ⊚

true false

51) An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset. ⊚ true ⊚ false

52)

Taking a "big bath" is reporting all losses in one year to make a bad year even worse. ⊚ ⊚

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true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 53) Real Angus Steakhouse purchased land for $75,000 cash. Commissions to the sales agent of $4,500, property taxes of $5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes includes $4,000 in back taxes (seller’s unpaid taxes) paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse report the land? A) $83,500 B) $84,300 C) $85,300 D) $75,000

54)

Which of the following would be reported as land improvements? A) Property taxes B) Title insurance C) Real estate commissions to the sales agent D) Adding a parking lot

55)

Which of the following wouldnot be reported as land improvements? A) Adding a parking lot B) Landscaping C) Sidewalks D) Closing costs on purchasing the land

56) A company purchased a piece of equipment by paying $5,000 cash. Shipping cost of $400 to get the equipment to its factory was also incurred. The fair value of this equipment is $7,000. For what amount should the company report the equipment?

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A) $5,000 B) $5,400 C) $7,000 D) $7,400

57) A company purchased new equipment for $50,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $2,500; sales tax paid, $2,100; and installation cost, $2,800. The total capitalized cost reported for the equipment was: A) $52,500. B) $57,400. C) $54,600. D) $50,000.

58) A company purchased new equipment for $60,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid, $3,000; and installation cost, $2,500. The total capitalized cost reported for the equipment was: A) $60,000. B) $61,000. C) $64,000. D) $66,500.

59) A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Purchase price of the land Sale of salvaged parts already on land Demolition of the old building Ground-breaking ceremony (food and supplies) Land preparation and leveling

$ 570,000 20,000 31,000 2,300 8,000

What is the total capitalized cost of the land? Version 1

A) $609,000 B) $591,300 C) $611,300 D) $589,000

60) A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Purchase price of the land Sale of salvaged parts already on land Demolition of the old building Ground-breaking ceremony (food and supplies) Land preparation and leveling

$ 400,000 20,000 30,000 1,500 7,500

What is the total capitalized cost of the land? A) $437,500 B) $417,500 C) $439,000 D) $419,000

61) A company purchased a commercial dishwasher by paying cash of $8,000. The dishwasher's fair value on the date of the purchase was $10,000. The company incurred $600 in transportation costs, $500 installation fees, and paid $300 annual insurance on the equipment. For what amount will the company record the dishwasher? A) $10,000 B) $9,100 C) $8,000 D) $9,400

62) A company purchased a commercial dishwasher by paying cash of $4,600. The dishwasher's fair value on the date of the purchase was $5,000. The company incurred $450 in transportation costs, $270 installation fees, and paid a $210 fine for illegal parking while the dishwasher was being delivered. For what amount will the company record the dishwasher? Version 1

A) $5,000 B) $5,720 C) $5,320 D) $5,530

63) A company purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will the company record the dishwasher? A) $5,600 B) $5,700 C) $5,900 D) $6,300

64) A company purchased a three-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The total capitalized cost of the land is: A) $366,400. B) $366,150. C) $364,650. D) $231,150.

65) A company purchased a $500,000 tract of land that is intended to be the site of a new office complex. The company incurred additional costs and realized salvage proceeds as follows: Demolition of existing building on site Legal and other fees to close escrow Proceeds from sale of demolition scrap

$ 75,000 15,000 10,000

What is the total capitalized cost of the land?

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A) $500,000 B) $575,000 C) $580,000 D) $590,000

66)

Assets acquired in a basket purchase are valued based on: A) Their relative fair values. B) Their assessed valuation. C) The present value of their future cash flows. D) Their cost plus the difference between their cost and fair values.

67) A company purchased land, a building, and equipment for one price of $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land? A) $80,000 B) $90,000 C) $100,000 D) $800,000

68) A company acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely equipped. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment, respectively. At what amount would the company record the building? A) $720,000 B) $1,300,000 C) $1,200,000 D) None of these answer choices are correct.

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69) A company acquired an office building, land, and equipment in a single basket purchase. The fair values were $1,200,000, $600,000, and $200,000 for the building, land, and equipment, respectively. The company recorded the building for $1,080,000. What was the total purchase cost for all three assets? A) $1,600,000 B) $1,500,000 C) $2,000,000 D) $1,800,000

70)

Productive assets that are physically used up or depleted are: A) Equipment. B) Land. C) Land improvements. D) Natural resources.

71)

The following financial information is from Cook Company:

Accounts Payable Land Inventory Accounts Receivable Equipment Deferred Revenue Short-Term Investments Notes Receivable (due in 8 months) Interest Payable Patents

$ 55,000 90,000 10,500 7,500 8,000 58,500 20,000 45,500 2,000 75,000

What is the total amount of property, plant, and equipment assuming the accounts above reflect normal activity?

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A) $90,000 B) $98,000 C) $165,000 D) $110,000

72)

The following financial information is from Cook Company:

Accounts Payable Land Inventory Accounts Receivable Equipment Deferred Revenue Short-Term Investments Notes Receivable (due in 8 months) Interest Payable Patents

$ 55,000 90,000 10,500 7,500 8,000 58,500 20,000 45,500 2,000 75,000

What is the amount of intangible assets assuming the accounts above reflect normal activity? A) $95,000 B) $75,000 C) $120,500 D) $140,500

73)

The following financial information is from Cook Company:

Accounts Payable Land Inventory Accounts Receivable Equipment Deferred Revenue Short-Term Investments Notes Receivable (due in 8 months) Interest Payable

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$ 55,000 90,000 10,500 7,500 8,000 58,500 20,000 45,500 2,000

Patents

75,000

What is the total amount of long-term assets assuming the accounts above reflect normal activity? A) $342,500 B) $173,000 C) $273,500 D) $98,000

74)

The legal life of a patent is: A) Forty years. B) Twenty years. C) Life of the inventor plus fifty years. D) Indefinite.

75)

An exclusive 20-year right to manufacture a product or to use a process is a: A) Patent. B) Copyright. C) Trademark. D) Franchise.

76)

The exclusive right to benefit from a creative work, such as a film, is a: A) Patent. B) Copyright. C) Trademark. D) Franchise.

77) a:

A word, slogan, or symbol that distinctively identifies a company, product, or service is

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A) Patent. B) Copyright. C) Trademark. D) Franchise.

78) The exclusive right to use another company’s name and to sell its products within a specified geographical area is a: A) Patent. B) Copyright. C) Trademark. D) Franchise.

79)

Nearly all research and development costs should be: A) Expensed in the period incurred. B) Expensed in the period they are determined to be unsuccessful. C) Deferred pending determination of success. D) Expensed if unsuccessful, capitalized if successful.

80) During the current year, a company spends $50,000 on research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will this $50,000 transaction have on this year's financial statements? A) Increase assets B) Decrease revenues C) Increase expenses D) Increase revenues

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81) A company spent $100,000 on research and development in 2024. As a result of the products that were successfully developed, additional revenue is expected to total $600,000 over the next five years. When should these research and development costs be reported as an expense? A) Evenly over the period 2025 to 2029 B) The full amount in 2029 C) Evenly over the period 2024 to 2028 D) The full amount in 2024

82) A company spent $100,000 in the current year to develop a new product, which is a safety device for its motorcycles. At end of the year, the company estimates that the new safety device has an 80% chance of generating $300,000 in revenues from sales to customers over the next five years. What is the amount of research and development expense that will be reported in the current year? A) $100,000 B) $80,000 C) $20,000 D) $0

83) A company developed a new horse transport device and incurred research and development costs of $250,000. Rather than continue with its own research, the company decided to purchase a patent for a similar design for $350,000. What are the total assets and expenses for these two transactions? A) Assets $600,000; Expenses $0 B) Assets $250,000; Expenses $350,000 C) Assets $350,000; Expenses $250,000 D) Assets $0; Expenses $600,000

84)

Research and development costs should be capitalized when the:

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A) Future benefit is probable and the amount can be reasonably estimated. B) Future benefit is reasonably possible and the amount can be reasonably estimated. C) Future benefit is probable and the amount cannot be reasonably estimated. D) None of these answer choices are correct.

85) During the current year, Bio-Lab Pharmaceuticals was engaged in a project to develop an oral medication that would dramatically shorten the recovery period of influenza. The project costs totaled $150,000 at the time Bio-Lab decided to abandon the project due to the slim possibility that it would obtain FDA approval for the new medication. Bio-Lab then spent $300,000 during the current year on another project to develop a vaccination that would achieve the same goal. The company is confident it will obtain FDA approval and generate significant profits when it starts selling the vaccination. What amount would be expensed in the current year’s income statement for these two projects? A) $0 B) $150,000 C) $300,000 D) $450,000

86)

Goodwill is: A) Amortized over the greater of its estimated life or forty years. B) Only reported by the seller of a company. C) The value of a company as a whole, over and above the value of its net identifiable

assets. D) Reported when created internally through advertising expense.

87)

In accounting, goodwill:

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A) May be reported whenever a company achieves a level of net income that exceeds the industry average. B) Is amortized over its useful life. C) May be reported only when one company acquires another company. D) Must be expensed in the period it is reported because benefits from goodwill are difficult to identify.

88)

In accounting, goodwill: A) Is never reported. B) May be reported when a company's level of net income exceeds the industry average. C) Must be expensed in the period when it is acquired. D) May be reported only when one company purchases another company.

89)

Which of the following is true concerning goodwill?

A) Goodwill can never be reported. B) Goodwill is reported by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company’s identifiable net assets. C) Goodwill is reported when the market value of a company exceeds the fair value of its identifiable net assets. D) Goodwill is reported as a revenue in the income statement.

90) The balance sheet of Cattleman's Steakhouse shows assets of $86,700 and liabilities of $14,700. The fair value of the assets is $90,900 and the fair value of its liabilities is $14,700. Longhorn paid Cattleman's $82,520 to acquire all of its assets and liabilities. Longhorn should report goodwill on this purchase of: A) $4,180. B) $1,600. C) $6,320. D) $10,520.

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91) The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire all of its assets and liabilities. Longhorn should report goodwill on this purchase of: A) $3,600. B) $5,000. C) $20,000. D) $23,600.

92) Northern Company acquired Southern Company. The purchase price included all Southern’s assets and liabilities and was in the amount of $665,000. Below is information related to the two companies: Northern Fair value of assets Fair value of liabilities Reported assets Reported liabilities Net income for the year

$1,041,000 574,000 803,000 500,000 58,000

Southern $783,000 307,000 644,000 264,000 69,000

How much goodwill will Northern record in its acquisition of Southern? A) $176,700 B) $285,000 C) $380,000 D) $189,000

93) Northern Company acquired Southern Company. The purchase price included all Southern’s assets and liabilities and was in the amount of $600,000. Below is information related to the two companies: Northern Fair value of assets Fair value of liabilities

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$1,050,000 575,000

Southern $800,000 300,000 21

Reported assets Reported liabilities Net income for the year

800,000 500,000 60,000

650,000 250,000 50,000

How much goodwill will Northern record in its acquisition of Southern? A) $100,000 B) $300,000 C) $200,000 D) $150,000

94)

Vikings, Incorporated reports the following amounts: Book Value

Assets Liabilities Net income

$ 400,000 45,000 25,000

Fair Value $ 500,000 45,000

If Toretto Holdings acquires Vikings, Incorporated, for $635,000, how much goodwill would be reported by Toretto? A) $255,000 B) $280,000 C) $180,000 D) $100,000

95)

Vikings, Incorporated reports the following amounts: Book Value

Assets Liabilities Net income

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$ 413,000 48,000 29,900

Fair Value $ 493,000 48,000

If Toretto Holdings acquires Vikings, Incorporated, for $630,000, how much goodwill would be reported by Vikings? A) $80,000 B) $0 C) $185,000 D) $265,000

96)

Vikings, Incorporated reports the following amounts: Book Value

Assets Liabilities Net income

Fair Value

$ 400,000 45,000 25,000

$ 500,000 45,000

If Toretto Holdings acquires Vikings, Incorporated, for $635,000, how much goodwill would be reported by Vikings? A) $0 B) $280,000 C) $180,000 D) $100,000

97) Lake Incorporated purchased all of the outstanding stock of Huron Company, paying $1,005,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were:

Current assets (net) Property, plant, equipment (net) Liabilities

Book Value

Fair Value

$ 115,000 610,000 185,000

$ 130,000 780,000 185,000

Lake would report goodwill of:

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A) $453,000. B) $280,000. C) $465,000. D) $0.

98) Lake Incorporated purchased all of the outstanding stock of Huron Company, paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were:

Current assets (net) Property, plant, equipment (net) Liabilities

Book Value

Fair Value

$ 130,000 600,000 175,000

$ 125,000 750,000 175,000

Lake would report goodwill of: A) $0. B) $150,000. C) $345,000. D) $850,000.

99)

A company has the following expenditures during the year:

Advertising Employee training Customer outreach and consultation

$ 100,000 80,000 50,000

The company believes that these efforts have increased the fair value of the entire company by $325,000. How much goodwill can the company recognize at the end of the year associated with these expenditures? A) $0 B) $80,000 C) $230,000 D) $325,000

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100)

Which of the following subsequent expenditures would be capitalized? A) Ordinary repairs B) Costs that increase the service life of an asset C) Routine maintenance D) Ordinary repairs and routine maintenance

101)

Which of the following subsequent expenditures would be capitalized? A) Ordinary repairs and maintenance B) Additions that maintain future benefits C) Improvements that increase future benefits D) None of these answer choices are correct.

102) The cost of an engine tune-up is an example of which of the following expenditures after acquisition? A) Ordinary repairs and maintenance B) Additions C) Improvements D) Capitalized costs

103)

Which of the following subsequent expenditures would not be capitalized? A) Ordinary repairs and maintenance B) Additions that increase future benefits C) Improvements that increase future benefits D) Successful legal defense of intangible assets

104)

The cost of replacing a major component on a piece of equipment is an example of:

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A) Repairs and maintenance. B) Improvements. C) Additions. D) An expenditure that only benefits the current period.

105) Adding a refrigeration unit to a delivery truck that previously did not have this capability is an example of: A) Repairs and maintenance. B) Additions. C) Improvements. D) An expenditure that only benefits the current period.

106) The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as: A) Goodwill. B) An addition in the Buildings account. C) An expense in the period of the purchase. D) A patent.

107) Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on Woods' financial statements? A) No, the repair was accounted for correctly. B) Yes, the error overstated assets and net income. C) Yes, in the years following, net income will be overstated. D) Yes, the error understated net income.

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108) The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour. The expenditure for the replacement component should be recorded as: A) Repairs Expense. B) Maintenance Expense. C) Equipment. D) Gain from Repairs.

109)

Which of the following subsequent expenditures would not be capitalized? A) Unsuccessful legal defense of intangible assets B) Additions that increase future benefits C) Improvements that increase future benefits D) Successful legal defense of intangible assets

111)

Which one of the following statements regarding the book value of an asset is correct?

A) It is the fair value of the asset if the asset is sold. B) It reflects the original cost of the asset less accumulated depreciation. C) It is the original cost of the asset minus the depreciation expense for that asset during the year. D) It is the original cost at which the asset was purchased.

112)

Which of the following is a contra asset account? A) Deferred Revenue B) Goodwill C) Accumulated Depreciation D) Cost of Goods Sold

113)

The factors used to compute depreciation expense are an asset's:

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A) Cost, residual value, and physical life B) Cost, residual value, and service life C) Fair value, residual value, and economic life D) Cost, replacement value, and service life

114)

The depreciable cost used in calculating depreciation expense is: A) Its service life. B) The amount allowable under tax depreciation methods. C) The difference between its replacement value and cost. D) The asset's cost minus its estimated residual value.

115) Which depreciation method generally will result in the greatest amount of depreciation expense in the first year of the asset’s life? A) Straight-line B) Double-declining balance C) Activity-based D) Capitalization

116) Kansas Enterprises purchased equipment for $75,500 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $7,950 at the end of five years. Using the straight-line method, depreciation expense for 2024 would be: A) $13,510. B) $16,690. C) $30,200. D) $15,100.

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117) Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2024 would be: A) $12,000. B) $11,000. C) $60,000. D) None of these.

118) Kansas Enterprises purchased equipment for $79,500 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $6,000 at the end of five years. Using the straight-line method, the book value at December 31, 2024, would be: A) $63,600. B) $58,800. C) $73,500. D) $64,800.

119) Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, the book value at December 31, 2024, would be: A) $44,000. B) $49,000. C) $55,000. D) $60,000.

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120) Kansas Enterprises purchased equipment for $75,000 on January 1, 2024. The equipment is expected to have a ten-year service life, with a residual value of $6,750 at the end of ten years. Using the straight-line method, depreciation expense for 2025 and the book value at December 31, 2025, would be: A) $6,825 and $54,600, respectively. B) $7,500 and $53,250, respectively. C) $7,500 and $60,000, respectively. D) $6,825 and $61,350, respectively.

121) Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2025 and the book value at December 31, 2025, would be: A) $12,000 and $36,000, respectively. B) $12,000 and $31,000, respectively. C) $11,000 and $33,000, respectively. D) $11,000 and $38,000, respectively.

122) Kansas Enterprises purchased equipment for $73,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $8,700 at the end of five years. Using the double-declining balance method, depreciation expense for 2024 would be: (Do not round your intermediate calculations) A) $25,720. B) $29,200. C) $14,600. D) $20,500.

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123) Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2024 would be: A) $24,000. B) $22,000. C) $19,000. D) $20,000.

124) Kansas Enterprises purchased equipment for $77,000 on January 1, 2024. The equipment is expected to have a ten-year service life, with a residual value of $8,550 at the end of ten years. Using the double-declining balance method, depreciation expense for 2025 would be: (Do not round your intermediate calculations) A) $12,320. B) $10,952. C) $15,400. D) $13,690.

125) Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2025 would be: A) $22,000. B) $13,200. C) $14,400. D) $24,000.

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126) Kansas Enterprises purchased equipment for $74,000 on January 1, 2024. The equipment is expected to have a five-year life, with a residual value of $6,150 at the end of five years. Using the double-declining balance method, the book value at December 31, 2025, would be: (Do not round your intermediate calculations) A) $14,800. B) $24,720. C) $27,120. D) $26,640.

127) Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, the book value at December 31, 2025, would be: A) $21,600. B) $24,800. C) $36,000. D) $45,600.

128) A machine has a cost of $15,600, an estimated residual value of $4,140, and an estimated service life of seven years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation? (Do not round your intermediate calculations. Round annual depreciation amount to the nearest dollar amount.) A) $1,637 B) $3,274 C) $12,326 D) $4,457

129) A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated service life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation?

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A) $9,000 B) $6,000 C) $7,500 D) $3,000

130) A building was purchased for $67,000. The asset has an expected service life of eight years and depreciation expense each year is $6,000 using the straight-line method. What is the residual value of the building? A) $0 B) $19,000 C) $13,375 D) $8,375

131) A building was purchased for $50,000. The asset has an expected service life of six years and depreciation expense each year is $8,000 using the straight-line method. What is the residual value of the building? A) $0 B) $2,000 C) $4,000 D) $6,000

132) A company purchases a piece of equipment on January 1, 2024, for $70,000 and the equipment has an expected service life of five years. Its residual value is estimated to be $10,000. Assuming the company uses the straight-line depreciation method, what should be the balance in accumulated depreciation for the equipment as of December 31, 2026 (three years later)? A) $44,000 B) $32,000 C) $36,000 D) $42,000

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133) Equipment with a cost of $390,000 and estimated residual value of $60,000 is expected to have a service life of 30,000 hours. During August, the equipment was operated 700 hours. What amount should be recorded as depreciation expense for the month? A) $8,400 B) $7,700 C) $9,100 D) $7,000

134) A company purchased a delivery truck on January 1, 2024, for $65,000. The truck has an estimated life of 10 years and an estimated residual value of $5,000. If the company uses straight-line depreciation, what would be the book value after four years? A) $41,000 B) $60,000 C) $36,000 D) $24,000

135) A company purchased a delivery truck on January 1, 2024, for $100,000. The truck has an estimated life of 10 years and an estimated residual value of $10,000. If the company uses double-declining balance, what would be the book value of the truck after two years? A) $64,000 B) $76,000 C) $82,000 D) $54,000

136) A company purchased a machine for $195,000 on October 1, 2024. The estimated service life is 10 years with a $19,000 residual value. The company records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2024, using straight-line depreciation, is: (Do not round your intermediate calculations. Round your answer to the nearest dollar amount)

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A) $4,875. B) $4,400. C) $6,925. D) $14,625.

137) A company purchased a machine for $100,000 on October 1, 2024. The estimated service life is 10 years with a $10,000 residual value. The company records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2024, using straight-line depreciation, is: A) $1,500. B) $7,500. C) $2,250. D) $2,500.

138) A company purchased equipment for $240,000 on March 1, 2024. The estimated service life is six years with a $60,000 residual value. The company records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2024, using straight-line depreciation, is: A) $33,333. B) $40,000. C) $30,000. D) $25,000.

139) Best Construction purchased a delivery truck on June 1, 2024. The following information is available: Cost = $90,000 Estimated service life = 5 years Estimated residual value = $15,000 What is the depreciation expense for the year ended December 31, 2024, using straight-line depreciation?

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A) $8,750 B) $15,000 C) $6,250 D) $18,000

140) Best Construction purchased a delivery truck on June 1, 2024. The following information is available: Cost = $90,000 Estimated service life = 5 years Estimated residual value = $15,000 What is the depreciation expense for the year ended December 31, 2025, using straight-line depreciation? A) $8,750 B) $15,000 C) $6,250 D) $18,000

141) Best Construction purchased a delivery truck on June 1, 2024. The following information is available: Cost = $90,000 Estimated service life = 5 years Estimated residual value = $15,000 What is the balance of accumulated depreciation as of December 31, 2025, using straight-line depreciation? A) $21,250 B) $17,500 C) $23,750 D) $30,000

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142) A company purchased office equipment for $130,000 on March 1, 2024. The estimated service life is four years with a $40,000 residual value. The company records partial-year depreciation based on the number of months in service. The balance of accumulated depreciation as of December 31, 2025, using straight-line depreciation, is: A) $41,250. B) $22,500. C) $88,750. D) $18,750.

143) A company purchased a computer system at a cost of $31,000. The estimated service life is 6 years, and the estimated residual value is $4,000. Assuming the company uses the doubledeclining-balance method, what is the depreciation expense for the second year? (Do not round your intermediate calculations. Round your answer to the nearest whole dollar amount.) A) $6,889 B) $8,389 C) $9,139 D) $6,139

144) A company purchased a computer system at a cost of $40,000. The estimated service life is 10 years, and the estimated residual value is $5,000. Assuming the company uses the doubledeclining-balance method, what is the depreciation expense for the second year? A) $8,000 B) $7,000 C) $5,600 D) $6,400

145) A company purchased a piece of equipment for $50,000 and the equipment has an expected service life of five years. Its residual value is estimated to be $4,000. Assuming the company uses the double-declining-balance depreciation method, what is the depreciation expense for the equipment for the second full year?

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A) $9,200 B) $9,040 C) $12,000 D) $11,040

146) During the first two years, Supplies, Incorporated drove the company truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck for $175,000. If the truck has an estimated life of 10 years or 300,000 miles, and an estimated residual value of $25,000, what amount of depreciation expense should Supplies, Incorporated report in the second year using the activity-based method? A) $11,000 B) $18,500 C) $7,500 D) $16,000

147) On January 1, 2025, a company purchased a machine that cost $500,000 and had a residual value of $50,000. The machine is expected to produce 360,000 units and is estimated to last 10 years. If 25,000 units were produced in 2025 and 35,000 were produced in 2026, what amount of accumulated depreciation is reported at the end of 2026 using the activity-based method (rounded to the nearest whole dollar if necessary)? A) $43,750 B) $90,000 C) $75,000 D) $31,200

148) A company purchased a tractor on January 1, 2024, for $65,000. The tractor's service life is estimated to be 30,000 miles with an expected residual value of $5,000. If the company used the tractor 5,000 miles in 2024 and 3,000 miles in 2025, what is the balance of accumulated depreciation at the end of 2025 using the activity-based method?

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A) $38,000 B) $6,000 C) $16,000 D) $10,000

149) A company purchased equipment at the beginning of 2024 for $500,000. The equipment is depreciated on a straight-line basis with an estimated service life of nine years and a $50,000 residual value. At the beginning of 2027, the company revised the equipment’s service life to a total of seven years (four more years) because of changing customer demand. The company also revised the expected residual value to $30,000. What depreciation expense would the company report for the year 2027 on this equipment? A) $87,500 B) $80,000 C) $50,000 D) $75,000

150) A company purchased equipment at the beginning of 2024 for $650,000. In 2024 and 2025, the company depreciated the asset on a straight-line basis with an estimated service life of eight years and a $10,000 residual value. At the beginning of 2026, due to changes in technology, the company revised the service life to a total of six years (four more years) with zero residual value. What depreciation expense would the company report for the year 2026 on this equipment? A) $108,333 B) $106,667 C) $122,500 D) $81,667

151)

Which of the following intangible assets is not amortized?

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A) Patent B) Copyright C) Franchise D) Goodwill

152) Which of the following intangible assets may or may not be amortized depending on whether it has a finite or an indefinite life? A) Patents B) Copyrights C) Goodwill D) Trademarks

153)

Which of the following intangible assets has an indefinite useful life? A) Patent B) Copyright C) Franchise D) Goodwill

154)

Which of the following amortization methods is most commonly used? A) Straight-line B) Double-declining-balance C) Activity-based D) A combination of methods

155)

Which of the following statements is true regarding the amortization of intangible assets?

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A) The expected residual value of most intangible assets is zero. B) The service life of an intangible asset is always equal to its legal life. C) Intangible assets with a limited useful life are not amortized. D) In recording amortization, an accumulated amortization account is always used.

156) Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the amortization expense for the first year? A) $0 B) $2,000 C) $3,333 D) $10,000

157) Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the carrying value of the copyright at the end of the first year? A) $0 B) $10,000 C) $50,000 D) $40,000

158) Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the carrying value of the copyright at the end of the second year?

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A) $10,000 B) $40,000 C) $50,000 D) $30,000

159) Berry Company purchases a patent on January 1, 2024, for $35,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Company uses the straight-line method, what is the amortization expense for the year ended December 31, 2025? A) $35,000 B) $7,000 C) $0 D) $14,000

160) Berry Company purchases a patent on January 1, 2024, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Company uses the straight-line method, what is the amortization expense for the year ended December 31, 2025? A) $0 B) $8,000 C) $16,000 D) $40,000

161) Berry Company purchases a patent on January 1, 2024, for $32,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Company uses the straight-line method, what is the carrying value of the patent on December 31, 2025? A) $23,400 B) $29,200 C) $19,200 D) $16,200

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162) Berry Company purchases a patent on January 1, 2024, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Company uses the straight-line method, what is the carrying value of the patent on December 31, 2025? A) $21,000 B) $33,000 C) $24,000 D) $26,000

163) Charco purchased a franchise from Burger Master on January 1, 2024, for $240,000. The franchise agreement allows Charco to sell hamburgers and other related food items using the Burger Master name for a period of six years. Assuming Charco uses the straight-line method, what is the amortization expense for the year ended December 31, 2024? A) $0 B) $28,000 C) $40,000 D) $240,000

164) Charco purchased a franchise from Burger Master on January 1, 2024, for $240,000. The franchise agreement allows Charco to sell hamburgers and other related food items using the Burger Master name for a period of 6 years. Assuming Charco uses the straight-line method, what is the carrying value of the franchise on December 31, 2025? A) $120,000 B) $80,000 C) $240,000 D) $160,000

165) When a company reports a gain on the sale of a depreciable asset, which of the following is always true?

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A) The company sold the asset for more than its fair value. B) The company sold the asset for more than its book value. C) The company sold the asset before its service life was over. D) The company sold the asset for more than it was worth.

166) When a company reports a loss on the sale of a depreciable asset, which of the following is always true? A) The company sold the asset for less than accumulated depreciation. B) The company sold the asset for less than fair value. C) The company sold the asset for less than book value. D) The company sold the asset before its service life was over.

167) Equipment was sold for $50,000. The equipment was originally purchased for $85,000. At the time of the sale, the equipment had accumulated depreciation of $30,000. What is the amount of the gain or loss to be recorded on the sale of equipment? A) Gain of $20,000 B) Loss of $5,000 C) Loss of $35,000 D) Gain of $5,000

168) Equipment was sold for $40,000. The equipment was originally purchased for $75,000. At the time of the sale, the equipment had accumulated depreciation of $50,000. What is the amount of the gain or loss to be recorded on the sale of equipment? A) Gain of $10,000 B) Loss of $15,000 C) Loss of $35,000 D) Gain of $15,000

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169) A company purchased a computer that cost $10,000. It had an estimated service life of five years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. The company should record: A) A gain of $1,000. B) A loss of $1,000. C) Neither a gain nor a loss—the computer was sold at its book value. D) Neither a gain nor a loss—the gain that occurred in this case would not be recognized.

170) A company purchased a computer that cost $10,000. It had an estimated service life of five years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the second year of use for $5,000 cash. The company should record: A) A loss of $1,000. B) A gain of $1,000. C) Neither a gain nor a loss—the computer was sold at its book value. D) Neither a gain nor a loss—the gain that occurred in this case would not be recognized.

171) On January 1, 2023, a company purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a service life of eight years and an estimated residual value of $8,000. On December 31, 2025, the company sold the truck for $30,000. What amount of gain or loss should the company record on December 31, 2025? A) Gain, $22,000 B) Loss, $18,000 C) Gain, $5,000 D) Loss, $3,000

172) On January 1, 2023, Jacob Incorporated purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a service life of eight years and an estimated residual value of $8,000. On December 31, 2024, Jacob Incorporated sold the truck for $43,000. What amount of gain or loss should Jacob Incorporated record on December 31, 2024?

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A) Gain, $22,000 B) Loss, $18,000 C) Gain, $5,000 D) Loss, $3,000

173) On January 1, 2024, Jacob Incorporated purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a service life of eight years and an estimated residual value of $8,000. Assume the truck was totaled in an accident on December 31, 2025. What amount of gain or loss should Jacob Incorporated record on December 31, 2025? A) Gain, $5,000 B) Loss, $18,000 C) Loss, $38,000 D) Loss, $3,000

174) On January 1, 2024, Jacob Incorporated purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a service life of eight years and an estimated residual value of $8,000. On December 31, 2025, the truck was exchanged for a new truck valued at $60,000. Jacob received a trade allowance of $35,000 on the exchange with the remaining $25,000 paid in cash. What amount of gain or loss should Jacob Incorporated record on December 31, 2025? A) Gain, $5,000 B) Loss, $18,000 C) Loss, $38,000 D) Loss, $3,000

175) Alliance Products purchased equipment that cost $120,000. It had an estimated service life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the second year of use. What is the amount of the gain or loss if Alliance sells the equipment for $65,000?

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A) Gain of $5,000 B) Loss of $5,000 C) Neither a gain nor a loss since the equipment was sold at its book value D) Neither a gain nor a loss since the gain would not be recognized

176) Alliance Products purchased equipment that cost $120,000. It had an estimated service life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use. What is the amount of the gain or loss if Alliance sells the equipment for $25,000? A) A gain of $5,000 B) A loss of $5,000 C) Neither a gain nor a loss since the equipment was sold at its book value D) Neither a gain nor a loss since the loss would not be recognized

177) Career Services, Incorporated purchased some office equipment for $80,000 on January 1, 2021. The company depreciated the equipment using the straight-line method assuming a residual value of $5,000 and a service life of 10 years. Career Services sold the office equipment for $52,000 on December 31, 2024. What is the amount of the gain or loss that will be reported by the company in its income statement for the year ending December 31, 2024? A) Gain of $2,000 B) Loss of $9,500 C) Gain of $9,500 D) Loss of $2,000

178) ABO purchased a truck at the beginning of 2024 for $140,000. They sold the truck at the end of 2025 for $95,000. The expected service life of the truck was six years and the residual value was estimated to be $20,000. ABO uses straight-line depreciation. Which of the following will be included in the journal entry to record the sale of the truck?

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A) Credit Gain $5,000 B) Debit Loss $5,000 C) Credit Accumulated Depreciation $40,000 D) Credit Equipment $100,000

179) Oregon Adventures purchased equipment for $80,000. The company sold the equipment three years later for $45,000. The expected service life of the equipment was seven years and its residual value was estimated to be $10,000. Oregon uses straight-line depreciation. Which of the following will be included in the journal entry used to record the sale of the equipment? A) Debit Loss $5,000 B) Credit Gain $5,000 C) Credit Accumulated Depreciation $40,000 D) Credit Equipment $5,000

180)

Gains on the sale of long-term assets for cash are: A) The excess of the book value over the cash received. B) Recorded only if the value of the asset has increased since its purchase. C) Reported on a net-of-tax basis, if material. D) The excess of the cash received over the book value.

181)

Losses on the sale of long-term assets for cash are:

A) The excess of the book value over the cash received. B) Recorded for the amount of accumulated depreciation since the asset’s original purchase. C) Reported on a net-of-tax basis, if material. D) The excess of the cash received over the book value.

182)

Return on assets is calculated as:

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A) Net Income divided by total assets. B) Net Income divided by average total assets. C) Net Income divided by ending total assets. D) Ending total assets divided by net income.

183)

Return on assets is equal to profit margin: A) Plus asset turnover. B) Minus asset turnover. C) Times asset turnover. D) Divided by asset turnover.

184) The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's return on assets? A) 15% B) 14.12% C) 16% D) 12%

185) The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's profit margin? A) 15% B) 14.12% C) 16% D) 12%

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186) The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's asset turnover? A) 1.25 times B) 1.33 times C) 8.33 times D) 0.80 times

187) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's return on assets? A) 10% B) 20% C) 200% D) 5%

188) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's profit margin? A) 5% B) 10% C) 20% D) 50%

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189) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's asset turnover? A) 0.5 times B) 20.0 times C) 10.0 times D) 2.0 times

190) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The return on assets for the year is 20%. What is Purdy's net income for the year? A) $4,500,000 B) $170,000 C) $4,250,000 D) $85,000

191) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's return on assets? A) 10% B) 20% C) 160% D) 18%

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192) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's profit margin? A) 10% B) 12.5% C) 18% D) 22%

193) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's asset turnover? A) 1.6 times B) 1.8 times C) 1.5 times D) 0.2 times

194) The balance sheet of Hidden Valley Farms reports total assets of $830,000 and $1,045,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year? A) $10,450,000 B) $9,375,000 C) $93,750 D) $104,500

195) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year?

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A) $5,000,000 B) $55,000 C) $5,500,000 D) $50,000

196)

Recognition of impairment for long-term assets is required if book value exceeds: A) Original cost. B) Fair value. C) Future cash flows. D) Accumulated depreciation.

197)

The amount of impairment loss is the excess of book value over: A) Carrying value. B) Future cash flows. C) Fair value. D) Future revenues.

198)

Accounting for impairment losses: A) Involves a two-step process to first test for impairment and then record the loss. B) Applies only to depreciable, operational assets. C) Applies only to assets with finite lives. D) All of these.

199)

Impairment occurs when:

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A) A long-term asset's book value exceeds the present value of the expected future cash flows generated for the asset. B) The expected future cash flows of a long-term asset exceed the asset's book value. C) The present value of the expected future cash flows of a long-term asset exceeds the asset’s book value. D) A long-term asset's book value exceeds the expected future cash flows generated for that asset.

200) Wilson Incorporated owns equipment for which it originally paid $70 million and has recorded accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated future cash flows to be provided by the equipment total $60 million, and its fair value at that point totals $50 million. Under these circumstances, Wilson would report: A) No impairment loss on the equipment. B) An $8 million impairment loss on the equipment. C) A $20 million impairment loss on the equipment. D) A $2 million impairment loss on the equipment.

201) Leonard’s Jewelry owns a patent with a carrying value of $50 million. Due to adverse economic conditions, Leonard’s management determined that it should assess whether an impairment should be recognized for the patent. The estimated future cash flows to be provided by the patent total $43 million, and its fair value at that point totals $35 million. Under these circumstances, Leonard would report: A) No impairment loss on the patent. B) A $7 million impairment loss on the patent. C) A $15 million impairment loss on the patent. D) A $31 million impairment loss on the patent.

202)

C-Stop reports the following information at year-end:

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Book Value Building Patent Copyright Machine

$ 500,000 35,000 40,000 100,000

Estimated Future Cash Flows $ 380,000 40,000 38,000 120,000

Fair Value $ 360,000 38,000 39,000 85,000

Based on the above information, what is the total amount of impairment loss that C-Stop should record at year-end? A) $141,000 B) $126,000 C) $123,000 D) $122,000

203)

Maple Incorporated has the following information regarding its assets: Book Value

Equipment Building Patent

$ 35,000 68,000 30,000

Estimated Future Cash Flows $ 30,000 70,000 34,000

Fair Value $ 28,000 65,000 32,000

What amount of loss should be reported due to asset impairment? A) $10,000 B) $9,000 C) $8,000 D) $7,000

204)

Based on the information below, what amount of impairment loss would be reported? Asset

Fair Value

Equipment Truck Building

$ 25,000 34,000 135,000

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Estimated Future Cash Flows $ 36,000 45,000 138,000

Book Value $ 30,000 42,000 140,000

A) $5,000 B) $23,000 C) $13,000 D) $18,000

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 205) If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet.

206) Why do we not depreciate land? What are land improvements? Why do we record land and land improvements separately?

207) Explain how the reporting rules for acquiring intangible assets differ depending on whether the intangible assets are purchased or are developed internally.

208) Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense.

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209) Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?

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Answer Key Test name: Chap 07_6e_Spiceland 1) TRUE 2) FALSE We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use. 3) FALSE We use the term capitalize to describe recording an expenditure as an asset. 4) FALSE Cash received from the sale of salvaged materials decreases the total capitalized cost of land. 5) TRUE 6) TRUE 7) TRUE 8) TRUE 9) TRUE 10) TRUE 11) FALSE We expense most of the costs for internally developed intangible assets in the income statement in the period we incur those costs. 12) TRUE 13) TRUE 14) FALSE Trademarks are registered with the U.S. Patent and Trademark Office for an indefinite number of 10-year periods. 15) TRUE Version 1

16) FALSE A patent is an exclusive right to manufacture a product or to use a process. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. 17) TRUE 18) TRUE 19) TRUE 20) FALSE Because we cannot tell what portion of today’s advertising benefits future periods and how many periods it might benefit, advertising costs are not reported as an intangible asset in the balance sheet. Instead, advertising costs are reported as expenses in the income statement in the period incurred. 21) FALSE The franchisee's initial fee is reported as an intangible asset and then expensed over the life of the franchise agreement. 22) TRUE 23) FALSE Goodwill is reported by the acquiring company for the amount that the purchase price exceeds the fair value of the acquired company’s identifiable net assets. 24) FALSE We expense repairs and maintenance expenditures in the period incurred because they maintain a given level of benefits. 25) FALSE If a firm successfully defends an intangible right, it should capitalize the litigation costs and amortize them over the remaining useful life of the related intangible. Version 1

26) TRUE 27) TRUE 28) FALSE Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. 29) FALSE Accumulated Depreciation is a contra (or negative) asset account. 30) TRUE 31) TRUE 32) FALSE The service life is how long the company expects to receive benefits from the asset before disposing of it. 33) TRUE 34) TRUE 35) FALSE When a change in estimate is required, the company changes depreciation in current and future years, but not in prior periods. 36) TRUE 37) FALSE Declining-balance depreciation will be higher than straight-line depreciation in earlier years, but lower in later years. 38) TRUE 39) FALSE Straight-line depreciation produces a higher net income than accelerated methods in the earlier years of an asset's life. 40) FALSE These are acceptable methods for financial reporting, not tax reporting. Most companies use MACRS for income tax depreciation. 41) TRUE Version 1

42) FALSE Intangible assets with indefinite useful lives (i.e., goodwill and most trademarks) are not amortized. 43) TRUE 44) FALSE We report a gain if we sell an asset for more than book value. 45) TRUE 46) TRUE 47) TRUE 48) FALSE Asset turnover is net sales divided by average total assets. 49) FALSE When operating conditions suggest a potential reduction in an asset’s benefit or service potential, management must review long-term assets for impairment. 50) FALSE Impairment occurs when the expected future cash flows (expected future benefits) generated for a long-term asset fall below its book value (original cost minus accumulated depreciation). 51) TRUE 52) TRUE 53) B $75,000 + $4,500 + $4,000 + $800 = $84,300 Property taxes paid for the seller’s unpaid taxes in previous years are necessary to get title clearance for the land. Any property taxes for the current period after the purchase are not included and instead expensed as incurred. 54) D

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55) D 56) B $5,000 + $400 = $5,400 57) B $50,000 + $2,500 + $2,100 + $2,800 = $57,400 58) D $60,000 + $1,000 + $3,000 + $2,500 = $66,500 59) D $570,000 − $20,000 + $31,000 + $8,000 = $589,000. The $2,300 in costs for the ground-breaking ceremony should be expensed. 60) B $400,000 − $20,000 + $30,000 + $7,500 = $417,500. The $1,500 in costs for the ground-breaking ceremony should be expensed. 61) B $8,000 + $600 + $500 = $9,100. The annual insurance on the equipment of $300 should be recorded as insurance expense over the first year of coverage. 62) C $4,600 + $450 + $270 = $5,320. The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use. 63) B $5,000 + $400 + $300 = $5,700. The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use. 64) C Costs necessary to get land ready for use: Purchase price Demolition costs Scrap sold Title insurance Legal fees

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$ 350,000 12,000 (1,500) 900 500

Property taxes ($3,000 − $250) Total capitalized cost of land

2,750 $ 364,650

Property taxes paid for the seller’s unpaid taxes in previous years are necessary to get title clearance for the land. Any property taxes for the current period after the purchase are not included and instead expensed as incurred. 65) C Costs necessary to get land ready for use: Purchase price Demolition costs Legal fees Sale of scrap Total capitalized cost of land

$ 500,000 75,000 15,000 (10,000) $ 580,000

66) A 67) A $800,000 × [$100,000 / ($100,000 + $700,000 + $200,000)] = $80,000 68) C $2,400,000 × [$1,300,000 / ($1,300,000 + $780,000 + $520,000)] = $1,200,000 69) D $1,200,000 / ($1,200,000 + $600,000 + $200,000) = 60% Purchase cost × 60% = $1,080,000 Purchase cost = $1,800,000 70) D 71) B $90,000 + $8,000 = $98,000 72) B Patents = $75,000 73) B $90,000 + $8,000 + $75,000 = $173,000

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74) B 75) A 76) B 77) C 78) D 79) A 80) C 81) D 82) A The reason we expense all research and development (R&D) costs in the period incurred is because of the difficulty in determining the portion of R&D that benefits future periods. Conceptually, we should report as an intangible asset the portion that benefits future periods. Due to the difficulties in arriving at this estimate, current U.S. accounting rules require firms to expense all R&D costs as incurred. 83) C We expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs. We record purchased intangible assets at their original cost plus all other costs, such as legal fees, necessary to get the assets ready for use. 84) D Nearly all research and development costs incurred in developing a new product or process are expensed directly in the income statement.in the period incurred. 85) D Costs incurred to conduct research and to develop a new product or process are not reported as an intangible asset in the balance sheet. Instead, they are expensed directly in the income statement. 86) C 87) C Version 1

88) D 89) B 90) C Purchase price

$ 82,520

Less: Fair value of net assets: Assets Less: Liabilities assumed

$ 90,900 14,700

Goodwill

(76,200) $ 6,320

91) C Purchase price

$ 95,000

Less: Fair value of net assets: Assets Less: Liabilities assumed Goodwill

$ 90,000 15,000

(75,000) $ 20,000

92) D Purchase price

$ 665,000

Less: Fair value of net assets: Assets Less: Liabilities assumed

$ 783,000 307,000

Goodwill

(476,000) $ 189,000

93) A Purchase price

$ 600,000

Less: Fair value of net assets: Assets Less: Liabilities assumed Goodwill

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$ 800,000 300,000

(500,000) $ 100,000

94) C Purchase price

$ 635,000

Less: Fair value of net assets: Assets Less: Liabilities assumed Goodwill

$ 500,000 45,000

(455,000) $ 180,000

95) B Goodwill is reported by the acquiring company (Toretto) for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets. Most companies, like Vikings, create goodwill to some extent through advertising, employee training, and other efforts. However, Vikings must expense costs incurred in the internal generation of goodwill. In other words, the acquired company (Vikings) would not record goodwill in this transaction. 96) A Goodwill is reported by the acquiring company (Toretto) for the amount that the purchase price exceeds the fair value of the acquired company's identifiable net assets. Most companies, like Vikings, create goodwill to some extent through advertising, employee training, and other efforts. However, Vikings must expense costs incurred in the internal generation of goodwill. In other words, the acquired company (Vikings) would not record goodwill in this transaction. 97) B Purchase price

$ 1,005,000

Less: Fair value of net assets: Assets ($130,000 + $780,000) Less: Liabilities assumed

$ 910,000 185,000

(725,000)

Goodwill

$ 280,000

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98) B Purchase price

$ 850,000

Less: Fair value of net assets: Assets ($125,000 + 750,000) Less: Liabilities assumed Goodwill

$ 875,000 175,000

(700,000) $ 150,000

99) A Goodwill is reported only when one company purchases another company. 100) B 101) C 102) A 103) A 104) B 105) B 106) B 107) B 108) C 109) A 110) A 111) B 112) C 113) B 114) D 115) B 116) A Depreciation expense = (($75,500 − $7,950) / 5 years) = $13,510. 117) B Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000 Version 1

118) D Depreciation expense = (($79,500 − $6,000) / 5 years) = $14,700 Book value = $79,500 − $14,700 = $64,800 119) B Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000 Book value = $60,000 − $11,000 = $49,000 120) D Depreciation expense = (($75,000 − $6,750) / 10 years) = $6,825 Book value = $75,000 − ($6,825 × 2 years) = $61,350 121) D Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000 Book value = $60,000 − ($11,000 × 2 years) = $38,000 122) B Depreciation rate = 2 / 5 = 0.40 Depreciation expense = $73,000 × 0.40 = $29,200 123) A Depreciation rate = 2 / 5 = 0.40 Depreciation expense = $60,000 × 0.40 = $24,000 124) A Depreciation rate = 2 / 10 = 0.20 Depreciation expense = [$77,000 − ($77,000 × 0.20)] × 0.20 = $12,320 125) C Depreciation rate = 2 / 5 = 0.40 Depreciation expense = [$60,000 − ($60,000 × 0.40)] × 0 .40 = $14,400 126) D Depreciation rate = 2 / 5 = 0.40 $74,000 × 0.40 = $29,600 depreciation in the first year ($74,000 − $29,600) × 0.40 = $17,760 depreciation in the second year Book value = $74,000 − $29,600 − $17,760 = $26,640. 127) A Version 1

Depreciation rate = 2 / 5 = 0.40 $60,000 × 0.40 = $24,000 depreciation in the first year ($60,000 − $24,000) × 0.40 = $14,400 depreciation in the second year Book value = $60,000 − $24,000 − $14,400 = $21,600. 128) B ($15,600 − $4,140) / 7 years = $1,637 per year × 2 years = $3,274 129) B ($15,000 − $3,000) / 4 years = $3,000 per year × 2 years = $6,000 130) B ($67,000 − X)/8 years = $6,000 depreciation expense; therefore X = $19,000. 131) B ($50,000 − X) / 6 years = $8,000 depreciation expense; therefore X = $2,000. 132) C ($70,000 − $10,000) / 5 years = $12,000 depreciation per year Accumulated depreciation = $12,000 × 3 years = $36,000 133) B ($390,000 − $60,000) / 30,000 hours = $11 per hour Depreciation expense = 700 hours × $11 per hour = $7,700 134) A ($65,000 − $5,000) / 10 years = $6,000 depreciation per year Book value = $65,000 − ($6,000 × 4 years) = $41,000 135) A Year 1 depreciation: $100,000 × (2 / 10) = $20,000 Year 2 depreciation: ($100,000 − $20,000) × (2 / 10) = $16,000 Book value = $100,000 − ($20,000 + $16,000) = $64,000 136) B Depreciation expense = [($195,000 − $19,000) / 10 years] × 3 / 12 = $4,400 Version 1

137) C Depreciation expense = [($100,000 − $10,000) / 10 years] × 3 / 12 = $2,250 138) D Depreciation expense = [($240,000 − $60,000) / 6 years] × 10 / 12 = $25,000 139) A Depreciation expense = [($90,000 − $15,000) / 5 years] × 7 / 12 = $8,750 140) B Depreciation expense = [($90,000 − $15,000) / 5 years] × 12 / 12 = $15,000 141) C Depreciation expense for 2024 = [($90,000 − $15,000) / 5 years] × 7 / 12 = $8,750 Depreciation expense for 2025 = [($90,000 − $15,000) / 5 years] × 12 / 12 = $15,000 Accumulated depreciation at end of 2025 = $8,750 + $15,000 = $23,750 142) A Depreciation expense for 2024 = [($130,000 − 40,000) / 4 years] × 10 / 12 = $18,750 Depreciation expense for 2025 = [($130,000 − 40,000) / 4 years] × 12 / 12 = $22,500 Accumulated depreciation at end of 2025 = $18,750 + $22,500 = $41,250 143) A Depreciation rate = 2 / 6 $31,000 × 2 / 6 = $10,333 depreciation in the first year ($31,000 − $10,333) × 2 / 6 = $6,889 depreciation in the second year Version 1

144) D Depreciation rate = 2 / 10 = 20% $40,000 × 20% = $8,000 depreciation in the first year ($40,000 − $8,000) × 20% = $6,400 depreciation in the second year 145) C Depreciation rate = 2 / 10 = 20% $50,000 × 40% = $20,000 depreciation in the first year ($50,000 − $20,000) × 40% = $12,000 depreciation in the second year 146) A ($175,000 − $25,000) / 300,000 miles = $0.50 per mile × 22,000 miles = $11,000 147) C ($500,000 − $50,000) / 360,000 units = $1.25 per unit (25,000 units + 35,000 units) × $1.25 per unit = $75,000 148) C ($65,000 − $5,000) / 30,000 miles = $2 per mile (5,000 miles + 3,000 miles) × $2 per mile = $16,000 149) B Accumulated depreciation at end of 2026 = [($500,000 − $50,000) / 9] × 3 years = $150,000 Book value at beginning of 2027 = ($500,000 − $150,000) = $350,000 Annual depreciation in 2027 = [($350,000 − $30,000) / 4] = $80,000 150) C Accumulated depreciation at end of 2025 = [($650,000 − $10,000) / 8] × 2 years = $160,000 Book value at beginning of 2026 = ($650,000 − $160,000) = $490,000 Annual depreciation for 2026 = [($490,000 − $0) / 4] = $122,500 151) D Version 1

152) D 153) D 154) A 155) A 156) D $50,000 / 5 years = $10,000 157) D $50,000 / 5 years = $10,000 amortization per year Cost Less: Accumulated Amortization = Carrying Value, end of year 1

$ 50,000 (10,000) $ 40,000

158) D $50,000 / 5 years = $10,000 amortization per year. Cost Less: Accumulated Amortization = Carrying Value, end of year 2

$ 50,000 (20,000) $ 30,000

159) B $35,000 / 5 years = $7,000 160) B $40,000 / 5 years = $8,000 161) C $32,000 / 5 years = $6,400 amortization per year Cost Less: Accumulated Amortization = Carrying Value, 12/31/2025

$ 32,000 (12,800) $ 19,200

162) C $40,000 / 5 years = $8,000 amortization per year Cost Less: Accumulated Amortization = Carrying Value, 12/31/2025

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$ 40,000 (16,000) $ 24,000

163) C $240,000 / 6 years = $40,000 amortization per year 164) D $240,000 / 6 years = $40,000 amortization per year Cost Less: Accumulated Amortization = Carrying Value, 12/31/2025

$ 240,000 (80,000) $ 160,000

165) B 166) C 167) B Original cost ($85,000) less accumulated depreciation ($30,000) = book value ($55,000). Because the sale price ($50,000) is less than book value ($55,000), a loss for the difference ($5,000) is recorded. 168) D Original cost ($75,000) less accumulated depreciation ($50,000) = book value ($25,000). Because the sale price ($40,000) is greater than book value ($25,000), a gain for the difference ($15,000) is recorded. 169) A $10,000 / 5 years = depreciation of $2,000 per year. After four years, the book value would be $10,000 − ($2,000 × 4 years) = $2,000. The asset was sold for $3,000, so the company should record a gain of $1,000. 170) A $10,000 / 5 years = depreciation of $2,000 per year. After two years, the book value would be $10,000 − ($2,000 × 2 years) = $6,000. The asset was sold for $5,000, so the company should record a loss of $1,000. 171) D ($48,000 − $8,000) / 8 = depreciation of $5,000 per year. After three years, the book value would be [$48,000 − ($5,000 × 3 years)] = $33,000. The truck was sold for $30,000, so the company should record a loss of $3,000. Version 1

172) C ($48,000 − $8,000) / 8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 − ($5,000 × 2 years)] = $38,000. The truck was sold for $43,000, so the company should record a $5,000 gain. 173) C ($48,000 − $8,000) / 8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 − ($5,000 × 2 years)] = $38,000. The truck was retired at a loss of $38,000. 174) D ($48,000 − $8,000) / 8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 − ($5,000 × 2 years)] = $38,000. The truck was exchanged receiving a trade allowance of only $35,000, so the company should record a loss of $3,000. 175) A $120,000 / 4 years = depreciation of $30,000 per year. After two years, the book value would be [$120,000 − ($30,000 × 2 years)] = $60,000. The asset was sold for $65,000, so the company should record a gain of $5,000. 176) B $120,000 / 4 years = depreciation of $30,000 per year. After three years, the book value would be [$120,000 − ($30,000 × 3 years)] = $30,000. The asset was sold for $25,000, so the company should record a loss of $5,000. 177) A [($80,000 − $5,000) / 10 years] = $7,500 depreciation per year. After four years, the book value would be [$80,000 − ($7,500 × 4 years)] = $50,000. The asset was sold for $52,000, so the company should record a gain of $2,000. 178) B Version 1

The journal entry to record the sale of the truck would be: Account Title Cash

Debit 95,000

Accumulated Depreciation*

40,000

Loss

5,000

Equipment

Credit

140,000

*[($140,000 − $20,000) / 6 years] = $20,000 per year × 2 years = $40,000. 179) A The sale of equipment is recorded as: Account Title Cash

Debit 45,000

Accumulated Depreciation*

30,000

Loss

5,000

Credit

Equipment

80,000

*[($80,000 − $10,000) / 7 years] = $10,000 per year × 3 years = $30,000. 180) D 181) A 182) B 183) C 184) A $240,000 / [($1,500,000 + $1,700,000) / 2] = 15%. 185) D $240,000 / $2,000,000 = 12%. 186) A Version 1

$2,000,000 / [($1,500,000 + $1,700,000) / 2] = 1.25 times. 187) A $85,000 / [($800,000 + $900,000) / 2] = 10%. 188) A $85,000 / $1,700,000 = 5%. 189) D $1,700,000 / [($800,000 + $900,000) / 2] = 2.0 times. 190) B Net income divided by average total assets = 20%. Average total assets = $850,000 [($800,000 + $900,000) / 2]; therefore, net income must be $170,000 ($850,000 × 20%). 191) B $100,000 / [($450,000 + $550,000) / 2] = 20%. 192) B $100,000 / $800,000 = 12.5%. 193) A $800,000 / [($450,000 + $550,000) /2] = 1.6 times. 194) C Net income divided by average total assets = 10%. Average total assets = $937,500 [($830,000 + $1,045,000) / 2]; therefore, net income must be $93,750 ($937,500 × 10%). 195) D Net income divided by average total assets = 10%. Average total assets = $500,000 [($450,000 + $550,000) / 2]; therefore, net income must be $50,000 ($500,000 × 10%). 196) C 197) C 198) A 199) D

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Impairment occurs when the expected future cash flows (expected future benefits) generated for a long-term asset fall below its book value (original cost minus accumulated depreciation). 200) A The estimated future cash flows of $60 million exceed the current book value of $58 million (or $70 million − $12 million), so no impairment exists. 201) C The patent is impaired because estimated future cash flows of $43 million are less than the carrying value of $50 million. The impairment loss is measured by the difference between its carrying value of $50 million and its fair value of $35 million. 202) A The building and the copyright are impaired since their estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value: Building ($500,000 − $360,000) = $140,000 and Copyright (40,000 − $39,000) = $1,000. Total impairment loss ($140,000 + $1,000) = $141,000. 203) D Only the equipment is impaired since its estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value ($35,000 − $28,000) = $7,000. 204) A Only the building is impaired since its estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value ($140,000 − $135,000) = $5,000.

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205)This mistake will overstate net income in the income statement and overstate assets and retained earnings in the balance sheet. If a company initially records an expense incorrectly as an asset, expenses are understated, or too small. Since expenses are subtracted from revenues in arriving at net income, understating expenses will overstate net income reported in the income statement. Similarly, recording an expense as an asset will overstate assets in the balance sheet. Retained earnings in the balance sheet will also be overstated due to the overstatement of net income. 206)We do not depreciate land because its useful life never ends. Land improvements are additional amounts spent to improve the land such as a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and similar additions. We record land improvements separately from land because, unlike land, these assets are subject to depreciation. 207)We report purchased intangible assets in the balance sheet at their original cost plus all other costs, such as legal fees, necessary to get them ready for use. Rather than reporting intangible assets developed internally in the balance sheet, we expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs. 208)Straight-line creates an equal amount of depreciation each year. Double-declining-balance creates more depreciation in earlier years and less depreciation in later years. Activity-based depreciation varies depending on the use of the asset each year.

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209)Most companies use the straight-line method for financial reporting and the Internal Revenue Service's prescribed accelerated method (called MACRS) for income tax purposes. Companies choose straight-line for financial reporting for several reasons. Many probably believe they realize benefits from their plant assets approximately evenly over these assets' service lives. Another contributing factor is that straight-line is the easiest method to understand and apply. One more important motivation is the positive effect on reported income. Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life. Most companies choose MACRS for tax reporting to reduce taxable income. MACRS combines decliningbalance methods in earlier years with straight-line in later years to allow for a more advantageous tax depreciation deduction.

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CHAPTER 8: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match the following: Terms: Interest on debt Line of credit The riskiness of a business's obligations Payroll taxes Current portion of long-term debt Descriptions: A) Classifying liabilities as either current or long-term helps investors and creditors assess this. B) FICA and FUTA. C) Long-term debt maturing within one year of the balance sheet date D) Informal agreement that permits a company to borrow up to a prearranged limit. E) Amount of note payable × annual interest rate × fraction of the year.

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Match the following:

Terms: Accrual accounting Current portion of long-term debt Deferred revenues Commercial paper The riskiness of a business's obligations Recording a contingent liability Interest expense FICA Acid-test ratio Disclosure of a contingent liability Descriptions: A) Cash, short-term investments, and accounts receivable all divided by current liabilities. B) Loss is probable and amount is reasonably estimable. C) Gift cards. D) Long-term debt maturing within one year of the balance sheet date. E) Social Security and Medicare. F) Interest expense is recorded in the period interest is incurred rather than in the period interest is paid. G) Loss is reasonably possible and amount is reasonably estimable. H) Incurred on a note payable. I) Notes issued by one company to another company with maturities normally ranging up to 270 days. J) Classifying liabilities as either current or long-term helps investors and creditors assess this.

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Match the following:

Terms: Disclosure of a contingent liability Deferred revenues Current portion of long-term debt Recording a contingent liability Notes payable Descriptions: A) A written promise to repay the amount borrowed plus interest. B) Loss is reasonably possible and amount is reasonably estimable. C) Debt that will be paid within one year of the balance sheet date. D) Loss is probable and amount is reasonably estimable. E) A liability that requires the sacrifice of something other than cash.

4) Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____ 1. Accounts payable _____ 2. A contingent liability that is probable of occurring within one year of the balance sheet date and is reasonably estimable _____ 3. A contingent liability that is reasonably possible of occurring within one year of the balance sheet date and is reasonably estimable _____ 4. Current portion of long-term debt _____ 5. Sales tax collected from customers

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5) Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____ 1. Notes payable due in more than one year of the balance sheet date _____ 2. Customer advances _____ 3. Commercial paper _____ 4. Unused line of credit _____ 5. A contingent liability that is probable of occurring within one year of the balance sheet date but cannot be estimated

6) On November 1, Vacation Destinations borrows $1.55 million and issues a six-month, 8% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period.

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7) On November 1, Vacation Destinations borrows $1.5 million and issues a six-month, 8% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period.

8) On September 1, 2024, Allied Moving Corporation borrows $80,000 cash from First National Bank. Allied signs a six-month, 6% note payable. Interest is payable at maturity. Allied's year-end is December 31. Required: 1. Record the note payable by Allied Moving Corporation. 2. Record the appropriate adjusting entry for the note by Allied Moving Corporation on December 31, 2024. 3. Record the payment of the note at maturity.

9) On September 1, 2024, Allied Moving Corporation borrows $100,000 cash from First National Bank. Allied signs a six-month, 6% note payable. Interest is payable at maturity. Allied's year-end is December 31. Required: 1. Record the note payable by Allied Moving Corporation. 2. Record the appropriate adjusting entry for the note by Allied Moving Corporation on December 31, 2024. 3. Record the payment of the note at maturity.

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10) On November 1, 2024, Dual Systems borrows $250,000 to expand operations. Dual Systems signs a six-month, 8% promissory note. Interest is payable at maturity. Dual Systems' year-end is December 31. Required: 1. Record the issuance of the note by Dual Systems on November 1, 2024. 2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2024. 3. Record the payment of the note by Dual Systems at maturity on April 30, 2025.

11) On November 1, 2024, Dual Systems borrows $200,000 to expand operations. Dual Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual Systems' year-end is December 31. Required: 1. Record the issuance of the note by Dual Systems on November 1, 2024. 2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2024. 3. Record the payment of the note by Dual Systems at maturity on April 30, 2025.

12) Assume that on July 1, 2024, Togo's Sandwiches issues a $1.11 million, one-year note. Interest is payable at maturity. Required: Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions: Interest Rate 1. 2. 3. 4.

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8% 8% 5% 6%

Fiscal Year-End December 31st September 30th October 31st January 31st

13) Assume that on July 1, 2024, Togo's Sandwiches issues a $2 million, one-year note. Interest is payable at maturity. Required: Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions: Interest Rate 1. 2. 3. 4.

8% 9% 6% 7%

Fiscal Year-End December 31st September 30th October 31st January 31st

14) The following selected transactions relate to liabilities of Food Emporium whose fiscal year ends on December 31: January 26

March 1

September 1

Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $8.20 million at the bank's prime rate. Arranged a six-month bank loan of $360,000 with City Bank under the line of credit agreement. Interest at the prime rate of 8% is payable at maturity. Paid the 8% note at maturity.

Required: Record each of these transactions.

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15) The following selected transactions relate to liabilities of Food Emporium whose fiscal year ends on December 31: January 26

March 1

September 1

Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $1 million at the bank's prime rate. Arranged a six-month bank loan of $400,000 with City Bank under the line of credit agreement. Interest at the prime rate of 8% is payable at maturity. Paid the 8% note at maturity.

Required: Record each of these transactions.

16) Mike Smith is a college football coach making a base salary of $840,000 a year ($70,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Unemployment taxes are 6.2% of the first $7,000 earned per employee. Required: 1. Assuming the Social Security base amount is $142,800, compute how much will be withheld during the year for Coach Smith's Social Security and Medicare. 2. Through what month will Social Security be withheld? 3. What additional amount will the employer need to pay, assuming unemployment taxes of 6.2%?

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17) Mike Smith is a college football coach making a base salary of $960,000 a year ($80,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Unemployment taxes are 6.2% of the first $7,000 earned per employee. Required: 1. Assuming the Social Security base amount is $142,800, compute how much will be withheld during the year for Coach Smith's Social Security and Medicare. 2. Through what month will Social Security be withheld? 3. What additional amount will the employer need to pay, assuming unemployment taxes of 6.2%?

18) Accurate Reports has 50 employees each working 37 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first $142,800 earned per employee and 1.45% thereafter. Unemployment taxes are 6.20% of the first $7,000 earned per employee. Required: 1. Compute the total salaries expense, the total withholdings from employee salaries, and the actual payroll payment (salaries payable) for the first week of January. 2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January.

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19) Accurate Reports has 50 employees each working 40 hours per week and earning $25 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first $142,800 earned per employee and 1.45% thereafter. Unemployment taxes are 3.8% of the first $7,000 earned per employee. Required: 1. Compute the total salaries expense, the total withholdings from employee salaries, and the actual payroll payment (salaries payable) for the first week of January. 2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January.

20) During January, Deluxe Printing pays employee salaries of $1.48 million. Withholdings in January are $69,000 for the employee portion of FICA, $190,000 for federal and state income tax, and $30,000 for the employee portion of health insurance (payable to Blue Cross). The company incurs an additional $28,000 for federal and state unemployment tax, and $40,000 for the employer portion of health insurance. Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.

21) During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in January are $76,500 for the employee portion of FICA, $210,000 for federal and state income tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross). The company incurs an additional $38,000 for federal and state unemployment tax, and $30,000 for the employer portion of health insurance. Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.

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22) Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the federal unemployment tax maximum salary of $6,000 in January. Salaries Federal and state income taxes withheld Federal unemployment tax rate State unemployment tax rate (after FUTA deduction) Social Security (FICA) tax rate

$900,000 160,000 0.80% 5.40% 7.65%

Required: Record salaries expense and payroll tax expense for the January pay period.

23) Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the federal unemployment tax maximum salary of $7,000 in January. Salaries Federal and state income taxes withheld Federal unemployment tax rate State unemployment tax rate (after FUTA deduction) Social Security (FICA) tax rate

$800,000 160,000 0.80% 3.00% 7.65%

Required: Record salaries expense and payroll tax expense for the January pay period.

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24) On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million for customized computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $700,000. Compusoft uses the perpetual inventory system. Required: What journal entries should Compusoft record on July 8 and August 1?

25) On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million for customized computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $700,000. Compusoft uses the perpetual inventory system. Required: What journal entries should Compusoft record on July 8 and August 1?

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26) T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of about 75,000. Assume the stadium sells out all four home games before the season begins and the athletic department collects $30.5 million in ticket sales. Required: 1. What was the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $30.5 million in ticket sales. 3. Record the revenue recognized after the first home game is completed.

27) T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of about 60,000. Assume the stadium sells out all six home games before the season begins and the athletic department collects $30.6 million in ticket sales. Required: 1. What was the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $30.6 million in ticket sales. 3. Record the revenue recognized after the first home game is completed.

28) During November, Wireless, Incorporated, makes a $2,200 credit sale excluding sales tax. The state sales tax rate is 5% and the local sales tax rate is 1.50%. Required: Record sales revenue and sales tax payable.

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29) During November, Wireless, Incorporated, makes a $1,600 credit sale excluding sales tax. The state sales tax rate is 5% and the local sales tax rate is 1.5%. Required: Record sales revenue and sales tax payable.

30) On April 1, 2024, the Electronic Superstore borrows $18 million of which $3 million is due in 2025. Show how the company would report the $18 million debt on its December 31, 2024 balance sheet.

31) On April 1, 2024, the Electronic Superstore borrows $22 million of which $4 million is due in 2025. Show how the company would report the $22 million debt on its December 31, 2024 balance sheet.

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32) Consultants notify the management of Generic Drug that a prescription medication poses a potential health risk. Legal counsel indicates that a product recall is probable and is estimated to cost the company between $5 and $8 million. How will this affect the company's income statement and balance sheet this period?

33) Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.6 and $4 million. Required: 1. Should this contingent liability be reported, disclosed in a note only, or both? Explain. 2. What loss, if any, should Decorative Concrete report in its income statement? 3. What liability, if any, should Decorative Concrete report in its balance sheet? 4. What journal entry, if any, should be recorded?

34) Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. Required: 1. Should this contingent liability be reported, disclosed in a note only, or both? Explain. 2. What loss, if any, should Decorative Concrete report in its income statement? 3. What liability, if any, should Decorative Concrete report in its balance sheet? 4. What journal entry, if any, should be recorded?

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35) Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. Required: For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary adjusting entry. 1. The likelihood of a loss occurring is probable and the estimated loss is $550,000. 2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $750,000. 3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $550,000. 4. The likelihood of a loss occurring is remote, while the estimated potential loss is $550,000.

36) Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. Required: For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary adjusting entry. 1. The likelihood of a loss occurring is probable and the estimated loss is $650,000. 2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $800,000. 3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000. 4. The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.

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37) Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 4% of sales. By the end of the first year, sales are $850,000. Actual warranty expenses incurred so far are $10,000. Required: 1. Does this situation represent a contingent liability? Why or why not? 2. Record warranty expense and warranty liability for the year based on 4% of sales. 3. Record the actual warranty expenditures of $10,000 incurred so far. 4. What is the ending balance in the Warranty Liability account after the entries in parts 2 and 3?

38) Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales are $800,000. Actual warranty expenses incurred so far are $13,000. Required: 1. Does this situation represent a contingent liability? Why or why not? 2. Record warranty expense and warranty liability for the year based on 5% of sales. 3. Record the actual warranty expenditures of $13,000 incurred so far. 4. What is the ending balance in the Warranty Liability account after the entries in parts 2 and 3?

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39) The Copper Grill has the following current assets: cash, $14 million; receivables, $58 million; inventory, $49 million; and other current assets $4 million. The Copper Grill has the following liabilities: accounts payable, $35 million; current portion of long-term debt, $7 million; and long-term debt, $14 million. Required: Based on these amounts, calculate the current ratio and the acid-test ratio for The Copper Grill.

40) The Copper Grill has the following current assets: cash, $12 million; receivables, $50 million; inventory, $44 million; and other current assets $4 million. The Copper Grill has the following liabilities: accounts payable, $38 million; current portion of long-term debt, $7 million; and long-term debt, $12 million. Required: Based on these amounts, calculate the current ratio and the acid-test ratio for The Copper Grill.

41) Selected financial data regarding current assets and current liabilities for two competing companies, Simon and Garfunkel, are provided as follows: ($ in millions) Current assets

Simon

Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets

$ 600 3,630 994 505 325 $ 6,054

Garfunkel

$ 2,980 0 1,330 207 472 $ 4,989

Current liabilities

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Accounts payable Short-term debt Other current liabilities Total current liabilities

$ 7,960 1,220 0 $ 9,180

$ 4,290 1,026 1,307 $ 6,623

Required: 1. Calculate the current ratio for Simon. Then calculate the current ratio for Garfunkel. Which of the two companies has the best current ratio? 2. Calculate the acid-test (quick) ratio for Simon. Then calculate the acid-test (quick) ratio for Garfunkel. Which of the two companies has the best acid-test ratio?

42) Selected financial data regarding current assets and current liabilities for two competing companies, Simon and Garfunkel, are provided as follows: ($ in millions) Current assets

Simon

Garfunkel

Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets

$ 648 3,676 991 515 334 $ 6,164

$ 2,917 0 1,372 202 476 $ 4,967

$ 7,081 1,239 0 $ 8,320

$ 4,295 1,021 1,308 $ 6,624

Current liabilities Accounts payable Short-term debt Other current liabilities Total current liabilities

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43) Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A _____ 1. Long-term debt maturing within one year of the balance sheet date _____ 2. Borrowing from another company with maturities up to 270 days _____ 3. Classifying liabilities as either current or long-term helps investors and creditors assess this _____ 4. Cash, short-term investments, and accounts receivable all divided by current liabilities _____ 5. Incurred on a note payable _____ 6. Interest expense is recorded in the period interest is incurred rather than in the period interest is paid _____ 7. Loss is reasonably possible and amount is reasonably estimable _____ 8. Loss is probable and amount is reasonably estimable _____ 9. Gift cards _____ 10. Social Security and Medicare

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List B a. FICA

b. Acid-test ratio

c. Accrual accounting

d. Recording a contingent liability

e. Deferred revenues f. The riskiness of a business's obligations

g. Current portion of long-term debt h. Disclosure of a contingent liability i. Interest expense j. Commercial paper

44) Aerospace Engineering borrows $40 million cash on November 1, 2024. Aerospace issues a six-month, 6% promissory note to First National Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each company has a December 31 yearend. Required: 1. Prepare the journal entries on November 1, 2024 to record (a) the note payable for Aerospace Engineering and (b) the note receivable for First National Bank. 2. Record the adjusting entries on December 31, 2024 for (a) Aerospace Engineering and (b) First National Bank. 3. Prepare the journal entries on April 30, 2025 to record payment of (a) the note payable for Aerospace Engineering and (b) the note receivable for First National Bank.

45) Assume payroll for Kicker Sound Systems for the month of January was $150,000 and the following withholdings, fringe benefits, and payroll taxes apply: Federal and state income taxes withheld Health insurance premiums (Blue Cross) paid by employer Contribution to retirement plan (Fidelity) paid by employer FICA tax rate (Social Security and Medicare) Federal and state unemployment tax rate

$38,000 12,000 15,000 7.65% 3.80%

Assume that Kicker has paid none of the withholdings or payroll taxes by the end of January (record them as payables) and that no employee's cumulative wages exceed the relevant wage bases. Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.

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46) Arrow Systems offers its employees free medical, dental, and life insurance coverage. It also matches employee contributions to a voluntary retirement plan up to 6% of their salaries. Assume that no employee's cumulative wages exceed the relevant wage bases. Payroll information for the bi-weekly payroll period ending January 24th is listed below. Wages and salaries Employee contribution to voluntary retirement plan Medical insurance premiums Dental insurance premiums Life insurance premiums Federal and state income taxes to be withheld FICA tax rate Federal and state unemployment tax rate

$1,000,000 60,000 25,000 6,000 7,000 205,000 7.65% 3.80%

Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.

47) The University of Nebraska football stadium is the third largest city in the state of Nebraska on game days. The stadium has sold out every game since the late 1960s. The seating capacity is about 80,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $38.4 million in ticket sales. Required: 1. What is the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $38.4 million in ticket sales. 3. Record the revenue recognized after the first home game is completed.

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48) During its first three months of operation, Palomino’s sold gift cards in various amounts totaling $5,200. The gift cards are redeemable for meals within one year of the purchase date. Gift cards totaling $1,900 were presented for redemption prior to year-end on December 31. The sales tax rate on restaurant sales is 7%, assessed at the time meals (not gift cards) are purchased. Palomino’s will remit sales taxes in January. Required: 1. Record (in summary form) the $5,200 in gift cards sold (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually). 2. Record the $1,900 in gift cards redeemed. The $1,900 includes a 7% sales tax of $124.30. (Round the journal entry amounts to two decimal places.) 3. Determine the ending balance in the deferred revenue account (remaining liability for gift cards) to be reported on the December 31 balance sheet.

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49) Leisure Luggage manufactures a line of luggage designed for airline travel. Assume the following transactions occur during the year ended December 31, 2024. Required: Record any amounts as a result of each of these contingencies. Provide an explanation if an entry is not required. 1. In November 2024, Leisure Luggage became aware of a design flaw in one of its lines of luggage. A product recall is probable and is estimated to cost the company between $300,000 and $500,000. 2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably possible Leisure Luggage will lose the case, and potential losses are estimated to be $1.2 million. 3. Credit sales were $12 million for 2024. Although no customer accounts have been shown to be uncollectible, the company estimates that 3% of credit sales will eventually prove uncollectible. 4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is highly probable that Leisure Luggage will win and be awarded $800,000.

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50) Washington County Airport (WCA) faces three potential contingency situations, described below. The end of the fiscal year is December 31, 2024. Required: Determine the appropriate means of reporting each situation for the year ended December 31, 2024 and record any necessary entries. Explain your reasoning. 1. WCA is suing a national airline. WCA's lawyers confirm that it is probable WCA will be awarded damages of $500,000 in the case. 2. In June, 2024, a worker was injured in an accident and has sued the company for $200,000. Legal counsel believes it is reasonably possible, but not probable, that the outcome of the suit will be unfavorable, and that the settlement would cost the company from $100,000 to $200,000. 3. A suit for $1.5 million was filed by an airline on November 3, 2024. Legal counsel believes an unfavorable outcome is probable. A reasonable estimate of the award payment to the airline is between $500,000 and $1 million. No amount within this range is a better estimate of potential damages than any other amount.

51)

Selected financial data regarding two competing airlines are provided as follows:

($ in millions) Current assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets

Company A

Company B

$ 1,225 3,104 811 525 270

$ 4,684 1,351 1,844 388 637

$ 5,935

$ 8,904

$ 6,702 2,672

$ 6,991 2,407 1,624

$ 9,374

$ 11,022

Current liabilities Accounts payable Short-term debt Other current liabilities Total current liabilities

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Required: 1. Calculate the current ratio for both companies. Which airline has the best current ratio? 2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best acid-test ratio? 3. How would the purchase of additional inventory by issuing short-term debt affect the current ratio? How would it affect the acid-test ratio?

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Answer Key Test name: Chap 08_6e_Spiceland_Problem Material 1)A) The riskiness of a business's obligations B) Payroll taxes C) Current portion of long-term debt D) Line of credit E) Interest on debt 2)A) Acid-test ratio B) Recording a contingent liability C) Deferred revenues D) Current portion of long-term debt E) FICA F) Accrual accounting G) Disclosure of a contingent liability H) Interest expense I) Commercial paper J) The riskiness of a business's obligations 3)A) Notes payable B) Disclosure of a contingent liability C) Current portion of long-term debt D) Recording a contingent liability E) Deferred revenues 4) C; C; D; C; C 5) L; C; C; D; D 6) Date

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Account Title

Debit

Credit

November 1

Cash

1,550,000

Notes Payable

1,550,000

(Issuance of notes payable) Date December 31

Account Title Interest Expense ($1,550,000 × 0.08 × 2/12) Interest Payable

Debit 20,667

Credit

20,667

(Interest expense incurred, but not paid)

7) Date November 1

Account Title Cash

Debit 1,500,000

Notes Payable

Credit

1,500,000

(Issuance of notes payable) Date December 31

Account Title Interest Expense ($1,500,000 × 0.08 × 2/12) Interest Payable

Debit 20,000

Credit

20,000

(Interest expense incurred, but not paid)

8)1. Date September 1, 2024

Account Title Cash

Debit 80,000

Notes Payable

Credit

80,000

(Issuance of note payable)

2. Date December 31, 2024

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Account Title Interest Expense ($80,000 × 6% × 4/12)

Debit 1,600

Credit

Interest Payable

1,600

(Interest expense incurred, but not paid)

3. Date March 1, 2025

Account Title Notes Payable

Debit 80,000

Interest Expense ($80,000 × 6% × 2/12) Interest Payable ($80,000 × 6% × 4/12) Cash

Credit

800 1,600 82,400

(Payment of note payable and interest)

9)1. Date September 1, 2024

Account Title Cash

Debit 100,000

Credit

Notes Payable

100,000

(Issuance of note payable)

2. Date December 31, 2024

Account Title Interest Expense ($100,000 × 6% × 4/12) Interest Payable

Debit 2,000

Credit

2,000

(Interest expense incurred, but not paid)

3. Date March 1, 2025

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Account Title Notes Payable

Debit 100,000

Credit

Interest Expense ($100,000 × 6% × 2/12) Interest Payable ($100,000 × 6% × 4/12) Cash

1,000 2,000 103,000

(Payment of note payable and interest)

10)1. Date November 1, 2024

Account Title Cash

Debit 250,000

Notes Payable

Credit

250,000

(Issuance of note payable)

2. Date December 31, 2024

Account Title Interest Expense ($250,000 × 8% × 2/12) Interest Payable

Debit 3,333

Credit

3,333

(Interest expense incurred, but not paid)

3. Date April 30, 2025

Account Title Notes Payable Interest Expense ($250,000 × 8% × 4/12) Interest Payable ($250,000 × 8% × 2/12) Cash

Debit 250,000

Credit

6,667 3,333 260,000

(Payment of note payable and interest)

11)1.

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Date November 1, 2024

Account Title Cash

Debit 200,000

Credit

Notes Payable

200,000

(Issuance of note payable)

2. Date December 31, 2024

Account Title Interest Expense ($200,000 × 9% × 2/12) Interest Payable

Debit 3,000

Credit

3,000

(Interest expense incurred, but not paid)

3. Date April 30, 2025

Account Title Notes Payable Interest Expense ($200,000 × 9% × 4/12) Interest Payable ($200,000 × 9% × 2/12) Cash

Debit 200,000

Credit

6,000 3,000 209,000

(Payment of note payable and interest)

12)1. $1,110,000 × 0.08 × 6/12 = $44,400. 2. $1,110,000 × 0.08 × 3/12 = $22,200. 3. $1,110,000 × 0.05 × 4/12 = $18,500. 4. $1,110,000 × 0.06 × 7/12 = $38,850. 13) 1. $2,000,000 × 0.08 × 6/12 = $80,000. 2. $2,000,000 × 0.09 × 3/12 = $45,000. 3. $2,000,000 × 0.06 × 4/12 = $40,000. 4. $2,000,000 × 0.07 × 7/12 = $81,667.

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14)1. Date January 26

Account Title No journal entry

Debit

Credit

2. Date March 1

Account Title Cash

Debit 360,000

Notes Payable

Credit

360,000

(Issuance of note payable)

3. Date September 1

Account Title Notes Payable

Debit 360,000

Interest Expense ($360,000 × 0.08 × 6/12) Cash

14,400

Credit

374,400

(Payment of note payable and interest)

15)1. Date January 26

Account Title No journal entry

Debit

Credit

2. Date March 1

Account Title Cash Notes Payable

Debit 400,000

Credit

400,000

(Issuance of note payable)

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Date September 1

Account Title Notes Payable

Debit 400,000

Interest Expense (400,000 × 0.08 × 6/12) Cash

16,000

Credit

416,000

(Payment of note payable and interest)

16)1. Total withheld for: Social Security: $142,800 × 0.062 = $8,854 Medicare: $840,000 × 0.0145 = $12,180 2. At $70,000 per month, Coach Smith's salary will exceed the Social Security base amount of $142,800 in February ($70,000 × 2 months = $140,000). 3. Social Security (matched from 1. above) Medicare (matched from 1. above) Unemployment ($7,000 × 0.062) Total

$ 8,854 12,180 434 $ 21,468

17)1. Total withheld for: Social Security: $142,800 × 0.062 = $8,854 Medicare: $960,000 × 0.0145 = $13,920 2. At $80,000 per month, Coach Smith's salary will exceed the Social Security base amount of $142,800 in February ($80,000 × 2 months = $160,000). 3. Version 1

Social Security (matched from 1. above) Medicare (matched from 1. above) Unemployment ($7,000 × 0.062)

$ 8,854 13,920 434

Total

$ 23,208

18)1. Total salaries expense

(50 × 37 hours × $30)

$55,500

Less: Withholdings Federal income taxes

($55,500 × 0.15)

$8,325

State income taxes

($55,500 × 0.06)

3,330

FICA taxes

($55,500 × 0.0765)

4,246

Total withholdings

15,901

Actual payroll payment (Salaries Payable)

$39,599

2. FICA taxes Unemployment taxes

($55,500 × 0.0765) ($55,500 × 0.062)

$4,246 3,441

Total payroll tax expense

$7,687

19)1. Total salaries expense

(50 × 40 hours × $25)

$50,000

Less: Withholdings Federal income taxes

($50,000 × 0.15)

$7,500

State income taxes

($50,000 × 0.06)

3,000

FICA taxes

($50,000 × 0.0765)

3,825

Total withholdings Actual payroll payment (Salaries Payable)

14,325 $35,675

2. Version 1

FICA taxes Unemployment taxes

($50,000 × 0.0765) ($50,000 × 0.038)

$3,825 1,900

Total payroll tax expense

$5,725

20)1. Date January 31

Account Title Salaries Expense

Debit 1,480,000

Credit

Employee Income Tax Payable

190,000

FICA Tax Payable

69,000

Fringe Benefits Payable (to Blue Cross) Salaries Payable (to employees)

30,000 1,191,000

(Record employee salary expense and withholdings)

Salaries Payable = $1,480,000 − $190,000 − $69,000 − $30,000 = $1,191,000 2. Date January 31

Account Title Salaries Expense (fringe benefits)

Debit 40,000

Fringe Benefits Payable (to Blue Cross) (Record employer-provided fringe benefits)

Credit

40,000

3. Date January 31

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Account Title Payroll Tax Expense (total)

Debit 97,000

Credit

FICA Tax Payable

69,000

Unemployment Tax Payable

28,000

(Record employer payroll taxes)

21)1. Date Account Title January Salaries Expense 31 Employee Income Tax Payable

Debit 1,000,000

Credit

210,000

FICA Tax Payable

76,500

Fringe Benefits Payable (to Blue Cross) Salaries Payable (to employees)

40,000 673,500

(Record employee salary expense and withholdings)

Salaries Payable = $1,000,000 − $210,000 − $76,500 − $40,000 = $673,500 2. Date January 31

Account Title Salaries Expense (fringe benefits)

Debit 30,000

Fringe Benefits Payable (to Blue Cross) (Record employer-provided fringe benefits)

Credit

30,000

3. Date Account Title January 31 Payroll Tax Expense (total)

Debit 114,500

Credit

FICA Tax Payable

76,500

Unemployment Tax Payable

38,000

(Record employer payroll taxes)

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Date January 31

Account Title Salaries Expense

Debit Credit 900,000

Employee Income Tax Payable

160,000

FICA Tax Payable ($900,000 × 0.0765) Salaries Payable (to balance)

68,850 671,150

(Employee salary expense and withholdings)

Salaries Payable = $900,000 − $160,000 − $68,850 = $671,150 Date January 31

Account Title Payroll Tax Expense (total)

Debit 124,650

Credit

FICA Tax Payable ($900,000 × 0.0765) Unemployment Tax Payable ($900,000 × 0.062) (Employer payroll tax expense)

68,850 55,800

23) Date Account Title January 31 Salaries Expense

Debit 800,000

Credit

Employee Income Tax Payable

160,000

FICA Tax Payable ($800,000 × 0.0765) Salaries Payable (to balance)

61,200 578,800

(Employee salary expense and withholdings)

Salaries Payable = $800,000 − $160,000 − $61,200 = $578,800 Date Account Title January 31 Payroll Tax Expense (total) FICA Tax Payable ($800,000 × 0.0765)

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Debit 91,600

Credit

61,200

Unemployment Tax Payable ($800,000 × 0.038) (Employer payroll tax expense)

30,400

24) Date July 8

Account Title Cash

Debit 250,000

Deferred Revenue

Date August 1

250,000

(to record advance receipt of cash) Account Title Cash

Debit 750,000

Deferred Revenue

250,000

Sales Revenue Cost of Goods Sold

Credit

1,000,000 700,000

Inventory

700,000

(to complete the sale)

25) Date July 8

Account Title Cash

Debit 250,000

Deferred Revenue

Date August 1

250,000

(to record advance receipt of cash) Account Title Cash

Debit 750,000

Deferred Revenue

250,000

Sales Revenue Cost of Goods Sold Inventory

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Credit

1,000,000 700,000 700,000

(to complete the sale)

26)1. $30,500,000/75,000 = $407 per season ticket $407/4 games = $102 per individual game ticket 2. Account Title Cash

Debit 30,500,000

Deferred Revenue

Credit

30,500,000

(Advance collection of ticket sales)

3. Account Title Deferred Revenue

Debit 7,625,000

Sales Revenue ($30,500,000/4)

Credit

7,625,000

(Revenue recognized after first home game)

27)1. $30,600,000/60,000 = $510 per season ticket $510/6 games = $85 per individual game ticket 2. Account Title Cash Deferred Revenue

Debit 30,600,000

Credit

30,600,000

(Advance collection of ticket sales)

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3. Account Title Deferred Revenue

Debit 5,100,000

Credit

Sales Revenue ($30,600,000/6)

5,100,000

(Revenue recognized after first home game)

28) Account Title Accounts Receivable

Debit 2,343

Credit

Sales Revenue

2,200

Sales Tax Payable (0.065 × $2,200)

143

(Record sales and sales tax)

29) Account Title Accounts Receivable Sales Revenue

Debit 1,704

Credit

1,600

Sales Tax Payable (0.065 × $1,600)

104

(Record sales and sales tax)

30) Electronic Superstore Partial Balance Sheet December 31, 2024 Current Liabilities: Current portion of long-term debt Long-Term Liabilities:

$3,000,000

Notes payable Total Liabilities

15,000,000 $18,000,000

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31) Electronic Superstore Partial Balance Sheet December 31, 2024 Current Liabilities: Current portion of long-term debt Long-Term Liabilities:

$4,000,000

Notes payable Total Liabilities

18,000,000 $22,000,000

32) The contingent liability is probable and reasonably estimable, so a loss and a liability for the minimum amount of the range ($5 million) must be recorded. Recording the contingent liability will reduce income before taxes on the income statement and increase total liabilities on the balance sheet by $5 million. 33)1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements. 2. When the loss is estimated within a range, the minimum amount of the loss, $1.60 million, should be reported in the company's income statement for the current period. 3. Similarly, a $1.60 million liability should be reported in the balance sheet for the current period. 4. Account Title Loss

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Debit 1,600,000

Credit

Contingent Liability

1,600,000

(Record a contingent liability)

34)1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements. 2. When the loss is estimated within a range, the minimum amount of the loss, $1.5 million, should be reported in the company's income statement for the current period. 3. Similarly, a $1.5 million liability should be reported in the balance sheet for the current period. 4. Account Title Loss

Debit 1,500,000

Contingent Liability

Credit

1,500,000

(Record a contingent liability)

35)1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows: Account Title Loss Contingent Liability

Debit 550,000

Credit

550,000

(Record a contingent liability)

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2 Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000) and disclose the range between $500,000 and $750,000 in the notes to the financial statements. The journal entry is as follows: Account Title Loss

Debit 500,000

Contingent Liability

Credit

500,000

(Record a contingent liability)

3. If the likelihood of loss is reasonably possible rather than probable, we record no adjusting entry, but make full disclosure in a note to the financial statements to describe the contingency. 4. If the likelihood of loss is remote, disclosure is usually not required. 36)1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows: Account Title Loss Contingent Liability

Debit 650,000

Credit

650,000

(Record a contingent liability)

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2 Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000) and disclose the range between $500,000 and $800,000 in the notes to the financial statements. The journal entry is as follows: Account Title Loss

Debit 500,000

Contingent Liability

Credit

500,000

(Record a contingent liability)

3. If the likelihood of loss is reasonably possible rather than probable, we record no adjusting entry, but make full disclosure in a note to the financial statements to describe the contingency. 4. If the likelihood of loss is remote, disclosure is usually not required. 37)1. Yes, this situation represents a contingent liability. It's probable that costs for warranties will be incurred, and based on previous experience the company can reasonably estimate the amount. 2. Account Title Warranty Expense ($850,000 × 4%)

Debit 34,000

Warranty Liability

Credit

34,000

(Record liability for warranties)

3. Account Title

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Debit

Credit

Warranty Liability

10,000

Cash

10,000

(Record actual warranty expenditures)

4. Debit Payment

Warranty Liability Credit 10,000 34,000 24,000

Expense Ending Balance

38)1. Yes, this situation represents a contingent liability. It's probable that costs for warranties will be incurred, and based on previous experience the company can reasonably estimate the amount. 2. Account Title Warranty Expense ($800,000 × 5%)

Debit 40,000

Warranty Liability

Credit

40,000

(Record liability for warranties)

3. Account Title Warranty Liability

Debit 13,000

Cash

Credit

13,000

(Record actual warranty expenditures)

4. Debit Payment

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Warranty Liability Credit 13,000 40,000

Expense

27,000

Ending Balance

39)Current Assets ÷ Current Liabilities = Current Ratio ($14 + 58 + 49 + 4) ÷ ($35 + 7) = 2.98 (rounded) Quick Assets ÷ Current Liabilities = Acid-Test Ratio ($14 + 58) ÷ ($35 + 7) = 1.71 (rounded) 40)Current Assets ÷ Current Liabilities = Current Ratio ($12 + 50 + 44 + 4) ÷ ($38 + 7) = 2.44 (rounded) Quick Assets ÷ Current Liabilities = Acid-Test Ratio ($12 + 50) ÷ ($38 + 7) = 1.38 (rounded) 41)1. Garfunkel has a slightly better current ratio. ($ in millions) Simon Garfunkel

Total Current ÷ Assets $ 6,054 ÷ $ 4,989 ÷

Total Current Liabilities $ 9,180 $ 6,623

Current Ratio

= =

0.66 (rounded) 0.75 (rounded)

Acid-Test Ratio

Total Current Liabilities $ 9,180

0.57 (rounded)

$ 6,623

0.65 (rounded)

Current Ratio

= =

0.74 (rounded) 0.75 (rounded)

2. Garfunkel has a slightly better acid-test ratio. ($ in millions) Simon Garfunkel

Quick Assets ÷ $ 5,224 (a) $ 4,310 (b)

(a) $600 + $3,630 + $994 = $5,224 (b) $2,980 + $1,330 = $4,310 42)1. Garfunkel has a slightly better current ratio. ($ in millions) Simon Garfunkel

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Total Current ÷ Assets $ 6,164 ÷ $ 4,967 ÷

Total Current Liabilities $ 8,320 $ 6,624

2. Garfunkel has a slightly better acid-test ratio. ($ in millions) Simon Garfunkel

Quick Assets ÷ $ 5,315 (a) $ 4,289 (b)

Acid-Test Ratio

Total Current Liabilities $ 8,320

0.64 (rounded)

$ 6,624

0.65 (rounded)

(a) $648 + $3,676 + $991 = $5,315 (b) $2,917 + $1,372 = $4,289 43) List A g 1. Long-term debt maturing within one year of the balance sheet date j 2. Borrowing from another company with maturities up to 270 days f 3. Classifying liabilities as either current or long-term helps investors and creditors assess this b 4. Cash, short-term investments, and accounts receivable all divided by current liabilities i 5. Incurred on a note payable c 6. Interest expense is recorded in the period interest is incurred rather than in the period interest is paid h 7. Loss is reasonably possible and amount is reasonably estimable d 8. Loss is probable and amount is reasonably estimable e 9. Gift cards a 10. Social Security and Medicare

List B a. FICA

b. Acid-test ratio

c. Accrual accounting

d. Recording a contingent liability e. Deferred revenues f. The riskiness of a business's obligations

g. Current portion of long-term debt h. Disclosure of a contingent liability i. Interest expense j. Commercial paper

44)1a. Version 1

Date November 1, 2024

Account Title Cash

Debit 40,000,000

Notes Payable

Credit

40,000,000

(Issuance of notes payable)

1b. Date November 1, 2024

Account Title Notes Receivable

Debit 40,000,000

Cash

Credit

40,000,000

(Acceptance of notes receivable)

2a. Date December 31, 2024

Account Title Interest Expense ($40 million × 6% × 2/12) Interest Payable

Debit 400,000

Credit

400,000

(To record interest expense incurred, but not paid)

2b. Date December 31, 2024

Account Title Interest Receivable ($40 million × 6% × 2/12) Interest Revenue

Debit 400,000

Credit

400,000

(Interest revenue earned, but not received)

3a. Date April 30, 2025

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Account Title Notes Payable

Debit 40,000,000

Credit

Interest Expense ($40 million × 6% × 4/12) Interest Payable ($40 million × 6% × 2/12) Cash

800,000 400,000 41,200,000

(Payment of notes payable and interest)

3b. Date April 30, 2025

Account Title Cash

Debit 41,200,000

Interest Revenue ($40 million × 6% × 4/12) Interest Receivable ($40 million × 6% × 2/12) Notes Receivable

Credit

800,000 400,000 40,000,000

(Collection of notes receivable and interest)

45)1. Date January 31

Account Title Salaries Expense

Debit 150,000

Credit

Employee Income Tax Payable

38,000

FICA Tax Payable

11,475

Salaries Payable (to employees)

100,525

(Record employee salary expense and withholdings)

FICA Tax Payable = $150,000 × 0.0765 = $11,475 2. Date January 31

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Account Title Salaries Expense (fringe benefits)

Debit 27,000

Credit

Fringe Benefits Payable

27,000

(Record employer-provided fringe benefits)

3. Date January 31

Account Title Payroll Tax Expense (total)

Debit 17,175

Credit

FICA Tax Payable

11,475

Unemployment Tax Payable

5,700

(Record employer payroll taxes)

Unemployment Tax Payable = $150,000 × 0.038 = $5,700 46)1. Date January 24

Account Title Salaries Expense

Debit 1,000,000

Credit

Employee Income Tax Payable

205,000

FICA Tax Payable

76,500

Fringe Benefits Payable (to related companies) Salaries Payable (to employees)

60,000 658,500

(Record employee salary expense and withholdings)

2. Date January 24

Account Title Salaries Expense (fringe benefits) Fringe Benefits Payable (to related companies) (Record employer-provided fringe benefits)

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Debit 98,000

Credit

98,000

3. Date January 24

Account Title Payroll Tax Expense (total)

Debit 114,500

Credit

FICA Tax Payable

76,500

Unemployment Tax Payable

38,000

(Record employer payroll taxes)

FICA Tax Payable: $1,000,000 × 0.0765 = $76,500 Unemployment Tax Payable: $1,000,000 × 0.038 = $38,000 47)1. $38,400,000/80,000 = $480 per season ticket $480/6 games = $80 per individual game ticket 2. Account Title Cash

Debit 38,400,000

Deferred Revenue

Credit

38,400,000

(Advance collection of ticket sales)

3. Account Title Deferred Revenue

Debit 6,400,000

Sales Revenue ($38,400,000/6)

Credit

6,400,000

(Revenue recognized after first home game)

48)1. Account Title

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Debit

Credit

Cash

5,200

Deferred Revenue

5,200

(Sale of gift cards)

2. Account Title Deferred Revenue

Debit 1,900.00

Credit

Sales ($1,900/1.07)

1,775.70

Sales Tax Payable

124.30

(Redemption of gift cards)

3. Debit

Deferred Revenue Credit 1,900 5,200 3,300

Balance

49)1. Account Title Loss Contingent Liability

Debit 300,000

Credit

300,000

(Record the contingent liability)

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2. The likelihood of loss is reasonably possible rather than probable, so no journal entry is recorded. However, full disclosure of the contingent liability and the estimated loss of $1.2 million is disclosed in notes to the financial statements. 3. Account Title Bad Debt Expense ($12 million × 3%) Allowance for Uncollectible Accounts

Debit 360,000

Credit

360,000

(Estimated uncollectible accounts)

4. Leisure Luggage has a contingent gain that is probable and is reasonably estimable; however, contingent gains are not recorded until the gain is certain. Though companies do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements.

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50)1. Washington County Airport (WCA) has a contingent gain that is probable and can be reasonably estimated at $500,000. However, contingent gains are not recorded until the gain is certain. Even though companies do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. 2. The contingent liability is reasonably possible and the amount is reasonably estimable within a range; however, because the loss is not probable, no journal entry for a loss and liability is required. WCA must disclose a description of the contingency in the notes to the financial statements. 3. The contingent liability is probable and reasonably estimable, so it must be reported. Because the estimate of the loss is a range where no amount within the range is a better estimate than any other amount, the minimum amount of the range will be recorded as follows: Account Title

Debit 500,000

Loss Contingent Liability

Credit

500,000

(Record the contingent liability)

The range of the potential loss (from $500,000 to $1 million) should also be disclosed. 51)1. Company B (0.81) has the best current ratio. ($ in millions) Company A

Version 1

Total Current Assets $ 5,935

÷ ÷

Total Current Liabilities $ 9,374

Current Ratio

0.63 (rounded)

Company B

$ 8,904

$ 11,022

0.81 (rounded)

2. Company B (0.71) also has the best acid-test ratio. ($ in millions) Quick Assets ÷ Company A Company B

$ 5,140 $ 7,879

÷ ÷

Total Current Liabilities $ 9,374 $ 11,022

Acid-Test Ratio

= =

0.55 (rounded) 0.71 (rounded)

3. The purchase of additional inventory by issuing short-term debt would increase the current ratio as both current assets and current liabilities would increase by an equal amount. The purchase of additional inventory by issuing short-term debt would decrease the acid-test ratio due to the increase in current liabilities in the denominator of the ratio. Recall that inventory is excluded in calculating the numerator for the acid-test ratio.

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CHAPTER 8 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A liability is an obligation of a company to transfer some economic benefit in the future. ⊚ true ⊚ false

In a classified balance sheet, we categorize all liabilities as current. ⊚ true ⊚ false

3) Typically, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable in more than one year. ⊚ ⊚

true false

4) Given a choice, most companies would prefer to report a liability as current rather than long-term, because doing so may cause the company to appear less risky. ⊚ ⊚

true false

5) When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable. ⊚ true ⊚ false

6) Companies often use long-term debt because it usually offers lower interest rates than does short-term debt, because the risk of default is lower with loans of longer durations. ⊚ ⊚

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true false

7) Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan. ⊚ true ⊚ false

8) We record interest expense in the period in which we pay it, rather than in the period we incur it. ⊚ true ⊚ false

9) A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. ⊚ true ⊚ false

10) If a company borrows from another company rather than from a bank, the note is referred to as commercial paper. ⊚ true ⊚ false

11) Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit. ⊚ true ⊚ false

12) Accounts payable are an attractive form of financing for business because suppliers generally do not charge interest on the amount owed. ⊚ true ⊚ false

13) Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions.

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⊚ ⊚

14)

true false

All states impose a state income tax. ⊚ true ⊚ false

15) Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government. ⊚ true ⊚ false

16) The employer records amounts deducted from employee payroll as liabilities until it pays them to the appropriate organizations. ⊚ true ⊚ false

17)

FICA taxes are paid only by the employee. ⊚ true ⊚ false

18) The employer is required to match the amount of FICA taxes withheld for each employee, effectively doubling the amount paid into Social Security. ⊚ true ⊚ false

19) Additional employee benefits paid for by the employer are often referred to as fringe benefits. ⊚ true ⊚ false

20) When a company receives cash in advance, it debits Cash and credits a revenue account called Deferred Revenue.

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⊚ ⊚

true false

21) Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs. ⊚ true ⊚ false

22) All states impose a general state sales tax, and many areas include an additional local sales tax. ⊚ true ⊚ false

23) Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments. ⊚ true ⊚ false

24) When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable. ⊚ true ⊚ false

25) Sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government. ⊚ true ⊚ false

26) Long-term obligations such as notes, mortgages, and bonds are reported as long-term liabilities when they become payable within one year of the balance sheet date. ⊚ true ⊚ false

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27) Given a choice, most managers would choose to record an obligation as long-term rather than current. ⊚ true ⊚ false

28)

A contingent liability is an existing, uncertain situation that might result in a loss. ⊚ true ⊚ false

29) We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the amount is reasonably estimable. ⊚ true ⊚ false

30) The adjusting entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability. ⊚ ⊚

true false

31) When no amount within a range of potential losses appears more likely than others with regards to a given contingent liability, we record the maximum amount in the range. ⊚ ⊚

true false

32) If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a note to the financial statements to describe the contingency. ⊚ true ⊚ false

33)

If the likelihood of loss is remote, disclosure of a contingency usually is not required.

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⊚ ⊚

true false

34) A contingent liability is recorded only if a loss is at least reasonably possible and the amount is reasonably estimable. ⊚ true ⊚ false

35)

The balance in the Warranty Liability account is always equal to Warranty Expense. ⊚ true ⊚ false

36) A gain contingency is an existing uncertain situation that might result in a gain, which often is the flip side of loss contingencies. ⊚ true ⊚ false

37) We record gain contingencies when the gain is probable and the amount is reasonably estimable. ⊚ true ⊚ false

38) A company is said to be liquid if it has sufficient cash (or other current assets convertible to cash in a relatively short time) to pay currently maturing debts. ⊚ ⊚

39)

true false

The current ratio is calculated by dividing current liabilities by current assets. ⊚ true ⊚ false

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40) The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities. ⊚ true ⊚ false

41)

Quick assets include only cash, short-term investments, and accounts receivable. ⊚ true ⊚ false

42) A lower current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 43) Which of the following is not a reason why a company might prefer to report a liability as long-term rather than current? A) It may cause the company to appear less risky to investors and creditors. B) It may increase interest rates on borrowing. C) It may cause the company to appear more stable commanding a higher stock price for new stock listings. D) It may reduce interest rates on borrowing.

44) Given a choice, most companies would prefer to report a liability as long-term rather than current because: A) It may cause the company to appear less risky to investors and creditors. B) It may reduce interest rates on borrowing. C) It may cause the company to appear more stable, commanding a higher stock price for new stock listings. D) All of these answer choices are correct.

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45)

Which of the following is not a current liability? A) Accounts payable B) A note payable due in 2 years C) Current portion of long-term debt D) Sales tax payable

46) In most cases, current liabilities are payable within ________ year(s) from the balance sheet date, and long-term liabilities are payable in more than ________ year(s). A) one; two B) one; one C) two; two D) one; ten

47)

Which of the following is not a characteristic of a liability? A) It represents a probable, future sacrifice of economic benefits. B) It must be payable in cash. C) It arises from present obligations to other entities. D) It results from past transactions or events.

48)

Which of the following is not a liability? A) Notes payable B) Current portion of long-term debt C) An unused line of credit D) Deferred revenue

49)

Liabilities are defined as:

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A) Resources owed by an entity as a result of past transactions. B) Resources owned by an entity as a result of past transactions. C) Selling products and services to customers in the current period. D) Costs of running the business in the current period.

50) Brian Incorporated borrowed $800,000 from First Bank and signed a promissory note. What journal entry should Brian Incorporated record? A) Debit Cash, $800,000; Credit Notes Receivable, $800,000 B) Debit Notes Receivable, $800,000; Credit Cash, $800,000 C) Debit Cash, $800,000; Credit Notes Payable, $800,000 D) Debit Notes Payable, $800,000; Credit Cash, $800,000

51) Brian Incorporated borrowed $800,000 from First Bank and signed a promissory note. What journal entry should First Bank record? A) Debit Cash, $800,000; Credit Notes Receivable, $800,000 B) Debit Notes Receivable, $800,000; Credit Cash, $800,000 C) Debit Cash, $800,000; Credit Notes Payable, $800,000 D) Debit Notes Payable, $800,000; Credit Cash, $800,000

52) On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company should report interest payable on December 31, 2024, in the amount of: A) $0. B) $1,000. C) $2,000. D) $3,000.

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53) On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company’s fiscal year-end is December 31. What is the amount of interest expense reported in 2025: A) $2,000. B) $1,000. C) $0. D) $3,000.

54) On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. What effect does receiving cash and signing a note have on the financial statements? A) Assets increase and liabilities increase. B) Assets increase and stockholders’ equity increases. C) Assets increase and expenses increase. D) Assets increase and stockholders’ equity decreases.

55) On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company recorded accrued interest on December 31, 2024. What effect does accrued interest have on the financial statements in 2024? A) Assets increase and stockholders’ equity decreases. B) Assets increase and liabilities increase. C) Liabilities increase and expenses increase. D) Assets increase and expenses increase.

56) On November 1, 2024, a company signed a $106,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company recorded accrued interest on December 31, 2024. The payment of the note and interest on May 1, 2025, causes assets to decrease by $109,180 and which of the following?(Do not round your intermediate calculations.)

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A) Liabilities to decrease by $110,240 and stockholders’ equity to decrease by $2,120. B) Liabilities to decrease by $107,060 and stockholders’ equity to decrease by $2,120. C) Liabilities to decrease by $106,000 and stockholders’ equity to decrease by $6,360. D) Liabilities to decrease by $109,180.

57) On November 1, 2024, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. The company recorded accrued interest on December 31, 2024. The payment of the note and interest on May 1, 2025, causes assets to decrease by $103,000 and which of the following?(Do not round your intermediate calculations.) A) Liabilities to decrease by $100,000 and stockholders’ equity to decrease by $6,000. B) Liabilities to decrease by $106,000. C) Liabilities to decrease by $101,000 and stockholders’ equity to decrease by $2,000. D) Liabilities to decrease by $104,000 and stockholders’ equity to decrease by $2,000.

58) On September 1, 2024, Daylight Donuts signed a $211,000, 7%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2025. Daylight Donuts should report interest payable at December 31, 2024, in the amount of: A) $7,385 B) $0 C) $2,462 D) $4,923

59) On September 1, 2024, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2025. Daylight Donuts should report interest payable at December 31, 2024, in the amount of:

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A) $0 B) $1,500 C) $3,000 D) $4,500

60) On September 1, 2024, Daylight Donuts signed a $110,000, 8%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2025. Daylight Donuts accrued interest for the note on December 31, 2024. Which of the following would be recorded on the payment of the note plus accrued interest at maturity on March 1, 2025? (Do not round your intermediate calculations.) A) Interest Expense of $2,933 B) Interest Expense of $4,400 C) Interest Payable of $1,467 D) Interest Expense of $1,467

61) On September 1, 2024, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2025. Daylight Donuts accrued interest for the note on December 31, 2024. Which of the following would be recorded on the payment of the note plus accrued interest at maturity on March 1, 2025? (Do not round your intermediate calculations.) A) Interest Expense of $3,000 B) Interest Expense of $1,500 C) Interest Payable of $1,500 D) Interest Expense of $4,500

62) On December 1, 2024, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2025. Old World Deli should record which of the following adjusting entries at December 31, 2024?

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A) Debit Interest Expense and credit Interest Payable, $7,500 B) Debit Interest Expense and credit Cash, $7,500 C) Debit Interest Expense and credit Interest Payable, $1,250 D) Debit Interest Expense and credit Cash, $1,250

63) On December 1, 2024, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2025. Old World Deli records the appropriate adjusting entry for the note on December 31, 2024. What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1, 2025? A) $300,000 B) $301,250 C) $306,250 D) $307,500

64) On November 1, 2024, New Morning Bakery signed a $204,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. New Morning Bakery should record which of the following adjusting entries at December 31, 2024? A) Debit Interest Expense and credit Cash, $2,040 B) Debit Interest Expense and credit Interest Payable, $6,120 C) Debit Interest Expense and credit Cash, $6,120 D) Debit Interest Expense and credit Interest Payable, $2,040

65) On November 1, 2024, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2025. New Morning Bakery should record which of the following adjusting entries at December 31, 2024?

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A) Debit Interest Expense and credit Interest Payable, $2,000 B) Debit Interest Expense and credit Cash, $2,000 C) Debit Interest Expense and credit Interest Payable, $6,000 D) Debit Interest Expense and credit Cash, $6,000

66) The Pita Pit borrowed $195,000 on November 1, 2024, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2025. In connection with this note, what is the amount of interest expense that Pita Pit should report in its income statement for the year ended December 31, 2024? A) $0 B) $3,900 C) $23,400 D) $11,700

67) The Pita Pit borrowed $100,000 on November 1, 2024, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2025. In connection with this note, what is the amount of interest expense that Pita Pit should report in its income statement for the year ended December 31, 2024? A) $0 B) $1,000 C) $2,000 D) $6,000

68) The Pita Pit borrowed $100,000 on November 1, 2024, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2025. In connection with this note, The Pita Pit should report interest expense in 2025 for the amount of: A) $0. B) $4,000. C) $2,000. D) $6,000.

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69) Universal Travel, Incorporated borrowed $498,000 on November 1, 2024, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2025. What is the amount of interest payable that should be reported by Universal Travel, Incorporated on December 31, 2024? A) $24,900 B) $4,980 C) $7,470 D) $29,880

70) Universal Travel, Incorporated borrowed $500,000 on November 1, 2024, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2025. What is the amount of interest payable that should be reported by Universal Travel, Incorporated on December 31, 2024? A) $8,000 B) $30,000 C) $5,000 D) $25,000

71) Universal Travel, Incorporated borrowed $520,000 on November 1, 2024, and signed a twelve-month note bearing interest at 9%. Principal and interest are payable in full at maturity on October 31, 2025. What is the amount of interest payable that should be reported by Universal Travel, Incorporated on December 31, 2025? A) $7,800 B) $46,800 C) $24,800 D) $0

72) Universal Travel, Incorporated borrowed $500,000 on November 1, 2024, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2025. What is the amount of interest payable that should be reported by Universal Travel, Incorporated on December 31, 2025? Version 1

A) $8,000 B) $30,000 C) $5,000 D) $0

73) Universal Travel, Incorporated borrowed $500,000 on November 1, 2024, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2025. In connection with this note, Universal Travel, Incorporated should record interest expense in 2025 in the amount of: A) $8,000 B) $30,000 C) $5,000 D) $25,000

74)

Large, highly-rated companies sometimes sell commercial paper: A) To borrow funds at a lower rate than through a bank. B) To borrow funds when they cannot obtain a loan from a bank. C) Because they can't borrow anywhere else. D) To improve their credit rating.

75) An informal agreement that allows a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork is known as: A) A line of credit. B) Commercial paper. C) A debt covenant. D) Working capital.

76)

Which of the following is not an employer payroll cost?

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A) FICA taxes B) Federal and state unemployment taxes C) Federal and state income taxes D) Employer contributions to a retirement plan

78)

Which of the following is not withheld from an employee's salary? A) FICA taxes B) Federal and state unemployment taxes C) Federal and state income taxes D) Employee portion of health insurance

80)

Which of the following is true regarding FICA taxes? A) FICA taxes are paid only by the employee. B) FICA taxes are paid only by the employer. C) FICA taxes are paid in equal amounts by the employee and the employer. D) FICA taxes are paid in different amounts by the employee and the employer.

81)

Which of the following are not included in an employer's payroll tax expense? A) Employer portion of FICA taxes B) Federal unemployment taxes C) State unemployment taxes D) State income taxes

82)

Which of the following are included in an employer's payroll tax expense? A) Matching FICA tax B) Federal unemployment taxes C) State unemployment taxes D) All of these answer choices are correct.

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83) Suppose a college football coach makes a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $142,800, how much will be withheld during the year for the coach's Social Security and Medicare taxes? (Round your answers to the nearest dollar amount.) A) $34,800 B) $43,654 C) $183,600 D) None of these answer choices are correct.

84) Suppose a college football coach makes a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $142,800, through what month will Social Security be withheld? A) Social Security will be withheld only in January. B) Social Security will be withheld through the entire year. C) Social Security will be withheld through the month of March. D) Social Security will be withheld through the month of June.

85) A senior manager at a public accounting firm makes a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $142,800, how much will be withheld during the year for the manager's Social Security and Medicare taxes? (Do not round your intermediate calculations. Round your answers to the nearest dollar amount.) A) $2,610 B) $11,464 C) $13,770 D) None of these choices are correct.

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86) A senior manager at a public accounting firm makes a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $142,800, through what month will Social Security be withheld? A) Social Security will be withheld through the month of September. B) Social Security will be withheld through the entire year. C) Social Security will be withheld through the month of January. D) Social Security will be withheld through the month of October.

87) Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual payroll payment (Salaries Payable) for the first week of January? A) $5,404 B) $5,708 C) $4,792 D) $8,000

88) Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January? A) $612 B) $1,224 C) $916 D) $304

89) Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual payroll payment (salaries payable) for the first week of January? Version 1

A) $13,923 B) $12,843 C) $5,157 D) $18,000

90) Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January? A) $1,377 B) $3,141 C) $2,061 D) $684

91)

Deferred Revenues is a(n): A) Liability account. B) Asset account. C) Stockholders' equity account. D) Revenue account.

92) On December 2, 2023, Quebecor Printing received cash from customers for online subscriptions to begin in 2024. What would be the appropriate journal entry at the time cash was received on December 2, 2023? A) Debit Cash, credit Subscription Revenue B) Debit Cash, credit Deferred Revenue C) Debit Subscription Revenue, credit Cash D) No journal entry is necessary.

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93) On December 2, 2023, Quebecor Printing received cash from customers for online subscriptions to begin in 2024. What effect will receiving cash on December 2, 2023, have on the financial statements? A) Increase assets and increase revenues B) Decrease assets and decrease stockholders’ equity C) Increase assets and increase liabilities D) There is no financial statement effect

94) In January 2024, Summit Department Store sells a gift card for $50 and receives cash. In February 2024, the customer comes back and spends $20 of the gift card to purchase a water bottle. What would be the appropriate journal entry for the sale of the gift card in January? A) Debit Cash, $50; credit Sales Revenue, $50 B) Debit Cash, $50; credit Deferred Revenue, $50 C) Debit Sales Revenue, $20; credit Cash, $20 D) No journal entry is necessary.

95) In January, 2024, Summit Department Store sells a gift card for $50 and receives cash. In February 2024, the customer comes back and spends $20 of the gift card to purchase a water bottle. What would be the appropriate journal entry for the customer's purchase of the water bottle in February? A) Debit Deferred Revenue, $50; credit Sales Revenue, $50 B) Debit Deferred Revenue, $20; credit Sales Revenue, $20 C) Debit Sales Revenue, $20; credit Deferred Revenue, $20 D) No journal entry is necessary.

96) In January 2024, Summit Department Store sells a gift card for $55 and receives cash. In February 2024, the customer comes back and spends $25 of the gift card to purchase a water bottle. What is the financial statement effect of the sale of the gift card in January?

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A) Increase assets by $25, decrease liabilities by $30, and increase stockholders’ equity by $55 B) Increase assets by $55 and increase liabilities by $55 C) Increase assets by $55 and increase stockholders’ equity by $55 D) Increase assets by $25, increase liabilities by $55, and decrease stockholders’ equity by $30

97) In January 2024, Summit Department Store sells a gift card for $50 and receives cash. In February 2024, the customer comes back and spends $20 of the gift card to purchase a water bottle. What is the financial statement effect of the sale of the gift card in January? A) Increase assets by $50 and increase liabilities by $50 B) Increase assets by $50 and increase stockholders’ equity by $50 C) Increase assets by $20, increase liabilities by $50, and decrease stockholders’ equity by $30 D) Increase assets by $20, decrease liabilities by $30, and increase stockholders’ equity by $50

98) In January 2024, Summit Department Store sells a gift card for $85 and receives cash. In February 2024, the customer comes back and spends $55 of the gift card to purchase a water bottle. What is the financial statement effect of the customer's purchase of the water bottle in February? A) Increase assets by $30, decrease liabilities by $55, and increase stockholders’ equity by $85 B) Decrease liabilities by $55 and increase stockholders’ equity by $55 C) Increase assets by $30, decrease liabilities by $85, and increase stockholders’ equity by $55 D) Increase assets by $55 and increase stockholders’ equity by $55

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99) In January 2024, Summit Department Store sells a gift card for $50 and receives cash. In February 2024, the customer comes back and spends $20 of the gift card to purchase a water bottle. What is the financial statement effect of the customer's purchase of the water bottle in February? A) Increase assets by $30, decrease liabilities by $50, and increase stockholders’ equity by $20 B) Increase assets by $20 and increase stockholders’ equity by $20 C) Increase assets by $30, decrease liabilities by $20, and increase stockholders’ equity by $50 D) Decrease liabilities by $20 and increase stockholders’ equity by $20

100) At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent: A) Liabilities until the product or service is provided. B) A component of stockholders' equity. C) Long-term assets until the product or service is provided. D) Revenue upon receipt of the advance payment.

101)

The sale of gift cards by a company is a direct example of: A) Deferred revenues. B) Sales tax payable. C) Current portion of long-term debt. D) Contingencies.

102) When a company delivers a product or service for which a customer has previously paid, the company records a debit to a(n):

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A) Revenue account and a credit to a liability account. B) Revenue account and a credit to an asset account. C) Asset account and a credit to a revenue account. D) Liability account and a credit to a revenue account.

103)

Gift card breakage refers to:

A) The inability of the company to satisfy its obligation to customers that have previously purchased gift cards. B) The point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote. C) The time at which customers redeem their previously purchased gift cards for goods and services. D) Companies selling gift cards to customers on account and then those customers failing to pay the amount owed.

104) On March 31, 2024, a company sells $1,200 of gift cards to customers. The gift cards expire one year from the date of sale. What entry should the company record on March 31, 2024? A) Debit Cash, $1,200; credit Sales Revenue, $1,200 B) Debit Sales Revenue, $1,200; credit Cash, $1,200 C) Debit Cash, $1,200; credit Deferred Revenue, $1,200 D) No journal entry is necessary.

105) On October 1, 2024, a company sells $800 of gift cards to customers. The gift cards expire one year from the date of sale. By October 1, 2025, $750 of the gift cards have been redeemed and the sales recorded at the time of redemption. What adjusting entry, if any, should the company record on October 1, 2025?

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A) Debit Deferred Revenue, $50; credit Sales Revenue, $50 B) Debit Sales Revenue, $50; credit Cash, $50 C) Debit Cash, $750; credit Sales Revenue, $750 D) No adjusting entry is necessary.

106) On July 1, 2024, a company sells $2,000 of gift cards to customers. The gift cards expire one year from the date of sale. By December 31, 2024, $1,600 of the gift cards have been redeemed. What is the ending balance in the Deferred Revenue account on December 31, 2024? A) $2,000 B) $1,800 C) $1,600 D) $400

107) Sales taxes collected by a company on behalf of the state and local governments are recorded as a(n): A) Expense. B) Revenue. C) Equity. D) Liability.

108)

When a company collects sales tax from a customer, the event is recorded by a debit to: A) Sales Tax Expense and a credit to Sales Tax Payable. B) Cash and a credit to Sales Tax Payable. C) Sales Tax Payable and a credit to Sales Tax Expense. D) Sales Tax Payable and a credit to Cash.

109) When a company collects sales tax from a customer, the event results in a(n) ________ in Cash and a(n) ________ in Sales Tax Payable: Version 1

A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

110) Suppose you buy lunch for $16.80 that includes a(n) 8% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much does the restaurant owe for sales tax? (Do not round intermediate calculations. Round the answers to 2 decimal places.) A) $15.56 for lunch and $1.24 for sales tax B) $16.80 for lunch and $1.24 for sales tax C) $15.46 for lunch and $1.34 for sales tax D) $16.80 for lunch and $1.34 for sales tax

111) Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much does the restaurant owe for sales tax? (Do not round intermediate calculations. Round the answers to 2 decimal places.) A) $8.39 for lunch and $0.42 for sales tax B) $8.39 for lunch and no sales tax C) $8.81 for lunch and $0.42 for sales tax D) $7.99 for lunch and $0.40 for sales tax

112) The Route 66 Gift Shop, which records sales and sales tax separately, had sales on account of $1,500 and cash sales of $1,000. The state sales tax is 8%. The journal entry to record the sales would include a: A) Debit to Sales Tax Payable for $75. B) Debit to Cash of $1,000. C) Credit to Sales Revenue of $2,700. D) Debit to Accounts Receivable of $1,620 and a debit to Cash of $1,080.

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113) Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the restaurant charge you for the dinner (excluding any tax) and how much does the restaurant owe for sales tax? A) $23.75 for dinner and $1.90 for sales tax B) $23.75 for dinner and no sales tax C) $21.85 for dinner and $1.90 for sales tax D) $21.99 for dinner and $1.76 for sales tax

114) Union Apparel has sales including sales taxes for the month of $551,700. If the sales tax rate is 6%, what are Union Apparel's sales for the month? A) $520,472 B) $518,598 C) $520,772 D) $551,700

115) Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what are Union Apparel's sales for the month? A) $500,000 B) $518,128 C) $520,000 D) $551,200

116) Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, how much does Union Apparel owe for sales tax? A) $51,200 B) $33,272 C) $31,200 D) $551,200

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117)

The current portion of long-term debt should be: A) Reported as a current liability in the balance sheet. B) Reported as a long-term liability in the balance sheet. C) Combined with the rest of the long-term debt in the balance sheet. D) Paid immediately.

118)

The current portion of long-term debt is: A) The amount that will be paid within one year of the balance sheet date. B) Reported as an asset. C) Reported as a long-term liability. D) None of the other answer choices is correct.

119) Region Jet has a $57 million liability at December 31, 2024, of which $10 million is payable in 2025. In its December 31, 2024 balance sheet, the company reports the $57 million debt as a: A) $10 million current liability and a $47 million long-term liability in the balance sheet. B) $57 million long-term liability in the balance sheet. C) $57 million current liability in the balance sheet. D) $47 million current liability and a $10 million long-term liability in the balance sheet.

120) Region Jet has a $50 million liability at December 31, 2024, of which $10 million is payable in 2025. In its December 31, 2024 balance sheet, the company reports the $50 million debt as a: A) $50 million current liability in the balance sheet. B) $50 million long-term liability in the balance sheet. C) $10 million current liability and a $40 million long-term liability in the balance sheet. D) $40 million current liability and a $10 million long-term liability in the balance sheet.

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121) United Supply has a $25 million liability at December 31, 2024, of which $5 million is payable in each of the next five years. United Supply reports the liability in the balance sheet as a: A) $5 million current liability and a $20 million long-term liability. B) $25 million current liability. C) $20 million current liability and a $5 million long-term liability. D) $25 million long-term liability.

122) United Supply has a $5 million liability at December 31, 2024, of which $1 million is payable in each of the next five years. United Supply reports the liability in the balance sheet as a: A) $5 million current liability. B) $5 million long-term liability. C) $1 million current liability and a $4 million long-term liability. D) $4 million current liability and a $1 million long-term liability.

123) If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be: A) Disclosed, but not reported as a liability. B) Disclosed and reported as a liability. C) Neither disclosed nor reported as a liability. D) Reported as a liability, but not disclosed.

124) If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss isprobable, a contingent liability should be:

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A) Disclosed, but not reported as a liability. B) Disclosed and reported as a liability. C) Neither disclosed nor reported as a liability. D) Reported as a liability, but not disclosed.

125) Reeves Company filed suit against Higgins, Incorporated, seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $200,000 to $300,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? A) As a liability for $300,000 with disclosure of the range B) In a disclosure only; no liability is reported C) As a liability for $200,000 with disclosure of the range D) As a liability for $250,000 with disclosure of the range

126) Reeves Company filed suit against Higgins, Incorporated, seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? A) As a liability for $100,000 with disclosure of the range B) As a liability for $150,000 with disclosure of the range C) As a liability for $200,000 with disclosure of the range D) In a disclosure only; no liability is reported

127) Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation?

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A) As a liability for $100,000 with disclosure of the range B) As a liability for $150,000 with disclosure of the range C) As a liability for $200,000 with disclosure of the range D) In a disclosure only; no liability is reported

128) Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation? A) As a receivable for $100,000 with disclosure of the range B) As a receivable for $150,000 with disclosure of the range C) As a receivable for $200,000 with disclosure of the range D) In a disclosure only; no receivable is reported

129) Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is: A) Remote and the amount is reasonably estimable. B) Probable and the amount is reasonably estimable. C) Reasonably possible and the amount is reasonably estimable. D) Probable and the amount is not reasonably estimable.

130) Ogden Motors, Incorporated is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet? A) Record; decrease stockholders' equity and increase liabilities B) Record; increase stockholders' equity and decrease liabilities C) Disclose; no effect in the balance sheet D) Disclose; decrease stockholders' equity and decrease liabilities

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131) Amplify, Incorporated was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Incorporated feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct? A) Amplify, Incorporated would record a loss and contingent liability for $50,000. B) Sound City would record a gain and lawsuit receivable for $50,000. C) Sound City would record nothing. D) Amplify, Incorporated would record a loss and contingent liability for $50,000; Sound City would record nothing.

132) A company has two active lawsuits at the end of the year. In Lawsuit 1, the company feels it is probable that it will win $10,000. In Lawsuit 2, the company feels that it is probable that it will lose $6,000. At the end of the year, the company should report a: A) Net gain for $4,000. B) Loss for $6,000. C) Net Loss for $4,000. D) Gain for $10,000.

133) While providing services to Palmer Company, Raider Group caused damages of $125,000. As of the end of the year, both parties agree that it is probable that Raider will pay Palmer the full amount of the damages within the next two months. How would Raider and Palmer report the lawsuit at the end of the year? A) Raider reports a loss; Palmer reports nothing. B) Raider reports nothing; Palmer reports nothing. C) Raider reports nothing; Palmer reports a gain. D) Raider reports a loss; Palmer reports a gain.

134) At the beginning of 2024, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 2% of net sales. Net sales made under warranty in 2024 were $250 million. Five percent of the units sold were returned in 2024 and repaired or replaced at a cost of $3.6 million. The amount of warranty expense in Angel's 2024 income statement is:

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A) $37.5 million. B) $5.0 million. C) $3.6 million. D) $2.2 million.

135) At the beginning of 2024, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2024 were $180 million. Five percent of the units sold were returned in 2024 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense in Angel's 2024 income statement is: A) $5.3 million. B) $7.2 million. C) $9.0 million. D) $27.0 million.

136)

Which of the following statements is correct regarding the account "Warranty Liability"? A) It is adjusted at the end of the year. B) It is closed at the end of the year. C) It has a year-end balance equal to the cost of warranty repairs made during the year. D) It is increased each time a warranty repair is made.

137) Strikers, Incorporated sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year? A) $0 B) $16,000 C) $7,000 D) $9,000

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138) Strikers, Incorporated sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,800 goals and 47 have been repaired. If the estimated cost to repair a goal is $140, what would be the warranty liability at the end of the year? A) $6,910 B) $13,440 C) $0 D) $6,860

139) Strikers, Incorporated sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year? A) $0 B) $16,000 C) $7,000 D) $9,000

140) Bears Incorporated sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2024 have been returned yet, based upon previous years, Bears Incorporated estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity reported at the end of 2024? A) A decrease in assets and decrease in stockholders' equity B) No effect C) An increase in stockholders' equity and a decrease in liabilities D) A decrease in stockholders' equity and an increase in liabilities

141) In 2024, a company estimates that warranty costs in the following year will be $25,000. Actual warranty costs in 2025 are only $20,000. What is the effect on the balance sheet when recording actual warranty costs in 2025? Version 1

A) Stockholders' equity decreases B) Stockholders' equity increases C) Liabilities increase D) Liabilities decrease

142) Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, warranty expense for the year would be: A) $0. B) $1,000. C) $2,000. D) $3,000.

143) Talks-A-Lot, Incorporated sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2024, Talks-A-Lot has sold 510 cell phones and has repaired 10 of them as of December 31, 2024. What amount of warranty liability should be reported at December 31, 2024? (Do not round intermediate calculations.) A) $3,825 B) $3,075 C) $750 D) Zero; all expected returns from warranties have been received.

144) Talks-A-Lot, Incorporated sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2024, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2024. What amount of warranty liability should be reported at December 31, 2024?

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A) $2,250 B) $3,375 C) $5,625 D) Zero; all expected returns from warranties have been received.

145) Carpenter Incorporated estimates warranty expense at 2% of sales. Sales during the year were $7 million and warranty expenditures during the year were $52,500. What was the balance in the Warranty Liability account at the end of the year? A) $87,500 B) $102,500 C) $52,500 D) $140,000

146) Carpenter Incorporated estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures during the year were $44,000. What was the balance in the Warranty Liability account at the end of the year? A) $44,000 B) $80,000 C) $36,000 D) $480,000

147) Note disclosure is required for material potential losses when the loss is at least reasonably possible: A) Only if the amount is known. B) Only if the amount is known or reasonably estimable. C) Unless the amount is not reasonably estimable. D) Even if the amount is not reasonably estimable.

148)

Gain contingencies usually are recognized in a company's income statement when the:

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A) Gain is certain. B) Amount is reasonably estimable. C) Gain is reasonably possible and the amount is reasonably estimable. D) Gain is probable and the amount is reasonably estimable.

149) A contingent liability should be reported in a company's financial statements only if the likelihood of a loss occurring is: A) At least remotely possible and the amount of the loss is known. B) At least reasonably possible and the amount of the loss is known. C) At least reasonably possible and the amount of the loss is reasonably estimable. D) Probable and the amount of the loss can be reasonably estimated.

150) When a gain contingency is probable and the amount of gain is reasonably estimable, the gain can be: A) Reported in the income statement and disclosed. B) Offset against stockholders' equity. C) Disclosed, but not recognized in the income statement. D) Reported in the income statement, but not disclosed.

151) A contingent liability should be disclosed in a note to the financial statements rather than being recorded if the likelihood of a loss is: A) Remote. B) Reasonably possible. C) Probable. D) 80% or higher.

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152) Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: A) When the equipment is sold. B) When the repairs are performed. C) When payments are made to the company providing the service. D) Evenly over the life of the warranty.

153)

Which of the following is a contingency that should be recorded?

A) The company is being sued and a loss is reasonably possible and reasonably estimable. B) The company deducts life insurance premiums from employees' paychecks. C) The company offers a two-year warranty and the expenses can be reasonably estimated. D) It is probable that the company will receive $100,000 in settlement of a lawsuit.

154) Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit? A) Unified does not record any loss; Northeast records a $5,000,000 gain. B) Unified records a $5,000,000 loss; Northeast does not record any gain. C) Unified records a $5,000,000 loss; Northeast records a $5,000,000 gain. D) Neither company records a loss or gain.

155) Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?

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A) Unified does not record any loss; Northeast records a $5,000,000 gain. B) Neither company records a loss or gain. C) Unified records a $5,000,000 loss; Northeast records a $5,000,000 gain. D) Unified records a $5,000,000 loss; Northeast does not record any gain.

156) Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the current ratio? A) 2.54 B) 2.98 C) 4.04 D) 2.84

157) Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the acid-test ratio? A) 1.47 B) 2.00 C) 2.84 D) 3.86

158)

Which of the following statements regarding liquidity ratios is false?

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A) A high current ratio generally indicates the ability to pay current liabilities on a timely basis. B) A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C) All current assets are due within one year and therefore have essentially equal liquidity. D) As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity.

159)

Which of the following statements regarding liquidity ratios is true? A) A low current ratio generally indicates the ability to pay current liabilities on a timely

basis. B) A low acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C) All current assets are due within one year and therefore have essentially equal liquidity. D) A high working capital generally indicates the ability to pay current liabilities on a timely basis.

160) Which of the following is true regarding the relationship between the current ratio and the acid-test ratio? A) The current ratio will always be equal to or larger than the acid-test ratio for a specific company. B) The acid-test ratio will always be equal to or larger than the current ratio for a specific company. C) Either the current ratio or the acid-test ratio could be larger for a specific company. D) One ratio will always exceed 1.0, while the other will always be less than 1.0.

161)

A company's liquidity refers to its ability to:

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A) Collect accounts receivable. B) Sell inventory efficiently. C) Generate profits from operations. D) Pay currently maturing debts.

162) Which financial ratio relates most closely to a company's ability to pay its short-term debts? A) Receivables turnover B) Debt to equity ratio C) Return on assets D) Current ratio

163)

Working capital is: A) Current assets divided by current liabilities. B) Current assets minus current liabilities. C) Cash, short-term investments, and accounts receivable divided by current liabilities. D) Cash, short-term investments, and accounts receivable minus current liabilities.

164)

The current ratio equals:

A) Current assets divided by current liabilities. B) Cash and short-term investments divided by current liabilities. C) Cash, short-term investments, and accounts receivable divided by current liabilities. D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

165)

The acid-test ratio equals:

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166) Which of the following measures of liquidity doesnot control for the relative size of the company? A) Working capital B) Current ratio C) Acid-test ratio D) All of these answer choices control for the relative size of the company.

167) Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio? A) Increase the current ratio and increase the acid-test ratio B) No change to the current ratio and decrease the acid-test ratio C) Decrease the current ratio and decrease the acid-test ratio D) Decrease the current ratio and increase the acid-test ratio

168) Assuming a current ratio of 1.0 and an acid-test ratio of 0.80, how will the borrowing of cash by issuing a six-month note payable affect each ratio? A) Increase the current ratio and increase the acid-test ratio B) No change to the current ratio and increase the acid-test ratio C) Decrease the current ratio and decrease the acid-test ratio D) Decrease the current ratio and increase the acid-test ratio

169) Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will an increase in accounts receivable affect each ratio?

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A) No change to the current ratio and decrease the acid-test ratio B) Increase the current ratio and increase the acid-test ratio C) Decrease the current ratio and decrease the acid-test ratio D) Decrease the current ratio and increase the acid-test ratio

170) Which of the following wouldnot result in an increase in both the current ratio and the acid-test ratio? A) Increase in cash B) Increase in inventory C) Increase in accounts receivable D) Increase in current investments

171) Which of the following would result in an increase in the current ratio, but not necessarily the acid-test ratio? A) Increase in current assets B) Increase in quick assets C) Decrease in current liabilities D) Decrease in current assets

172) How many of the following transactions increase a company’s liquidity? ● Provide services on account. ● Pay workers’ salaries in the current period. ● Purchase office supplies with cash. ● Pay dividends to stockholders. A) 0 B) 1 C) 2 D) 3

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 173) Why is it important to distinguish between current and long-term liabilities?

174) Explain why we record interest in the period in which we incur it rather than in the period we pay it.

175) Name as many items as you can that are withheld from employee payroll checks. Which employee deductions are required by law and which are voluntary? Name as many items as you can that are employer payroll costs in addition to the employee's salary. Which employer costs are required by law and which are voluntary?

176) Retailers like McDonald's, American Eagle, and Apple Computer sell a large number of gift cards. Explain how these companies account for the sale of gift cards.

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177) Define a contingent liability. Provide three common examples. Under what circumstances should a company report a contingent liability?

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Answer Key Test name: Chap 08_6e_Spiceland 1) TRUE 2) FALSE Liabilities may be classified as either current or long-term. 3) TRUE 4) FALSE Companies prefer to report a liability as long-term, because long-term debt makes a company appear less risky. 5) TRUE 6) FALSE Companies often use short-term debt because it usually offers lower interest rates than does long-term debt, because the risk of default is lower with loans of shorter durations. 7) TRUE 8) FALSE Interest expense is recorded in the period incurred, not in the period in which we pay it. 9) TRUE 10) TRUE 11) TRUE 12) TRUE 13) TRUE 14) FALSE Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax. 15) TRUE

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16) TRUE 17) FALSE The employer is required to match the amount withheld for each employee, effectively doubling the amount paid into Social Security. 18) TRUE 19) TRUE 20) FALSE When a company receives cash in advance, it debits Cash and credits a liability account called Deferred Revenue. 21) TRUE 22) FALSE Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a general state sales tax. 23) TRUE 24) TRUE 25) TRUE 26) FALSE These liabilities usually are reclassified and reported as current liabilities when they become payable within one year of the balance sheet date. 27) TRUE 28) TRUE 29) FALSE We record a contingent liability when the likelihood of the loss occurring is probable and the amount is reasonably estimable. 30) TRUE 31) FALSE When no amount within a range of potential losses appears more likely than others, we record the minimum amount in the range. 32) TRUE 33) TRUE Version 1

34) FALSE A contingent liability is recorded only if a loss is probable and the amount is reasonably estimable. 35) FALSE The Warranty Liability account is increased by warranty expense, but it is also reduced over time by actual warranty expenditures. 36) TRUE 37) FALSE We do not record gain contingencies until the gain is certain. 38) TRUE 39) FALSE The current ratio is calculated by dividing current assets by current liabilities. 40) TRUE 41) TRUE 42) FALSE A higher current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis. 43) B 44) D 45) B 46) B 47) B 48) C 49) A 50) C 51) B 52) B ($100,000 × 6%) × 2/12 = $1,000 53) A Version 1

Interest expense in 2025 = ($100,000 × 6%) × 4/12 = $2,000 54) A 55) C 56) B Liabilities are reduced by $107,060 [$106,000 note payable plus $1,060 interest payable ($106,000 × 6% × 2/12)]. Stockholders' equity is reduced by interest expense of $2,120 ($106,000 × 6% × 4/12). 57) C Liabilities are reduced by $101,000 [$100,000 note payable plus $1,000 interest payable ($100,000 × 6% × 2/12)]. Stockholders' equity is reduced by interest expense of $2,000 ($100,000 × 6% × 4/12). 58) D ($211,000 × 7%) × 4/12 = $4,923 59) C ($100,000 × 9%) × 4/12 = $3,000 60) D Interest expense in 2025 = ($110,000 × 8%) × 2/12 = $1,467 61) B Interest expense in 2025 = ($100,000 × 9%) × 2/12 = $1,500 62) C ($300,000 × 5%) × 1/12 = $1,250 63) D $300,000 + ($300,000 × 5% × 6/12) = $307,500 64) D $204,000 × 6% × 2/12 = $2,040 65) A $200,000 × 6% × 2/12 = $2,000 Version 1

66) B $195,000 × 12% × 2/12 = $3,900 67) C $100,000 × 12% × 2/12 = $2,000 68) B $100,000 × 12% × 4/12 = $4,000 69) B $498,000 × 6% × 2/12 = $4,980 70) C $500,000 × 6% × 2/12 = $5,000 71) D The note plus all interest payable was paid in full on October 31, 2025, so no interest remains payable on December 31, 2025. 72) D The note plus all interest payable was paid in full on October 31, 2025, so no interest remains payable on December 31, 2025. 73) D $500,000 × 6% × 10/12 = $25,000 74) A 75) A 76) C 77) C 78) B 79) B 80) C 81) D 82) D 83) B Version 1

Total withheld for: Social Security Medicare Total

$ 142,800 × 0.062 = $ 2,400,000 × 0.0145 =

$ 8,854 34,800 $43,654

84) A The coach's monthly salary of $200,000 in January exceeds the Social Security maximum base amount of $142,800, so the total amount of Social Security for the year will be withheld in January. 85) B Total withheld for: Social Security Medicare Total

$142,800 × 0.062 = $180,000 × 0.0145 =

$ 8,854 2,610 $11,464

86) D The manager's monthly salary of $15,000 finally exceeds the Social Security maximum base amount of $142,800 during the 10th month of the year (that is, $15,000 per month × 10 months = $150,000), so Social Security will only be withheld through October. Note: Since the manager’s cumulative salary for the year equals $135,000 (or $15,000 per month × 9 months) through the end of September, only $7,800 (or the maximum base of $142,800 minus his cumulative salary through September of $135,000) will be taxed at 6.2% during October. 87) B Total Salaries Expense

[(10 × 40 hours) × $20]

$8,000

Less: Withholdings Federal Income Taxes

($8,000 × 0.15)

$1,200

State Income Taxes

($8,000 × 0.06)

480

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FICA Taxes

($8,000 × 0.0765)

612

Total Withholdings

2,292

Actual Payroll Payment (Salaries Payable)

$5,708

88) C FICA Taxes Unemployment Taxes

($8,000* × 0.0765) ($8,000* × 0.038)

Total Payroll Tax Expense

$ 612 304 $ 916

*[(10 × 40 hours) × $20] 89) B Total Salaries Expense

[(15 × 40 hours) × $30]

$18,000

Less: Withholdings Federal Income Taxes

($18,000 × 0.15)

$2,700

State Income Taxes

($18,000 × 0.06)

1,080

($18,000 × 0.0765)

1,377

FICA Taxes Total Withholdings

5,157

Actual Payroll Payment (Salaries Payable)

$12,843

90) C FICA Taxes Unemployment Taxes Total Payroll Tax Expense

($18,000* × 0.0765) ($18,000* × 0.038)

$ 1,377 684 $ 2,061

*[(15 × 40 hours) × $30] 91) A 92) B 93) C 94) B 95) B

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96) B 97) A 98) B 99) D 100) A 101) A 102) D 103) B 104) C 105) A $800 − $750 = $50 106) D $2,000 − $1,600 = $400 107) D 108) B 109) B 110) A Cost of lunch = $16.80 / 1.08 = $15.56 Sales tax = $16.80 − $15.56 = $1.24 111) D Cost of lunch = $8.39 / 1.05 = $7.99 Sales tax = $8.39 − $7.99 = $0.40 112) D $1,500 × 1.08 = $1,620 $1,000 × 1.08 = $1,080 113) D Cost of dinner = $23.75 / 1.08 = $21.99 Sales tax = $23.75 − $21.99 = $1.76

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114) A $551,700 / 1.06 = $520,472 115) C $551,200 / 1.06 = $520,000 116) C $551,200/1.06 = $520,000 $551,200 − $520,000 = $31,200 117) A 118) A 119) A 120) C 121) A 122) C 123) A 124) B 125) C When no amount within a range of potential losses appears more likely than others, the liability is recorded at the minimum amount in the range. 126) A When no amount within a range of potential losses appears more likely than others, the liability is recorded at the minimum amount in the range. 127) D A contingent liability is not recorded if the likelihood of loss is only reasonably possible. 128) D A contingent gain is not recorded until the gain is certain. 129) B 130) C

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The outcome is reasonably possible, not probable, so the contingent liability will be disclosed, but not recorded. 131) D 132) B 133) A 134) B $250 million × 2% = $5.0 million. 135) B $180 million × 4% = $7.2 million. 136) A 137) B (4,000 goals × 2%) × $200 = $16,000 138) D (4,800 goals × 2%) × $140 = $13,440 $13,440 − (47 × $140) = $6,860 139) C (4,000 goals × 2%) × $200 = $16,000 $16,000 − (45 × $200) = $7,000 140) D The company would record an expense and a liability related to the estimated warranties. 141) D The company would record a reduction in the warranty liability and a reduction in cash, inventory parts, or other assets used to repair the items. 142) D (1,000 × 15%) × $20 = $3,000 143) B (510 × 10%) × $75 = $3,825; $3,825 − (10 × $75) = $3,075 144) B Version 1

(750 × 10%) × $75 = $5,625; $5,625 − (30 × $75) = $3,375 145) A $7 million × 2% = $140,000 $140,000 − $52,500 = $87,500 146) C $4 million × 2% = $80,000 $80,000 − $44,000 = $36,000 147) D 148) A 149) D 150) C 151) B 152) A 153) C 154) B 155) B 156) B ($102 + $94 + $182 + $18) / ($98 + $35) = 2.98 (rounded) 157) A ($102 + $94) / ($98 + $35) = 1.47 (rounded) 158) C 159) D 160) A 161) D 162) D 163) B 164) A 165) C 166) A Version 1

167) B 168) B 169) B 170) B 171) A 172) B Providing services on account increases current assets (Accounts Receivable). 173) Distinguishing between current and long-term liabilities is important in helping investors and creditors assess the riskiness of a business's obligations. Given a choice, most companies would prefer to report a liability as long-term rather than current because it may cause the company to appear less risky. In turn, less risky companies may enjoy lower interest rates on borrowing and command higher stock prices for new stock listings. 174) Accrual-basis accounting requires expenses to be recorded when incurred; cash-basis requires expenses to be recorded when the cash is paid. Generally Accepted Accounting Principles (GAAP) require the use of accrual-basis accounting in preparing financial statements because it best reflects the timing of the expense.

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175)Items commonly withheld from employee payroll checks include federal and state income taxes; Social Security and Medicare; health, dental, disability, and life insurance premiums; and employee investments to retirement or savings plans. Federal and state income taxes, Social Security, and Medicare are required by law. The rest are voluntary. Common employer payroll costs, in addition to the employee's salary, include federal and state unemployment taxes, the employer portion of Social Security and Medicare, employer contributions for health, dental, disability, and life insurance; and employer contributions to retirement or savings plans. Federal and state unemployment taxes and the employer portion of Social Security and Medicare are required by law. The rest are voluntary benefits paid by a company on behalf of its employees. 176)When a company receives cash in advance through the sale of gift cards, it debits Cash and credits a current liability account called Deferred Revenue. When customers redeem gift cards for goods or services, the company debits Deferred Revenue and credits Sales Revenue. 177) A contingent liability is an existing, uncertain situation that might result in a loss. Examples include lawsuits, product warranties, environmental problems, and premium offers. A contingent liability is recorded only if a loss is probable and the amount is reasonably estimable.

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CHAPTER 9: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match the following: Terms: A) Present value of payments B) Discount C) Amortization schedule D) Times interest earned ratio E) Sinking fund F) Premium G) Market interest rate H) Lease I) Stated interest rate J) Debt to equity ratio Descriptions: 1) The rate quoted in the bond contract used to calculate the cash payments for interest. 2) Arrangement by which an asset's owner provides another party the right to use the asset for a specified period of time. 3) Total liabilities divided by total stockholders' equity; measure a company's risk. 4) The true interest rate used by investors to value a bond. 5) The issue price is below its face amount. 6) Amount to record a lease asset and lease liability at the beginning of the lease period. 7) Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments. 8) The issue price is above its face amount. 9) Ratio that compares interest expense with income available to pay those charges. 10) An investment fund used to set aside money to be used to pay debts as they come due.

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2) Terms: A) Private placement. B) Bond issue costs. C) Secured bond. D) Term bond. E) Unsecured bond. F) Convertible bond. G) Serial bond. H) Callable bond. Descriptions: 1) Matures in installments. 2) Allows the issuer to pay off the bonds early at a fixed price. 3) Allows the investor to transfer each bond into shares of common stock. 4) Includes underwriting, legal, accounting, registration, and printing fees. 5) Sale of debt securities directly to a single investor. 6) Supported by specific assets pledged as collateral by the issuer. 7) Secured only by the "full faith and credit" of the issuing corporation. 8) Matures on a single date.

3) Match the following: Terms: A) Secured bond. B) Term bond. C) Unsecured bond. D) Serial bond. Descriptions 1) Matures in installments. 2) Matures on a single date. 3) Supported by specific assets pledged as collateral by the issuer. 4) Secured only by the "full faith and credit" of the issuing corporation.

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4) Match the following: Terms: A) Bond issue costs. B) Callable bond. C) Private placement. D) Convertible bond. Descriptions: 1) Allows the issuer to pay off the bonds early at a fixed price. 2) Allows the investor to transfer each bond into shares of common stock. 3) Includes underwriting, legal, accounting, registration, and printing fees. 4) Sale of debt securities directly to a single investor.

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Match the following:

Terms: A) Bonds issued at a premium B) Bonds issued at a discount C) Market interest rate D) Stated interest rate E) Bonds issued at face amount Descriptions: 1) The true interest rate used by investors to value a bond. 2) The stated interest rate is more than the market interest rate. 3) The stated interest rate equals the market interest rate. 4) The stated interest rate is less than the market interest rate. 5) The rate quoted in the bond contract used to calculate the cash payments for interest.

6) On January 1, 2024, Middling Company borrows $31,000 by agreeing to a 9%, 4-year note with the bank. Payments of $771.44 are due at the end of each month with the first installment due on January 31, 2024. Required: Record the issuance of the note payable and the first two monthly payments.

7) On January 1, 2024, Middling Company borrows $30,000 by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the end of each month with the first installment due on January 31, 2024. Required: Record the issuance of the note payable and the first two monthly payments.

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8) On January 1, 2024, Alcatraz Company purchases a building for $900,000, signing a 5%, 20-year mortgage. Installment payments of $5,939.60 are due at the end of each month, with the first payment due on January 31, 2024. Required: 1. Record issuance of the mortgage on January 1, 2024. 2. Record the first monthly mortgage payment on January 31, 2024. 3. Record the second monthly mortgage payment on February 28, 2024. 4. Total payments over the 20 years are $1,425,504 ($5,939.60 × 240 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

9) On January 1, 2024, Lexington Financial purchases a condo for $400,000. The company pays cash of $80,000 and issues a 6%, 30-year note payable for the remaining $320,000. Installment payments of $1,918.56 are due at the end of each month, with the first payment due on January 31, 2024. Required: 1. Record purchase of the condo building on January 1, 2024. 2. Fill in the blanks for the first three rows of the amortization schedule below: (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Change in Carrying Value

(5) Carrying Value

1/1/2024 1/31/2024 2/28/2024

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3. Record the first monthly mortgage payment on January 31, 2024. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan? (Do not round your answers.) 4. Total payments over the 30 years are $690,682 ($1,918.56 × 360 monthly payments). How much of this is interest expense and how much is actual payment of the loan? (Do not round your answers.)

10) D’Angelo’s Pizzeria issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty-five shares of common stock. The current market price of D'Angelo's stock is $35 per share. Required: 1. Explain why D'Angelo's might choose to issue convertible bonds. 2. Explain why investors might choose to purchase D'Angelo's convertible bonds.

11) A company issues 9%, 9-year bonds with a face amount of $90,000 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is also 9%. Interest is paid semiannually on June 30 and December 31. Required: 1. Record the bond issue. 2. Record the first interest payment on June 30, 2024.

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12) A company issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is also 7%. Interest is paid semiannually on June 30 and December 31. Required: 1. Record the bond issue. 2. Record the first interest payment on June 30, 2024.

13) A company issues 7%, 9-year bonds with a face amount of $80,000 for $74,934 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually on June 30 and December 31. Required: 1. Record the bond issue. 2. Record the first interest payment on June 30, 2024.

14) A company issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually on June 30 and December 31. Required: 1. Record the bond issue. 2. Record the first interest payment on June 30, 2024.

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15) A company issues 5%, 10-year bonds with a face amount of $80,000 for $86,540 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 4%. Interest is paid semiannually on June 30 and December 31. Required: 1. Record the bond issue. 2. Record the first interest payment on June 30, 2024.

16) A company issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on January 1, 2024. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. Required: 1. Record the bond issue. 2. Record the first interest payment on June 30, 2024.

17)

Presented below is a partial amortization schedule for Fabulous Food Store:

(1) Period

Issue date

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(2) Cash Paid

(3) Interest Expense

(4) Increase in Carrying Value

(5) Carrying Value $ 74,600

1 2

$ 2,500 2,500

$ 2,984 3,003

$ 484 503

75,084 75,587

Required: 1. Record the bond issue assuming the face amount of bonds payable is $80,000. 2. Record the first interest payment.

18)

Presented below is a partial amortization schedule for Fabulous Food Store:

(1) Period

(2) Cash Paid

(3) Interest Expense

(4) Increase in Carrying Value

(5) Carrying Value

Issue date 1 2

$ 74,564 $ 2,800 2,800

$ 2,983 2,990

$ 183 190

74,747 74,937

Required: 1. Record the bond issue assuming the face amount of bonds payable is $80,000. 2. Record the first interest payment.

19)

Presented below is a partial amortization schedule for Mill Street Investors:

(1) Period

(2) Cash Paid

(3) Interest Expense

(4) Decrease in Carrying Value

Issue date 1 2

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(5) Carrying Value $ 85,900

$ 4,000 4,000

$ 3,436 3,413

$ 564 587

85,336 84,749

Required: 1. Record the bond issue assuming the face amount of bonds payable is $79,000. 2. Record the first interest payment.

20)

Presented below is a partial amortization schedule for Mill Street Investors:

(1) Period

(2) Cash Paid

(3) Interest Expense

(4) Decrease in Carrying Value

(5) Carrying Value

Issue date 1 2

$ 85,951 $ 2,800 2,800

$ 2,579 2,572

$ 221 228

85,730 85,502

Required: 1. Record the bond issue assuming the face amount of bonds payable is $80,000. 2. Record the first interest payment.

21) On January 1, 2024, a company issues $750,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. The bonds will issue at $750,000. Required: Record the bond issue on January 1, 2024, and the first two semiannual interest payments on June 30, 2024, and December 31, 2024.

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22) On January 1, 2024, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. The bonds will issue at $800,000. Required: Record the bond issue on January 1, 2024, and the first two semiannual interest payments on June 30, 2024, and December 31, 2024.

23) On January 1, 2024, a company issues $720,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $673,172. Required: 1. Fill in the blanks in the amortization schedule below: (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Change in Carrying Value

(5) Carrying Value

1/1/2024 6/30/2024 12/31/2024

2. Record the bond issue on January 1, 2024, and the first two semiannual interest payments on June 30, 2024, and December 31, 2024.

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24) On January 1, 2024, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $747,968. Required: 1. Fill in the blanks in the amortization schedule below: (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Change in (5) Carrying Carrying Value Value

1/1/2024 6/30/2024 12/31/2024

2. Record the bond issue on January 1, 2024, and the first two semiannual interest payments on June 30, 2024, and December 31, 2024.

25) On January 1, 2024, a company issues $730,000 of 10% bonds, due in seven years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $767,313. Required: 1. Fill in the blanks for the first three rows of the amortization schedule below: (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Change in Carrying Value

(5) Carrying Value

1/1/2024

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6/30/2024 12/31/2024

2. Record the bond issue on January 1, 2024, and the first two semiannual interest payments on June 30, 2024, and December 31, 2024.

26) On January 1, 2024, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850. Required: 1. Fill in the blanks for the first three rows of the amortization schedule below: (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Change in (5) Carrying Carrying Value Value

1/1/2024 6/30/2024 12/31/2024

2. Record the bond issue on January 1, 2024, and the first two semiannual interest payments on June 30, 2024, and December 31, 2024.

27) Sun City issues $54 million of bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: (1) Date

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(2) Cash Paid

(3) Interest Expense

(4) Decrease in Carrying Value

(5) Carrying Value

1/1/2024 6/30/2024 12/31/2024

$64,688,098 $2,700,000 2,700,000

$2,587,524 2,583,025

$112,476 116,975

64,575,622 64,458,647

Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) 5. What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) 6. What is the total cash paid for interest assuming the bonds mature in 20 years?

28) Sun City issues $50 million of bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Decrease in Carrying Value

1/1/2024 6/30/2024 12/31/2024

(5) Carrying Value $55,338,768

$2,000,000 2,000,000

$1,936,857 1,934,647

$63,143 65,353

55,275,625 55,210,272

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29) Sharett Company retires its 7% bonds having a face amount of $72,600 for $70,600 before their scheduled maturity. At the time, the bonds have a carrying value of $74,955. Required: Record the early retirement of the bonds.

30) Sharett Company retires its 7% bonds having a face amount of $70,000 for $68,000 before their scheduled maturity. At the time, the bonds have a carrying value of $74,937. Required: Record the early retirement of the bonds.

31) Magic Mountain retires its 8% bonds having a face amount of $121,000 for $123,000 before their scheduled maturity. At the time, the bonds have a carrying value of $115,000. Required: Record the early retirement of the bonds.

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32) Magic Mountain retires its 8% bonds having a face amount of $125,000 for $127,000 before their scheduled maturity. At the time, the bonds have a carrying value of $118,000. Required: Record the early retirement of the bonds.

33) Michelangelo’s Craft Center issues 7%, 7-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. Required: At what price will the bonds be issued?

34) Michelangelo’s Craft Center issues 7%, 10-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. Required: At what price will the bonds be issued?

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35) Stealth Fitness Center issues 7%, 9-year bonds with a face amount of $300,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. Required: At what price will the bonds be issued?

36) Stealth Fitness Center issues 7%, 15-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. Required: At what price will the bonds be issued?

37) On January 1, 2024, Tableau Company issues $30 million of 9% bonds, due in six years, with interest payable semiannually on June 30 and December 31 each year. Required: 1. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 2. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 3. If the market rate is 10%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

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38) On January 1, 2024, Tableau Company issues $20 million of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Required: 1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

39)

Southwestern Industries has the following selected data ($ in millions): 2024

2023

$ 3,500 1,800 1,700

$ 2,050 1,100 950

Balance Sheet Data Total Assets Total Liabilities Total Stockholders' Equity Income Statement Data Sales

$ 820

Interest Expense

Income Tax Expense

Net Income

Version 1

Required: Based on these amounts, calculate the following ratios for Southwestern Industries in 2024: 1. Debt to equity ratio. 2. Return on assets ratio. 3. Times interest earned ratio.

40)

Southwestern Industries has the following selected data ($ in millions): 2024

2023

$ 2,511 1,685 826

$ 2,315 1,525 790

Balance Sheet Data Total Assets Total Liabilities Total Stockholders' Equity Income Statement Data Sales

$ 786

Interest Expense

Income Tax Expense

Net Income

Required: Based on these amounts, calculate the following ratios for Southwestern Industries in 2024: 1. Debt to equity ratio. 2. Return on assets ratio. 3. Times interest earned ratio.

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41) Selected financial data for these two close competitors in the home building industry are provided below: ($ in millions) Total assets Total liabilities Total stockholders' equity Sales Interest expense Income tax expense Net income

Company A $ 40,860 21,480 19,380 66,175 740 1,430 2,620

Company B $ 33,070 13,910 19,160 47,230 340 1,050 1,730

Required: 1. 1. Calculate the debt to equity ratio for Company A and Company B. Which company has the higher ratio? 2. Calculate the times interest earned ratio for Company A and Company B. Which company is better able to meet interest payments as they become due?

42) Selected financial data for these two close competitors in the home building industry are provided below: ($ in millions) Total assets Total liabilities Total stockholders' equity Sales Interest expense Income tax expense Net income

Version 1

Company A $ 40,877 21,484 19,393 66,176 676 1,362 2,620

Company B $ 33,005 13,936 19,069 47,220 287 1,042 1,783

Required: 1. Calculate the debt to equity ratio for Company A and Company B. Which company has the higher ratio? 2. Calculate the times interest earned ratio for Company A and Company B. Which company is better able to meet interest payments as they become due?

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Answer Key Test name: Chap 09_6e_Spiceland_Problem Material 1)1) I 2) H 3) J 4) G 5) B 6) A 7) C 8) F 9) D 10) E 2)1) G 2) H 3) F 4) B 5) A 6) C 7) E 8) D 3)1) D 2) B 3) A 4) C 4)1) B 2) D 3) A 4) C Version 1

5)1) C 2) A 3) E 4) B 5) D 6) Date January 1, 2024

Account Title Cash

Debit 31,000

Notes Payable

Date January 31, 2024

(Issue a note payable) Account Title Interest Expense ($31,000 × 9% × 1/12) Notes Payable (difference)

Credit

31,000

Debit Credit 232.50 538.94

Cash (monthly payment)

771.44

(Pay monthly installment on note) Date February 28, 2024

Account Title Interest Expense [($31,000 − $538.94) × 9% × 1/12] Notes Payable (difference)

Debit 228.46

Credit

542.98

Cash (monthly payment)

771.44

(Pay monthly installment on note)

7) Date January 1, 2024

Account Title Cash

Debit 30,000

Notes Payable

Credit

30,000

(Issue a note payable) Date

Version 1

Account Title

Debit

Credit

January 31, 2024

Interest Expense ($30,000 × 6% × 1/12) Notes Payable (difference)

150.00 554.55

Cash (monthly payment)

Date February 28, 2024

(Pay monthly installment on note) Account Title Interest Expense [($30,000 − $554.55) × 6% × 1/12] Notes Payable (difference)

704.55

Debit 147.23

Credit

557.32

Cash (monthly payment)

704.55

(Pay monthly installment on note)

8)1. Date January 1, 2024

Account Title Buildings

Debit 900,000

Notes Payable

Credit

900,000

(Issue a note payable)

2. Date January 31, 2024

Account Title Interest Expense ($900,000 × 5% × 1/12) Notes Payable (difference)

Debit 3,750.00

Credit

2,189.60

Cash (monthly payment)

5,939.60

(Pay monthly installment on note)

3. Date Account Title February 28, Interest Expense [($900,000 2024 2,189.60) × 5% × 1/12]

Version 1

Debit 3,740.88

Credit

Notes Payable (difference)

2,198.72

Cash (monthly payment)

5,939.60

(Pay monthly installment on note)

4. The actual payments on the loan are $1,425,504. Therefore, total interest expense over the 20-year mortgage is $525,504 ($1,425,504 − $900,000). 9)1. Date January 1, 2024

Account Title Buildings

Debit 400,000

Credit

Cash

80,000

Notes Payable

320,000

(Purchase building with cash and note)

2. (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Decrease in Carrying Value Carrying Value (2) − (3) × 0.06 × 1/12

1/1/2024 1/31/2024 2/28/2024

$ 1,918.56 1,918.56

$ 1,600.00 1,598.41

(5) Carrying Value Prior Carrying Value − (4) $ 320,000.00

$ 318.56 320.15

319,681.44 319,361.29

3. Date January 31, 2024

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Account Title Debit Interest Expense ($320,000 × 6% 1,600.00 × 1/12) Notes Payable (difference) 318.56

Credit

Cash (monthly payment)

1,918.56

(Pay monthly installment on note)

In the first monthly payment, $1,600.00 goes to interest expense and only $318.56 goes to reducing the carrying value of the loan. 4. The actual payments on the loan are $690,681.60 ($1,918.56 × 360 months). Therefore, total interest expense over the 30-year mortgage is $370,681.60 (or $690,681.60 − $320,000). 10)1. Convertible bonds sell at a higher price and require a lower interest rate than bonds without a conversion feature. 2. Investors would benefit if the market price of the common stock goes above $40 per share ($1,000/25 shares = $40 per share) assuming the current market price of the bond is $1,000. Example: If the company's stock price goes to $50 per share, the convertible bondholder could trade a $1,000 bond for 25 shares of stock worth $50 per share (or $1,250). Prior to conversion, the bondholder has also received 3% interest on the convertible bond. 11)1. Date January 1, 2024

Account Title Cash Bonds Payable

Debit 90,000

Credit

90,000

(Issue bonds at face amount)

2. Version 1

Date June 30, 2024

Account Title Interest Expense

Debit 4,050

Cash ($90,000 × 9% × 1/2)

Credit

4,050

(Pay semiannual interest)

12)1. Date January 1, 2024

Account Title Cash

Debit 80,000

Bonds Payable

Credit

80,000

(Issue bonds at face amount)

2. Date June 30, 2024

Account Title Interest Expense

Debit 2,800

Cash ($80,000 × 7% × 1/2)

Credit

2,800

(Pay semiannual interest)

13)1. Date January 1, 2024

Account Title Cash

Debit 74,934

Discount on Bonds Payable

5,066

Bonds Payable

Credit

80,000

(Issue bonds at a discount)

2. Date June 30, 2024

Version 1

Account Title Interest Expense ($74,934 × 8% × 1/2) (rounded) Discount on Bonds Payable (difference)

Debit 2,997

Credit

197

Cash ($80,000 × 7% × 1/2)

2,800

(Pay semiannual interest)

14)1. Date January 1, 2024

Account Title Cash

Debit 74,564

Discount on Bonds Payable

5,436

Bonds Payable

Credit

80,000

(Issue bonds at a discount)

2. Date June 30, 2024

Account Title Interest Expense ($74,564 × 8% × 1/2) (rounded) Discount on Bonds Payable (difference) Cash ($80,000 × 7% × 1/2)

Debit 2,983

Credit

183 2,800

(Pay semiannual interest)

15)1. Date January 1, 2024

Account Title Cash

Debit 86,540

Credit

Bonds Payable

80,000

Premium on Bonds Payable

6,540

(Issue bonds at a premium)

2. Date June 30, 2024

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Account Title Interest Expense ($86,540 × 4% × ½) (rounded)

Debit 1,731

Credit

Premium on Bonds Payable (difference)

269

Cash ($80,000 × 5% × 1/2)

2,000

(Pay semiannual interest)

16)1. Date January 1, 2024

Account Title

Debit 85,951

Cash

Credit

Bonds Payable

80,000

Premium on Bonds Payable

5,951

(Issue bonds at a premium)

2. Date June 30, 2024

Account Title Interest Expense ($85,951 × 6% × ½) (rounded) Premium on Bonds Payable (difference)

Debit 2,579

Cash ($80,000 × 7% × 1/2)

Credit

221 2,800

(Pay semiannual interest)

17)1. Account Title Cash Discount on Bonds Payable

Debit 74,600

Credit

5,400

Bonds Payable

80,000

(Issue bonds at a discount)

2. Account Title

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Debit

Credit

Interest Expense

2,984

Discount on Bonds Payable

484

Cash

2,500

(Pay semiannual interest)

18)1. Account Title Cash Discount on Bonds Payable

Debit 74,564

Credit

5,436

Bonds Payable

80,000

(Issue bonds at a discount)

2. Account Title Interest Expense

Debit 2,983

Discount on Bonds Payable

Credit

183

Cash

2,800

(Pay semiannual interest)

19)1. Account Title Cash

Debit 85,900

Credit

Bonds Payable

79,000

Premium on Bonds Payable

6,900

(Issue bonds at a premium)

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Account Title Interest Expense

Debit 3,436

Premium on Bonds Payable

Credit

564

Cash

4,000

(Pay semiannual interest)

20)1. Account Title

Debit 85,951

Cash

Credit

Bonds Payable

80,000

Premium on Bonds Payable

5,951

(Issue bonds at a premium)

2. Account Title Interest Expense

Debit 2,579

Premium on Bonds Payable

Credit

221

Cash

2,800

(Pay semiannual interest)

21) Date January 1, 2024

Account Title Cash

Debit 750,000

Bonds Payable

Credit

750,000

(Issue bonds at face amount) June 30, 2024

Interest Expense Cash ($750,000 × 8% × 1/2)

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30,000 30,000

(Pay semiannual interest) December 31, 2024

Interest Expense

30,000

Cash ($750,000 × 8% × 1/2)

30,000

(Pay semiannual interest)

22) Date January 1, 2024

Account Title

Debit 800,000

Cash Bonds Payable

Credit

800,000

(Issue bonds at face amount) June 30, 2024

Interest Expense

32,000

Cash ($800,000 × 8% × 1/2)

32,000

(Pay semiannual interest) December 31, 2024

Interest Expense

32,000

Cash ($800,000 × 8% × 1/2)

32,000

(Pay semiannual interest)

23)1. (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Increase in Carrying Value Face Amount × Carrying Value (3) − (2) Stated Rate × Market Rate

1/1/2024 6/30/2024 12/31/2024

$ 28,800 28,800

$ 30,293 30,360

$ 1,493 1,560

(5) Carrying Value Prior Carrying Value + (4) $ 673,172 674,665 676,225

2. Date

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Account Title

Debit

Credit

January 1, 2024

Cash

673,172

Discount on Bonds Payable

46,828

Bonds Payable

720,000

(Issue bonds at a discount) June 30, 2024

Interest Expense ($673,172 × 9% × 1/2) Discount on Bonds Payable (difference) Cash ($720,000 × 8% × 1/2)

30,293 1,493 28,800

(Pay semiannual interest) December 31, 2024

Interest Expense ($674,665 × 9% × 1/2) Discount on Bonds Payable (difference) Cash ($720,000 × 8% × 1/2)

30,360 1,560 28,800

(Pay semiannual interest)

24)1. (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Increase in Carrying Value Face Amount × Carrying Value (3) − (2) Stated Rate × Market Rate

1/1/2024 6/30/2024 12/31/2024

$ 32,000 32,000

$ 33,659 33,733

$ 1,659 1,733

(5) Carrying Value Prior Carrying Value + (4) $ 747,968 749,627 751,360

2. Date January 1, 2024

Version 1

Account Title Cash

Debit 747,968

Discount on Bonds Payable

52,032

Credit

Bonds Payable

800,000

(Issue bonds at a discount) June 30, 2024

Interest Expense ($747,968 × 9% × 1/2) Discount on Bonds Payable (difference) Cash ($800,000 × 8% × ½)

33,659 1,659 32,000

(Pay semiannual interest) December 31, 2024

Interest Expense ($749,627 × 9% × 1/2) Discount on Bonds Payable (difference) Cash ($800,000 × 8% × 1/2)

33,733 1,733 32,000

(Pay semiannual interest)

25)1. (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Increase in Carrying Value Face Amount × Carrying Value (3) − (2) Stated Rate × Market Rate

1/1/2024 6/30/2024 12/31/2024

$ 36,500 36,500

$ 34,529 34,440

$ 1,971 2,060

(5) Carrying Value Prior Carrying Value + (4) $ 767,313 765,342 763,282

2. Date January 1, 2024

Account Title Cash

Debit 767,313

Credit

Bonds Payable

730,000

Premium on Bonds Payable

37,313

(Issue bonds at a discount)

Version 1

June 30, 2024

Interest Expense ($767,313 × 9% × 1/2) Premium on Bonds Payable (difference) Cash ($730,000 × 10% × 1/2)

34,529 1,971 36,500

(Pay semiannual interest) December 31, 2024

Interest Expense ($765,342 × 9% × 1/2) Premium on Bonds Payable (difference) Cash ($730,000 × 10% × 1/2)

34,440 2,060 36,500

(Pay semiannual interest)

26)1. (1) Date

(2) Cash Paid

(3) Interest Expense

(4) Decrease in Carrying Value Face Amount × Carrying Value (2) − (3) Stated Rate × Market Rate

(5) Carrying Value

1/1/2024 6/30/2024 12/31/2024

$ 32,000 32,000

$ 29,990 29,919

$ 2,010 2,081

Prior Carrying Value + (4) $ 856,850 854,840 852,759

2. Date January 1, 2024

Account Title Cash

Debit 856,850

Credit

Bonds Payable

800,000

Premium on Bonds Payable

56,850

(Issue bonds at a discount) June 30, 2024

Version 1

Interest Expense ($856,850 × 7% × 1/2) Premium on Bonds Payable (difference)

29,990 2,010

Cash ($800,000 × 8% × 1/2)

32,000

(Pay semiannual interest) December 31, 2024

Interest Expense ($854,840 × 7% × 1/2) Premium on Bonds Payable (difference) Cash ($800,000 × 8% × 1/2)

29,919 2,081 32,000

(Pay semiannual interest)

27)1. Premium 2. $64,688,098 3. $54,000,000 4. 10% [($2,700,000 cash paid ÷ $54,000,000 face amount) × 2] 5. 8%. [($2,587,524 interest expense ÷ $64,688,098 carrying value) × 2] 6. $108,000,000 ($54,000,000 × 10% × 20 years)

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28)1. Premium 2. $55,338,768 3. $50,000,000 4. 8% [($2,000,000 cash paid ÷ $50,000,000 face amount) × 2] 5. 7%. [($1,936,857 interest expense ÷ $55,338,768 carrying value) × 2] 6. $80,000,000 ($50,000,000 × 8% × 20 years) 29) Account Title Bonds Payable Premium on Bonds Payable

Debit 72,600

Credit

2,355

Gain

4,355

Cash

70,600

(Entry to record early retirement)

30) Version 1

Account Title

Debit 70,000

Bonds Payable Premium on Bonds Payable

Credit

4,937

Gain

6,937

Cash

68,000

(Entry to record early retirement)

31) Account Title

Debit 121,000

Bonds Payable Loss

Credit

8,000

Discount on Bonds Payable

6,000

Cash

123,000

(Entry to record early retirement)

32) Account Title

Debit 125,000

Bonds Payable Loss

Credit

9,000

Discount on Bonds Payable

7,000

Cash

127,000

(Entry to record early retirement)

33) If the market rate is 8%, the bonds will be issued at $189,438 (a discount). Bond Characteristics 1. Face amount 2. Interest payment

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CALCULATOR INPUT Key FV $ 200,000 PMT

Amount

$ 7,000 = $200,000 × 7% x ½ year 38

3. Number of periods 4. Market interest rate Bond Characteristics Issue price

14 = 7 years x 2 periods per year I 0.04 = 8% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 189,438 (rounded)

34) If the market rate is 8%, the bonds will be issued at $186,410 (a discount). Bond Characteristics 1. Face amount 2. Interest payment 3. Number of periods 4. Market interest rate Bond Characteristics Issue price

CALCULATOR INPUT Key FV $ 200,000

Amount

$ 7,000 = $200,000 x 7% x ½ year 20 = 10 years x 2 periods per year I 0.04 = 8% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 186,410 (rounded) PMT N

35) If the market rate is 6%, the bonds will be issued at $320,629 (a premium). Bond Characteristics 1. Face amount 2. Interest payment 3. Number of periods 4. Market interest rate Bond Characteristics Issue price

CALCULATOR INPUT Key FV $ 300,000

Amount

$ 10,500 = $300,000 × 7% × ½ year 18 = 9 years × 2 periods per year I 0.03 = 6% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 320,629 (rounded) PMT N

36) If the market rate is 6%, the bonds will be issued at $219,600 (a premium). Bond Characteristics 1. Face amount

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CALCULATOR INPUT Key FV $ 200,000

Amount

2. Interest payment 3. Number of periods 4. Market interest rate Bond Characteristics Issue price

$ 7,000 = $200,000 × 7% × ½ year 30 = 15 years × 2 periods per year I 0.03 = 6% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 219,600 (rounded) PMT N

37)1. Premium; the issue price is $31,407,761 (rounded). Bond Characteristics 1. Face amount

CALCULATOR INPUT Key FV $30,000,000

2. Interest payment

PMT

3. Number of periods

4. Market interest rate

Amount

= $30,000,000 × 9% × ½ year 12 = 6 years × 2 periods each year 4.00% = 8% ÷ 2 periods per year

$1,350,000

CALCULATOR OUTPUT Bond Characteristics Key Issue price PV

Amount $31,407,761 (rounded)

2. Face amount; the issue price is $30,000,000 (rounded). Bond Characteristics 1. Face amount

CALCULATOR INPUT Key FV $30,000,000

2. Interest payment

PMT

3. Number of periods

4. Market interest rate

= $30,000,000 × 9% × ½ year 12 = 6 years × 2 periods per year 4.50% = 9% ÷ 2 periods per year

$1,350,000

CALCULATOR OUTPUT Bond Characteristics Issue price

Version 1

Amount

Key PV

Amount $30,000,000

3. Discount; the issue price is $28,670,512 (rounded). Bond Characteristics 1. Face amount

CALCULATOR INPUT Key FV $30,000,000

2. Interest payment

PMT

$1,350,000

3. Number of periods

4. Market interest rate

5.00

CALCULATOR OUTPUT Bond Characteristics Key Issue price PV

Amount

= $30,000,000 × 9% × ½ year = 6 years × 2 periods per year = 10% ÷ 2 periods per year

Amount $28,670,512 (rounded)

38)1. Premium; the issue price is $21,421,240 (rounded). Bond Characteristics 1. Face amount 2. Interest payment 3. Number of periods 4. Market interest rate

Bond Characteristics Issue price

CALCULATOR INPUT Key FV $ 20,000,000

Amount

$ 800,000 = $20,000,000 x 8% x ½ year N 20 = 10 years x 2 periods per year I 0.035 = 6% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 21,421,240 (rounded) PMT

2. Face amount; the issue price is $20,000,000. Bond Characteristics 1. Face amount

CALCULATOR INPUT Key FV $ 20,000,000

2. Interest payment

PMT

Version 1

Amount

$ 800,000 = $20,000,000 x 8% x ½ year

3. Number of periods

4. Market interest rate

Bond Characteristics Issue price

20 = 10 years x 2 periods per year I 0.04 = 8% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 20,000,000 (rounded)

3. Discount; the issue price is $18,699,206 (rounded). CALCULATOR INPUT Key FV $ 20,000,000

Bond Characteristics 1. Face amount 2. Interest payment

$ 800,000 = $20,000,000 x 8% x ½ year N 20 = 10 years x 2 periods per year I 0.045 = 9% ÷ 2 periods per year CALCULATOR OUTPUT Key Amount PV $ 18,699,206 (rounded) PMT

3. Number of periods 4. Market interest rate

Bond Characteristics Issue price

Amount

39)1. Total Liabilities

$ 1,800

Net Income

$ 85

Total Stockholders' Equity $ 1,700

Debt to Equity Ratio

1.06

Average Total Assets $ 2,775*

Return on Assets Ratio

3.06% (rounded)

*($3,500 + $2,050) ÷ 2 3. Net Income + Interest +

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Interest

Times Interest Earned Ratio

Income Tax Expense $ 171

$ 50

3.42 (rounded)

40)1. Total Liabilities

$ 1,685

Net Income

$ 80

Total Stockholders' Equity $ 826

Debt to Equity Ratio

2.04

Average Total Assets $2,413*

Return on Assets Ratio

3.3% (rounded)

*($2,511 + $2,315) ÷ 2 3. Net Income + Interest + Income Tax Expense $ 189

Interest

Times Interest Earned Ratio

$ 77

2.5 (rounded)

41)1. Company A: 1.11 Company B: 0.73 Company A has a higher debt to equity ratio than Company B. Company B, with a lower debt to equity ratio, is considered to be less risky. ($ in millions)

Company A Company B

Version 1

Total Liabilities

$ 21,480 $ 13,910

÷ ÷

Total Stockholders' Equity $ 19,380 $ 19,160

Debt to Equity Ratio

= =

1.11 (rounded) 0.73 (rounded)

2. Company A: 6.5 times Company B: 9.2 times Company B, with a times interest earned ratio of 9.2 times is better able to meet interest payments as they become due than Company A with a ratio of 6.5 times. ($ in millions)

Company A Company B

Net Income + ÷ Interest + Income Tax Expense $ 4,790 ÷ $ 3,120 ÷

Interest Expense

Time Interest Earned Ratio

$ 740 $ 340

= =

6.5 times (rounded) 9.2 times (rounded)

42)1. Company A has a higher debt to equity ratio than Company B. Company B, with a lower debt to equity ratio, is considered to be less risky. ($ in millions)

Company A Company B

Total Liabilities

$ 21,484 $ 13,936

÷ ÷

Total Stockholders' Equity $ 19,393 $ 19,069

Debt to Equity Ratio

= =

1.11 (rounded) 0.73 (rounded)

2. Company B, with a times interest earned ratio of 10.8 times is better able to meet interest payments as they become due than Company A with a ratio of 6.9 times. ($ in millions)

Company A Company B

Version 1

Net Income + Interest + Income Tax Expense $ 4,658 $ 3,112

Interest Expense

= Times Interest Earned Ratio

÷ ÷

$ 676 $ 287

= 6.9 times (rounded) = 10.8 times (rounded)

CHAPTER 9 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The mixture of liabilities and stockholders' equity a business uses is called its capital structure. ⊚ true ⊚ false

2) Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are tax-deductible. ⊚ true ⊚ false

Debt financing refers to borrowing money from creditors. ⊚ true ⊚ false

Equity financing refers to profits generated by operations. ⊚ true ⊚ false

Three primary sources of long-term debt financing are notes, leases, and bonds. ⊚ true ⊚ false

The two sources of external financing are debt financing and equity financing. ⊚ ⊚

true false

7) Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. ⊚ true ⊚ false

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8) Car loans and home loans that require monthly payments are sometimes referred to as installment notes. ⊚ true ⊚ false

The carrying value is the amount for which a liability is reported in the balance sheet. ⊚ ⊚

true false

10) As each monthly payment of an installment note payable is recorded, the amount of interest expense does not change. ⊚ true ⊚ false

11) The amount of interest expense recorded with each monthly payment of an installment note payable equals the note's monthly interest rate times the note's carrying value at the end of the previous month. ⊚ true ⊚ false

12) For financial reporting, since they are paid over a number of periods, installment notes should always be classified as long-term debt. ⊚ ⊚

true false

13) A lease is a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time. ⊚ true ⊚ false

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14) An advantage of leasing an asset rather than buying is that leasing improves cash flows by reducing the upfront cash needed to use an asset. ⊚ true ⊚ false

15) An advantage of buying an asset rather than leasing is that installment payments associated with buying often are lower than lease payments. ⊚ true ⊚ false

16)

Signing a lease for equipment has no effect on the lessee's (user’s) balance sheet. ⊚ true ⊚ false

17) Leasing typically does not protect the lessee (user) against the risk of declining asset values. ⊚ true ⊚ false

18) At the beginning of the lease term, a lease is recorded for the sum of all future lease payments. ⊚ true ⊚ false

19) A private placement is when a company chooses to sell the debt securities directly to a single investor. ⊚ true ⊚ false

20) When the issuing company buys back its bonds from the investors, we say that company has retired those bonds. ⊚ ⊚

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true false

21)

Secured bonds are backed by the federal government. ⊚ true ⊚ false

22)

Unsecured bonds are not backed by a specific asset. ⊚ true ⊚ false

23)

Unsecured bonds are secured only by the “full faith and credit” of the issuing company. ⊚ ⊚

true false

24)

Term bonds require payments in installments over a series of years. ⊚ true ⊚ false

25) date.

Serial bonds require payment of the full principal amount of the bond at a single maturity ⊚ ⊚

true false

26) Callable bonds allow the borrower to repay the bonds before their scheduled maturity date at a specified call price. ⊚ true ⊚ false

27) Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. ⊚ true ⊚ false

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28) We can calculate the issue price of a bond as the face amount plus the total periodic interest payments. ⊚ true ⊚ false

29) The market interest rate represents the true interest rate used by investors to value a company's bond issue. ⊚ true ⊚ false

30) The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest. ⊚ true ⊚ false

31)

The market interest rate does not change over time. ⊚ true ⊚ false

32)

The stated interest rate does not change over time. ⊚ true ⊚ false

33) As a company's default risk increases, investors demand a higher market interest rate on their bond investments. ⊚ true ⊚ false

34)

The lower the market interest rate, the lower the bond issue price will be. ⊚ true ⊚ false

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35)

Bonds issued below face amount are said to be issued at a discount. ⊚ true ⊚ false

36)

A premium occurs when the issue price of a bond is above its face amount. ⊚ true ⊚ false

37) The amount reported in the balance sheet for bonds payable is equal to the carrying value at the balance sheet date. ⊚ true ⊚ false

38) When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest expense increase over time. ⊚ true ⊚ false

39) When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time. ⊚ true ⊚ false

40)

Interest expense is calculated as the carrying value times the market rate. ⊚ true ⊚ false

41)

The cash payment each period is calculated as the carrying value times the market rate. ⊚ true ⊚ false

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42) An amortization schedule details the cash payment each period, the portions of each cash payments that represents interest and the change in carrying value, and the balance of the carrying value. ⊚ true ⊚ false

43) For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds. ⊚ true ⊚ false

44) When bonds are issued at a premium, the amount of the premium effectively represents the increase in total interest paid by the issuing company. ⊚ ⊚

true false

45)

At the maturity date, the carrying value will equal the face amount of the bond. ⊚ true ⊚ false

46)

The market value of bonds moves in the opposite direction of interest rates. ⊚ true ⊚ false

47) When an issuer retires debt of any type before its scheduled maturity date, the transaction is an early extinguishment of debt. ⊚ true ⊚ false

48) Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement. ⊚ true ⊚ false

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49)

Losses have the effect of reducing net income, while gains increase net income. ⊚ true ⊚ false

50)

A gain or loss is recorded on bonds retired at maturity. ⊚ true ⊚ false

51)

Solvency refers to a company’s ability to pay its current and long-term obligations. ⊚ ⊚

true false

52) The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. ⊚ true ⊚ false

53)

Leverage enables a company to earn a higher return using debt than without debt. ⊚ true ⊚ false

54) Return on assets is calculated as net income divided by the ending balance for total assets. ⊚ true ⊚ false

55) The times interest earned ratio compares interest expense with income available to pay interest charges. ⊚ true ⊚ false

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MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 56) Which of the following is not a primary source of corporate debt financing? A) Bonds B) Stockholders C) Leases D) Notes

57)

Which of the following is the primary source of corporate equity financing? A) Bonds B) Stockholders C) Leases D) Notes

58)

Profits generated by the company are a(n): A) Source of external financing. B) Source of internal financing. C) Liability. D) Asset.

59)

The mixture of liabilities and stockholders' equity a business uses is called its: A) Bond contract. B) Carrying value. C) Capital structure. D) Accounting equation.

60)

In each succeeding payment on an installment note, the amount:

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A) That goes to decreasing the carrying value of the note increases. B) That goes to decreasing the carrying value of the note decreases. C) That goes to decreasing the carrying value of the note is unchanged. D) Paid for both interest and principal increase proportionately.

61)

In each succeeding payment on an installment note, the amount: A) Of interest expense increases. B) Of interest expense decreases. C) Of interest expense is unchanged. D) Paid for both interest and principal increase proportionately.

62) For a ten-year installment note, the portion of the periodic installment payment that represents interest in the third year is: A) The same as in the fourth year. B) The same as in the first year. C) Less than in the fourth year. D) More than in the fourth year.

63)

Which of the following describes monthly installment payments of a note payable? A) The monthly payments equal interest expense plus the reduction of the note’s carrying

value. B) The amount of interest expense recorded each month increases over time. C) The amount of the reduction in the note’s carrying value recorded each month decreases over time. D) All of the other answer choices are correct.

64) Babble Company signs a five-year installment note on January 1, 2024. At which of the following dates would the carrying value be the highest?

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A) August 1, 2024 B) November 30, 2026 C) April 30, 2027 D) December 31, 2025

65) Babble Company signs a five-year installment note on January 1, 2024. At which of the following dates would the carrying value be the lowest? A) August 1, 2024 B) November 30, 2026 C) April 30, 2027 D) December 31, 2025

66) The issuance of an installment note payable for the purchase of equipment will have what effect on the financial statements? A) Increase assets and increase liabilities. B) Increase assets and increase stockholders’ equity. C) Increase liabilities and decrease stockholders’ equity. D) The issuance will have no effect on the financial statements.

67) The periodic payment on an installment note will have what effect on the financial statements? A) Increases expenses, decreases liabilities, and decreases assets. B) Increases expenses, increases liabilities, and increases assets. C) Increases expenses, decreases liabilities, and increases assets. D) Increases expenses, increases liabilities, and decreases assets.

68) Which of the following statements is correct regarding the first two monthly payments of a typical installment note?

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A) Liabilities decrease more for the first payment. B) Interest expense is greater for the first payment. C) Cash paid is less for the first payment. D) The amounts for cash paid, interest expense, and decrease to liabilities are the same for both payments.

69) How does the amortization schedule for an installment note, such as a car loan, differ from an amortization schedule for bonds? A) The final carrying value is not zero in either amortization schedule. B) The final carrying value is zero in an amortization schedule for bonds. C) The final carrying value is zero in both amortization schedules. D) The final carrying value is zero in an amortization schedule for an installment note.

70) Camp Tadmor obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2024. What amount will be recorded for interest expense for the first month’s payment on January 31, 2024? A) $625 B) $125 C) $7,500 D) $1,000

71) Camp Tadmor obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2024. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2024? A) $1,791.60 B) $625.00 C) $2,416.60 D) $1,000.60

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72) A company issues a $200,000, 5%, six-year note on January 1, 2024. What amount will be recorded for interest expense for the first month’s payment on January 31, 2024? A) $1,000.00 B) $138.89 C) $833.33 D) $694.44

73) A company issues a $200,000, 5%, six-year note on January 1, 2024. If the monthly payment is $3,220.99, by how much will the carrying value decrease when the first month’s payment is made on January 31, 2024? A) $4,054.32 B) $2,387.66 C) $3,220.99 D) $833.33

74) A company issues a $200,000, 5%, six-year note on January 1, 2024. If the monthly payment is $3,220.99, what is the note’s carrying value after the first month’s payment is made on January 31, 2024? A) $197,612.34 B) $200,000.00 C) $196,779.01 D) $199,166.67

75) On January 1, 2024, a company borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2024, which of the following would be true?

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A) The effective interest rate would have been higher. B) The annual cash payment would have been less. C) The first year’s interest expense would have been higher. D) The second year’s interest expense would have been less.

76) Which of the following best describes how the remaining balance of an installment note is reported in the balance sheet? A) Split between a current asset and a long-term asset B) As a long-term liability C) As a current liability D) Split between a current liability and a long-term liability

77) Which of the following represents an advantage of leasing rather than buying an asset with an installment note? A) Leasing may offer protection against the risk of declining asset values. B) Lease payments often are lower than installment payments. C) Leasing offers flexibility and lower costs when disposing of an asset. D) All of the other answer choices are correct.

78) Which of the following is the number one method of external financing by U.S. companies? A) Issuing installment notes B) Leasing C) Issuing bonds D) Borrowing from banks

79)

Which of the following is not a reason why some companies lease rather than buy?

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A) Leasing may allow you to borrow with little or no down payment. B) Leasing may offer protection against risk of declining asset values. C) Leasing offers flexibility and lower costs when disposing of an asset. D) Leasing transfers the title to the lessee (user) at the beginning of the lease.

80) At the beginning of the lease period, a lease is reported in the lessee's (user’s) balance sheet as a(n): A) Decrease in assets and decrease in stockholders’ equity. B) Increase in liabilities and decrease in stockholders’ equity. C) Increase in assets and increase in stockholders’ equity. D) Increase in assets and increase in liabilities.

81) At the beginning of the lease period, a lease is reported in the lessee’s (user’s) balance sheet for which amount? A) Fair value of the underlying asset. B) Present value of expected cash inflows from using the underlying asset. C) Present value of lease payments over the lease period. D) Leases are not reported in the balance sheet.

82) A company is deciding between two options: (1) purchase a piece of equipment for $10,000 or (2) lease the same piece of equipment for three years and then return the equipment to the owner. The lease payments are $182.53 per month and have a present value of $6,000. If the company decides to lease, for what amount would the leased asset be recorded at the beginning of the lease? A) $10,000 B) $6,000 C) $4,000 D) $6,571

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83) Before signing a lease, a company reports total assets of $500,000 and total liabilities of $300,000. The company then signs a 30-month lease for equipment with payments of $922.21 each month. The lease payments have a present value of $25,000. After recording the inception of the lease, the company would report which of the following? A) Total assets of $527,666.30, and total liabilities of $325,000.00 B) Total assets of $525,000.00, and total liabilities of $327,666.30 C) Total assets of $527,666.30, and total liabilities of $327,666.30 D) Total assets of $525,000.00, and total liabilities of $325,000.00

84) On April 1, 2024, a company signs a 20-month lease for equipment. Monthly payments of $554.15 begin on May 1, 2024. The company’s normal borrowing rate is 12%. For what amount would the company record the lease on April 1, 2024 (rounded to nearest whole dollar)? Refer to PV of $1 and PVA of $1 using the appropriate factor(s). Do not round interest rate factors. A) $12,000 B) $11,083 C) $10,000 D) $10,800

85) On January 1, 2024, a company signs a 25-year lease for land. Annual payments of $20,000 begin on December 31, 2024. The company’s normal borrowing rate is 6%. For what amount would the company record the lease on January 1, 2024 (rounded to nearest whole dollar)? Refer to PV of $1 and PVA of $1 using the appropriate factor(s). Do not round interest rate factors. A) $255,667 B) $440,463 C) $500,000 D) $244,333

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86) On July 1, 2024, a company signs a 30-month lease for an office building. Lease payments of $6,457 are due every three months (10 payments total), beginning on October 1, 2024. The company’s normal borrowing rate is 8% (2% every three months). For what amount would the company record the lease on July 1, 2024 (rounded to nearest whole dollar)? Refer to PV of $1 and PVA of $1 using the appropriate factor(s). Do not round interest rate factors. A) $62,000 B) $58,001 C) $64,570 D) $43,327

87) A bond is a formal debt instrument that obligates the borrower to repay a stated amount at the maturity date. This stated amount is referred to as the: A) Note. B) Interest. C) Lease. D) Principal or face amount.

88) A common advantage of obtaining long-term funds by issuing bonds, rather than borrowing from the bank, includes which of the following? A) Bonds involve less surrendering of ownership control. B) Bonds usually have a lower interest rate. C) Bonds are more likely to involve borrowing from a single lender. D) Bond issue costs are usually lower than fees charged by the bank.

89)

Which of the following definitions describes a term bond? A) Matures on a single date. B) Secured only by the "full faith and credit" of the issuing corporation. C) Matures in installments. D) Supported by specific assets pledged as collateral by the issuer.

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90)

Which of the following definitions describes a serial bond? A) Matures on a single date. B) Secured only by the "full faith and credit" of the issuing corporation. C) Matures in installments. D) Supported by specific assets pledged as collateral by the issuer.

91)

Which of the following definitions describes a secured bond? A) Matures on a single date. B) Secured only by the "full faith and credit" of the issuing corporation. C) Matures in installments. D) Supported by specific assets pledged as collateral by the issuer.

92)

Term bonds are bonds: A) issued below the face amount. B) that mature in installments. C) that mature all at once. D) issued above the face amount.

93)

Serial bonds are bonds: A) backed by collateral. B) that mature in installments. C) with greater risk. D) issued below the face amount.

94) Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common?

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A) Secured and term B) Secured and serial C) Unsecured and term D) Unsecured and serial

95) A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics? A) Secured and term B) Secured and serial C) Unsecured and term D) Unsecured and serial

96)

Which of the following is not true regarding callable bonds?

A) This feature allows the issuer to repay the bonds before their scheduled maturity date. B) This feature helps protect the issuer against future decreases in interest rates. C) This feature usually allows the issuer to repay bonds just below face amount. D) This feature benefits the issuer more when the bond’s stated rate is 8% and the market interest rate is 5%.

97)

Convertible bonds provide: A) potential benefits only to the issuer. B) potential benefits only to the investor. C) potential benefits to both the issuer and the investor. D) no potential benefits.

98) A bond issue with a face amount of $503,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:

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A) Less than $503,000. B) Equal to $503,000. C) The answer cannot be determined from the information provided. D) More than $503,000.

99) A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is: A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided.

100) A bond issue with a face amount of $495,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is: A) More than $495,000. B) The answer cannot be determined from the information provided. C) Equal to $495,000. D) Less than $495,000.

101) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is: A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided.

102) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:

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A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided.

103)

A $500,000 bond issue sold for $510,000. Therefore, the bonds sold: A) at a premium because the stated interest rate was higher than the market rate. B) for the $500,000 face amount plus $10,000 of accrued interest. C) at a discount because the stated interest rate was higher than the market rate. D) at a premium because the market interest rate was higher than the stated rate.

104)

A $509,000 bond issue sold for $480,000. Therefore, the bonds sold: A) at a discount because the market interest rate was higher than the stated rate. B) at a discount because the stated interest rate was higher than the market rate. C) at a premium because the stated interest rate was higher than the market rate. D) for the $509,000 face amount less $29,000 of accrued interest.

105)

A $500,000 bond issue sold for $490,000. Therefore, the bonds sold: A) at a discount because the stated interest rate was higher than the market rate. B) for the $500,000 face amount less $10,000 of accrued interest. C) at a premium because the stated interest rate was higher than the market rate. D) at a discount because the market interest rate was higher than the stated rate.

106)

For a bond issue that sells for more than the bond face amount, the stated interest rate is: A) The actual yield rate. B) The prime rate. C) More than the market rate. D) Less than the market rate.

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107)

For a bond issue that sells for less than the bond face amount, the stated interest rate is: A) The actual yield rate. B) The prime rate. C) More than the market rate. D) Less than the market rate.

108) Bond X and Bond Y are both issued by the same company. Each of the bonds has a face amount of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct? A) Both bonds will sell for the same amount. B) Bond X will sell for more than Bond Y. C) Bond Y will sell for more than Bond X. D) Both bonds will sell at a premium.

109) Seaside Industries issues a bond with a stated interest rate of 10%, face amount of $50,000, and due in 5 years. Interest payments are made semiannually. The market rate for this type of bond is 12%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1) A) $83,920 B) $46,320 C) $53,605 D) $50,000

110) Seaside Industries issues a bond with a stated interest rate of 10%, face amount of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4)

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A) $83,920 B) $46,320 C) $54,055 D) $50,000

111)

Given the information below, which bond(s) will be issued at a discount?

Stated Rate of Return Market Rate of Return

Bond 1

Bond 2

Bond 3

Bond 4

7% 5%

8% 8%

10% 12%

8% 12%

A) Bond 1 B) Bond 3 C) Bond 4 D) Bonds 3 and 4

112)

Given the information below, which bond(s) will be issued at a discount?

Stated Rate of Return Market Rate of Return

Bond 1

Bond 2

Bond 3

5% 7%

7% 8%

12% 12%

Bond 4 10% 9%

A) Bond 1 B) Bond 2 C) Bond 4 D) Bonds 1 and 2

113)

Given the information below, which bond(s) will be issued at a premium?

Stated Rate of Return Market Rate of Return

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Bond 1

Bond 2

Bond 3

Bond 4

9% 6%

8% 6%

10% 10%

9% 12%

A) Bond 1 B) Bond 3 C) Bond 4 D) Bonds 1 and 2

114)

Given the information below, which bond(s) will be issued at a premium?

Stated Rate of Return Market Rate of Return

Bond 1

Bond 2

Bond 3

Bond 4

5% 7%

10% 8%

7% 7%

10% 9%

A) Bond 1 B) Bond 2 C) Bond 3 D) Bonds 2 and 4

115)

Given the information below, which bond(s) will be issued at a discount?

Stated Rate of Return Market Rate of Return

Bond 1

Bond 2

Bond 3

Bond 4

10% 12%

8% 8%

12% 15%

12% 10%

A) Bond 1 B) Bond 3 C) Bonds 2 and 4 D) Bonds 1 and 3

116)

Given the information below, which bond(s) will be issued at a premium?

Stated Rate of Return Market Rate of Return

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Bond 1

Bond 2

Bond 3

Bond 4

7% 8%

12% 10%

10% 10%

8% 9%

A) Bond 1 B) Bond 2 C) Bond 3 D) Bonds 2 and 4

117) The rate quoted in the bond contract used to calculate the cash payments for interest is called the: A) Face rate. B) Yield rate. C) Market rate. D) Stated rate.

118)

The true interest rate used by investors to value a bond is called the: A) Face interest rate. B) Cash payment rate. C) Market interest rate. D) Stated interest rate.

119)

Which of the following is true for bonds issued at a discount? A) The stated interest rate is greater than the market interest rate. B) The market interest rate is greater than the stated interest rate. C) The stated interest rate and the market interest rate are equal. D) The stated interest rate and the market interest rate are unrelated.

120)

A bond issued at a discount indicates that at the date of issue:

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A) Its stated rate was lower than the prevailing market rate of interest on similar bonds. B) Its stated rate was higher than the prevailing market rate of interest on similar bonds. C) The bonds were issued at a price greater than their face amount. D) The bonds must be non-interest bearing.

121)

Which of the following is true for bonds issued at a premium? A) The stated interest rate is less than the market interest rate. B) The market interest rate is less than the stated interest rate. C) The stated interest rate and the market interest rate are equal. D) The stated interest rate and the market interest rate are unrelated.

122)

A bond issued at a premium indicates that at the date of issue: A) Its stated rate was lower than the prevailing market rate of interest on similar bonds. B) Its stated rate was higher than the prevailing market rate of interest on similar bonds. C) The bonds were issued at a price less than their face amount. D) The bonds must be non-interest bearing.

123) A company issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The bond issuance would have what effect on the financial statements? A) Increase assets B) Increase liabilities C) Increase stockholders' equity D) Increase assets and liabilities

124) A company issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on the balance sheet?

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A) Increase assets and liabilities B) Increase and decrease assets C) Increase assets and stockholders' equity D) Increase and decrease stockholders' equity

125)

The cash interest payment each period is calculated as the: A) Face amount times the stated interest rate. B) Face amount times the market interest rate. C) Carrying value times the market interest rate. D) Carrying value times the stated interest rate.

126)

Interest expense on bonds issued at a discount or premium is calculated as the: A) Face amount times the stated interest rate. B) Face amount times the market interest rate. C) Carrying value times the market interest rate. D) Carrying value times the stated interest rate.

127) When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds? A) Carrying value and interest expense increase. B) Carrying value and interest expense decrease. C) Carrying value decreases and interest expense increases. D) Carrying value increases and interest expense decreases.

128) When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?

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A) Carrying value and interest expense increase. B) Carrying value and interest expense decrease. C) Carrying value decreases and interest expense increases. D) Carrying value increases and interest expense decreases.

129)

Bonds payable should be reported as a long-term liability in the balance sheet at the: A) Face amount. B) Current bond market price. C) Carrying value. D) Face amount less accrued interest since the last interest payment date.

130) How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium? A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium. B) Decrease for bonds issued at a discount and increase for bonds issued at a premium. C) Increase for bonds issued at a discount and decrease for bonds issued at a premium. D) Increase for bonds issued at a discount and increase for bonds issued at a premium.

131)

Using the effective interest method, the carrying value: A) would decrease each year if the bonds were sold at a discount. B) would decrease each year if the bonds were sold at a premium. C) would decrease each year if the bonds were sold at either a discount or a premium. D) of bonds will never decrease.

132)

Using the effective interest method, the carrying value:

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A) Would increase each year if the bonds were sold at a discount. B) Would increase each year if the bonds were sold at a premium. C) Would increase each year if the bonds were sold at either a discount or a premium. D) Of bonds will never increase.

133) When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is: A) Less than the interest expense. B) Equal to the interest expense. C) Greater than the interest expense. D) More than if the bonds had been sold at a premium.

134) When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is: A) Less than the interest expense. B) Equal to the interest expense. C) Greater than the interest expense. D) More than if the bonds had been sold at a discount.

135) When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense: A) Increases. B) Decreases. C) Remains the same. D) Is equal to the change in book value.

136) When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:

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A) Increases. B) Decreases. C) Remains the same. D) Is equal to the change in book value.

137)

An amortization schedule for a bond issued at a discount:

A) Has a carrying value that decreases over time. B) Is contained in the balance sheet. C) Is a schedule that reflects the changes in carrying value of the bond over its term to maturity. D) All of the other answer choices are correct.

138)

An amortization schedule for a bond issued at a premium:

A) Has a carrying value that increases over time. B) Is contained in the balance sheet. C) Is a schedule that reflects the changes in the carrying value of the bond over its term to maturity. D) All of the other answer choices are correct.

139) Discount-Mart issues $19 million in bonds on January 1, 2024. The bonds have a sevenyear term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $17,233,953

$950,000 950,000 950,000 950,000

$1,034,037 1,039,079 1,044,424 1,050,090

$84,037 89,079 94,424 100,090

17,317,990 17,407,069 17,501,493 17,601,583

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

Version 1

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) (Do not round your intermediate calculations.)

A) 12% B) 5% C) 11% D) 10%

140) Discount-Mart issues $10 million in bonds on January 1, 2024. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 47,464 49,363 51,337

8,686,606 8,734,070 8,783,433 8,834,770

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 3% B) 4% C) 6% D) 8%

141) Discount-Mart issues $10 million in bonds on January 1, 2024. The bonds have a nineyear term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date 01/01/2024

Version 1

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $8,994,091

06/30/2024 12/31/2024 06/30/2025 12/31/2025

$600,000 600,000 600,000 600,000

$629,586 631,657 633,873 636,244

$29,586 31,657 33,873 36,244

9,023,677 9,055,334 9,089,207 9,125,451

What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) (Do not round your intermediate calculations.) A) 12% B) 14% C) 6% D) 13%

142) Discount-Mart issues $10 million in bonds on January 1, 2024. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 47,464 49,363 51,337

8,686,606 8,734,070 8,783,433 8,834,770

What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 3% B) 4% C) 6% D) 8%

143) Discount-Mart issues $14 million in bonds on January 1, 2024. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date

Version 1

Cash Paid

Interest

Increase in

Carrying 32

Expense

Carrying Value

Value $12,255,291

$612,765 615,403 618,173 621,082

$52,765 55,403 58,173 61,082

12,308,056 12,363,459 12,421,632 12,482,714

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

$560,000 560,000 560,000 560,000

What is the interest expense on the bonds in 2024? A) $1,228,168 B) $615,403 C) $612,765 D) $1,120,000

144) Discount-Mart issues $10 million in bonds on January 1, 2024. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 47,464 49,363 51,337

8,686,606 8,734,070 8,783,433 8,834,770

What is the interest expense on the bonds in 2024? A) $693,103 B) $600,000 C) $345,639 D) $347,464

145) Discount-Mart issues $13 million in bonds on January 1, 2024. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Version 1

Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $11,233,257

$390,000 390,000 390,000 390,000

$449,330 451,703 454,172 456,738

$59,330 61,703 64,172 66,738

11,292,587 11,354,290 11,418,462 11,485,200

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

What is the carrying value of the bonds as of December 31, 2025? A) $11,485,200 B) $12,265,200 C) $11,418,462 D) $11,354,290

146) Discount-Mart issues $10 million in bonds on January 1, 2024. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 47,464 49,363 51,337

8,686,606 8,734,070 8,783,433 8,834,770

What is the carrying value of the bonds as of December 31, 2025? A) $8,834,770 B) $8,686,606 C) $8,734,070 D) $8,783,433

147) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Version 1

Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

$ 194,758 $ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

SWAC issued the bonds: A) at par. B) at a premium. C) at a discount. D) Cannot be determined from the given information.

148) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $265,788

$11,200 11,200 11,200 11,200 11,200 11,200

$13,289 13,394 13,504 13,619 13,740 13,866

$2,089 2,194 2,304 2,419 2,540 2,666

267,877 270,071 272,375 274,794 277,334 280,000

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

SWAC issued the bonds for: A) $280,000. B) $265,788. C) $347,200. D) Cannot be determined from the given information.

Version 1

149) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

Carrying Value $ 194,758

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

SWAC issued the bonds for: A) $200,000. B) $194,758. C) $242,000. D) Cannot be determined from the given information.

150) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

Carrying Value $ 194,758

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

The SWAC bonds have a life of:

Version 1

A) 2 years. B) 3 years. C) 6 years. D) Cannot be determined from the given information.

151) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $284,773

$12,000 12,000 12,000 12,000 12,000 12,000

$14,239 14,351 14,468 14,592 14,721 14,856

$2,239 2,351 2,468 2,592 2,721 2,856

287,012 289,363 291,831 294,423 297,144 300,000

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) (Do not round your intermediate calculations.) A) 4% B) 8% C) 9% D) 10%

152) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Version 1

Carrying Value $ 194,758

$ 7,000 7,000

$ 7,790 7,822

$ 790 822

195,548 196,370

06/30/2025 12/31/2025 06/30/2026 12/31/2026

7,000 7,000 7,000 7,000

7,855 7,889 7,925 7,961

855 889 925 961

197,225 198,114 199,039 200,000

What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 3% B) 3.5% C) 6% D) 7%

153) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

$7,800 7,800 7,800 7,800 7,800 7,800

$9,855 9,937 10,023 10,111 10,204 10,299

Increase in Carrying Value

Carrying Value $246,371

$2,055 2,137 2,223 2,311 2,404 2,499

248,426 250,563 252,786 255,097 257,501 260,000

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) (Do not round your intermediate calculations.) A) 8% B) 7% C) 3% D) 6%

Version 1

154) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

$ 194,758 $ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 4% B) 3.5% C) 7% D) 8%

155) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

Carrying Value $229,267

$15,400 15,400 15,400 15,400 15,400

$13,756 13,657 13,553 13,442 13,325

$1,644 1,743 1,847 1,958 2,075

227,623 225,881 224,033 222,075 220,000

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

X2 issued the bonds at:

Version 1

A) face amount. B) a premium. C) a discount. D) Cannot be determined from the given information.

156) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

Carrying Value $ 104,212

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

103,465 102,673 101,833 100,943 100,000

X2 issued the bonds at: A) face amount. B) a premium. C) a discount. D) Cannot be determined from the given information.

157) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

Version 1

Carrying Value $ 104,212

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

103,465 102,673 101,833 100,943 100,000

X2 issued the bonds for: A) $100,000. B) $107,000. C) $104,212. D) Cannot be determined from the given information.

158) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

Carrying Value $ 104,212

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

103,465 102,673 101,833 100,943 100,000

The X2 bonds have a life of: A) 3 years. B) 4 years. C) 5 years. D) Cannot be determined from the given information.

159) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

Carrying Value $120,693

$9,860 9,860

$9,052 8,991

$808 869

119,885 119,016

01/01/2024 12/31/2024 12/31/2025

Version 1

12/31/2026 12/31/2027 12/31/2028

9,860 9,860 9,860

8,926 8,856 8,781

934 1,004 1,079

118,083 117,079 116,000

What is the annual stated interest rate on the bonds? A) 7.5% B) 3.8% C) 4.3% D) 8.5%

160) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

Carrying Value $ 104,212

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

103,465 102,673 101,833 100,943 100,000

What is the annual stated interest rate on the bonds? A) 3% B) 3.5% C) 6% D) 7%

161) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Version 1

Cash Paid

Interest Expense

Decrease in Carrying Value

Carrying Value

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

$106,182 $8,160 8,160 8,160 8,160 8,160

$7,433 7,382 7,327 7,269 7,207

$727 778 833 891 953

105,455 104,677 103,844 102,953 102,000

What is the annual market interest rate on the bonds? A) 3.5% B) 7% C) 8% D) 4%

162) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

Carrying Value $ 104,212

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

103,465 102,673 101,833 100,943 100,000

What is the annual market interest rate on the bonds? A) 3% B) 3.5% C) 6% D) 7%

163) Bronco High School issues $10 million in bonds on January 1, 2024, that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Version 1

Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $ 8,800,000

$ 400,000 400,000

$ 440,000 442,000

$ 40,000 42,000

8,840,000 8,882,000

The bonds were issued at: A) Face amount. B) A discount. C) A premium. D) Cannot be determined from the given information.

164) Bronco High School issues $10 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $8,800,000

$400,000 400,000

$440,000 442,000

$40,000 42,000

8,840,000 8,882,000

What is the original issue price of the bonds? A) $10,000,000 B) $8,882,000 C) $8,800,000 D) $8,840,000

165) Bronco High School issues $10 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date 01/01/2024

Version 1

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $8,800,000

06/30/2024 12/31/2024

$400,000 400,000

$440,000 442,000

$40,000 42,000

8,840,000 8,882,000

What is the face amount of the bonds? A) $10,000,000 B) $8,882,000 C) $8,800,000 D) $8,840,000

166) Bronco High School issues $10 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $8,800,000

$400,000 400,000

$440,000 442,000

$40,000 42,000

8,840,000 8,882,000

What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 4% B) 10% C) 5% D) 8%

167) Bronco High School issues $10 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Increase in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Version 1

Carrying Value $8,800,000

$400,000 400,000

$440,000 442,000

$40,000 42,000

8,840,000 8,882,000

What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 4% B) 10% C) 5% D) 8%

168) Bronco High School issues $10 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value

01/01/2024 06/30/2024 12/31/2024

$8,800,000 $400,000 400,000

$440,000 442,000

$40,000 42,000

8,840,000 8,882,000

What is the total cash paid for interest assuming the bonds mature in 10 years? A) $8,800,000 B) $10,000,000 C) $8,000,000 D) $18,000,000

169) Tomkin Library System issues $5 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $5,500,000

$250,000 250,000

$220,000 218,800

$30,000 31,200

5,470,000 5,438,800

The bonds were issued at:

Version 1

A) Face amount. B) A discount. C) A premium. D) Cannot be determined from the given information.

170) Tomkin Library System issues $5 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024

Carrying Value $5,500,000

06/30/2024 12/31/2024

$250,000 250,000

$220,000 218,800

$30,000 31,200

5,470,000 5,438,800

What is the original issue price of the bonds? A) $5,000,000 B) $5,470,000 C) $5,500,000 D) $5,438,800

171) Tomkin Library System issues $5 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $5,500,000

$250,000 250,000

$220,000 218,800

$30,000 31,200

5,470,000 5,438,800

What is the face amount of the bonds?

Version 1

A) $5,000,000 B) $5,470,000 C) $5,500,000 D) $5,438,800

172) Tomkin Library System issues $5 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $5,500,000

$250,000 250,000

$220,000 218,800

$30,000 31,200

5,470,000 5,438,800

What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 4% B) 10% C) 5% D) 8%

173) Tomkin Library System issues $5 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

01/01/2024 06/30/2024 12/31/2024

Carrying Value $5,500,000

$250,000 250,000

$220,000 218,800

$30,000 31,200

5,470,000 5,438,800

What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.)

Version 1

A) 4% B) 10% C) 5% D) 8%

174) Tomkin Library System issues $5 million in bonds on January 1, 2024 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

Carrying Value

01/01/2024 06/30/2024 12/31/2024

$5,500,000 $250,000 250,000

$220,000 218,800

$30,000 31,200

5,470,000 5,438,800

What is the total cash paid for interest assuming the bonds mature in 7 years? A) $5,500,000 B) $3,500,000 C) $5,000,000 D) $8,500,000

175)

Which of the following statements is correct? A) Bonds are always issued at their face amount. B) Bonds issued at more than their face amount are said to be issued at a discount. C) Bondholders must hold their bonds until maturity to receive cash for their investment. D) None of the other answer choices are correct.

176) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Version 1

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

$255,846 $8,100 8,100 8,100 8,100 8,100 8,100

$10,234 10,319 10,408 10,500 10,596 10,697

$2,134 2,219 2,308 2,400 2,496 2,597

257,980 260,199 262,507 264,907 267,403 270,000

SWAC buys back the bonds for $257,919 immediately after the interest payment on 12/31/2024 and retires them. What gain or loss, if any, would SWAC record on this date? A) $2,073 loss B) $2,280 gain C) $12,081 gain D) No gain or loss.

177) Shaun White Adventure Company (SWAC) issued callable bonds on January 1, 2024. SWAC's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Increase in Carrying Value

Carrying Value $194,758

$7,000 7,000 7,000 7,000 7,000 7,000

$7,790 7,822 7,855 7,889 7,925 7,961

$790 822 855 889 925 961

195,548 196,370 197,225 198,114 199,039 200,000

01/01/2024 06/30/2024 12/31/2024 06/30/2025 12/31/2025 06/30/2026 12/31/2026

SWAC buys back the bonds for $196,000 immediately after the interest payment on 12/31/2024 and retires them. What gain or loss, if any, would SWAC record on this date? A) No gain or loss B) $370 gain C) $4,000 gain D) $1,242 loss

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178) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

Carrying Value $112,094

$11,880 11,880 11,880 11,880 11,880

$11,209 11,142 11,069 10,987 10,898

$671 738 811 893 982

111,423 110,686 109,874 108,982 108,000

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

X2 buys back the bonds for $111,160 immediately after the interest payment on 12/31/2025 and retires them. What gain or loss, if any, would X2 record on this date? A) No gain or Loss B) $3,160 gain C) $1,362 loss D) $474 loss

179) X2 issued callable bonds on January 1, 2024. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date

Cash Paid

Interest Expense

Decrease in Carrying Value

$7,000 7,000 7,000 7,000 7,000

$6,253 6,208 6,160 6,110 6,057

$747 792 840 890 943

01/01/2024 12/31/2024 12/31/2025 12/31/2026 12/31/2027 12/31/2028

Carrying Value $104,212 103,465 102,673 101,833 100,943 100,000

X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/2025 and retires them. What gain or loss, if any, would X2 record on this date?

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A) No gain or loss B) $3,000 gain C) $1,202 loss D) $327 loss

180)

When bonds are retired before their maturity date: A) GAAP has been violated. B) The issuing company will always report a non-operating gain. C) The issuing company will always report a non-operating loss. D) The issuing company may report a non-operating gain or loss.

181) The Viper retires a $50.1 million bond issue when the carrying value of the bonds is $52.2 million, but the market value of the bonds is $46.3 million. The retirement will include: A) a gain of $5.9 million. B) a loss of $5.9 million. C) an increase in cash of $52.2 million. D) No gain or loss on retirement.

182) The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The retirement will include: A) a gain of $6 million. B) a loss of $6 million. C) No gain or loss on retirement. D) an increase in cash of $42 million.

183) The Raptor retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $15 million. The retirement will include:

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A) a loss of $3 million. B) a gain of $3 million. C) No gain or loss on retirement. D) a decrease to cash of $18 million.

184) The Titan retires a $25.8 million bond issue when the carrying value of the bonds is $21.3 million, but the market value of the bonds is $28.0 million. The retirement will include: A) No gain or loss on retirement. B) a loss of $6.7 million. C) a gain of $6.7 million. D) a decrease to cash of $21.3 million.

185) The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $23 million. The retirement will include: A) a loss of $5 million. B) a gain of $5 million. C) No gain or loss on retirement. D) a decrease to cash of $18 million.

186)

The issue price of a bond is equal to the:

A) future value of the face amount only. B) present value of the interest only. C) present value of the face amount plus the present value of the periodic interest payments. D) future value of the face amount plus the future value of the periodic interest payments.

187)

Ordinarily, the proceeds from the sale of a bond issue will be equal to the:

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A) face amount of the bond. B) total of the face amount plus all interest payments. C) present value of the face amount plus the present value of the periodic interest payments. D) face amount of the bond plus the present value of the periodic interest payments.

188) In calculating the issue price of a bond, the portion associated with the principal is calculated using which time value factor? A) Future value of $1 B) Present value of $1 C) Future value of an ordinary annuity of $1 D) Present value of an ordinary annuity of $1

189) In calculating the issue price of a bond, the portion associated with the periodic interest payments is calculated using which time value factor? A) Future value of $1 B) Present value of $1 C) Future value of an ordinary annuity of $1 D) Present value of an ordinary annuity of $1

190) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face amount of $500,000. Interest payments are made semiannually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to the nearest whole dollar)? (Use PV of $1 and PVA of $1) A) $537,194. B) $464,471. C) $359,528. D) $500,000.

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191) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face amount of $500,000. Interest payments are made semiannually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1) A) $537,194 B) $464,469 C) $538,972 D) $500,000

192) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face amount of $500,000. Interest payments are made semiannually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $537,194 B) $464,469 C) $359,528 D) $500,000

193) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face amount of $500,000. Interest payments are made semiannually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $537,194 B) $464,469 C) $538,973 D) $500,000

194) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face amount of $200,000. Interest payments are made semiannually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1)

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A) $139,609 B) $186,410 C) $214,877 D) $200,000

195) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face amount of $200,000. Interest payments are made semiannually. The market rate for this type of bond is 6%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1) A) $163,200 B) $186,410 C) $214,878 D) $200,000

196) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face amount of $200,000. Interest payments are made semiannually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar? (Use a financial calculator or Excel) A) $139,609 B) $186,410 C) $214,877 D) $200,000

197) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face amount of $200,000. Interest payments are made semiannually. The market rate for this type of bond is 6%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $163,200 B) $186,410 C) $214,877 D) $200,000

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198) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face amount of $100,000. Interest payments are made semiannually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1) A) $104,625 B) $95,842 C) $71,906 D) $100,000

199) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face amount of $100,000. Interest payments are made semiannually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use PV of $1 and PVA of $1) A) $102,323 B) $84,557 C) $104,376 D) $100,000

200) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face amount of $100,000. Interest payments are made semiannually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $104,265 B) $95,842 C) $71,906 D) $100,000

201) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face amount of $100,000. Interest payments are made semiannually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel)

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A) $102,323 B) $84,557 C) $104,376 D) $100,000

202) The balance sheet of Sub America reports total assets of $400,000 and $450,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Sub America's net income for the year? A) $42,500 B) $45,000 C) $4,250,000 D) $85,000

203) The balance sheet of Montezuma reports total assets of $900,000 and $1,100,000 at the beginning and end of the year, respectively. The net income for the year is $100,000. What is Montezuma's return on assets? A) 10% B) 11% C) 9% D) 25%

204) A company reports net income of $250,000. The return on assets for the year is 20%. What is the company’s average total assets for the year? A) $1,250,000 B) $1,000,000 C) $1,500,000 D) $250,000

205) A company’s balance sheet reports total stockholders' equity of $400,000, total liabilities of $600,000, and total assets of $1,000,000. What is the company’s debt to equity ratio? Version 1

A) 1.5 B) 0.66 C) 2.5 D) 1.0

206) A company’s balance sheet reports total stockholders' equity of $800,000. The debt to equity ratio is 2.5. What is the amount of the company’s total liabilities? A) $2,000,000 B) $320,000 C) $1,000,000 D) $800,000

207) A company’s balance sheet reports total liabilities of $2,000,000. The debt to equity ratio is 2.5. What is the company’s total stockholders' equity? A) $800,000 B) $320,000 C) $1,000,000 D) $2,000,000

208)

Financial leverage is best measured by which of the following ratios? A) The debt to equity ratio B) The return on equity ratio C) The times interest earned ratio D) The return on assets ratio

209)

Which of the following is true regarding a company assuming more debt?

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A) Assuming more debt is always bad for the company. B) Assuming more debt is always good for the company. C) Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds. D) Assuming more debt reduces leverage.

210)

Which of the following is not a true statement?

A) The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by total stockholders' equity. B) Leverage enables a company to earn a higher return using debt than without debt. C) Return on assets is calculated as net income divided by the ending balance of total assets. D) The times interest earned ratio compares interest expense with income available to pay interest charges.

211)

The times interest earned ratio is calculated as A) Interest expense ÷ Net income. B) Net income ÷ Interest expense. C) (Net income + Interest expense + Income tax expense) ÷ Interest expense. D) Interest expense ÷ (Net income + Interest expense + Income tax expense).

212)

Selected financial data for Channel Company is provided below:

($ in millions) Sales Interest expense Income tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders’ equity (end of year)

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$50,000 1,000 2,000 7,000 54,000 60,000 24,000 36,000

What is the debt to equity ratio for Channel Company? A) 0.67 B) 0.40 C) 1.50 D) 0.60

213)

Selected financial data for Channel Company is provided below:

$50,000 1,000 2,000 7,000 52,000 60,000 24,000 36,000

What is the return on assets for Channel Company? A) 11.7% B) 13.5% C) 12.5% D) 17.9%

214)

Selected financial data for Channel Company is provided below:

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$50,000 1,000 2,000 7,000 54,000 60,000 24,000 36,000

What is the times interest earned ratio for Channel Company? A) 10.0 times B) 7.0 times C) 4.0 times D) 8.5 times

215)

Selected financial data for Surfer Company is provided below:

$940,000 3,000 21,000 54,000 900,000 820,000 600,000 220,000

What is the debt to equity ratio for Surfer Company? A) 0.37 B) 0.73 C) 2.73 D) 3.73

216)

Selected financial data for Surfer Company is provided below:

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$940,000 3,000 21,000 54,000 900,000 820,000 600,000 220,000

What is the return on assets for Surfer Company? A) 6.0% B) 6.9% C) 6.6% D) 6.3%

217)

Selected financial data for Surfer Company is provided below:

$940,000 3,000 21,000 54,000 900,000 820,000 600,000 220,000

What is the times interest earned ratio for Surfer Company? A) 21.0 times B) 26.0 times C) 18.0 times D) 25.0 times

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 218) What is capital structure? Why would a company choose to borrow money rather than issue additional stock?

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219)

Why do some companies issue bonds rather than borrow money directly from a bank?

220)

Contrast the following types of bonds:

(a) Secured and unsecured. (b) Term and serial. (c) Callable and convertible.

221) Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a premium?

222) What are the potential risks and rewards of carrying additional debt? How does additional debt affect a company's return to investors?

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Answer Key Test name: Chap 09_6e_Spiceland 1) TRUE 2) FALSE Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders and not tax-deductible. 3) TRUE 4) FALSE Equity financing refers to obtaining investment from stockholders. 5) TRUE 6) TRUE 7) TRUE 8) TRUE 9) TRUE 10) FALSE Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The monthly payment amount does not change. Interest expense equals the prior month’s carrying value times the interest rate. The amount of interest expense decreases with each payment (since the carrying value is decreasing) and the amount paid on the note’s principal balance increases. 11) TRUE 12) FALSE

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For financial reporting, the remaining balance of an installment note needs to be split into its current and long-term portions. The current portion is the amount of the loan that will be settled within one year of the balance sheet date. The long-term portion is the remaining amount of the loan not classified as current. 13) TRUE 14) TRUE 15) FALSE Lease payments often are tied only to the portion of the asset’s fair value expected to decline over the lease period (rather than the asset’s entire value). This means the monthly payments associated with leasing often are lower. 16) FALSE Leases are recorded by the lessee as an increase in assets and an increase in liabilities at the beginning of the lease. 17) FALSE Lessees don’t have to worry about declining fair values (selling prices) while they are using the asset. 18) FALSE Leases are recorded for the present value of the lease payments. 19) TRUE 20) TRUE 21) FALSE Secured bonds are supported by specific assets the issuer has pledged as collateral. 22) TRUE 23) TRUE 24) FALSE

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Term bonds require payments of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. 25) FALSE Serial bonds require payments in installments over a series of years. Term bonds require payment of the full principal amount of the bond at a single maturity date. 26) TRUE 27) TRUE 28) FALSE We can calculate the issue price of a bond as the present value of the face amount plus the present value of the periodic interest payments. The market rate of interest is used to calculate the present value. 29) TRUE 30) TRUE 31) FALSE Market rates change continuously. The market value of bonds moves in an opposite direction of interest rates. When market interest rates go up, the market value of bonds goes down. 32) TRUE 33) TRUE 34) FALSE The higher the market interest rate, the lower the bond issue price will be. 35) TRUE 36) TRUE 37) TRUE 38) TRUE 39) FALSE

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When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense decrease over time. 40) TRUE 41) FALSE The cash payment each period is calculated as the face amount times the stated interest rate. 42) TRUE 43) FALSE For bonds issued at a premium, the difference between interest expense and the cash paid decreases the carrying value of the bonds. 44) FALSE When bonds are issued at a premium, the cash received from investors exceeds the face amount, which is the amount that must be paid to investors at maturity. Since the cash received from the issuance exceeds the cash that must be paid at maturity, the difference (which is the amount of the premium) effectively represents the reduction in total interest paid. (Note that the opposite is true for bonds issued at a discount. When bonds are issued at a discount, the amount of the discount effectively represents additional interest expense.) 45) TRUE 46) TRUE 47) TRUE 48) FALSE Gains/losses on the early extinguishment of debt are reported as nonoperating items in the income statement. 49) TRUE 50) FALSE No gain or loss is recorded on bonds retired at maturity, as the carrying value at maturity is equal to the face amount of the bond. 51) TRUE Version 1

52) TRUE 53) TRUE 54) FALSE Return on assets is calculated as net income divided by average total assets. 55) TRUE 56) B 57) B 58) B 59) C 60) A Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. Interest expense equals the prior month’s carrying value times the interest rate. The amount of interest expense decreases with each payment (since the carrying value is decreasing) and the amount paid on the note’s principal balance increases. 61) B Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. Interest expense equals the prior month’s carrying value times the interest rate. The amount of interest expense decreases with each payment (since the carrying value is decreasing) and the amount paid on the note’s principal balance increases. 62) D

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Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. Interest expense equals the prior month’s carrying value times the interest rate. The amount of interest expense decreases with each payment (since the carrying value is decreasing) and the amount paid on the note’s principal balance increases. 63) A Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. 64) A Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The carrying value of the note decreases over time. 65) C Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The carrying value of the note decreases over time. 66) A 67) A 68) B 69) D 70) A $125,000 × 6% × 1/12 = $625 71) A $125,000 × 6% × 1/12 = $625.00 interest expense $2,416.60 − $625.00 = $1,791.60 decrease in carrying value 72) C Version 1

$200,000 × 5% × 1/12 = $833.33 73) B $200,000 × 5% × 1/12 = $833.33 interest expense. $3,220.99 − $833.33 = $2,387.66 decrease in carrying value. 74) A $200,000 × 5% × 1/12 = $833.33 interest expense. $3,220.99 − $833.33 = $2,387.66 decrease in carrying value. $200,000 − $2,387.66 = $197,612.34 new carrying value 75) D If a note requires the payment of interest each period and the amount borrowed, the amount of interest expense will be the same each period. On the other hand, the payments on an installment note includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. Interest expense equals the prior month’s carrying value times the interest rate. The amount of interest expense on an installment note decreases with each payment (since the carrying value is decreasing) and the amount paid on the note’s principal balance increases. 76) D 77) D 78) B 79) D 80) D 81) C 82) B Recorded at the present value of the lease payments. 83) D

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Total assets = $500,000 (beginning) + $25,000 (PV of lease payments = $525,000). Total liabilities = $300,000 (beginning) + $25,000 (PV of lease payments = $325,000). 84) C $554.15 × 18.04555* = $10,000 (rounded) *PV of ordinary annuity of $1 (n=20; i=1%) 85) A $20,000 × 12.78336* = $255,667 (rounded) *PV of ordinary annuity of $1 (n=25; i=6%) 86) B $6,457 × 8.98259* = $58,001 (rounded) *PV of ordinary annuity of $1 (n=10; i=2%) 87) D 88) B 89) A 90) C 91) D 92) C 93) B 94) C 95) B 96) C 97) C 98) B 99) A 100) D 101) C 102) B 103) A Version 1

104) A 105) D 106) C 107) D 108) B 109) B $50,000 × 0.55839* = $27,920 (rounded) $2,500^ × 7.36009** = $18,400 (rounded) $27,920 + $18,400 = $46,320 ^$50,000 × 10% × ½ year = $2,500 *PV of $1: i = 12% ÷ 2 semiannual periods = 6% n = 5 years × 2 periods each year = 10 periods **PVA of $1: i = 12% ÷ 2 semiannual periods = 6% n = 5 years × 2 periods each year = 10 periods 110) C $50,000 × 0.67556* = $33,778 $2,500^ × 8.11090** = $20,277 (rounded) $33,778 + $20,277 = $54,055 ^$50,000 × 10% × ½ year = $2,500 *Table 2: i = 8%/2 semiannual periods = 4% n = 5 years × 2 periods each year = 10 periods **Table 4: i = 8%/2 semiannual periods = 4% n = 5 years × 2 periods each year = 10 periods Version 1

111) D 112) D 113) D 114) D 115) D 116) B 117) D 118) C 119) B 120) A 121) B 122) B 123) D 124) A 125) A 126) C 127) A 128) B 129) C 130) C 131) B 132) A 133) A 134) C 135) A 136) B 137) C 138) C 139) D ($950,000 ÷ $19,000,000) × 2 payments per year = 10% Version 1

140) C ($300,000 ÷ $10,000,000) × 2 payments per year = 6% 141) B ($629,586 ÷ $8,994,091) × 2 payments per year = 14%. 142) D ($345,639 ÷ $8,640,967) × 2 payments per year = 8% 143) A $612,765 + $615,403 = $1,228,168 144) A $345,639 + $347,464 = $693,103 145) A 146) A 147) C 148) B 149) B 150) B 151) B ($12,000 ÷ $300,000) × 2 payments per year = 8%. 152) D ($7,000 ÷ $200,000) × 2 payments per year = 7% 153) A ($9,855 ÷ $246,371) × 2 payments per year = 8% 154) D ($7,790 ÷ $194,758) × 2 payments per year = 8% 155) B 156) B 157) C 158) C 159) D Version 1

$9,860 ÷ $116,000 = 8.5% 160) D $7,000 ÷ $100,000 = 7% 161) B $7,433 ÷ $106,182 = 7% 162) C $6,253 ÷ $104,212 = 6% 163) B The initial carrying amount of $8,800,000 is less than the face amount of $10,000,000. 164) C 165) A 166) D $400,000 ÷ $10,000,000 = 4%; 4% × 2 payments per year = 8% 167) B $440,000 ÷ $8,800,000 = 5%; 5% × 2 payments per year = 10% 168) C $8,000,000 = $400,000 × 20 payments 169) C The initial carrying amount of $5,500,000 is greater than the face amount of $5,000,000. 170) C 171) A 172) B $250,000 ÷ $5,000,000 = 5%; 5% × 2 payments per year = 10% 173) D $220,000 ÷ $5,500,000 = 4%; 4% × 2 payments per year = 8% 174) B $3,500,000 = $250,000 × 14 payments 175) D Version 1

176) B SWAC paid only $257,919 to remove a liability with a carrying value of $260,199, so there is a gain of $2,280. 177) B SWAC paid only $196,000 to remove a liability with a carrying value of $196,370, so there is a gain of $370. 178) D X2 paid $111,160 to remove a liability with a carrying value of $110,686, so there is a loss of $474. 179) D X2 paid $103,000 to remove a liability with a carrying value of $102,673, so there is a loss of $327. 180) D 181) A Carrying value, $52.2 million, less cash paid to retire the bonds of $46.3 million = $5.9 million gain. 182) A Carrying value, $42 million, less cash paid to retire the bonds of $36 million = $6 million gain. 183) B Carrying value, $18 million, less cash paid to retire the bonds of $15 million = $3 million gain. 184) B Carrying value, $21.3 million, less cash paid to retire the bonds of $28.0 million = $6.7 million loss. 185) A Carrying value, $18 million, less cash paid to retire the bonds of $23 million = $5 million loss. 186) C 187) C Version 1

188) B 189) D 190) B $500,000 × 0.50257* = $251,285 $15,000^ × 14.21240** = $213,186 $251,285 + $213,186 = $464,471 ^$500,000 × 6% × ½ year = $15,000 *PV of $1: i = 7% ÷ 2 semiannual periods = 3.5% n = 10 years × 2 periods each year = 20 periods **PVA of $1: i = 7% ÷ 2 semiannual periods = 3.5% n = 10 years × 2 periods each year = 20 periods 191) C $500,000 × 0.61027* = $305,135 $15,000^ × 15.58916** = $233,837 (rounded) $305,135 + $233,837 = $538,972 ^$500,000 × 6% × ½ year = $15,000 *PV of $1: i = 5% ÷ 2 semiannual periods = 2.5% n = 10 years × 2 periods each year = 20 periods **PVA of $1: i = 5% ÷ 2 semiannual periods = 2.5% n = 10 years × 2 periods each year = 20 periods 192) B

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FV ($500,000); PMT ($15,000); I (3.5%); N (20 periods) = PV ($464,469) PMT = $500,000 × 6% × ½ year = $15,000 I = 7% ÷ 2 semiannual periods = 3.5% N = 10 years × 2 periods each year = 20 periods 193) C FV ($500,000); PMT ($15,000); I (2.5%); N (20 periods) = PV ($538,973) PMT = $500,000 × 6% × ½ year = $15,000 I = 5% ÷ 2 semiannual periods = 2.5% N = 10 years × 2 periods each year = 20 periods 194) B $200,000 × 0.45639* = $91,278 $7,000^ × 13.59033** = $95,132 (rounded) $91,278 + $95,132 = $186,410 ^$200,000 × 7% × ½ year = $7,000. *PV of $1: i = 8% ÷ 2 semiannual periods = 4% n = 10 years × 2 periods each year = 20 periods **PVA of $1: i = 8% ÷ 2 semiannual periods = 4% n = 10 years × 2 periods each year = 20 periods 195) C

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$200,000 × 0.55368* = $110,736 $7,000^ × 14.87747** = $104,142 (rounded) $110,736 + $104,142 = $214,878 ^$200,000 × 7% × ½ year = $7,000 *PV of $1: i = 6% ÷ 2 semiannual periods = 3% n = 10 years × 2 periods each year = 20 periods **PVA of $1: i = 6% ÷ 2 semiannual periods = 3% n = 10 years × 2 periods each year = 20 periods 196) B FV ($200,000); PMT ($7,000); I (4%); N (20 periods) = PV ($186,410) (rounded) PMT = $200,000 × 7% × ½ year = $7,000 I = 8% ÷ 2 semiannual periods = 4% N = 10 years × 2 periods each year = 20 periods 197) C FV ($200,000); PMT ($7,000); I (3%); N (20 periods) = PV ($214,877) (rounded) PMT = $200,000 × 7% × ½ year = $7,000 I = 6% ÷ 2 semiannual periods = 3% N = 10 years × 2 periods each year = 20 periods 198) B

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$100,000 × 0.70892* = $70,892 $3,000^ × 8.31661** = $24,950 (rounded) $70,892 + $24,950 = $95,842 ^$100,000 × 6% × ½ year = $3,000 *PV of $1: i = 7% ÷ 2 semiannual periods = 3.5% n = 5 years × 2 periods each year = 10 periods **PVA of $1: i = 7% ÷ 2 semiannual periods = 3.5% n = 5 years × 2 periods each year = 10 periods 199) C $100,000 × 0.78120* = $78,120 $3,000^ × 8.75206** = $26,256 (rounded) $78,120 + $26,256 = $104,376 ^$100,000 × 6% × ½ year = $3,000 *PV of $1: i = 5% ÷ 2 semiannual periods = 2.5% n = 5 years × 2 periods each year = 10 periods **PVA of $1: i = 5% ÷ 2 semiannual periods = 2.5% n = 5 years × 2 periods each year = 10 periods 200) B FV ($100,000); PMT ($3,000); I (3.5%); N (10 periods) = PV ($95,842) (rounded) PMT = $100,000 × 6% × ½ year = $3,000 I = 7% ÷ 2 semiannual periods = 3.5% N = 5 years × 2 periods each year = 10 periods Version 1

201) C FV ($100,000); PMT ($3,000); I (2.5%); N (10 periods) = PV ($104,376) (rounded) PMT = $100,000 × 6% × ½ year = $3,000 I = 5% ÷ 2 semiannual periods = 2.5% N = 5 years × 2 periods each year = 10 periods 202) A Net income divided by average total assets = 10%. Average total assets = $425,000 [($400,000 + $450,000)/2]; therefore, net income must be $42,500 ($425,000 × 10%). 203) A [$100,000/($900,000 + $1,100,000)/2] = 10% 204) A $250,000/X = 20%, therefore X = ($250,000/20%) = $1,250,000. 205) A $600,000 ÷ $400,000 = 1.5 206) A X ÷ $800,000 = 2.5, therefore X = ($800,000 × 2.5) = $2,000,000. 207) A $2,000,000/X = 2.5, therefore X = ($2,000,000/2.5) = $800,000. 208) A 209) C 210) C 211) C 212) A $24,000 ÷ $36,000 = 0.67 (rounded) 213) C $7,000 ÷ [($52,000 + $60,000) ÷ 2] = 12.5% 214) A ($7,000 + $1,000 + $2,000)/1,000 = 10.0 times Version 1

215) C $600,000 ÷ $220,000 = 2.73 (rounded) 216) D $54,000 ÷ [($840,000 + $880,000)/2] = 6.3% (rounded) 217) B ($54,000 + $3,000 + $21,000) ÷ $3,000 = 26.0 times 218) Capital structure is the mixture of liabilities and stockholders' equity a business uses. One of the primary reasons a company chooses to borrow money relates to taxes. Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders arenot tax deductible. Due to tax considerations, debt can be a less costly form of financing. 219)A company that borrows by issuing bonds is effectively bypassing the bank and borrowing directly from the investing public, usually at a lower interest rate than in a bank loan. However, issuing bonds entails significant bond issue costs that often exceed 5% of the amount borrowed. For smaller loans, the additional bond issue costs exceed the savings from a lower interest rate, making it more economical to borrow from a bank. For loans of $20 million or more, the interest rate savings often exceed the additional bond issuance costs, making a bond issue more attractive. 220)(a) Secured bonds are supported by assets pledged as collateral. Unsecured bonds, also referred to as debentures, are not backed by a specific asset. (b) Term bonds require payment of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. (c) Callable bonds allow the issuer to repay the bonds before their scheduled maturity date at a specified call price. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

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221)Cash paid is calculated as the face amount of the bonds times the stated interest rate. Interest expense is the carrying value times the market rate. The difference between interest expense and the cash paid increases the carrying value of the bonds. At the maturity date, the carrying value will equal the face amount. The amortization schedule is similar when bonds are issued at a premium, except that the difference between interest expense and the cash paid decreases, rather than increases, the carrying value of the bonds over time. 222)Additional debt increases risk. Failure to repay debt, or the interest associated with the debt, on a timely basis may result in default and perhaps even bankruptcy. Other things being equal, the higher the debt, the higher the risk of bankruptcy. Additional debt also offers potential rewards. If a company earns a return in excess of the cost of borrowing the funds, stockholders are provided with a total return greater than what could have been earned with equity funds alone. Unfortunately, borrowing is not always favorable. Sometimes the cost of borrowing the funds exceeds the returns they generate. If a company has returns in excess of the rate charged on borrowed funds, assuming additional debt will result in a higher return to investors. However, if returns should fall below the rate charged on borrowed funds, assuming additional debt will result in lower overall returns to investors.

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CHAPTER 10: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match the following: Terms: A) Publicly held corporation B) Articles of incorporation C) Venture capital firms D) Limited liability company E) S corporation F) Limited liability G) Double taxation H) Angel investors Descriptions: 1) Provide additional financing, often in the millions, for a percentage ownership in the company. 2) Allows for legal treatment as a corporation, but tax treatment as a partnership. 3) Like an S corporation, but there are no limitations on the number of owners as in an S corporation. 4) Wealthy individuals willing to risk investment funds on a promising business venture. 5) Has stock traded on a stock exchange such as the New York Stock Exchange (NYSE). 6) Corporate earnings are taxed twice—at the corporate level and individual stockholder level. 7) Describes (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the initial board of directors. 8) Stockholders can lose no more than the amount they invest in the company.

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Match the following:

Terms: A) Retained earnings B) Cumulative C) Paid-in capital D) Outstanding stock E) Limited liability F) Issued stock G) Redeemable H) Treasury stock I) Authorized stock J) Angel investors Descriptions: 1) Wealthy individuals willing to risk investment funds on a promising business venture. 2) The amount invested by stockholders. 3) Shares actually sold. 4) Shares available to sell. 5) Shares can be returned to the corporation at a predetermined price. 6) Preferred stock shares receive priority for future dividends, if dividends are not declared in a given year. 7) The earnings not paid out in dividends. 8) Stockholders can lose no more than the amount they invested in the company. 9) The corporation's own stock that it has reacquired. 10) Shares held by investors.

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Match the following:

Terms: A) Stock split B) Preferred stock C) Statement of stockholders' equity D) Additional paid-in capital E) Retained earnings F) Venture capital firms G) Organization chart H) Articles of incorporation I) Stock dividends J) Dividends Descriptions: 1) Provide additional financing, often in the millions, for a percentage ownership in the company. 2) A mixture of attributes somewhere between common stock and bonds payable. 3) Summarizes the changes in the balance in each stockholders' equity account over a period of time. 4) Traces the line of authority for a typical corporation. 5) The portion of the cash proceeds above par value. 6) A large stock dividend recorded as a reduction in the par or stated value per share. 7) Represents all net income, less all dividends, since the company began. 8) Distributions by a corporation to its stockholders. 9) Additional shares of the companies' own stock given to stockholders. 10) Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors.

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Match each of following descriptions to the appropriate preferred stock characteristic.

Terms: A) Cumulative B) Redeemable C) Convertible Descriptions: 1) Shares can be exchanged for common stock. 2) Shares can be sold at a predetermined price. 3) Preferred stock shares receive priority for future dividends, if dividends are not declared in a given year.

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Match the following:

Terms: A) 100% stock dividend B) PE ratio C) Growth stocks D) Return on equity E) Retained earnings F) Statement of stockholders' equity G) Stockholders' equity section of the balance sheet H) Value stocks I) Accumulated deficit J) Treasury stock Descriptions: 1) Summarizes the changes in the balance in each stockholders' equity account over a period of time. 2) The corporation's own stock that it has reacquired. 3) Priced low in relation to current earnings. 4) The earnings not paid out in dividends. 5) The stock price divided by earnings per share. 6) Shows the balance in each equity account at a point in time. 7) Measures the ability of company management to generate profits from the resources provided by owners. 8) Priced high in relation to current earnings as investors expect future earnings to be higher. 9) Effectively the same as a 2-for-1 stock split. 10) A debit balance in retained earnings.

6) The Shoe Exchange issues 4,000 shares of its $1 par value common stock to provide funds for further expansion. The issue price is $14 per share. Required: Record this transaction.

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7) The Shoe Exchange issues 5,000 shares of its $1 par value common stock to provide funds for further expansion. The issue price is $15 per share. Required: Record this transaction.

8) Environmental Designs issues 4,000 shares of its $1 par value common stock at $13 per share. Required: 1. Record the issuance of the stock. 2. Record the issuance of the stock assuming it is no-par value stock.

9) Environmental Designs issues 10,000 shares of its $1 par value common stock at $25 per share. Required: 1. Record the issuance of the stock. 2. Record the issuance of the stock assuming it is no-par value stock.

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10) Diane's Designs has two classes of stock authorized: 8%, $10 par value preferred and $1 par value common. The following transactions affect stockholders' equity during 2024, its first year of operations: January 1 Issue 200,000 shares of common stock for $14 per share. February 6 Issue 900 shares of preferred stock for $14 per share. October 10 Purchase 12,000 shares of its own common stock for $16 per share. November 12 Resell 4,000 shares of treasury stock at $25 per share.

Required: Record each of these transactions.

11) Diane's Designs has two classes of stock authorized: 8%, $10 par value preferred and $1 par value common. The following transactions affect stockholders' equity during 2024, its first year of operations: January 1 Issue 200,000 shares of common stock for $15 per share. February 6 Issue 1,000 shares of preferred stock for $11 per share. October 10 Purchase 10,000 shares of its own common stock for $18 per share. November 12 Resell 5,000 shares of treasury stock at $20 per share.

Required: Record each of these transactions.

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12) Northwest Clothing Supply has the following transactions during the year related to stockholders' equity: January 1 March 15 December 1

December 15 December 31

Issues 3,000 shares of no-par value common stock for $22 per share. Issues 700 shares of $20 par value preferred stock for $23 per share. Declares a cash dividend of $3 per share to all stockholders of record (both common and preferred) on December 15. Northwest Clothing Supply has fixed the Record Date for both common and preferred shares as December 15. Pays the cash dividend declared on December 1.

Required: Record each of these transactions.

13) Northwest Clothing Supply has the following transactions during the year related to stockholders' equity: January 1 Issues 3,000 shares of no-par value common stock for $20 per share March 15 Issues 800 shares of $20 par value preferred stock for $22 per share December 1 Declares a cash dividend of $1 per share to all stockholders of record (both common and preferred) on December 15 December Date of record 15 December Pays the cash dividend declared on December 1 31

Required: Record each of these transactions.

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14) Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster: (a) Issue $10 million of 6% bonds at face amount, or (b) Issue one million shares of common stock for $10 per share

Operating income Interest expense

Issue Bonds

Issue Stock

$5,000,000

3,000,000

4,000,000

Income before tax Income tax expense (30%) Net income # of shares Earnings per share

Required: 1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed above for each alternative. 2. Which alternative results in the highest earnings per share?

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15) Oregon Outfitters issues 1,900 shares of $1 par value common stock at $21 per share. Later in the year, the company decides to reacquire 270 shares at a cost of $22 per share. Required: 1. Record the original issue of the 1,900 shares. 2. Record the purchase of 270 shares. 3. Record the entry if Oregon Outfitters resells the 270 shares of treasury stock at $26 per share.

16) Oregon Outfitters issues 1,000 shares of $1 par value common stock at $20 per share. Later in the year, the company decides to reacquire 200 shares at a cost of $22 per share. Required: 1. Record the original issue of the 1,000 shares. 2. Record the purchase of 200 shares. 3. Record the entry if Oregon Outfitters resells the 200 shares of treasury stock at $25 per share.

17) Court Casuals has 200,000 shares of common stock outstanding as of the beginning of the year and has the following transactions affecting stockholders' equity during the year: May 18 May 31 July 1

July 31 August 10

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Issues 21,000 additional shares of $1 par value common stock for $40 per share. Purchases 5,000 shares of treasury stock for $44 per share. Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock. Pays the cash dividend declared on July 1. Resells 2,900 shares of treasury stock purchased on May 31 for $49 per share.

Required: Record each of these transactions.

18) Court Casuals has 100,000 shares of common stock outstanding as of the beginning of the year and has the following transactions affecting stockholders' equity during the year: May 18 May 31 July 1

July 31 August 10

Issues 25,000 additional shares of $1 par value common stock for $40 per share. Purchases 5,000 shares of treasury stock for $45 per share. Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock. Pays the cash dividend declared on July 1. Resells 2,500 shares of treasury stock purchased on May 31 for $46 per share.

Required: Record each of these transactions.

19) Tropical Rainwear issues 1,000 shares of its $16 par value preferred stock for cash at $18 per share. Required: Record the issuance of the preferred shares.

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20) Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share. Required: Record the issuance of the preferred shares.

21) Desert Apparel has 6,000 shares of common stock outstanding. On April 1, the company declares a $5 per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Required: Record all necessary entries on the appropriate dates for cash dividends.

22) Desert Apparel has 5,000 shares of common stock outstanding. On April 1, the company declares a $2 per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Required: Record all necessary entries on the appropriate dates for cash dividends.

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23) On May 15, Canadian Falcon declares a quarterly cash dividend of $0.12 per share payable on June 10 to all stockholders of record on May 31. Required: Record Canadian Falcon's declaration and payment of cash dividends for its 200,000 shares of common stock.

24) On May 15, Canadian Falcon declares a quarterly cash dividend of $0.15 per share payable on June 10 to all stockholders of record on May 31. Required: Record Canadian Falcon's declaration and payment of cash dividends for its 200,000 shares of common stock.

25) On March 31, the board of directors of Shoeboxes, Incorporated declares a 100% stock dividend on its 400,000, $0.02 par value, common shares. The market price of Shoeboxes common stock is $24 on March 31. Required: Record the stock dividend.

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26) On March 31, the board of directors of Shoeboxes, Incorporated declares a 100% stock dividend on its 100,000, $0.01 par value, common shares. The market price of Shoeboxes common stock is $30 on March 31. Required: Record the stock dividend.

27) Indicate whether each of the following transactions increases (+), decreases (−), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity. Transaction

Total Assets

Total Liabilities

Total Stockholders' Equity

Issue common stock Issue preferred stock Purchase treasury stock Sale of treasury stock

28) Indicate whether each of the following transactions increases (+), decreases (−), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity. Version 1

Transaction

Total Assets

Total Liabilities

Total Stockholders' Equity

Issue common stock Issue preferred stock Purchase treasury stock Sell treasury stock Declare cash dividend Pay cash dividend 100% stock dividend 2-for-1 stock split

29) Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2024: Common Stock, $1 par value, 2,700,000 shares; Additional Paid-in Capital, $24 million; Retained Earnings, $14 million; and Treasury Stock, 50,000 shares, $1.05 million. Required: Prepare the stockholders' equity section of the balance sheet.

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30) Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2024: Common Stock, $1 par value, 2,000,000 shares; Additional Paid-in Capital, $22 million; Retained Earnings, $15 million; and Treasury Stock, 50,000 shares, $1.25 million. Required: Prepare the stockholders' equity section of the balance sheet.

31) Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2024: Treasury Stock, $375,000; Common Stock, $250,000; Preferred Stock, $1,200,000; Retained Earnings, $1,800,000; and Additional Paid-in Capital, $3,000,000. Required: Prepare the stockholders' equity section of the balance sheet for Donnie Hilfiger as of December 31, 2024.

32) Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2024: Treasury Stock, $375,000; Common Stock, $350,000; Preferred Stock, $1,200,000; Retained Earnings, $1,675,000; and Additional Paid-in Capital, $3,150,000. Required: Prepare the stockholders' equity section of the balance sheet for Donnie Hilfiger as of December 31, 2024.

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33) Formal Footwear has the following beginning balances in its stockholders' equity accounts on January 1, 2024: Common Stock, $500,000; Additional Paid-in Capital, $8,200,000; and Retained Earnings, $2,400,000. Net income for the year ended December 31, 2024, is $900,000. Formal Footwear has the following transactions affecting stockholders' equity in 2024: May 18 Issues 10,000 additional shares of $5 par value common stock for $60 per share. July 1 Declares a cash dividend of $3 per share to all stockholders of record on July 15. July Pays the cash dividend declared on July 1. 31

Required: Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2024, using the format provided.

Balance, January 1 Issue common stock Cash dividends

FORMAL FOOTWEAR Statement of Stockholders' Equity For the Year Ended December 31, 2024 Common Additional Retained Stock Paid-in Earnings Capital $ 500,000 $ 8,200,000 $ 2,400,000

Total Stockholders' Equity $ 11,100,000

Net income Balance, December 31

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34) Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1, 2024: Common Stock, $80,000; Additional Paid-in Capital, $3,900,000; and Retained Earnings, $1,000,000. Net income for the year ended December 31, 2024, is $800,000. Court Casuals has the following transactions affecting stockholders' equity in 2024: May 18 May 31 July 1

July 31 August 10

Issues 21,000 additional shares of $1 par value common stock for $40 per share. Purchases 3,000 shares of treasury stock for $40 per share. Declares a cash dividend of $2 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock. Pays the cash dividend declared on July 1. Resells 2,500 shares of treasury stock purchased on May 31 for $53 per share.

Required: Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2024.

Balance, January 1 Issue common stock Purchase treasury stock Cash dividends Resell treasury stock Net income

COURT CASUALS Statement of Stockholders' Equity For the Year Ended December 31, 2024 Common Additional Retained Treasury Total Stock Paid-in Earnings Stock Stockholders' Capital Equity $ $ $ $ 0 $ 4,980,000 80,000 3,900,000 1,000,000

Balance, December 31

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35) Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1, 2024: Common Stock, $100,000; Additional Paid-in Capital, $4,100,000; and Retained Earnings, $3,000,000. Net income for the year ended December 31, 2024, is $800,000. Court Casuals has the following transactions affecting stockholders' equity in 2024: May 18 May 31 July 1

July 31 August 10

Required: Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2024, using the format provided.

Balance, January 1 Issue common stock Purchase treasury stock Cash dividends Resell treasury

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stock Net income Balance, December 31

36) The financial statements of Heatwave Athletic Wear include the following selected data ($ in millions): Sales, $22,500; Net income, $950; Beginning stockholders' equity, $3,560; Ending stockholders' equity, $4,180. Required: Calculate the return on equity.

37) The financial statements of Heatwave Athletic Wear include the following selected data ($ in millions): Sales, $22,502; Net income, $875; Beginning stockholders' equity, $3,567; Ending stockholders' equity, $4,102. Required: Calculate the return on equity.

38)

The financial statements of Trail Apparel include the following selected data:

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($ in thousands, except stock price) Sales Net income Dividends Stockholders' equity, end of year Shares outstanding Average stock price

2024 $728,620 16,200 4,620 244,150 47,000 $ 5.40

2023 $754,158 13,920 3,420 221,450 37,000 $ 4.50

Required: Calculate the following amounts for 2024: 1. Return on equity. 2. Dividend yield. 3. Earnings per share. 4. Price-earnings ratio.

39)

The financial statements of Trail Apparel include the following selected data:

($ in thousands, except stock price) Sales Net income Dividends Stockholders' equity, end of year Shares outstanding Average stock price

2024 $728,121 16,012 4,087 235,153 45,000 $ 5.40

2023 $751,558 13,626 3,885 221,457 40,000 $ 4.70

Required: Calculate the following amounts for 2024: 1. Return on equity. 2. Dividend yield. 3. Earnings per share. 4. Price-earnings ratio.

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Answer Key Test name: Chap 10_6e_Spiceland_Problem Material 1)1) C 2) E 3) D 4) H 5) A 6) G 7) B 8) F 2)1) J 2) C 3) F 4) I 5) G 6) B 7) A 8) E 9) H 10) D

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3)1) F 2) B 3) C 4) G 5) D 6) A 7) E 8) J 9) I 10) H 4)1) C 2) B 3) A 5)1) F 2) J 3) H 4) E 5) B 6) G 7) D 8) C 9) A 10) I 6) Account Title Cash (4,000 shares × $14)

Debit 56,000

Credit

Common Stock (4,000 shares × $1)

4,000

Additional Paid-in Capital (difference)

52,000

(Issue common stock above par)

7) Account Title

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Debit

Credit 24

Cash (5,000 shares × $15)

75,000

Common Stock (5,000 shares × $1)

5,000

Additional Paid-in Capital (difference)

70,000

(Issue common stock above par)

8)1. Account Title Cash (4,000 shares × $13)

Debit 52,000

Credit

Common Stock (4,000 shares × $1)

4,000

Additional Paid-in Capital (difference)

48,000

(Issue common stock above par)

2. Account Title Cash (4,000 shares × $13)

Debit 52,000

Common Stock

Credit

52,000

(Issue common stock above par)

9)1. Account Title Cash (10,000 shares × $25)

Debit 250,000

Credit

Common Stock (10,000 shares × $1)

10,000

Additional Paid-in Capital (difference)

240,000

(Issue common stock above par)

2. Account Title Cash (10,000 shares × $25)

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Debit 250,000

Credit

Common Stock

250,000

(Issue no-par value common stock)

10) Date January 1

Account Title Cash (200,000 shares × $14)

Debit 2,800,000

Common Stock (200,000 shares × $1) Additional Paid-in Capital (difference) (Issue common stock above par) February 6

October 10

Cash (900 shares × $14) Preferred Stock (900 shares × $10) Additional Paid-in Capital (difference) (Issue preferred stock above par) Treasury Stock (12,000 shares × $16) Cash

Credit

200,000 2,600,000

12,600 9,000 3,600

192,000 192,000

(Purchase treasury stock) November 12

Cash (4,000 shares × $25)

100,000

Treasury Stock (4,000 shares × $16) Additional Paid-in Capital (difference) (Resell treasury stock above cost)

64,000 36,000

11) Date January 1

Account Title Cash (200,000 shares × $15) Common Stock (200,000 shares × $1)

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Debit 3,000,000

Credit

200,000

Additional Paid-in Capital (difference) (Issue common stock above par) February 6

October 10

Cash (1,000 shares × $11) Preferred Stock (1,000 shares × $10) Additional Paid-in Capital (difference) (Issue preferred stock above par) Treasury Stock (10,000 shares × $18) Cash

2,800,000

11,000 10,000 1,000

180,000 180,000

(Purchase treasury stock) November 12

Cash (5,000 shares × $20)

100,000

Treasury Stock (5,000 shares × $18) Additional Paid-in Capital (difference) (Resell treasury stock above cost)

90,000 10,000

12) Date January 1

Account Title Cash (3,000 shares × $22)

Debit 66,000

Common Stock (3,000 shares × $22)

Credit

66,000

(Issue no-par value common stock) March 15

Cash (700 shares × $23)

16,100

Preferred Stock (700 shares × $20) Additional Paid-in Capital (difference) (Issue preferred stock above par) December 1

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Dividends (3,700 shares × $3)

14,000 2,100

11,100

Dividends Payable

11,100

(Declare cash dividends) December 15

No Entry

December 31

Dividends Payable (3,700 shares × $3) Cash

11,100 11,100

(Pay cash dividends)

13) Date January 1

Account Title Cash (3,000 shares × $20)

Debit 60,000

Common Stock (3,000 shares × $20)

Credit

60,000

(Issue no-par value common stock) March 15

Cash (800 shares × $22)

17,600

Preferred Stock (800 shares × $20) Additional Paid-in Capital (difference) (Issue preferred stock above par) December 1

Dividends (3,800 shares × $1)

16,000 1,600

3,800

Dividends Payable

3,800

(Declare cash dividends) December 15

No Entry

December 31

Dividends Payable (3,800 shares × $1) Cash

3,800 3,800

(Pay cash dividends)

14)1.

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Issue Bonds

Issue Stock

Operating income Interest expense (bonds only)

$ 5,000,000 600,000

$ 5,000,000

Income before tax Income tax expense (30%) Net income # of shares Earnings per share

4,400,000 1,320,000 $ 3,080,000 3,000,000 $ 1.03

5,000,000 1,500,000 $ 3,500,000 4,000,000 $ 0.88

2. Issuing bonds results in earnings per share of $1.03 compared with earnings per share of $0.88 for issuing stock. 15)1. Account Title Cash (1,900 shares × $21)

Debit 39,900

Credit

Common Stock (1,900 shares × $1)

1,900

Additional Paid-in Capital (difference)

38,000

(Issue common stock above par)

2. Account Title Treasury Stock (270 shares × $22)

Debit 5,940

Cash

Credit

5,940

(Purchase treasury stock)

3. Account Title Cash (270 shares × $26) Treasury Stock (270 shares × $22)

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Debit 7,020

Credit

5,940

Additional Paid-in Capital (difference)

1,080

(Resell treasury stock above cost)

16)1. Account Title Cash (1,000 shares × $20)

Debit 20,000

Credit

Common Stock (1,000 shares × $1)

1,000

Additional Paid-in Capital (difference)

19,000

(Issue common stock above par)

2. Account Title Treasury Stock (200 shares × $22)

Debit 4,400

Cash

Credit

4,400

(Purchase treasury stock)

3. Account Title Cash (200 shares × $25) Treasury Stock (200 shares × $22) Additional Paid-in Capital (difference)

Debit 5,000

Credit

4,400 600

(Resell treasury stock above cost)

17) Date May 18

Account Title Cash (21,000 shares × $40) Common Stock (21,000 shares × $1)

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Debit Credit 840,000 21,000

Additional Paid-in Capital (difference) (Issue common stock above par) May 31

Treasury Stock (5,000 shares × $44)

819,000

220,000

Cash

220,000

(Purchase treasury stock) July 1

Dividends (216,000 shares × $1)

216,000

Dividends Payable

216,000

(Declare cash dividends) July 31

Dividends Payable (216,000 shares × $1) Cash

216,000 216,000

(Pay cash dividends) August 10

Cash (2,900 shares × $49)

142,100

Treasury Stock (2,900 shares × $44)

127,600

Additional Paid-in Capital (difference)

14,500

18) Date May 18

May 31

Account Title Cash (25,000 shares × $40)

Debit Credit 1,000,000

Common Stock (25,000 shares × $1)

25,000

Additional Paid-in Capital (difference) (Issue common stock above par)

975,000

Treasury Stock (5,000 shares × $45) Cash

225,000 225,000

(Purchase treasury stock)

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July 1

Dividends (120,000 shares × $1)

120,000

Dividends Payable

120,000

(Declare cash dividends) July 31

Dividends Payable (120,000 shares × $1) Cash

120,000 120,000

(Pay cash dividends) August 10

Cash (2,500 shares × $46)

115,000

Treasury Stock (2,500 shares × $45)

112,500

Additional Paid-in Capital (difference)

2,500

19) Account Title Cash (1,000 shares × $18)

Debit 18,000

Credit

Preferred Stock (1,000 shares × $16)

16,000

Additional Paid-in Capital (difference)

2,000

(Issue preferred stock above par)

20) Account Title Cash (1,000 shares × $22)

Debit 22,000

Credit

Preferred Stock (1,000 shares × $20)

20,000

Additional Paid-in Capital (difference)

2,000

(Issue preferred stock above par)

21) Date April 1

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Account Title Dividends (6,000 shares × $5)

Debit 30,000

Credit

Dividends Payable

30,000

(Declare cash dividends) April 15

No Entry

April 30

Dividends Payable (6,000 shares × $5) Cash

30,000 30,000

(Pay cash dividends)

22) Date April 1

Account Title Dividends (5,000 shares × $2)

Debit 10,000

Dividends Payable

Credit

10,000

(Declare cash dividends) April 15

No Entry

April 30

Dividends Payable (5,000 shares × $2) Cash

10,000 10,000

(Pay cash dividends)

23) Date May 15

Account Title Dividends (200,000 shares × $0.12)

Debit 24,000

Dividends Payable

Credit

24,000

(Declare cash dividends) May 31

No Entry

June 10

Dividends Payable (200,000 shares × $0.12) Cash

24,000 24,000

(Pay cash dividends)

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24) Date May 15

Account Title Dividends (200,000 shares × $0.15)

Debit 30,000

Dividends Payable

Credit

30,000

(Declare cash dividends) May 31

No Entry

June 10

Dividends Payable (200,000 shares × $0.15) Cash

30,000 30,000

(Pay cash dividends)

25) Date March 31

Account Title Stock Dividends (400,000 shares × $0.02) Common Stock

Debit 8,000

Credit

8,000

(Distribute 100% (large) stock dividend)

26) Date March 31

Account Title Stock Dividends (100,000 shares × $0.01) Common Stock

Debit 1,000

Credit

1,000

(Distribute 100% (large) stock dividend)

27) Transaction

Issue common stock Issue preferred stock Purchase treasury stock Sale of treasury stock

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Total Assets

Total Liabilities

+ + − +

NE NE NE NE

Total Stockholders' Equity + + − + 34

28) Transaction

Total Assets

Total Liabilities

+ + − + NE − NE NE

NE NE NE NE + − NE NE

Issue common stock Issue preferred stock Purchase treasury stock Sell treasury stock Declare cash dividend Pay cash dividend 100% stock dividend 2-for-1 stock split

Total Stockholders' Equity + + − + − NE NE NE

29) PROM NIGHT FORMAL WEAR Balance Sheet (Stockholders' Equity Section) December 31, 2024 Stockholders' equity: Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Treasury stock, 50,000 shares

$ 2,700,000 24,000,000 26,700,000 14,000,000 (1,050,000)

Total stockholders' equity

$ 39,650,000

30) PROM NIGHT FORMAL WEAR Balance Sheet (Stockholders' Equity Section) December 31, 2024 Stockholders' equity: Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Treasury stock, 50,000 shares Total stockholders' equity

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$ 2,000,000 22,000,000 24,000,000 15,000,000 (1,250,000) $ 37,750,000

31) DONNIE HILFIGER Balance Sheet (Stockholders' Equity Section) December 31, 2024 Stockholders' equity: Preferred stock Common stock Additional paid-in capital Total paid-in capital Retained earnings Treasury stock

$ 1,200,000 250,000 3,000,000 4,450,000 1,800,000 (375,000)

Total stockholders' equity

$ 5,875,000

32) DONNIE HILFIGER Balance Sheet (Stockholders' Equity Section) December 31, 2024 Stockholders' equity: Preferred stock Common stock Additional paid-in capital Total paid-in capital Retained earnings Treasury stock Total stockholders' equity

$ 1,200,000 350,000 3,150,000 4,700,000 1,675,000 (375,000) $ 6,000,000

33)

Balance, January 1

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FORMAL FOOTWEAR Statement of Stockholders' Equity For the Year Ended December 31, 2024 Common Additional Retained Stock Paid-in Earnings Capital $ 500,000 $ 8,200,000 $ 2,400,000

Total Stockholders' Equity $ 11,100,000

Issue common stock Cash dividends

50,000

550,000

600,000 (330,000)

(330,000)

900,000

$ 2,970,000

$ 12,270,000

Net income Balance, December 31

$ 550,000

$ 8,750,000

34)

Balance, January 1 Issue common stock Purchase treasury stock Cash dividends Resell treasury stock Net income Balance, December 31

COURT CASUALS Statement of Stockholders' Equity For the Year Ended December 31, 2024 Common Additional Retained Treasury Stock Paid-in Earnings Stock Capital $ $ $ $ 0 80,000 3,900,000 1,000,000 21,000 819,000

(120,000)

(196,000) 32,500

$ 4,751,500

100,000

$ 1,604,000

840,000

(120,000)

(196,000)

800,000 $ 101,000

Total Stockholders' Equity $ 4,980,000

132,500

800,000 $(20,000)

$ 6,476,500

35) COURT CASUALS Statement of Stockholders' Equity For the Year Ended December 31, 2024 Common Additional Retained Treasury Stock Paid-in Earnings Stock Capital

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Total Stockholders' Equity

Balance, $ January 1 100,000 Issue 25,000 common stock Purchase treasury stock Cash dividends Resell treasury stock Net income

$ 4,100,000 975,000

Balance, December 31

$ 5,082,500

$ 3,000,000

$ 0

1,000,000

(225,000)

(120,000)

(225,000)

(120,000)

7,500

$ 125,000

$ 7,200,000

112,500

120,000

800,000

$ 3,680,000

$(112,500) $ 8,775,000

36) Net Income $950

÷ ÷

Average Stockholders' Equity ($3,560 + $4,180) / 2

= Return on Equity = 24.5%

37) Net Income

Average Stockholders' Equity

$ 875

($3,567 + $4,102)/2

Return on Equity 22.8%

38)1. Net Income $16,200

÷ ÷

Average Stockholders' Equity ($244,150 + $221,450)/2

= =

Return on Equity 7.0% (rounded)

2. Dividends Per Share $4,620/47,000

÷ ÷

Stock Price $5.40

= =

Dividend Yield 1.8% (rounded)

3. Net Income

$16,200

Shares Outstanding 47,000

Earnings Per Share

$0.34 (rounded)

4. Version 1

Stock Price $5.40

÷ ÷

Earnings Per Share ($16,200/47,000)

= =

÷ ÷

Average Stockholders' Equity ($235,153 + $221,457)/2

Price-Earnings Ratio 15.7 (rounded)

39)1. Net Income $16,012

= =

Return on Equity 7.0% (rounded)

2. Dividends Per Share $4,087/45,000

÷ ÷

Stock Price $5.40

= =

Dividend Yield 1.7% (rounded)

3. Net Income

$16,012

Shares Outstanding 45,000

Earnings Per Share

$0.36 (rounded)

4. Stock Price $5.40

Version 1

÷ ÷

Earnings Per Share ($16,012/45,000)

= =

Price-Earnings Ratio 15.2 (rounded)

CHAPTER 10 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A company’s assets arise from one of two forms of financing: debt financing or equity financing. ⊚ true ⊚ false

Articles of incorporation are sometimes called the corporate charter. ⊚ ⊚

true false

Angel investors are investors that focus on companies at or near bankruptcy. ⊚ true ⊚ false

4) A corporation is an entity that is (1) legally separate from its owners and (2) not required to pay its own income taxes. ⊚ ⊚

true false

5) All publicly held corporations in the United States are regulated by the Securities and Exchange Commission. ⊚ true ⊚ false

6) Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. ⊚ true ⊚ false

7) Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred, over and beyond the investment they have made. Version 1

⊚ ⊚

true false

8) A corporation has limited liability and attracting outside investment is easier relative to sole proprietorships and partnerships. ⊚ true ⊚ false

9) A corporation has lower taxes and less paperwork relative to sole proprietorships and partnerships. ⊚ true ⊚ false

10) An S corporation allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership. ⊚ true ⊚ false

11)

Authorized stock is the number of shares that have been sold to investors. ⊚ true ⊚ false

12)

Outstanding stock is the number of shares held by investors. ⊚ true ⊚ false

13) Par value is the legal capital per share of stock that's assigned when the corporation is first established. ⊚ true ⊚ false

14)

Par value has a direct relationship to the market value of the common stock.

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⊚ ⊚

true false

15) A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received for the issuance of stock. ⊚ true ⊚ false

16) The number of shares outstanding is equal to the number of shares issued by the company minus the number of the company’s own shares that it has purchased. ⊚ true ⊚ false

17) In the event a corporation is dissolved, common stockholders receive preference over preferred stockholders in the distribution of assets. ⊚ true ⊚ false

18) Convertible preferred stock allows the stockholder to convert shares of preferred stock into common stock at a specified conversion ratio. ⊚ true ⊚ false

19)

Cumulative preferred stock means that dividends accumulate interest during the year. ⊚ true ⊚ false

20) We usually record preferred stock as equity and report it in the stockholders' equity section of the balance sheet just above common stock. ⊚ true ⊚ false

21)

Treasury stock is the purchase of a company's own issued stock.

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⊚ ⊚

true false

22) If a company purchases shares of another company, it records this transaction as treasury stock. ⊚ true ⊚ false

23) Treasury stock purchases reduce the number of shares outstanding, thereby increasing earnings per share. ⊚ true ⊚ false

24)

We record treasury stock at the cost of the shares acquired. ⊚ true ⊚ false

25) Treasury stock is a contra-equity account because treasury stock increases total stockholders' equity. ⊚ true ⊚ false

26) When we resell treasury stock, we report the difference between its cost and the cash received as an increase or a decrease in additional paid-in capital. ⊚ true ⊚ false

27) Retained earnings represent the earnings of the corporation that have not been distributed as dividends to stockholders. ⊚ true ⊚ false

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28) Retained earnings equals net income for the current period minus dividends for the current period. ⊚ ⊚

true false

29) If a company has expenses that are more than revenues, the net loss decreases retained earnings. ⊚ true ⊚ false

30)

Dividends are paid on all shares issued by the company including treasury stock. ⊚ true ⊚ false

31) Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend. ⊚ true ⊚ false

32) Small stock dividends are recorded by debiting Stock Dividends for the par value per share. ⊚ true ⊚ false

33) No journal entry is made to record a stock split unless it is treated similar to a large stock dividend. ⊚ true ⊚ false

34) A stock split has no effect on the total of any account in stockholders' equity unless it is treated similar to a large stock dividend. ⊚ true ⊚ false

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35)

Common stock is listed before preferred stock in the balance sheet. ⊚ true ⊚ false

36) We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock balance by the number of shares purchased. ⊚ true ⊚ false

37) year.

The statement of stockholders' equity shows how each equity account changed during the ⊚ ⊚

true false

38) The stockholders' equity section of the balance sheet shows how each equity account changed during the year. ⊚ true ⊚ false

39) The return on equity measures the ability of company management to generate profits from the resources provided by owners. ⊚ true ⊚ false

40) We compute the return on equity ratio by dividing net income by ending stockholders' equity. ⊚ true ⊚ false

41) Earnings per share (EPS) measures the net income earned per share of common stock outstanding.

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⊚ ⊚

true false

42) We calculate earnings per share as net income divided by the average shares outstanding during the period. ⊚ true ⊚ false

43)

Earnings per share is useful in comparing earnings performance across companies. ⊚ true ⊚ false

44) We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 45) Which of the following accounts is not reported in the stockholders' equity section of the balance sheet? A) Treasury Stock B) Common Stock C) Sales Revenue D) Retained Earnings

46)

Which of the following is a disadvantage of an S corporation? A) Double taxation B) Liability C) Restrictions on number of stockholders D) Inability to transfer ownership

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47) Which of the following stages of equity financing comes last in the traditional order of progression? A) Investment by friends and family of the founders B) Investment by the founders of the business C) Initial public offering (IPO) D) Outside investment by "angel" investors and venture capital firms

48) Which of the following stages of equity financing comes first in the traditional order of progression? A) Investment by friends and family of the founders. B) Initial public offering (IPO) C) Investment by the founders of the business D) Outside investment by "angel" investors and venture capital firms.

49) a:

In terms of total sales, assets, and earnings, the dominant form of business organization is

A) Sole proprietorship. B) Partnership. C) Corporation. D) Limited liability company (LLC).

50)

Common stockholders usually have all of the following rights except: A) To receive dividends when declared. B) To share in the distribution of assets. C) To elect board of directors. D) To participate in the day-to-day operations.

51)

All publicly held corporations are regulated by what government organization?

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A) The Financial Accounting Standards Board B) The Commission on Accounting Procedures C) The Accounting Principles Board D) The Securities and Exchange Commission

52) Which of the following is a reason that a corporation would prefer to issue stock instead of bonds? A) Dividend payments can be deducted for income tax purposes but interest payments cannot. B) Expansion is accomplished without surrendering ownership control. C) The risk of going bankrupt is less. D) All of the other answer choices are correct.

53)

The articles of incorporation describe: A) The nature of the firm’s business activities. B) The shares of stock to be issued. C) The initial board of directors. D) All of the other answer choices are correct.

54)

Advantages of the corporate form of business include which of the following?

I. Double taxation II. Ability to raise capital III. Ability to transfer ownership IV. More paperwork V. Limited liability A) II B) II., III., V C) I., II., III D) II., IV., V

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55)

Which of the following statements regarding the corporate form of business is correct?

A) The disadvantages are that generating capital is difficult and that owners have limited liability. B) Disadvantages are that the business is subject to government regulations and double taxation on its income. C) One disadvantage is that ownership is easy to transfer. D) All of the other answer choices are correct.

56)

The disadvantages of the corporate form of business include: A) Ability to transfer ownership. B) Additional taxes. C) Limited liability. D) Ability to raise capital.

57)

The correct order from the smallest number of shares to the largest number of shares is: A) Authorized, issued, and outstanding. B) Outstanding, issued, and authorized. C) Issued, outstanding, and authorized. D) Issued, authorized, and outstanding.

58)

Authorized common stock refers to the total number of shares: A) Outstanding. B) Issued. C) Issued and outstanding. D) That can be issued.

59)

Issued stock refers to the number of shares:

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A) Outstanding plus treasury shares. B) Authorized. C) In the hands of stockholders. D) That may be issued under state law.

60)

Outstanding common stock refers to the total number of shares: A) Issued. B) Issued plus treasury stock. C) Issued less treasury stock. D) Authorized.

61)

Outstanding common stock specifically refers to stock: A) That is performing well. B) That has been authorized for issuance. C) Issued plus treasury stock. D) In the hands of stockholders.

62)

The par value of shares issued is normally recorded in the: A) Additional Paid-in Capital account. B) Common Stock account. C) Retained Earnings account. D) Treasury Stock account.

63)

The par value of common stock represents the:

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A) Amount received when the stock was issued. B) Liquidation value of a share. C) Market value of a share of stock. D) Legal capital per share of stock assigned when the corporation was first established.

64) If a company issues 1,000 shares of $1 par value common stock for $20 per share, what would be the effect on the balance sheet? A) Increase assets and increase liabilities B) Increase assets and increase revenue C) Increase assets and increase stockholders' equity D) Increase assets and decrease stockholders' equity

65) If a company issues 1,000 shares of $1 par value common stock for $20 per share, which of the following accounts would be recorded? A) Treasury Stock B) Dividends C) Additional Paid-in Capital D) Retained Earnings

66) When a company issues 30,000 shares of $2 par value common stock for $20 per share, the journal entry for this issuance would include a: A) Debit to Additional Paid-in Capital for $60,000. B) Credit to Additional Paid-in Capital for $540,000. C) Debit to Cash for $60,000. D) Credit to Common Stock for $600,000.

67) When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include a:

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A) Debit to Cash for $25,000. B) Debit to Additional Paid-in Capital for $25,000. C) Credit to Common Stock for $250,000. D) Credit to Additional Paid-in Capital for $225,000.

68) When a company issues 25,000 shares of $1 par value common stock for $10 per share, this issuance would be recorded as a(n): A) Increase to Cash for $25,000. B) Decrease to Additional Paid-in Capital for $25,000. C) Increase to Additional Paid-in Capital for $250,000. D) Increase to Common Stock for $25,000.

69) A company issued 20,000 shares of $1 par value common stock for $80,000. The issuance would have which of the following effects? A) Increase the Common Stock account for $80,000. B) Decrease the Additional Paid-In Capital account for $60,000. C) Increase the Additional Paid-In Capital account for $80,000. D) Increase the Common Stock account for $20,000.

70) A company issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance? A) Credit Common Stock $300,000 B) Credit Cash $300,000 C) Credit Common Stock $15,000 D) Debit Additional Paid-In Capital $285,000

71) A company issued 9,000 shares of $3 par value stock for $15 per share. What is true about the journal entry to record the issuance? Version 1

A) Credit Additional Paid-In Capital $108,000 B) Credit Additional Paid-in Capital $27,000 C) Debit Common Stock $27,000 D) Credit Common Stock $135,000

72) A company issued 10,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance? A) Debit Common Stock $10,000 B) Credit Cash $50,000 C) Credit Common Stock $50,000 D) Credit Additional Paid-In Capital $40,000

73) A company issues 100 shares of its $1 par value common stock for $15 per share. The issuance would NOT have which of the following effects? A) Increase the Cash account for $1,500. B) Increase the Additional Paid-In Capital account for $1,400. C) Increase the Common Stock account for $100. D) All of the other answer choices are effects of issuing common stock.

74) Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to: A) Payment of dividends and voting rights. B) Higher par value and payment of dividends. C) Distribution of assets if the corporation is dissolved and higher par value. D) Distribution of assets if the corporation is dissolved and payment of dividends.

75)

Preferred stock:

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A) Is always recorded as a liability. B) Is always recorded as part of stockholders' equity. C) Can have features of both liabilities and stockholders' equity. D) Is not included in either liabilities or stockholders' equity.

76)

Which of the following has the highest expected return to the investor? A) Common stock B) Preferred stock C) Bonds D) All of the answer choices have similar expected returns.

77)

Which of the following has the lowest expected return to the investor? A) Bonds B) Preferred stock C) Common stock D) All of the answer choices have similar expected returns.

78)

Which of the following is the most likely to have voting rights? A) Common stock B) Preferred Stock C) Bonds D) All of the answer choices have similar voting rights.

79) Which of the following financing alternatives has the highest preference for dividends/interest payments?

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A) Common stock B) Preferred stock C) Bonds D) All of the other answer choices have equal preference.

80)

Which of the following is not a potential feature of preferred stock? A) Convertible B) Redeemable C) Cumulative D) All of the answer choices are potential features of preferred stock.

81) A company issued 900 shares of $3 par value preferred stock for $4 per share. What is true about the journal entry to record the issuance? A) Credit Cash $3,600 B) Credit Additional Paid-In Capital $900 C) Debit Preferred Stock $3,600 D) Credit Preferred Stock $3,600

82) A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance? A) Debit Preferred Stock $5,000 B) Credit Cash $5,000 C) Credit Preferred Stock $5,000 D) Credit Additional Paid-In Capital $4,000

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83) Surf's Up, Incorporated issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2023. All remaining shares are common stock. The company was not able to pay dividends in 2023, but plans to pay dividends of $18,000 in 2024. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2024? A) $6,000 to preferred stockholders and $12,000 to common stockholders B) $18,000 to preferred stockholders and $0 to common stockholders C) $12,000 to preferred stockholders and $6,000 to common stockholders D) $9,000 to preferred stockholders and $9,000 to common stockholders

84) Surf's Up, Incorporated issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2023. All remaining shares are common stock. The company was not able to pay dividends in 2023, but plans to pay dividends of $18,000 in 2024. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2024? A) $6,000 to preferred stockholders and $12,000 to common stockholders B) $18,000 to preferred stockholders and $0 to common stockholders C) $12,000 to preferred stockholders and $6,000 to common stockholders D) $9,000 to preferred stockholders and $9,000 to common stockholders

85) California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2023. All remaining shares are common stock. The company was not able to pay dividends in 2023, but plans to pay dividends of $100,000 in 2024. Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2024? A) $40,000 to preferred stockholders and $60,000 to common stockholders B) $80,000 to preferred stockholders and $20,000 to common stockholders C) $20,000 to preferred stockholders and $80,000 to common stockholders D) $100,000 to preferred stockholders and $0 to common stockholders

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86) California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2023. All remaining shares are common stock. The company was not able to pay dividends in 2023, but plans to pay dividends of $100,000 in 2024. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2024? A) $40,000 to preferred stockholders and $60,000 to common stockholders B) $80,000 to preferred stockholders and $20,000 to common stockholders C) $20,000 to preferred stockholders and $80,000 to common stockholders D) $100,000 to preferred stockholders and $0 to common stockholders

87)

Treasury Stock is normally reported as a(n): A) Reduction of total stockholders' equity. B) Asset account. C) Liability account. D) Expense account.

88)

When treasury stock is resold at a price above cost: A) A gain is reported. B) A loss is reported. C) A revenue account is increased. D) Additional Paid-in Capital is increased.

89)

When treasury stock is acquired, what is the effect on total stockholders' equity? A) Decrease B) Increase C) No effect D) Cannot determine from the given information

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90) When an investment is made in another corporation’s common stock, what is the effect on total stockholders' equity? A) Decrease B) Increase C) No effect D) Cannot determine from the given information

91)

When treasury stock is acquired, what is the effect on assets and stockholders' equity? A) Assets and stockholders' equity increase. B) Assets and stockholders' equity decrease. C) Assets increase and stockholders' equity decrease. D) Assets decrease and stockholders' equity increase.

92)

The Treasury Stock account: A) Normally is reported in the income statement. B) Decreases stockholders' equity. C) Is recorded as an investment. D) Increases stockholders' equity.

93)

Which of the following statements about treasury stock transactions is true?

A) When a company purchases its own stocks, the stock is recorded as an asset equal to the cost to acquire the shares. B) Only losses on the sale of treasury stock are recorded in the income statement. C) Stockholders' equity is reduced when treasury stock is acquired. D) Gains and losses on the sale of treasury stock are recorded in the income statement.

94)

Which of the following is true regarding the accounting for treasury stock?

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A) Treasury stock is reported on the balance sheet in the equity section. B) The purchase and sale of treasury stock has no impact on the income statement. C) Treasury stock represents a negative equity account. D) All of the other answer choices are correct.

95)

What would be the impact on the balance sheet when a company acquires treasury stock? A) Increase assets and increase stockholders' equity B) Decrease assets and increase stockholders' equity C) Decrease assets and decrease stockholders' equity D) No effect on the balance sheet

96) The corporation's own stock that has been issued and then bought back by the company is referred to as: A) Preferred Stock. B) Authorized Stock. C) Treasury Stock. D) Common Stock.

97)

Why would a corporation purchase its own stock? A) To distribute surplus cash without paying dividends. B) To boost earnings per share. C) To satisfy employee stock ownership plans. D) All of the other answer choices are correct.

98)

The purchase of treasury stock can boost earnings per share by:

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A) Increasing the number of shares outstanding. B) Increasing profits. C) Reducing the number of shares outstanding. D) Decreasing the company’s obligation to pay dividends.

99) A company currently has 200,000 shares issued and 190,000 shares outstanding. If the company purchases 20,000 shares of treasury stock, what is the number of shares that will then be outstanding? A) 170,000 B) 220,000 C) 210,000 D) 180,000

100) When treasury stock is sold for more than the company originally paid to purchase the shares, the difference: A) Increases net income. B) Increases stockholders' equity. C) Has no effect on net income or stockholders' equity. D) Decreases net income and decreases stockholders' equity.

101) Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2024, Crossroads bought back 20,000 shares of its own stock at $30 per share. On July 23, 2024, Crossroads resold 10,000 shares at $28 per share. What was the net effect on the balance sheet as a result of the two treasury stock transactions? A) Increase in assets and decrease in stockholders' equity B) Decrease in assets and increase in stockholders' equity C) Increase in assets and increase in stockholders' equity D) Decrease in assets and decrease in stockholders' equity

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102) On December 2, Coley Corporation acquired 1,900 shares of its $4 par value common stock for $25 each. On December 20, Coley Corporation resold 1,500 shares for $11 each. Which of the following is correct regarding the journal entry for the resold shares? A) Credit Treasury Stock $37,500 B) Credit Additional Paid-in Capital $10,500 C) Debit Cash $20,900 D) Credit Treasury Stock $16,500

103) On December 2, Coley Corporation acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corporation resold 400 shares for $15 each. Which of the following is correct regarding the journal entry for the resold shares? A) Debit Cash $15,000 B) Credit Treasury Stock $10,800 C) Credit Additional Paid-in Capital $5,200 D) Credit Treasury Stock $6,000

104) On December 2, Coley Corporation acquired 4,000 shares of its $2 par value common stock for $22 each. On December 20, Coley Corporation resold 1,500 shares for $24 each. Which of the following is correct regarding the effect of the reselling of shares on the balance sheet? A) Stockholders' Equity increases B) Expenses increase C) Assets decrease D) Liabilities decrease

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105) On December 2, Coley Corporation acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corporation resold 400 shares for $30 each. Which of the following is correct regarding the effect of the reselling of shares on the balance sheet? A) Assets decrease B) Liabilities decrease C) Expenses increase D) Stockholders' Equity increases

106) A company acquires 1,000 shares of its own $1 par common stock for $15 per share. This purchase would be recorded with a: A) Credit to Treasury Stock for $1,000. B) Debit to Additional Paid-in Capital for $14,000. C) Credit to Treasury Stock for $15,000. D) Debit to Treasury Stock for $15,000.

107) A company resells 400 shares of its own common stock for $20 per share. The company had acquired these shares two months before for $15 per share. The resale of this stock would be recorded with a: A) Credit to Treasury Stock for $8,000. B) Debit to Additional Paid-in Capital for $2,000. C) Debit to Common Stock for $8,000. D) Credit to Additional Paid-in Capital for $2,000.

108) On February 22, Brett Corporation acquired 190 shares of its $3 par value common stock for $23 each. On March 15, the company resold 66 shares for $26 each. What is true of the entry for reselling the shares?

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A) Credit Treasury Stock $1,716 B) Debit Treasury Stock $1,518 C) Credit Cash $1,518 D) Credit Additional Paid-in Capital $198

109) On February 22, Brett Corporation acquired 200 shares of its $5 par value common stock for $25 each. On March 15, the company resold 70 shares for $30 each. What is true of the entry for reselling the shares? A) Credit Cash $1,750 B) Credit Additional Paid-in Capital $350 C) Debit Treasury Stock $1,750 D) Credit Treasury Stock $2,100

110)

Retained Earnings represent a company's: A) Net income less dividends since the company first began operations. B) Undistributed net assets. C) Extra paid-in capital. D) Undistributed cash.

111)

The Retained Earnings balance reported in the balance sheet typically isnot affected by: A) Net income. B) Net loss. C) Dividends paid. D) Stock splits.

112)

The Retained Earnings balance reported in the balance sheet typically is affected by:

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A) Net income. B) Net loss. C) Dividends paid. D) All of the other answer choices are correct.

113)

The balance of Retained Earning at the end of the year represents: A) Current year's profits less payments to owners. B) Total earnings less payments to owners over the life of the company. C) Total contributions from owners less withdrawals over the life of the company. D) Total earnings over the life of the company.

114)

The Retained Earnings account normally: A) Has a debit balance. B) Decreases stockholders' equity. C) Is equal to the balance in the Cash account. D) Increases stockholders' equity.

115)

Cash dividends are recorded on the: A) Declaration date, record date, and payment date. B) Record date and payment date. C) Declaration date and payment date. D) Declaration date and record date.

116) On June 1, the board of directors declares a cash dividend to be paid on June 30 to stockholders of record on June 15. On which date would the company record the Dividends Payable account?

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A) June 30 B) June 15 C) June 1 D) The Dividends Payable account is never recorded.

117) The board of directors of Capstone Incorporated declared a $0.60 per share cash dividend on its $3 par common stock. On the date of declaration, there were 48,000 shares authorized, 21,000 shares issued, and 5,000 shares held as treasury stock. What is the entry when the dividends are declared? Transection A. A.

Account Title Dividends

Debit 9,600

Dividends Payable B.

Dividends

9,600 9,600

Cash C.

Dividends

9,600 28,800

Dividends Payable D.

Dividends Cash

Credit

28,800 12,600 12,600

A) Option C B) Option B C) Option A D) Option D

118) The board of directors of Capstone Incorporated declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry when the dividends are declared?

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Transection A. A.

Account Title Dividends

Debit 9,000

Dividends Payable B.

Dividends

9,000 9,000

Cash C.

Dividends

9,000 12,000

Dividends Payable D.

Dividends

Credit

12,000 12,000

Cash

12,000

A) Option A B) Option B C) Option C D) Option D

119) The board of directors of Capstone Incorporated declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. Assuming the dividends were declared on June 1, what is the entry on June 30 to record the payment of cash dividends? Transection A. A.

Account Title Dividends

Debit 9,000

Dividends Payable B.

Dividends Payable

9,000 9,000

Cash C.

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Dividends Dividends Payable

Credit

9,000 12,000 12,000

D. D.

Dividends Payable

12,000

Cash

12,000

A) Option A B) Option B C) Option C D) Option D

120) The following amounts represent totals from the first three years of operations. Calculate the balance of Retained Earnings at the end of 2024.

Net Income (loss) Net Cash Flows Dividends Issuance of Stock

2022

2023

2024

$1,200 $500 $200 $2,000

$(500) $300 $0 $0

$2,300 $2,800 $200 $0

A) $2,600 B) $4,600 C) $3,100 D) $3,500

121) The ending Retained Earnings balance of Lambert Incorporated increased by $1.4 million from the beginning of the year. The company's net income earned during the year is $4.2 million. What is the amount of dividends Lambert Incorporated declared and paid? A) $4.2 million B) $5.6 million C) $2.8 million D) $1.4 million

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122) The ending Retained Earnings balance of Lambert Incorporated increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Incorporated declared and paid? A) $1.5 million B) $3.5 million C) $2.0 million D) $5.0 million

123) Over the first four years of the company's life, the company earned the following net income (loss): $6,000; $4,000; $10,000, and $(3,000). If the company's ending retained earnings is $13,000 after year 4, what is the average amount of dividends paid per year? A) $1,000 B) $4,000 C) $17,000 D) $0

124) Over the first four years of the company's life, the company earned the following net income (loss): $6,000; $3,000; $6,000, and $(2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year? A) $3,000 B) $7,000 C) $0 D) $750

125) Fashion, Incorporated had a Retained Earnings balance of $17,000 at December 31, 2024. The company had an average income of $7,000 over the next 5 years, and an ending Retained Earnings balance of $12,000 at December 31, 2027. What was the total amount of dividends paid over the last five years?

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A) $41,500 B) $40,000 C) $39,250 D) $43,000

126) Fashion, Incorporated had a Retained Earnings balance of $12,000 at December 31, 2024. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2027. What was the total amount of dividends paid over the last three years? A) $4,500 B) $6,500 C) $19,500 D) $27,000

127)

Given the information below, what was the amount of Dividends in the current period?

Beginning Retained Earnings Increase in Cash Ending Retained Earnings Issuance of Common Stock Net Income

$150,000 40,000 200,000 50,000 160,000

A) $90,000 B) $60,000 C) $110,000 D) $150,000

128)

A noncash asset that is distributed to stockholders is referred to as a: A) Treasury dividend. B) Property dividend. C) Preferred dividend. D) Real dividend.

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129)

Both cash dividends and stock dividends reduce: A) Total assets. B) Total liabilities. C) Total stockholders' equity. D) Retained earnings.

130)

The declaration and issuance of a stock dividend: A) Does not change total assets, liabilities, or total stockholders' equity. B) Decreases total stockholders' equity and increases common stock. C) Decreases assets and decreases total stockholders' equity. D) Does not change retained earnings or paid-in capital.

131) The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit Stock Dividends for an amount equal to the: A) Book value of the shares issued. B) Par value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements.

132) The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should credit Common Stock for an amount equal to the: A) Book value of the shares issued. B) Par value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements.

133) The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit Stock Dividends for an amount equal to the:

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A) Book value of the shares issued. B) Par or stated value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements.

134)

The entry to record a large stock dividend would include a: A) Debit to Additional Paid-in Capital. B) Debit to Common Stock. C) Debit to Stock Dividends. D) Credit to Stock Dividends.

135) The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should credit Common Stock for an amount equal to the: A) Book value of the shares issued. B) Par or stated value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements.

136)

A feature common to both stock splits and stock dividends is: A) That there is no effect on total stockholders' equity. B) A reduction in the invested capital of a corporation. C) A transfer to earned capital of a corporation. D) An increase in total liabilities of a corporation.

137)

Large stock dividends and stock splits are issued primarily to:

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A) Lower the trading price of the stock per share. B) Increase the number of authorized shares. C) Increase legal capital. D) Increase the number of outstanding shares.

138)

The Common Stock account in a company's balance sheet is measured as: A) The number of common shares outstanding × the stock's par value per share. B) The number of common shares outstanding × the stock's current market value per

share. C) The number of common shares issued × the stock's par value per share. D) The number of common shares issued × the stock's current market value per share.

139)

The stockholders' equity section in the balance sheet shows: A) The ending balance in each stockholders' equity account. B) How each equity account changed over time. C) The average balance in each stockholders' equity account. D) More information than the statement of stockholders' equity.

140)

The statement of stockholders' equity shows: A) Only the ending balance in each stockholders' equity account. B) How each equity account changed over time. C) Only the beginning balance in each stockholders' equity account. D) Less information than the stockholders' equity section in the balance sheet.

141)

The statement of stockholders' equity shows:

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A) Only the ending balance in each stockholders' equity account. B) More information than the stockholders' equity section in the balance sheet. C) Only the beginning balance in each stockholders' equity account. D) Less information than the stockholders' equity section in the balance sheet.

142) How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity? A) The stockholders' equity section is more detailed than the statement of stockholders' equity. B) The stockholders' equity section shows balances at a point in time; whereas, the statement of stockholders' equity shows activity over a period of time. C) The stockholders' equity section shows activity over a period of time; whereas, the statement of stockholders' equity is at a point time. D) There are no differences between them.

143) Clothing Emporium was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Clothing Emporium had the following transactions relating to stockholders' equity: 1.Issued 30,000 shares of common stock at $7 per share 2.Issued 20,000 shares of common stock at $8 per share 3.Reported a net income of $100,000 4.Paid dividends of $50,000 What is the total amount recorded in the Common Stock account at the end of 2024? A) $420,000 B) $370,000 C) $470,000 D) $250,000

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144) Clothing Emporium was organized on January 1, 2024. The firm was authorized to issue 160,000 shares of $7 par value common stock. During 2024, Clothing Emporium had the following transactions relating to stockholders' equity: 1.Issued 48,000 shares of common stock at $9 per share 2.Issued 32,000 shares of common stock at $10 per share 3.Reported a net income of $160,000 4.Paid dividends of $80,000 What is total paid-in capital at the end of 2024? A) $912,000 B) $672,000 C) $832,000 D) $752,000

145) Clothing Emporium was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Clothing Emporium had the following transactions relating to stockholders' equity: 1.Issued 30,000 shares of common stock at $7 per share 2.Issued 20,000 shares of common stock at $8 per share 3.Reported a net income of $100,000 4.Paid dividends of $50,000 What is total paid-in capital at the end of 2024? A) $420,000 B) $370,000 C) $470,000 D) $320,000

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146) Clothing Emporium was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Clothing Emporium had the following transactions relating to stockholders' equity: 1.Issued 30,000 shares of common stock at $7 per share. 2.Issued 20,000 shares of common stock at $8 per share. 3.Reported a net income of $100,000. 4.Paid dividends of $50,000. What is the ending balance in the Retained Earnings account at the end of 2024? A) $50,000 B) $370,000 C) $420,000 D) $100,000

147) Clothing Emporium was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Clothing Emporium had the following transactions relating to stockholders' equity: 1.Issued 30,000 shares of common stock at $7 per share. 2.Issued 20,000 shares of common stock at $8 per share. 3.Reported a net income of $100,000. 4.Paid dividends of $50,000. What is the total stockholders' equity at the end of 2024? A) $420,000 B) $370,000 C) $470,000 D) $250,000

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148) Roberto Designers was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Roberto had the following transactions relating to stockholders' equity: 1.Issued 10,000 shares of common stock at $7 per share. 2.Issued 20,000 shares of common stock at $8 per share. 3.Reported a net income of $100,000. 4.Paid dividends of $50,000. 5.Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is the balance in the Treasury Stock account at the end of 2024? A) $160,000 B) $260,000 C) $30,000 D) $250,000

149) Roberto Designers was organized on January 1, 2024. The firm was authorized to issue 180,000 shares of $6 par value common stock. During 2024, Roberto had the following transactions relating to stockholders' equity: 1.Issued 18,000 shares of common stock at $8 per share. 2.Issued 36,000 shares of common stock at $9 per share. 3.Reported a net income of $180,000. 4.Paid dividends of $90,000. 5.Purchased 2,500 shares of treasury stock at $11 (part of the 36,000 shares issued at $9). What is total stockholders' equity at the end of 2024? A) $530,500 B) $1,178,500 C) $998,500 D) $566,500

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150) Roberto Designers was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Roberto had the following transactions relating to stockholders' equity: 1.Issued 10,000 shares of common stock at $7 per share. 2.Issued 20,000 shares of common stock at $8 per share. 3.Reported a net income of $100,000. 4.Paid dividends of $50,000. 5.Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total stockholders' equity at the end of 2024? A) $270,000 B) $300,000 C) $250,000 D) $200,000

151)

Why doesn't stockholders' equity equal the market value of equity?

A) Stockholders' equity usually does equal the market value of equity. B) Investors tend to incorrectly price the market value of equity. C) It's related to the use of historical cost to report many long-term assets and the expensing of value-generating costs such as research and development and advertising. D) It's due to incorrect entries prepared by accountants.

152) The balance sheet of California Clothing reports total equity of $600,000 and $700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $65,000 and $1,300,000, respectively. What is California Clothing's return on equity? A) 10% B) 20% C) 200% D) 5%

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153) Western Wear reports net income and sales for the year of $65,000 and $1,300,000, respectively. Return on equity is 10%. What is Western Wear's average Stockholders' Equity for the year? A) $650,000 B) $13,000,000 C) $682,500 D) 5%

154) The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear's net income for the year? A) $100,000 B) $130,000 C) $2,875,000 D) $115,000

155)

Dividend yield is calculated as: A) Dividends per share divided by the stock price. B) Net income divided by average stockholders' equity. C) The stock price divided by dividends per share. D) Dividends divided by stockholders' equity.

156) Beach Boards reports dividends per share of $1.40 and net income for the year of $150,000. The current stock price is $40.00. What is Beach Boards' dividend yield? A) 1.2% B) 26.7% C) 4.0% D) 3.5%

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157) Blaylock Industries reports dividends per share of $1.40 and net income for the year of $150,000. Dividend yield is 3.5%. What is Blaylock 's current stock price? A) $23.82 B) $15.00 C) $35.00 D) $40.00

158)

Financial information for Accessories Unlimited includes the following selected data:

Dividends (in millions) Shares outstanding (in millions) Stock price

$75 300 $20.00

What is the company's dividend yield? A) 1.25% B) 10.0% C) 5.0% D) 2.5%

159)

Financial information for Accessories Unlimited includes the following selected data:

Net income (in millions) Shares outstanding (in millions) Stock price

$150 300 $20.00

What is the company's earnings per share? A) $0.50 B) $0.25 C) $2.00 D) $0.05

160)

Financial information for Accessories Unlimited includes the following selected data:

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Net income (in millions) Shares outstanding (in millions) Stock price

$150 300 $20.00

What is the company's price-earnings ratio? A) 20.0 B) 40.0 C) 60.0 D) 80.0

161)

Return on equity is calculated as net income divided by: A) Average stockholders' equity. B) Ending stockholders' equity. C) Average market value of equity. D) Ending market value of equity.

162)

Earnings per share (EPS) is:

A) Useful in comparing earnings performance across companies. B) Useful in comparing earnings performance for the same company over time. C) Useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time. D) Not useful in comparing earnings performance across companies or in comparing earnings performance for the same company over time.

163)

Which of the following statements is not true regarding earnings per share?

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A) Earnings per share is useful in comparing earnings performance across companies at the same point in time. B) Earnings per share is useful in comparing earnings performance for the same company over time. C) Earnings per share is calculated as net income minus preferred stock dividends divided by the average common shares outstanding during the period. D) Earnings per share is forecasted by financial analysts.

164)

Financial information for Retro Designs includes the following selected data:

Net income (in millions) Preferred stock dividends (in millions) Average common shares outstanding (in millions) Stock price

$175 $25 250 $10.00

What is the company's earnings per share? A) $0.60 B) $0.70 C) $0.50 D) $0.05

165)

Financial information for Retro Designs includes the following selected data:

Net income (in millions) Preferred stock dividends (in millions) Average common shares outstanding (in millions) Stock price

$175 $25 250 $10.00

What is the company's price-earnings ratio?

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A) 14.3 B) 16.7 C) 5.7 D) 15.0

166)

The PE ratio:

A) Tends to be higher for growth stocks. B) Tends to be higher for value stocks. C) Indicates how a stock is trading in relation to cumulative earnings over the life of the company. D) Typically is less than 1.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 167) Corporations typically do not start raising capital by issuing stock to the general public. What are the common stages of equity financing leading to an initial public offering (IPO)?

168) Describe the primary advantages and disadvantages of a corporation in comparison to a sole proprietorship or partnership.

169)

Explain the difference between authorized, issued, and outstanding shares.

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170) Explain why preferred stock often is said to have a mixture of attributes somewhere between common stock and bonds.

171) Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities, and total stockholders' equity.

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Answer Key Test name: Chap 10_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. 4) FALSE A corporation is an entity that is legally separate from its owners and even pays its own income taxes. 5) TRUE 6) TRUE 7) TRUE 8) TRUE Two advantages of a corporation relative to sole proprietorships and partnerships are (1) limited liability and (2) the ability to raise capital and transfer ownership. 9) FALSE A corporation has higher taxes and more paperwork relative to sole proprietorships and partnerships. 10) TRUE 11) FALSE Authorized stock is the total number of shares available to sell, stated in the company’s articles of incorporation. Issued stock is the number of shares that have been sold to investors. 12) TRUE

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Issued stock is the number of shares that have been sold to investors. Outstanding stock is the number of shares held by investors. Issued stock includes treasury stock. Outstanding stock excludes treasury stock. 13) TRUE 14) FALSE Par value is the legal capital per share of stock that’s assigned when the corporation is first established. Par value has no relationship to the market value of the common stock. 15) TRUE 16) TRUE 17) FALSE Preferred stockholders received preference over common stockholders in the distribution of assets in the event the corporation is dissolved. 18) TRUE 19) FALSE Cumulative preferred stock means shares receive priority for future dividends, if dividends are not paid in a given year. 20) TRUE 21) TRUE 22) FALSE If a company purchases shares of another company, it records this transaction as an investment and not as treasury stock. 23) TRUE 24) TRUE 25) FALSE Treasury stock is a contra-equity account because treasury stock decreases total stockholders’ equity. 26) TRUE 27) TRUE 28) FALSE Version 1

Retained earnings is the amount of earnings the company has kept or retained—that is, the earnings not distributed in dividends to stockholders over the life of the company. 29) TRUE 30) FALSE Dividends are not paid on treasury shares purchased by the company. 31) TRUE 32) FALSE Small stock dividends are recorded by debiting Stock Dividends for the market value, rather than the par value, per share. 33) TRUE 34) TRUE 35) FALSE Preferred stock is listed before common stock in the balance sheet. 36) TRUE 37) TRUE 38) FALSE The stockholders’ equity section of the balance sheet presents the balance of each equity account at a point in time. The statement of stockholders’ equity shows how each account changes during the period. 39) TRUE 40) FALSE We compute the return on equity ratio by dividing net income by average stockholders’ equity. 41) TRUE 42) TRUE 43) FALSE

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Earnings per share is useful in comparing earnings performance for the same company over time. Earnings per share cannot be used to compare across companies because of differences in the number of shares outstanding among companies. 44) TRUE 45) C 46) C 47) C 48) C 49) C 50) D 51) D 52) C 53) D 54) B 55) B 56) B 57) B 58) D 59) A 60) C 61) D 62) B 63) D 64) C The journal entry would be: Account Title Cash

Debit 20,000

Credit

Common Stock

1,000

Additional Paid-in Capital

19,000

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65) C The journal entry would be: Account Title Cash

Debit 20,000

Credit

Common Stock

1,000

Additional Paid-in Capital

19,000

66) B 67) D 68) D The journal entry would be: Account Title Cash

Debit 250,000

Credit

Common Stock

25,000

Additional Paid-in Capital

225,000

69) D 70) C The journal entry would be: Account Title Cash

Debit 300,000

Credit

Common Stock

15,000

Additional Paid-in Capital

285,000

71) A The journal entry would be: Account Title Cash

Debit 135,000

Credit

Common Stock

27,000

Additional Paid-in Capital

108,000

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72) D The journal entry would be: Account Title Cash

Debit 50,000

Credit

Common Stock

10,000

Additional Paid-in Capital

40,000

73) D 74) D 75) C 76) A 77) A 78) A 79) C 80) D 81) B The journal entry would be: Account Title Cash

Debit 3,600

Preferred Stock

Credit

2,700

Additional Paid-in Capital

900

82) D The journal entry would be: Account Title Cash

Debit 5,000

Credit

Preferred Stock

1,000

Additional Paid-in Capital

4,000

83) C Preferred dividends in arrears from 2023

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$ 6,000

Preferred dividends for 2024 (1,000 shares × 6% × $100 par value) Remaining dividends to common stockholders Total dividends

6,000 6,000 $18,000

84) A Preferred dividends in arrears from 2023 are lost Preferred dividends for 2024 (1,000 shares × 6% × $100 par value) Remaining dividends to common stockholders

$ 0 6,000 12,000

Total dividends

$18,000

85) B Preferred dividends in arrears from 2023 Preferred dividends for 2024 (5,000 shares × 8% × $100 par value) Remaining dividends to common stockholders

$ 40,000 40,000

Total dividends

$100,000

20,000

86) A Preferred dividends in arrears from 2023 are lost Preferred dividends for 2024 (5,000 shares × 8% × $100 par value) Remaining dividends to common stockholders Total dividends

$ 0 40,000 60,000 $100,000

87) A 88) D 89) A 90) C 91) B 92) B 93) C

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Treasury stock is the purchase of a corporation’s own stock, and we record it as a reduction in stockholders’ equity. It is not an asset; a company cannot invest in itself. In other words, when a company buys back its own common stock that previously was issued, the treasury stock is recorded as a separate contra (or negative) equity account for the cost to acquire the shares. If a company resells its treasury stock for an amount greater or less than its original costs, no gain or loss is recorded in the income statement, as we would for the sale of an investment in another company, since the company is reselling its own stock. Instead, the difference is recorded as Additional Paid-In Capital. 94) D 95) C 96) C 97) D 98) C 99) A 100) B 101) D The journal entries would be: Date June 16 June 16 July 23 July 23 July 23

Account Title Treasury Stock

Debit 600,000

Cash

Credit

600,000

Cash (10,000 × $28)

280,000

Additional Paid-in Capital

20,000

Treasury Stock (10,000 × $30)

300,000

102) A The journal entry for the resold shares would be: Account Title Cash (1,500 × $11)

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Debit 16,500

Credit

Additional Paid-in Capital

21,000

Treasury Stock (1,500 × $25)

37,500

103) B The journal entry for the resold shares would be: Account Title Cash (400 × $15) Additional Paid-in Capital

Debit 6,000

Credit

4,800

Treasury Stock (400 × $27)

10,800

104) A The entry for the resale of shares would be: Account Title Cash (1,500 × $24)

Debit 36,000

Credit

Treasury Stock (1,500 × $22)

33,000

Additional Paid-in Capital

3,000

105) D The entry for the resale of shares would be: Account Title Cash (400 × $30)

Debit 12,000

Credit

Treasury Stock (400 × $27)

10,800

Additional Paid-in Capital

1,200

106) D The entry for the purchase of Treasury Stock would be: Account Title Treasury Stock

Debit 15,000

Cash

Credit

15,000

107) D The entry for the resale of the shares would be: Account Title

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Debit

Credit

Cash (400 × $20)

8,000

Treasury Stock (400 × $15)

6,000

Additional Paid-in Capital

2,000

108) D The entry to resell the shares would be: Account Title Cash (66 × $26)

Debit 1,716

Credit

Treasury Stock (66 × $23)

1,518

Additional Paid-in Capital

198

109) B The entry to resell the shares would be: Account Title Cash (70 × $30)

Debit 2,100

Credit

Treasury Stock (70 × $25)

1,750

Additional Paid-in Capital

350

110) A 111) D 112) D 113) B 114) D 115) C 116) C 117) C Account Title Dividends [(21,000 − 5,000) × $0.60]

Debit 9,600

Dividends Payable

Credit

9,600

118) A Account Title

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Debit

Credit

Dividends [(20,000 − 5,000) × $0.60]

9,000

Dividends Payable

9,000

119) B Account Title Dividends Payable [(20,000 − 5,000) × $0.60] Cash

Debit 9,000

Credit

9,000

120) A ($1,200 − $500 + $2,300) − $200 − $200 = $2,600. 121) C Net income minus dividends equals the change in retained earnings. 122) C Net income minus dividends equals the change in retained earnings. 123) A ($6,000 + $4,000 + $10,000 − $3,000) = $17,000 − $13,000 = $4,000/4 = $1,000. 124) D ($6,000 + $3,000 + $6,000 − $2,000) = $13,000 − $10,000 = $3,000/4 = $750. 125) B Beginning Retained Earnings + Net income − Dividends = Ending Retained Earnings $17,000 + $35,000 ($7,000 × 5) − Dividends = $12,000 Dividends = $40,000. 126) C Beginning Retained Earnings + Net income − Dividends = Ending Retained Earnings $12,000 + $22,500 ($7,500 × 3) − Dividends = $15,000 Dividends = $19,500. 127) C Version 1

Beginning Retained Earnings + Net income − Dividends = Ending Retained Earnings $150,000 + $160,000 − $X = $200,000 Dividends = $110,000 128) B 129) D 130) A 131) B 132) B 133) C 134) C 135) B 136) A When a company declares a stock split, we do not record a transaction. So, stock splits have no effect on the total stockholder’s equity. The entry to record a stock dividend decreases one equity account, Retained Earnings, and increases another equity account, Common Stock (and, in the case of a small stock dividend, it increases the Additional Paid-in Capital account). So, stock dividends also have no effect on the total stockholder’s equity. With regards to invested capital (which is comprised of the Common Stock, Preferred Stock, and Paid-in Capital accounts), stock dividends increase one or more of those accounts. With regards to earned capital, stock dividends are recorded with a debit to Stock Dividends, a temporary stockholders equity account that is closed to the Retained Earnings account; that debit results in a transfer out of (rather than into) earned capital (which commonly refers to retained earnings). 137) A 138) C Version 1

139) A 140) B 141) B 142) B 143) D (30,000 × $5) + (20,000 × $5) = $250,000 144) D [(48,000 × $9) + (32,000 × $10)] = $752,000 145) B [(30,000 × $7) + (20,000 × $8)] = $370,000 146) A $100,000 − $50,000 = $50,000 147) A Common Stock (50,000 × $5) + Additional Paid-in Capital [(30,000 × $2) + (20,000 × $3)] + Net Income ($100,000) − Dividends ($50,000) = $420,000 148) C (3,000 × $10) = $30,000 149) A Common Stock (at par) (54,000 × $6) Additional paid-in capital (18,000 × $2) + (36,000 × $3) Net income Dividends Treasury stock (2,500 × $11)

$324,000 144,000 180,000 (90,000) (27,500) $530,500

150) C Common stock (at par) (30,000 × $5) Additional paid-in capital [(10,000 × $2) + (20,000 × $3)] Net income Dividends Treasury stock (3,000 × $10)

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$150,000 80,000 100,000 (50,000) (30,000)

$250,000

151) C 152) A $65,000/[($600,000 + $700,000)/2] = 10% 153) A $65,000/10% = $650,000 154) D Net income divided by average total equity = 20%. Average total equity = $575,000 [($500,000 + $650,000)/2]; therefore, net income must be $115,000 ($575,000 × 20%). 155) A 156) D ($1.40/$40.00) = 0.035 157) D ($1.40/0.035) = $40.00 158) A ($75 ÷ 300)/$20.00 = 0.0125 or 1.25% 159) A $150 ÷ 300 = $0.50 160) B $20 ÷ $0.50* = 40.0 *Earnings per share = $150 ÷ 300 = $0.50 161) A 162) B 163) A 164) A ($175 − $25) ÷ 250 = $0.60 165) B

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$10 ÷ $0.60* = 16.7 (rounded) *Earnings per share = ($175 − $25) ÷ 250 = $0.60 166) A 167) Most corporations first raise money by selling stock to the founders of the business and their friends and family. As the equity financing needs of the corporation grow, companies prepare a business plan and seek outside investment from "angel" investors and venture capital firms. Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. Venture capital firms provide additional financing, often in the millions, for a percentage ownership in the company. Many venture capital firms look to invest in promising companies to which they can add value through business contacts, financial expertise, or marketing channels. Most corporations do not consider issuing stock to the general public (going public) until their equity financing needs exceed $20 million.

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168)A corporation offers two primary advantages over sole proprietorships and partnerships. These are (1) limited liability and (2) the ability to raise capital and transfer ownership. Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. Because corporations sell ownership interest in the form of shares of stock, ownership rights are easily transferred. An investor can sell his or her ownership interest (shares of stock) at any time and without affecting the structure of the corporation or its operations. A corporation has two primary disadvantages relative to sole proprietorships and partnerships. These are (1) additional taxes and (2) more paperwork. Corporations have double taxation. Corporate income is taxed once on earnings at the corporate level, and again on dividends at the individual level. Corporations also have more paperwork as federal and state governments impose extensive reporting requirements on the company. 169)Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors. A company usually does not issue all its authorized stock. Outstanding stock is the number of shares held by investors. Issued and outstanding are the same amounts as long as the corporation has not purchased any of its own shares. Purchased shares, called treasury stock, are included as part of shares issued, but excluded from shares outstanding.

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170) Investors in common stock are the owners of the corporation because they have voting rights, and some preferred stock may be convertible to common stock. Investors in long-term debt, such as bonds, are creditors who have loaned money to the corporation. These investors have the right to interest payments each year and then the face amount of the bond at maturity. This financing arrangement is similar to preferred stock that pays cumulative dividends and is redeemable by stockholders. Preferred stock fits somewhere between common stock and bonds. There are other factors where preferred stock falls in the middle between common stock and bonds. For example, the risk and expected return are greatest for investments in common stock followed by preferred stock and then bonds. In contrast, preference for payments of interest and dividends are given first to bonds, then preferred stock, and then common stock. 171)Declaration and payment of a cash dividend reduces total assets and total stockholders' equity. Declaration and payment of a stock dividend has no effect on total assets, total liabilities, and total stockholders' equity.

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CHAPTER 11: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match the following:Descriptions: A) Inflow from investing activities B) Add to net income C) Subtract from net income D) Outflow from financing activities E) Outflow from investing activities F) Inflow from financing activities Transactions: 1) Gain on sale of land 2) Purchase equipment 3) Obtain loan from the bank 4) Sale of investments 5) Increase in salaries payable 6) Pay dividends

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2) Match the following: Description: A) Outflow from investing activities B) Inflow from financing activities C) Inflow from investing activities D) Subtract from net income E) Add to net income F) Outflow from financing activities Transactions: 1) Depreciation expense 2) Issue common stock 3) Increase in prepaid rent 4) Sale of building 5) Repay amount borrowed from the bank 6) Purchase of equipment

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3) Match the following: Terms: A) Indirect method B) Asset turnover C) Investing activities D) Operating activities E) Direct method F) Noncash activities G) Financing activities H) Statement of cash flows I) Cash return on assets J) Cash flow to sales Descriptions: 1) Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows. 2) Significant investing and financing activities that do not affect cash. 3) Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets. 4) Includes cash receipts and cash payments for transactions relating to revenue and expense activities. 5) Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets. 6) A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing activities. 7) Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales. 8) Includes cash transactions resulting from the external financing of a business. 9) Includes cash transactions involving the purchase and sale of long-term assets and current investments. 10) Adjusts the items on the income statement to show items such as cash received from customers, and cash paid for inventory, salaries, rent, interest, and taxes.

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4) For each of the following ten transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of Activity O

Cash Inflow or Outflow CO

Transaction Payment of employee salaries 1. Issuance of bonds 2. Payment of income taxes 3. Payment of a long-term note payable 4. Sale of treasury stock 5. Payment of an account payable 6. Sale of land for cash 7. Purchase of long-term assets by issuing debt 8. Collection of an account receivable 9. Issuance of common stock 10. Purchase of inventory

5) For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of Activity

Transaction 1. Investment in bonds 2. Payment of interest on bonds payable

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3. Payment of a cash dividend 4. Purchase of a building 5. Collection of a note receivable

6) For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of Activity

Transaction 1. Issuance of common stock 2. Sale of land 3. Purchase of treasury stock 4. Collection of an account receivable 5. Issuance of a note payable

7) For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of Activity

Transaction 1. Purchase of inventory

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2. Repayment of note payable 3. Payment of employee salaries 4. Sale of equipment for a note receivable 5. Issuance of bonds

8) Classify each of the following items as an operating, investing, or financing activity. 1. Dividends paid 2. Sale of goods or services for cash 3. Sale of equipment 4. Purchase of inventory 5. Repayment of notes payable

Classify each of the following items as an operating, investing, or financing activity.

1. Payment of income taxes 2. Sale of investments 3. Receipt of interest 4. Issuance of common stock 5. Purchase of intangibles

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10) The following selected transactions occur during the first year of operations. Determine how each should be reported in the statement of cash flows. State whether it is a cash inflow or a cash outflow and whether it is an operating, investing, or financing activity. 1. Issued 1 million shares of common stock at $20 per share. 2. Purchased land and a building for $3 million. 3. Received $200,000 from a cash sale of merchandise to customers. 4. Paid a dividend of $1 per share to common stockholders. 5. Loaned $50,000 to an employee and accepted a note receivable.

11) Analysis of the income statement, balance sheets, and additional information from the accounting records of Chuckles Company reveals the following items: 1. Collection of notes receivable 2. Purchase of equipment 3. Exchange of long-term assets 4. Decrease in accounts payable 5. Payment of dividends 6. Purchase of a patent 7. Depreciation expense 8. Decrease in accounts receivable 9. Issuance of note payable 10. Increase in inventory Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or noncash activities.

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12) Place the following items in the correct order as they would appear in the statement of cash flows: Beginning cash balance Ending cash balance Investing activities Financing activities Net increase (decrease) in cash Operating activities

13) Nanning Company reports net income of $97,000. The accounting records reveal Depreciation Expense of $51,600 as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $39,000, $24,000, and $20,900, respectively. Required: Prepare the operating activities section of Electronic Wonders' statement of cash flows using the indirect method.

14) Nanning Company reports net income of $95,000. The accounting records reveal Depreciation Expense of $50,000, as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000, $23,000, and $20,000, respectively. Required: Prepare the operating activities section of Electronic Wonders' statement of cash flows using the indirect method.

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15) Nanotec Manufacturing reports net income of $866,000. Depreciation Expense is $77,000, Accounts Receivable increased $39,000, and Accounts Payable decreased $17,000. Required: Calculate net cash flows from operating activities using the indirect method.

16) Nanotec Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts Receivable increased $30,000, and Accounts Payable decreased $10,000. Required: Calculate net cash flows from operating activities using the indirect method.

17) Fidelity Systems reports net income of $81 million. Included in that number is depreciation expense of $9 million, and a gain on the sale of equipment of $2 million. Records reveal increases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $3 million, respectively. Required: Calculate Fidelity's net cash flows from operating activities using the indirect method.

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18) Fidelity Systems reports net income of $80 million. Included in that number is depreciation expense of $8 million, and a gain on the sale of equipment of $1 million. Records reveal increases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Required: Calculate Fidelity's net cash flows from operating activities using the indirect method.

19) Baringa Computers reports net income of $44 million. Included in that number is depreciation expense of $8 million, and a loss on the sale of land of $1 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $1 million, respectively. Required: Calculate Baringa Computers' net cash flows from operating activities using the indirect method.

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20) Baringa Computers reports net income of $44 million. Included in that number is depreciation expense of $7 million, and a loss on the sale of land of $2 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Required: Calculate Baringa Computers' net cash flows from operating activities using the indirect method.

21)

Portions of the financial statements for Sunset Telecom are provided below: SUNSET TELECOM Income Statement For the Year Ended December 31, 2024

Revenues

$617,000

Expenses: Cost of goods sold

$364,000

Salaries expense

115,000

Depreciation expense

35,000

Income tax expense

51,500

Total expenses Net Income SUNSET TELECOM Selected Balance Sheet Data December 31, 2024 Increase in accounts receivable Increase in inventory Decrease in prepaid rent Increase in salaries payable

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565,500 $ 51,500

$4,700 12,700 10,200 5,700 11

Decrease in accounts payable Increase in income tax payable

7,700 21,800

Required: Prepare the operating activities section of the statement of cash flows for Sunset Telecom using the indirect method.

22)

Portions of the financial statements for Sunset Telecom are provided below: SUNSET TELECOM Income Statement For the Year Ended December 31, 2024

Revenues

$610,000

Expenses: Cost of goods sold

$370,000

Salaries expense

120,000

Depreciation expense

32,000

Income tax expense

44,000

Total expenses Net Income SUNSET TELECOM Selected Balance Sheet Data December 31, 2024 Increase in accounts receivable Increase in inventory Decrease in prepaid rent Increase in salaries payable Decrease in accounts payable Increase in income tax payable

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566,000 $ 44,000

$6,000 13,000 9,000 5,000 8,000 20,000 12

Required: Prepare the operating activities section of the statement of cash flows for Sunset Telecom using the indirect method.

23) Lindsey Herrmann has completed the basic format to be used in preparing the statement of cash flows (indirect method) for Longhorn Consultants. LONGHORN CONSULTANTS Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash

(31,500)

Cash at the beginning of the period

101,000

Cash at the end of the period

$ 69,500

Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment

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$227,000

Increase in inventory Increase in prepaid rent Payment of dividends Depreciation expense Increase in accounts receivable Increase in accounts payable Loss on sale of land Net income Repayment of notes payable Cash received from the sale of land Issuance of common stock

30,000 8,000 33,000 15,000 53,000 20,000 15,000 66,000 46,000 5,500 244,000

Required: Prepare the statement of cash flows for Longhorn Consultants using the indirect method.

24) Lindsey Herrmann has completed the basic format to be used in preparing the statement of cash flows (indirect method) for Longhorn Consultants. LONGHORN CONSULTANTS Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities

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Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period

(50,000) 95,000 $ 45,000

Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment Increase in inventory Increase in prepaid rent Payment of dividends Depreciation expense Increase in accounts receivable Increase in accounts payable Loss on sale of land Net income Repayment of notes payable Cash received from the sale of land Issuance of common stock

$220,000 30,000 10,000 40,000 20,000 60,000 10,000 7,000 70,000 50,000 3,000 250,000

Required: Prepare the statement of cash flows for Longhorn Consultants using the indirect method.

25) Kutcher Systems sold land, investments, and issued their own common stock for $12 million, $16 million, and $20 million, respectively. Kutcher also purchased treasury stock, equipment, and a patent for $2 million, $2 million, and $5 million, respectively. Required: 1. What amount should the company report as net cash flows from investing activities? 2. What amount should the company report as net cash flows from financing activities?

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26) Kutcher Systems sold land, investments, and issued their own common stock for $10 million, $15 million, and $20 million, respectively. Kutcher also purchased treasury stock, equipment, and a patent for $2 million, $4 million, and $6 million, respectively. Required: 1. What amount should the company report as net cash flows from investing activities? 2. What amount should the company report as net cash flows from financing activities?

27) Two competitors in the construction supply industry report the following selected financial data:

Net sales Net income Operating cash flows Total assets, beginning Total assets, ending

Company A

Company B

$46,870 1,813 3,924 33,355 32,225

$65,676 2,750 5,045 40,077 41,714

Required: 1. Calculate the cash return on assets, cash flow to sales ratio, and asset turnover ratio for each company. 2. Which company has the better cash flow to sales ratio and which company has the better asset turnover ratio?

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28) Two competitors in the construction supply industry report the following selected financial data:

Net sales Net income Operating cash flows Total assets, beginning Total assets, ending

Company A

Company B

$47,220 1,783 4,054 32,625 33,005

$66,176 2,620 5,125 41,164 40,877

29) The balance sheets of Xenon Company reports total assets of $885,000 and $944,000 at the beginning and end of the year, respectively. Sales revenues are $2.1 million, net income is $179,000, and net cash flows from operating activities are $161,000. Required: Calculate the cash return on assets, cash flow to sales, and asset turnover.

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30) The balance sheets of Xenon Company reports total assets of $890,000 and $950,000 at the beginning and end of the year, respectively. Sales revenues are $1.6 million, net income is $185,000, and net cash flows from operating activities are $155,000. Required: Calculate the cash return on assets, cash flow to sales, and asset turnover.

31) The balance sheets of Technology Associates reports total assets of $153,000 and $217,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 8%. Required: Calculate the net cash flows from operating activities for the year.

32) The balance sheets of Technology Associates reports total assets of $160,000 and $220,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. Required: Calculate the net cash flows from operating activities for the year.

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33)

Discount Computers' accounts receivable increases during the year by $2.1 million.

Required: What is the amount of cash received from customers during the reporting period if its sales are $46.1 million?

34)

Discount Computers' accounts receivable increases during the year by $3 million.

Required: What is the amount of cash received from customers during the reporting period if its sales are $47 million?

35) Laser Solutions' inventory decreases during the year by $7 million and its accounts payable to suppliers increases by $6 million during the same period. Required: What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold is $81 million?

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36) Laser Solutions' inventory decreases during the year by $8 million and its accounts payable to suppliers increases by $6 million during the same period. Required: What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold is $81 million?

37) Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense and salaries expense. Prepaid rent decreases during the year by $18,000 and salaries payable increases by $17,000. Required: What is the cash paid for operating expenses during the year?

38) Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense and salaries expense. Prepaid rent decreases during the year by $10,000 and salaries payable increases by $25,000. Required: What is the cash paid for operating expenses during the year?

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39) Wilson Electric reports income tax expense of $144,000. Income tax payable at the beginning and end of the year are $19,900 and $24,600, respectively. Required: What is the cash paid for income taxes during the year?

40) Wilson Electric reports income tax expense of $150,000. Income tax payable at the beginning and end of the year are $20,000 and $25,000, respectively. Required: What is the cash paid for income taxes during the year?

41)

Portions of the financial statements for Sunset Telecom are provided below. SUNSET TELECOM Income Statement For the Year Ended December 31, 2024

Revenues

$616,000

Expenses: Cost of goods sold

$368,000

Salaries expense

119,000

Depreciation expense

26,000

Income tax expense

51,500

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Total expenses

564,500

Net Income

$51,500

SUNSET TELECOM Selected Balance Sheet Data December 31, 2024 Increase in accounts receivable Increase in inventory Decrease in prepaid rent Increase in salaries payable Decrease in accounts payable Increase in income tax payable

$4,400 12,000 10,300 6,200 7,700 20,400

Required: Prepare the operating activities section of the statement of cash flows for Sunset Telecom using the direct method.

42)

Portions of the financial statements for Sunset Telecom are provided below. SUNSET TELECOM Income Statement For the Year Ended December 31, 2024

Revenues

$610,000

Expenses: Cost of goods sold

$391,000

Salaries expense

120,000

Depreciation expense

32,000

Income tax expense

44,000

Total expenses

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587,000

Net Income SUNSET TELECOM Selected Balance Sheet Data December 31, 2024 Increase in accounts receivable Increase in inventory Decrease in prepaid rent Increase in salaries payable Decrease in accounts payable Increase in income tax payable

$23,000

$6,000 13,000 9,000 5,000 8,000 20,000

Required: Prepare the operating activities section of the statement of cash flows for Sunset Telecom using the direct method.

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Answer Key Test name: Chap 11_6e_Spiceland_Problem Material 1)1) C 2) E 3) F 4) A 5) B 6) D 2) 1) E 2) B 3) D 4) C 5) F 6) A 3)1) A 2) F 3) B 4) D 5) I 6) H 7) J 8) G 9) C 10) E 4) Type of Activity O F O F F O I NC

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Cash Inflow or Outflow CO CI CO CO CI CO CI NE

O F O

CI CI CO

debt 8. Collection of an account receivable 9. Issuance of common stock 10. Purchase of inventory

5) Type of Activity I O F I I

Transaction 1. Investment in bonds 2. Payment of interest on bonds payable 3. Payment of a cash dividend 4. Purchase of a building 5. Collection of a note receivable

6) Type of Activity F I F O F

Transaction 1. Issuance of common stock 2. Sale of land 3. Purchase of treasury stock 4. Collection of an account receivable 5. Issuance of a note payable

7) Type of Activity O F O NC F

Transaction 1. Purchase of inventory 2. Repayment of note payable 3. Payment of employee salaries 4. Sale of equipment for a note receivable 5. Issuance of bonds

8)1. Financing Activity 2. Operating Activity 3. Investing Activity 4. Operating Activity 5. Financing Activity

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9)1. Operating Activity 2. Investing Activity 3. Operating Activity 4. Financing Activity 5. Investing Activity 10)1. Cash inflow, Financing activity 2. Cash outflow, Investing activity 3. Cash inflow, Operating activity 4. Cash outflow, Financing activity 5. Cash outflow, Investing activity 11)1. Investing activities 2. Investing activities 3. Noncash activities 4. Operating activities 5. Financing activities 6. Investing activities 7. Operating activities 8. Operating activities 9. Financing activities 10. Operating activities 12)The correct order would be: 1. Operating activities 2. Investing activities 3. Financing activities 4. Net increase (decrease) in cash 5. Beginning cash balance 6. Ending cash balance 13) NANNING COMPANY Statement of Cash Flows (partial)

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Cash Flows from Operating Activities: Net income

$ 97,000

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in prepaid rent

51,600 (39,000)

Increase in accounts payable

24,000

Increase in income tax payable

20,900

Net cash flows from operating activities

$ 154,500

14) NANNING COMPANY Statement of Cash Flows (partial) Cash Flows from Operating Activities: Net income

$ 95,000

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in prepaid rent

50,000 (40,000)

Increase in accounts payable

23,000

Increase in income tax payable

20,000

Net cash flows from operating activities

$ 148,000

15) NANOTEC MANUFACTURING Statement of Cash Flows (partial) Cash Flows from Operating Activities Net income

$866,000

Adjustments to reconcile net income to net cash flows from operating activities:

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Depreciation expense

77,000

Increase in accounts receivable

(39,000)

Decrease in accounts payable

(17,000)

Net cash flows from operating activities

$887,000

16) NANOTEC MANUFACTURING Statement of Cash Flows (partial) Cash Flows from Operating Activities: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

$ 850,000

60,000

Increase in accounts receivable

(30,000)

Decrease in accounts payable

(10,000)

Net cash flows from operating activities

$ 870,000

17) FIDELITY SYSTEMS Statement of Cash Flows (partial) Cash Flows from Operating Activities ($ in millions) Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

$81

Gain on sale of equipment

(2)

Increase in accounts receivable

(4)

Increase in inventory

(3)

Increase in accounts payable

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Net cash flows from operating activities

$84

18) FIDELITY SYSTEMS Statement of Cash Flows (partial) Cash Flows from Operating Activities ($ in millions) Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

$80

Gain on sale of equipment

(1)

Increase in accounts receivable

(4)

Increase in inventory

(3)

Increase in accounts payable

Net cash flows from operating activities

$82

19) BARINGA COMPUTERS Statement of Cash Flows (partial) Cash Flows from Operating Activities ($ in millions) Net income

$44

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

Loss on sale of land

Decrease in accounts receivable

(4)

Decrease in inventory

(3)

Decrease in accounts payable Net cash flows from operating activities

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1 $59

20) BARINGA COMPUTERS Statement of Cash Flows (partial) Cash Flows from Operating Activities ($ in millions) Net income

$44

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

Loss on sale of land

Decrease in accounts receivable

Decrease in inventory

Decrease in accounts payable

(2)

Net cash flows from operating activities

$58

21) SUNSET TELECOM Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Net income

$ 51,500

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

35,000

Increase in accounts receivable

(4,700)

Increase in inventory

(12,700)

Decrease in prepaid rent

10,200

Increase in salaries payable

5,700

Decrease in accounts payable

(7,700)

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Increase in income tax payable

21,800

Net cash flows from operating activities

$ 99,100

22) SUNSET TELECOM Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Net income

$ 44,000

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

32,000

Increase in accounts receivable

(6,000)

Increase in inventory

(13,000)

Decrease in prepaid rent

9,000

Increase in salaries payable

5,000

Decrease in accounts payable

(8,000)

Increase in income tax payable

20,000

Net cash flows from operating activities

$ 83,000

23) LONGHORN CONSULTANTS Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

Version 1

$ 66,000

15,000

Loss on sale of land

15,000

Increase in accounts receivable

(53,000)

Increase in inventory

(30,000)

Increase in prepaid rent

(8,000)

Increase in accounts payable

20,000

Net cash flows from operating activities

$ 25,000

Cash Flows from Investing Activities Cash received from sale of land Purchase of equipment

5,500 (227,000)

Net cash flows from investing activities

(221,500)

Cash Flows from Financing Activities Issuance of common stock

244,000

Payment of dividends

(33,000)

Repayment of notes payable

(46,000)

Net cash flows from financing activities

165,000

Net increase (decrease) in cash

(31,500)

Cash at the beginning of the period

101,000

Cash at the end of the period

$ 69,500

24) LONGHORN CONSULTANTS Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Net income

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$ 70,000

Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense

20,000

Loss on sale of land

7,000

Increase in accounts receivable

(60,000)

Increase in inventory

(30,000)

Increase in prepaid rent

(10,000)

Increase in accounts payable

10,000

Net cash flows from operating activities Cash Flows from Investing Activities Cash received from sale of land Purchase of equipment

$ 7,000

3,000 (220,000)

Net cash flows from investing activities Cash Flows from Financing Activities

(217,000)

Issuance of common stock

250,000

Payment of dividends

(40,000)

Repayment of notes payable

(50,000)

Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period

160,000 (50,000) 95,000 $ 45,000

25)1. ($ in millions) Cash Flows from Investing Activities

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Sale of land

$12

Sale of investments

Purchase equipment

(2)

Purchase a patent

(5)

Net cash flows from investing activities

$21

2. ($ in millions) Cash Flows from Financing Activities Issuance of common stock

$20

Purchase treasury stock

(2)

Net cash flows from financing activities

$18

26)1. ($ in millions) Cash Flows from Investing Activities Sale of land

$10

Sale of investments

Purchase of equipment

(4)

Purchase of patent

(6)

Net cash flow from investing activities

$15

2. ($ in millions) Cash Flows from Financing Activities Issuance of common stock

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$20

Purchase of treasury stock

(2)

Net cash flow from financing activities

$18

27)1. Company A

Operating Cash Flows $3,924

Company B

$5,045

Company A Company B

÷ Average Total Assets = ÷ ÷

($33,355 + $32,225)/2 ($40,077 + $41,714)/2 ÷ Net Sales =

Cash Return on Assets 11.97% (rounded)

12.34% (rounded)

Operating Cash Flow to Sales Cash Flows $3,924 ÷ $46,870 = 8.37% (rounded) $5,045 ÷ $65,676 = 7.68% (rounded) Net Sales ÷ Average Total Assets = Asset Turnover

Company A

$46,870

÷ ($33,355 + $32,225)/2 =

Company B

$65,676

÷ ($40,077 + $41,714)/2 =

1.43 times (rounded) 1.61 times (rounded)

2. Company A has a better (higher) cash flow to sales ratio, while Company B has a better (higher) asset turnover. 28)1.

Company A

Operating Cash Flows $ 4,054

Company B

$ 5,125

Operating Cash Flows $ 4,054 $ 5,125 Net Sales

$ 47,220

Company A Company B

Company A

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÷ Average Total Assets = ÷

($32,625 + $33,005)/2 ($41,164 + $40,877)/2 Net Sales

Cash Return on Assets 12.4% (rounded)

12.5% (rounded)

Cash Flow to Sales

÷ $ 47,220 = ÷ $ 66,176 = ÷ Average Total Assets = ($32,625 + $33,005)/2

8.6% (rounded) 7.7% (rounded) Asset Turnover

= 1.4 times (rounded)

Company B

$ 66,176

($41,164 + $40,877)/2

= 1.6 times (rounded)

2. Company A has a better (higher) cash flow to sales ratio, while Company B has a better (higher) asset turnover. 29) Operating Cash ÷ Average Total Assets = Cash Return on Assets Flows $161,000 ÷ ($885,000 + $944,000)/2 = 17.6% (rounded) Operating Cash ÷ Net Sales = Cash Flow to Sales Flows $161,000 ÷ $2,100,000 = 7.7% (rounded) Net Sales ÷ Average Total Assets = Asset Turnover $2,100,000 ÷ ($885,000 + $944,000)/2 = 2.3 times (rounded)

30) Operating Cash ÷ Average Total Assets = Cash Return on Assets Flow $155,000 ÷ ($890,000 + $950,000)/2 = 16.8% (rounded) Operating Cash Flow ÷ Net Sales = Cash Flow to Sales $155,000 ÷ $1,600,000 = 9.7% (rounded) Net Sales ÷ Average Total Assets = Asset Turnover $1,600,000 ÷ ($890,000 + $950,000)/2 = 1.7 times (rounded)

31) Operating Cash Flows = 0.08 × [($153,000 + $217,000) ÷ 2] = $14,800. 32)Operating Cash Flows = 0.10 × [($160,000 + $220,000) ÷ 2] = $19,000. 33)($ in millions) Sales − Increase in accounts receivable

$46.1 (2.1)

Cash received from customers

$44.0

34)($ in millions) Sales − Increase in accounts receivable

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$47 (3)

Cash received from customers

$44

35)($ in millions) Cost of goods sold − Decrease in inventory = Purchases − Increase in accounts payable

$81 (7) 74 (6)

= Cash paid to suppliers

$68

36)($ in millions) Cost of goods sold − Decrease in inventory = Purchases − Increase in accounts payable

$81 (8) 73 (6)

= Cash paid to suppliers

$67

37) Operating expenses − Decrease in prepaid rent − Increase in salaries payable

$255,000 (18,000) (17,000)

= Cash paid for operating expenses

$220,000

38) Operating expenses − Decrease in prepaid rent − Increase in salaries payable

$255,000 (10,000) (25,000)

= Cash paid for operating expenses

$220,000

39) Income tax expense − Increase in income tax payable Cash paid for income taxes

$144,000 (4,700) $139,300

40) Income tax expense − Increase in income tax payable

$150,000 (5,000)

Cash paid for income taxes

$145,000

41) SUNSET TELECOM

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Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Cash received from customers

$ 611,600

Cash paid to suppliers

(387,700)

Cash paid for salaries

(102,500)

Cash paid for income taxes

(31,100)

Net cash flows from operating activities

$ 90,300

Revenues − Increase in accounts receivable

$616,000 (4,400)

= Cash received from customers

$611,600

Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable

$368,000 12,000 380,000 7,700

= Cash paid to suppliers

$387,700

Salaries expense − Increase in salaries payable

$119,000 (6,200)

= Cash paid for salaries

$102,500

Income tax expense − Increase in income tax payable

$ 51,500 (20,400)

= Cash paid for income taxes

$ 31,100

42) SUNSET TELECOM Statement of Cash Flows For the Year Ended December 31, 2024 Cash Flows from Operating Activities Cash received from customers

$ 604,000

Cash paid to suppliers

(412,000)

Cash paid for salaries

(106,000)

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Cash paid for income taxes Net cash flows from operating activities

(24,000) $ 62,000

Revenues − Increase in accounts receivable

$610,000 (6,000)

= Cash received from customers

$604,000

Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable

$391,000 13,000 404,000 8,000

= Cash paid to suppliers

$412,000

Salaries expense − Increase in salaries payable

$120,000 (5,000)

= Cash paid for salaries

$106,000

Income tax expense − Increase in income tax payable

$ 44,000 (20,000)

= Cash paid for income taxes

$ 24,000

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CHAPTER 11 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period. ⊚ true ⊚ false

2) The three primary categories of cash flows are cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. ⊚ true ⊚ false

3) Financing activities include cash receipts and cash payments for transactions relating to revenue and expense activities. ⊚ true ⊚ false

4) Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. ⊚ true ⊚ false

5) Capital expenditures (or CAPEX) represent investments in capital assets and are included in financing activities. ⊚ ⊚

true false

6) Operating activities are both inflows and outflows of cash resulting from the external financing of a business. ⊚ true ⊚ false

We report interest and dividends received from investments with investing activities.

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⊚ ⊚

true false

8) We report interest paid on bonds or notes payable with operating activities rather than financing activities. ⊚ true ⊚ false

We record dividends received as a financing activity. ⊚ true ⊚ false

10)

We record dividends paid as a financing activity. ⊚ true ⊚ false

11) Transactions that do not increase or decrease cash, but that result in significant investing and financing activities, are reported either directly after the cash flow statement or in a separate note to the financial statements as noncash activities. ⊚ true ⊚ false

12) If no cash was exchanged in the purchase of equipment financed entirely with a note payable, we represent this as both an investing activity and a financing activity in the statement of cash flows. ⊚ true ⊚ false

13) The purchase of long-term assets by issuing debt is recorded as both an investing activity and a financing activity. ⊚ true ⊚ false

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14) The total net cash flows from operating activities differ between the direct and indirect methods. ⊚ true ⊚ false

15) Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. ⊚ true ⊚ false

16) The total of the cash flows from operating, investing, and financing activities equals the net increase or decrease in cash for the period. ⊚ true ⊚ false

17) Using the direct method, we adjust the items in the income statement to directly show the cash inflows and outflows from operations. ⊚ true ⊚ false

18) When the indirect method is used to prepare the operating activities section of the statement of cash flows, adjustments to net income include both income statement items and balance sheet items. ⊚ ⊚

true false

19) When the indirect method is used to prepare the operating activities section of the statement of cash flows, the adjustments to net income for income statement items relate only to the removal of noncash revenues and noncash expenses. ⊚ ⊚

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true false

20) When the indirect method is used to prepare the operating activities section of the statement of cash flows, the adjustments to net income for balance sheet items include adjustments for changes in current assets and current liabilities. ⊚ ⊚

true false

21) Under the indirect method, when there is an increase in accounts receivable, the corresponding amount of sales revenue needs to be added to net income so that only the cash portion of sales revenue remains. ⊚ ⊚

true false

22) Under the indirect method, adding back the amount of depreciation eliminates the deduction of this noncash expense in net income. ⊚ ⊚

true false

23) Because depreciation expense reduces net income, companies will add depreciation expense back to net income as a step in arriving at net cash flows from operating activities under the indirect method. ⊚ true ⊚ false

24) Companies need to subtract amortization expense from net income as a step in arriving at net cash flows from operating activities under the indirect method. ⊚ ⊚

true false

25) A loss on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. ⊚ true ⊚ false

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26) Gains should be added and losses should be subtracted from net income to arrive at net cash flows from operating activities when the indirect method is used. ⊚ ⊚

true false

27) A gain on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. ⊚ true ⊚ false

28) When reconciling net income to operating cash flows, we adjust for changes in the balances of current assets accounts (other than investments and notes receivable), and current liabilities (other than various forms of borrowing). ⊚ ⊚

true false

29) Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash flows from operating activities. ⊚ true ⊚ false

30) Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows from operating activities. ⊚ true ⊚ false

31) Under the indirect method, an increase in inventory is added to net income and a decrease in inventory is subtracted from net income to arrive at net cash flows from operating activities. ⊚ true ⊚ false

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32) When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is subtracted from net income. ⊚ true ⊚ false

33) Under the indirect method, an increase in accounts payable is added to net income to arrive at net cash flows from operating activities. ⊚ true ⊚ false

34) Under the indirect method, a decrease in accounts payable is added to net income to arrive at net cash flows from operating activities. ⊚ true ⊚ false

35) The long-term assets section of the balance sheet is the place to look for investing activities. ⊚ true ⊚ false

36) The sale of land is reported in the operating activities section of the statement of cash flows. ⊚ true ⊚ false

37) We report the purchase of stock in another corporation as a cash outflow from investing activities. ⊚ true ⊚ false

38) We report the actual amount of cash proceeds received from the sale of land as a cash inflow from investing activities. ⊚ true ⊚ false

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39) We can find most financing activities by examining changes in long-term liabilities and stockholders' equity accounts. ⊚ true ⊚ false

40) The inflow of cash received from issuing common stock is reported as an investing activity. ⊚ true ⊚ false

41) The balance in Retained Earnings is increased by net income and is decreased by dividends. ⊚ true ⊚ false

42)

We report the cash payment of dividends as a cash outflow from investing activities. ⊚ true ⊚ false

43)

We calculate cash return on assets as the change in cash divided by average total assets. ⊚ true ⊚ false

44) Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. ⊚ true ⊚ false

45) To maximize cash flow from operations, a company strives to increase both cash flows per dollar of sales and sales per dollar of assets invested. ⊚ true ⊚ false

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46) Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. ⊚ true ⊚ false

47) Income statement items that have no cash effect are still reported under the direct method. ⊚ true ⊚ false

48) Using the direct method, we examine each account in the income statement and convert it from an accrual amount to a cash amount. ⊚ true ⊚ false

49) If accounts receivable decreases, this indicates that revenues exceed cash receipts from customers. ⊚ true ⊚ false

50) When accounts payable decreases, cash paid to suppliers must have been more than purchases. ⊚ true ⊚ false

51) If there are no current assets or liabilities associated with operating expenses, the amounts we report for these expenses in the income statement must equal the amount of cash we paid for these items. ⊚ true ⊚ false

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52) Depreciation expense is not reported on the statement of cash flows under the direct method. ⊚ true ⊚ false

53) We add an increase in interest payable to interest expense in arriving at cash paid for interest under the direct method. ⊚ true ⊚ false

54) We add a decrease in income tax payable to income tax expense to calculate cash paid for income taxes. ⊚ true ⊚ false

55) The indirect method begins with net income, while the direct method considers each of the individual accounts that make up net income. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 56) Which financial statement separates business activities into operating, investing, and financing activities? A) Statement of stockholders' equity B) Income statement C) Statement of cash flows D) Balance sheet

57)

The purchase of land is classified in the statement of cash flows as a(n):

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A) Operating activity. B) Investing activity. C) Financing activity. D) Noncash activity.

58) The cash collection from the sale of a good or service is classified in the statement of cash flows as a(n): A) Investing activity. B) Operating activity. C) Financing activity. D) Noncash activity.

59)

The payment of salaries is classified in the statement of cash flows as a(n): A) Investing activity. B) Operating activity. C) Financing activity. D) Noncash activity.

60) The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n): A) Operating activity. B) Investing activity. C) Financing activity. D) Noncash activity.

61)

The purchase of treasury stock is classified in the statement of cash flows as a(n):

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A) Operating activity. B) Investing activity. C) Financing activity. D) Noncash activity.

62)

Operating cash flows exclude: A) Interest received. B) Interest paid. C) Dividends received. D) Dividends paid.

63)

The statement of cash flows reports cash flows from the activities of: A) Operating, purchasing, and investing. B) Borrowing, paying, and investing. C) Operating, investing, and financing. D) Lending, investing, and financing.

64)

Which of the following is correct about the statement of cash flows?

A) A company with a net loss will always have a net cash outflow from operating activities. B) Collecting interest earned from a note receivable creates a cash inflow from investing activities. C) Paying dividends to investors creates a cash outflow from financing activities. D) The repayment of long-term debt is a cash inflow from financing activities.

65)

Which of the following is correct about the statement of cash flows?

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A) A company with a net loss on the income statement will always have a net cash outflow from operating activities. B) A purchase of equipment is classified as a cash inflow from investing activities. C) Cash dividends received on stock investments are classified as cash flows from operating activities. D) Cash dividends paid are classified as cash flows from operating activities.

66)

Which of the following is not correct about the statement of cash flows?

A) Paying dividends to investors creates a cash outflow from financing activities. B) A purchase of equipment is classified as a cash outflow from investing activities. C) Cash dividends paid are classified as cash flows from operating activities. D) Cash dividends received on stock investments are classified as cash flows from operating activities.

67)

Which of the following is not correct about the statement of cash flows?

A) Paying dividends to investors creates a cash outflow from financing activities. B) A purchase of equipment creates a cash outflow from investing activities. C) The sale of land in exchange for cash creates a cash inflow from operating activities. D) Cash dividends received on stock investments creates a cash inflow from operating activities.

68) All classifications on the balance sheet have a general relationship with sections identified on the statement of cash flows. Indicate which relationships are correctly identified in the table below. Number I II III IV V

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Classification on the Balance Sheet Bonds Payable Equipment Common Stock Accounts Payable Accounts Receivable

Section on Statement of Cash Flows Financing Operating Financing Operating Operating

A) IV, V B) I, II, III C) I, III, IV, V D) l, ll, lll, lV, V

69) Under what section of the statement of cash flows would you classify dividends paid on common stock? A) Operating B) Investing C) Financing D) Noncash activity

70) Under what section of the statement of cash flows would you classify the purchase of equipment by issuing a long-term note payable? A) Operating B) Investing C) Financing D) Noncash activity

71)

Which of the following transactions would not create a cash flow? A) Purchase treasury stock for cash B) Payment of a cash dividend C) Purchase of land by issuing common stock D) Sale of equipment at book value for cash

72)

Which of the following is an example of a noncash activity?

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A) Sale of land for less than its cost B) Purchase of land by issuing debt C) Sale of land for more than its cost D) Purchase of land using cash proceeds from issuance of common stock

73)

Which of the following is not true regarding cash flows? A) Operating activities include the payment of dividends. B) Investing activities involve long-term investments. C) Financing activities involve long-term liabilities and equities. D) Purchasing a building with a note is considered a noncash activity.

74) Dividends received from an investment are classified as a(n) ________ cash flow, and paying dividends on stock issued is classified as a(n) ________ cash flow on the statement of cash flows. A) Operating; Operating B) Operating; Financing C) Financing; Operating D) Investing; Financing

75) The collection of cash from customers would be classified as which type of cash flow on the statement of cash flows? A) Financing B) Investing C) Operating D) Not reported on the statement of cash flows

76) Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:

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A) Operating, $2,000; Financing, $16,000. B) Operating, $0; Financing, $18,000. C) Operating, $12,000; Financing, $6,000. D) Operating, $18,000; Financing, $0.

77)

The statement of cash flows:

A) Lists all cash flows over the life of a company. B) Breaks down all cash transactions into investing and financing cash flows. C) Shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows. D) Has two methods for investing cash flows—direct and indirect.

78) The balance of cash reported in the balance sheet this year minus the balance of cash reported in the balance sheet last year equals: A) Net cash flows from operating activities only. B) Net income. C) Net cash flows from operating, investing, and financing activities. D) Net cash flows from financing activities only.

79)

The indirect and direct methods: A) Are used by companies about equally in actual practice. B) Affect the presentations of operating, investing, and financing activities. C) Arrive at different amounts for net cash flows from operating activities. D) Are two allowable methods to present operating activities in the statement of cash

flows.

80) In the operating activities section of the statement of cash flows, we start with net income when using:

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A) The direct method. B) The indirect method. C) Both the direct and the indirect method. D) Neither the direct nor the indirect method.

81)

We can identify operating activities from income statement information and changes in: A) Long-term asset accounts. B) Long-term liability accounts. C) Current asset and current liability accounts. D) Stockholders' equity accounts.

82)

Operating cash flows can be described as: A) Change in total cash for the year. B) Purchase and sale of long-term assets. C) Cash-basis net income. D) Total revenues minus total expenses.

83) In preparing a statement of cash flows under the indirect method, adjustments to net income include: A) Removing noncash revenues and noncash expenses. B) Removing nonoperating gains and nonoperating losses. C) Adjusting for changes in current assets and changes in current liabilities. D) All of these answers are adjustments needed under the indirect method.

84) In preparing a statement of cash flows under the indirect method, which of the following requires an adjustment to net income as a noncash expense?

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A) Interest expense. B) Depreciation expense. C) Salaries expense. D) Rent expense.

85) In preparing a statement of cash flows under the indirect method, which of the following requires an adjustment to net income as a nonoperating gain? A) Selling inventory above its original purchase cost. B) Receiving interest on a note receivable. C) Selling land above its original purchase cost. D) Receiving dividends on an equity investment in another company.

86) In preparing a statement of cash flows under the indirect method, which of the following correctly explains why changes in current assets and changes in current liabilities are adjustments made to net income in calculating operating cash flows? A) These changes represent differences between accrual-basis revenues/expenses and their corresponding operating cash flows. B) These changes represent inflows and outflows from investing and financing activities. C) These changes represent transactions that are unlikely to recur and therefore are unlikely to affect future operating cash flows. D) These changes represent inflows and outflows from operating activities.

87) In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would be reported as a(n): A) Addition to net income in the operating activities section. B) Deduction from net income in the operating activities section. C) Financing activity. D) Investing activity.

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88) In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be reported as a(n): A) Addition to net income in the operating activities section. B) Deduction from net income in the operating activities section. C) Financing activity. D) Investing activity.

89) Which of the following is not a correct practice when adjusting net income to net operating cash flows? A) Subtract depreciation expense. B) Add losses on sales of assets. C) Subtract increase in accounts receivable. D) Add increase in accounts payable.

90) Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Salaries payable increase. B) Gain on the sale of land. C) Inventory increase. D) Accounts receivable increase.

91) Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Gain on the sale of land. B) Accounts receivable decrease. C) Inventory decrease. D) Salaries payable increase.

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92)

Consider the following items:

(a) Decrease in accounts receivable (b) Issuance of common stock (c) Increase in interest receivable (d) Purchase of land (e) Decrease in accounts payable (f) Gain on the sale of equipment (g) Depreciation expense (h) Payment of dividends (i) Decrease in utilities payable (j) Increase in inventory How many of these items would be added to net income when using the indirect method to prepare the operating activities section of the statement of cash flows? A) 2 B) 4 C) 1 D) 3

93)

Consider the following items:

(a) Decrease in accounts receivable (b) Issuance of common stock (c) Increase in interest receivable (d) Purchase of land (e) Decrease in accounts payable (f) Gain on the sale of equipment (g) Depreciation expense (h) Payment of dividends (i) Decrease in utilities payable (j) Increase in inventory How many of these items would be subtracted from net income when using the indirect method to prepare the operating activities section of the statement of cash flows?

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A) 5 B) 4 C) 1 D) 2

94) Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Salaries payable decrease B) Inventory decrease C) Depreciation expense D) Accounts receivable decrease

95) Which of the following is not subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Depreciation expense B) Interest receivable increase C) Increase in inventory D) Salaries payable decrease

98) Rachel's Recordings reported net income of $230,000. Beginning balances in Accounts Receivable and Accounts Payable were $17,000 and $22,000 respectively. Ending balances in these accounts were $10,500 and $29,000, respectively. Assuming that all relevant information has been presented, Rachel's net cash flows from operating activities would be: A) $236,500. B) $243,500. C) $216,500. D) $230,000.

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99) Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were $12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's net cash flows from operating activities would be: A) $200,000. B) $195,000. C) $205,000. D) $199,000.

100) Mary's Music Store reported net income of $144,000. Beginning balances in Accounts Receivable and Accounts Payable were $24,500 and $18,500, respectively. Ending balances in these accounts were $34,500 and $12,600, respectively. Assuming that all relevant information has been presented, Mary's net cash flows from operating activities would be: A) $148,100. B) $139,900. C) $159,900. D) $128,100.

101) Mary's Music Store reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Mary's net cash flows from operating activities would be: A) $132,000. B) $134,000. C) $136,000. D) $138,000.

102) Jannette Corporation reports net income of $520,000 that includes depreciation expense of $74,000. Also, cash of $40,000 was borrowed on a 4-year note payable. Based on this data, total cash inflows from operating activities are:

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A) $560,000. B) $594,000. C) $634,000. D) $446,000.

103) Jannette Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash of $50,000 was borrowed on a five-year note payable. Based on this data, total cash inflows from operating activities are: A) $380,000. B) $470,000. C) $520,000. D) $570,000.

104) Assume net income was $210,000, depreciation expense was $6,200, accounts receivable decreased by $8,000, and accounts payable decreased by $2,800. The amount of net cash flows from operating activities is: A) $216,200. B) $203,800. C) $221,400. D) $210,000.

105) Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by $7,500, and accounts payable decreased by $2,500. The amount of net cash flows from operating activities is: A) $103,000. B) $100,000. C) $108,000. D) $113,000.

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106) Loring Company reported net income of $218,000. Beginning and ending inventory balances were $46,500 and $48,000, respectively. Accounts payable balances at the beginning and end of the year were $40,500 and $37,500, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of: A) $222,500. B) $219,500. C) $213,500. D) $216,500.

107) Loring Company reported net income of $205,000. Beginning and ending Inventory balances were $40,000 and $45,000, respectively. Accounts payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of: A) $202,000. B) $198,000. C) $212,000. D) $205,000.

108) Sitewide Company’s net income was $350,000. Given the account information below, what is the net cash flows from operating activities for Sitewide? Increase in accounts receivable Increase in salaries payable Decrease in inventory Depreciation expense Increase in prepaid insurance

$61,000 53,000 37,500 46,500 3,100

A) $422,900 B) $438,900 C) $551,100 D) $354,100

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109) Sitewide Company’s net income was $250,000. Given the account information below, what is the net cash flows from operating activities for Sitewide? Increase in accounts receivable Increase in salaries payable Decrease in inventory Depreciation expense Increase in prepaid insurance

$60,000 50,000 30,000 45,000 3,000

A) $152,000 B) $278,000 C) $312,000 D) $438,000

110) Servo Industries' net income was $300,000. Given the account information below, what is the net cash flows from operating activities for Servo Industries? Decrease in accounts receivable Decrease in salaries payable Decrease in inventory Depreciation expense Increase in interest payable

$50,000 75,000 20,000 35,000 7,000

A) $487,000. B) $323,000. C) $337,000. D) $237,000.

111) Laser World's income statement reported total revenues of $870,000 and total expenses (including $41,500 depreciation) of $745,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $57,000 and ending balance, $58,000; Accounts Payable—beginning balance, $25,500 and ending balance, $31,500. Therefore, based only on this information, the net cash flows from operating activities were:

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A) $130,000. B) $78,800. C) $171,500. D) $161,650.

112) Laser World's income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash flows from operating activities were: A) $126,000. B) $166,000. C) $174,000. D) $186,000.

113) Assuming net income for the year is $225,000 and consider the following information, what is the net cash flows from operating activities? Increase in salaries payable Depreciation expense Increase in prepaid rent Loss on sale of asset Increase in accounts payable Increase in inventory

$16,500 10,000 29,500 1,400 27,500 81,000

A) $209,400 B) $199,400 C) $169,900 D) $334,100

114) Assuming net income for the year is $115,000 and consider the following information, what is the net cash flows from operating activities?

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Increase in salaries payable Depreciation expense Increase in prepaid rent Loss on sale of asset Increase in accounts payable Increase in inventory

$15,000 6,000 24,000 1,000 25,000 50,000

A) $112,000 B) $88,000 C) $118,000 D) $188,000

115)

Which of the following statements is true?

A) Investment in another company's common stock is classified as a cash outflow from financing activities in the statement of cash flows. B) Repayment of long-term debt is classified as a cash outflow from investing activities in the statement of cash flows. C) Losses on the sale of long-term assets are an adjustment reported in the operating activities section of the statement of cash flows under the indirect method. D) Dividends paid are classified as a cash outflow from operating activities in the statement of cash flows.

116)

Which of the following is an example of a cash outflow from an investing activity? A) Payment of cash for treasury stock B) Payment of cash for the purchase of land C) Payment of cash for inventory D) Payment on a long-term note payable

117)

Which of the following transactions would generally result in an investing cash inflow?

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A) Receive cash from borrowing at the bank B) Receive cash from the sale of land C) Receive cash from customers D) Receive cash from stockholders for the issuance of common stock

118)

Which of the following is an example of a cash inflow from a financing activity? A) Issuance of bonds B) Sale of an intangible asset C) Receipt of cash dividends D) Purchase of land

119) ________ is an investing cash flow and ________ is a financing cash flow, as reported in the statement of cash flows. A) Issuing bonds; selling investments B) Purchasing land; repaying a bank loan C) Receiving cash from the sale of inventory; paying cash dividends D) Purchasing treasury stock; lending cash to an employee

120)

Cash flows from investing activities do not include cash flows from: A) Lending. B) The sale of equipment. C) Borrowing. D) The purchase of land and buildings.

121)

Cash flows from investing activities do not include:

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A) Proceeds from the sale of land. B) Proceeds from the issuance of common stock. C) Proceeds from the sale of marketable securities. D) Cash outflows from acquiring land.

122)

Cash flows from investing activities include: A) Proceeds from the issuance of common stock. B) Cash outflows from acquiring land. C) Retirement of bonds payable. D) Interest received.

123) Shively Manufacturing Company sold land costing $10,000 for $12,000. Shively would report: A) Operating cash inflows of $12,000. B) Investing cash inflows of $12,000. C) Financing cash inflows of $12,000. D) Financing cash inflows of $2,000.

124)

Cash flows from financing activities include: A) Interest received. B) Interest paid. C) Dividends received. D) Cash dividends paid.

125)

Cash flows from financing activities do not include:

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A) Retirement of bonds payable. B) Cash dividends paid. C) Issuance of common stock. D) Interest received.

126) Sammy's Pizza had the following financial information for the year as follows ($ in millions): Net income Obtain loan from the bank Depreciation expense Purchase equipment Increase in accounts receivable Pay cash dividends Increase in salaries payable Sale of land

$9,200 4,600 1,800 5,400 3,900 2,200 1,700 3,500

Sammy's Pizza would report net cash inflows (outflows) from operating activities in the amount of: A) $7,000. B) $8,800. C) $6,600. D) $7,400.

127) Sammy's Pizza had the following financial information for the year as follows ($ in millions): Net income Obtain loan from the bank Depreciation expense Purchase equipment Increase in accounts receivable Pay cash dividends Increase in salaries payable Sale of land

$9,200 4,600 1,800 5,400 3,900 2,200 1,700 3,500

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Sammy's Pizza would report net cash inflows (outflows) from investing activities in the amount of: A) $(800). B) $2,400. C) $(1,900). D) $1,300.

128) Sammy’s Pizza had the following financial information for the year as follows ($ in millions): Net income Obtain loan from the bank Depreciation expense Purchase equipment Increase in accounts receivable Pay cash dividends Increase in salaries payable Sale of land

$9,200 4,600 1,800 5,400 3,900 2,200 1,700 3,500

Sammy's Pizza would report net cash inflows (outflows) from financing activities in the amount of: A) $(7,600). B) $5,900. C) $(1,900). D) $2,400.

129)

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

Cash received from: Customers

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$2,700

Interest on investments Sale of land Sale of common stock Issuance of debt securities Cash paid for:

220 140 620 2,700

Interest on debt Income taxes Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$340 80 1,500 3,500 900 220 700

Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of: A) $680. B) $1,240. C) $(980) . D) $900.

130)

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

Cash received from: Customers Interest on investments Sale of land Sale of common stock Issuance of debt securities Cash paid for:

$1,800 200 100 600 2,000

Interest on debt Income taxes Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$ 300 80 1,500 4,000 1,000 200 500

Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of: Version 1

A) ($80). B) $120. C) $200. D) $420.

131)

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

Cash received from: Customers Interest on investments Sale of land Sale of common stock Issuance of debt securities Cash paid for:

$3,200 290 100 500 2,200

Interest on debt Income taxes Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$270 110 1,500 4,500 1,050 290 450

Bad Brad's would report net cash inflows (outflows) from investing activities in the amount of: A) $(4,400). B) $(4,500). C) $100. D) $(2,200).

132)

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

Cash received from: Customers Interest on investments

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$1,800 200

Sale of land Sale of common stock Issuance of debt securities Cash paid for:

100 600 2,000

Interest on debt Income taxes Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$ 300 80 1,500 4,000 1,000 200 500

Bad Brad's would report net cash inflows (outflows) frominvesting activities in the amount of: A) ($4,000). B) $100. C) ($3,900). D) ($1,900).

133)

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

Cash received from: Customers Interest on investments Sale of land Sale of common stock Issuance of debt securities Cash paid for:

$2,400 240 80 580 2,400

Interest on debt Income taxes Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock

$ 270 130 1,800 4,200 1,150 240

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Operating expenses

550

Bad Brad's would report net cash inflows (outflows) from financing activities in the amount of: A) $1,020. B) $(1,020). C) $1,190. D) $940.

134)

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

Cash received from: Customers Interest on investments Sale of land Sale of common stock Issuance of debt securities Cash paid for:

$1,800 200 100 600 2,000

Interest on debt Income taxes Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$ 300 80 1,500 4,000 1,000 200 500

Bad Brad's would report net cash inflows (outflows) fromfinancing activities in the amount of: A) $1,100. B) ($1,100). C) $820. D) $900.

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135) During the year, Next Tec Corporation had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000; payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net investing cash inflows (outflows) in the statement of cash flows? A) $5,000. B) $2,000. C) $6,000. D) ($8,000).

136) During the year, Next Tec Corporation had the following cash flows: receipt from customers, $15,000; receipt from the bank for long-term borrowing, $7,200; payment to suppliers, $5,900; payment of dividends; $1,700, payment to workers, $2,100; and payment for machinery, $9,500. What amount would be reported for net financing cash inflows (outflows) in the statement of cash flows? A) $7,200 B) $5,500 C) ($9,500) D) $6,500

137) During the year, Next Tec Corporation had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000; payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net financing cash inflows (outflows) in the statement of cash flows? A) $5,000. B) $2,000. C) $6,000. D) ($8,000).

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138) A company had the following cash flows for the year: 1. (a) Purchased inventory, $60,000 2. (b) Sold goods to customers, $90,000 3. (c) Received loan from a local bank, $150,000 4. (d) Purchased land, $180,000 5. (e) Purchased treasury stock, $40,000 6. (f) Paid dividends, $10,000 7. (g) Sold delivery truck, $30,000

What amount would be reported for netinvesting cash inflows (outflows) in the statement of cash flows? A) ($150,000) B) ($180,000) C) $30,000 D) ($190,000)

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139) A company had the following cash flows for the year: 1. (a) Purchased land, $60,000 2. (b) Borrowed from a local bank, $100,000 3. (c) Paid employee salaries, $50,000 4. (d) Issued common stock, $75,000 5. (e) Paid dividends, $20,000 6. (f) Sold equipment, $40,000 7. (g) Sold services to customers, $120,000

What amount would be reported for netinvesting cash inflows (outflows) in the statement of cash flows? A) ($20,000) B) $70,000 C) $155,000 D) $40,000

140)

Which of the following would be classified as an investing cash flow? A) Issue bonds B) Receive cash in advance from a customer C) Sell a piece of equipment below cost D) Repurchase the company's own shares of common stock

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141)

A company had the following cash flows for the year:1. (a) Purchased land, $60,000

2. (b) Borrowed from a local bank, $100,000 3. (c) Paid employee salaries, $50,000 4. (d) Issued common stock, $75,000 5. (e) Paid dividends, $20,000 6. (f) Sold equipment, $40,000 7. (g) Sold services to customers, $120,000

What amount would be reported for net financing cash inflows (outflows) in the statement of cash flows? A) $155,000 B) $70,000 C) ($20,000) D) $40,000

142)

Financing activities would include cash paid for: A) The stock of another company. B) Dividends to stockholders. C) The purchase of treasury stock. D) Both dividends to stockholders and the purchase of treasury stock.

143) Cash received from issuing common stock would be classified in which section of the statement of cash flows?

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A) Operating B) Investing C) Financing D) Not shown in the statement of cash flows

144) During 2024, Victory Solutions had the following cash flows: (1) received cash of $5,000 billed to a customer in 2023; (2) earned $20,000 of net income; (3) paid interest of $6,000 on a corporate bond issued; (4) paid dividends of $8,000 to its stockholders; (5) borrowed $40,000 from a local bank; and (6) purchased its own shares of common stock for $10,000. What is Victory Solutions' net cash flows fromfinancing activities for 2024? A) $40,000 B) $30,000 C) $22,000 D) $16,000

145)

The following information pertains to Baringa Computing at the end of 2024:

Assets Liabilities Net income Common stock

$962,500 445,000 227,500 380,000

Baringa Computing's Retained Earnings account had a zero balance at the beginning of 2024. What was the total amount of dividends declared by the company in 2024? A) $91,000 B) $93,000 C) $90,000 D) $92,000

146)

The following information pertains to Baringa Computing at the end of 2024:

Assets Liabilities

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$970,000 560,000

Net income Common stock

90,000 350,000

Baringa Computing's Retained Earnings account had a zero balance at the beginning of 2024. What was the total amount of dividends declared by the company in 2024? A) $280,000 B) $150,000 C) $30,000 D) $80,000

147) The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World’s cash return on assets? A) 33.3% B) 42.9% C) 25.0% D) 37.5%

148) The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's cash flow to sales? A) 15.6% B) 25.0% C) 18.8% D) 37.5%

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149) The balance sheet of Worldwide Company reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Worldwide's asset turnover? A) 2.0 times B) 2.3 times C) 0.5 times D) 1.8 times

150) The balance sheet of Logan Company reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Logan’s cash return on assets? A) 19.4% B) 21.9% C) 22.6% D) 18.8%

151) The balance sheet of Logan Company reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Logan’s cash flow to sales? A) 22.6% B) 11.7% C) 14.6% D) 13.0%

152) The balance sheet of Logan Company reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Logan’s asset turnover?

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A) 2.0 times B) 1.7 times C) 0.5 times D) 1.9 times

153) The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash return on assets compare to the industry average of 10%? A) Better B) Worse C) Same as the industry average D) Cannot be determined with the data provided.

154) The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash flow to sales ratio compare to the industry average of 5%? A) Better B) Worse C) Same as the industry average D) Cannot be determined with the data provided

155) The balance sheet of Tech Track reports total assets of $400,000 and $600,000 at the beginning and end of the year, respectively. Sales revenue for the year is $1,000,000 ($800,000 in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's asset turnover compare to the industry average of 2.0 times? A) Better B) Worse C) Same as the industry average D) Cannot be determined with the data provided

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156)

We can separate cash return on assets into: A) Cash flow to sales and return on assets. B) Cash flow to sales and asset turnover. C) Cash flow to sales and profit margin. D) Profit margin and asset turnover.

157) Some cash flow ratios are derived by substituting net cash flows from operating activities in place of: A) Average total assets. B) Net income. C) Average stockholders' equity. D) The change in cash.

158) The balance sheet of Technology World reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 20%. What is Technology World's net operating cash flows for the year? A) $4,500,000 B) $170,000 C) $4,250,000 D) $85,000

159) The balance sheet of Orion Medical Equipment reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Orion's net operating cash flows for the year? A) $5,000,000 B) $55,000 C) $5,500,000 D) $50,000

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160)

We calculate cash return on assets as A) The change in cash divided by average total assets. B) Net cash flows from operating activities divided by average total assets. C) The change in cash divided by ending total assets. D) Net cash flows from operating activities divided by ending total assets.

161)

Which of the following statements is not true relating to cash flow analysis?

A) Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. B) To maximize cash flow from operations, a company strives to increase both cash flow per dollar of sales and sales per dollar of assets invested. C) Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. D) Positive cash flow from operations is not important to a company's survival in the long run.

162) The balance sheet of Tyler Industries reports total assets of $300,000 and $350,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Tyler’s net cash flows from operating activities for the year? A) $25,000 B) $30,000 C) $32,500 D) $35,000

163) In 2024, Lonesome Company incurred sales on account of $140,000. The company also has the following information:

Accounts Receivable Accounts Payable

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December 31, 2024 $21,000 $68,000

December 31, 2023 $51,000 $46,000

What is the amount of cash received from customers for Lonesome Company in 2024? A) $170,000 B) $146,400 C) $140,000 D) $125,000

164) In 2024, Lonesome Company incurred sales on account of $100,000. The company also has the following information: December 31, 2024 December 31, 2023 Accounts Receivable Accounts Payable

$20,000 $40,000

$50,000 $65,000

What is the amount of cash received from customers for Lonesome Company in 2024? A) $100,000 B) $45,000 C) $130,000 D) $70,000

165) Wireless Technologies reports sales of $50 million. Accounts receivable at the beginning and end of the year are $5 million and $7 million, respectively. What is the amount of cash received from customers? A) $50 million B) $52 million C) $48 million D) $55 million

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166) At the beginning of the period, Utilities Payable equals $500. At the end of the period, Utilities Payable equals $700. If Utilities Expense for the period equals $1,500, what was the cash paid for utilities for the period? A) $500 B) $1,500 C) $1,300 D) $700

167) At the beginning of the period, Accounts Receivable equals $1,700. At the end of the period, Accounts Receivable equals $2,200. If Service Revenue for the period equals $15,400, what was the cash received from customers for the period? A) $13,200 B) $15,900 C) $14,900 D) $15,400

168) A company reports cost of goods sold of $40 million. Inventory at the beginning and end of the year is $4 million and $3 million, respectively. Accounts payable at the beginning and end of the year are $3 million and $6 million, respectively. What is the amount of cash paid to suppliers? A) $40 million B) $36 million C) $44 million D) $42 million

169) A company reports operating expenses of $2 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year is $20,000 and $70,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?

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A) $2,000,000 B) $2,070,000 C) $1,950,000 D) $2,050,000

170) A company reports income tax expense of $800,000. Income tax payable at the beginning and end of the year is $50,000 and $70,000, respectively. What is the amount of cash paid for income taxes? A) $780,000 B) $800,000 C) $820,000 D) $870,000

171) A company reports sales of $100 million. Accounts receivable at the beginning and end of the year are $6 million and $9 million, respectively. What is the amount of cash received from customers? A) $100 million B) $103 million C) $97 million D) $109 million

172) A company reports cost of goods sold of $75 million. Inventory at the beginning and end of the year is $8 million and $9 million, respectively. Accounts payable at the beginning and end of the year are $5 million and $3 million, respectively. What is the amount of cash paid to suppliers? A) $78 million B) $72 million C) $75 million D) $76 million

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173) A company reports operating expenses of $5 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year is $120,000 and $80,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses? A) $5,000,000 B) $5,040,000 C) $4,960,000 D) $5,080,000

174) A company reports income tax expense of $1,700,000. Income tax payable at the beginning and end of the year is $250,000 and $370,000, respectively. What is the amount of cash paid for income taxes? A) $1,700,000 B) $1,820,000 C) $2,070,000 D) $1,580,000

175) A company purchases its inventory from suppliers on account. During the year, its inventory account increased by $20 million and its accounts payable to suppliers decreased by $7 million. If cost of goods sold was $520 million, its cash outflows to inventory suppliers totaled: A) $493 million. B) $547 million. C) $507 million. D) $533 million.

176) A company purchases its inventory from suppliers on account. During the year, its inventory account increased by $10 million and its accounts payable to suppliers decreased by $3 million. If cost of goods sold was $440 million, its cash outflows to inventory suppliers totaled:

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A) $453 million. B) $447 million. C) $433 million. D) $427 million.

177) A company's Income Tax Payable account decreased from $17 million to $14 million during the year. If its income tax expense was $106 million, what would be shown as cash paid for income taxes under the direct method? A) A cash outflow of $103 million B) A cash outflow of $106 million C) A cash outflow of $109 million D) A cash outflow of $14 million

178) A company's Income Tax Payable account decreased from $14 million to $12 million during the year. If its income tax expense was $80 million, what would be shown as cash paid for income taxes under the direct method? A) A cash outflow of $12 million B) A cash outflow of $78 million C) A cash outflow of $80 million D) A cash outflow of $82 million

179) A company began operations in Year 1. The following information is provided at the end of each year:

Total salaries earned by employees Salaries payable

Year 1

Year 2

$150,000 20,000

$180,000 30,000

What would be the cash paid to employees in Year 2?

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A) $150,000 B) $160,000 C) $170,000 D) $180,000

180) A company collects $50,000 from customers for the year. Accounts Receivable at the beginning of the year is $5,000, and Accounts Receivable at the end of the year is $15,000. What is sales revenue for the year? A) $60,000 B) $55,000 C) $65,000 D) $40,000

181) Which of the following items isnot reported in the operating section of the statement of cash flows using thedirect method? A) Depreciation expense B) Cash paid to suppliers C) Cash received from customers D) Cash paid for income taxes

182) Which of the following items is reported in the operating section of the statement of cash flows using the direct method? A) Depreciation expense B) Gain on sale of an asset C) Cash received from customers D) Loss on sale of an asset

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 183) Identify and briefly describe the three categories of cash flows reported in the statement of cash flows.

184) Distinguish between the indirect method and the direct method for reporting net cash flows from operating activities. Which method is more common in practice? Which method provides a more logical presentation of cash flows?

185) Highland Park Homes reports net income of $300,000, and yet its net cash flow from operating activities is a negative $200,000 during the same period. Is this possible? Explain.

186) A $10,000 investment on the books of the company is sold for $11,000. How does this transaction affect operating, investing, and financing activities under the indirect method?

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187) Explain the difference in the calculation of return on assets and cash return on assets. How can cash-based ratios supplement the analysis of ratios based on income statement and balance sheet information?

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Answer Key Test name: Chap 11_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities. 4) TRUE 5) FALSE Capital expenditures are included in investing activities, not financing activities. 6) FALSE Financing activities are both inflows and outflows of cash resulting from the external financing of a business. 7) FALSE We report interest and dividends received from investments with operating activities. 8) TRUE 9) FALSE We record dividends received as an operating activity. 10) TRUE 11) TRUE 12) FALSE We represent this as a noncash activity either directly after the cash flow statement or in a note to the financial statements. 13) FALSE

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Purchase of long-term assets by issuing debt is reported as a noncash activity either directly after the cash flow statement or in a separate note to the financial statements. 14) FALSE The total net cash flows from operating activities are identical under both the direct and indirect methods. 15) TRUE 16) TRUE 17) TRUE 18) TRUE 19) FALSE When the indirect method is used to prepare the operating activities section of the statement of cash flows, the adjustments to net income for income statement items include (a) removing noncash revenues and noncash expenses and (b) removing nonoperating gains and nonoperating losses. 20) TRUE 21) FALSE An increase in accounts receivable represents sales to customers (accrual-basis revenue) that have not yet been collected (no operating cash inflow). We need toremove this amount of revenue from net income so that only the cash portion of sales revenue remains. 22) TRUE 23) TRUE 24) FALSE

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Amortization expense reduces net income without any related cash outflows in the current period. Because we deducted this noncash item in the determination of net income, we need to add back that amount in calculating operating cash flows. Adding back the amount of amortization eliminates the deduction of this noncash expense in net income. 25) TRUE 26) FALSE To calculate operating cash flows using the indirect method, we adjust for gains and losses that do not affect operating cash flows. These gains and losses typically relate to investing activities, such as the sale of land, equipment and buildings. To remove their impact, gains should be subtracted and losses should be added back to net income. 27) FALSE A gain on the sale of long-term assets is subtracted from net income to arrive at net cash flows from operating activities under the indirect method. 28) TRUE 29) TRUE 30) FALSE We would subtract an increase in prepaid rent from net income to arrive at net cash flows from operating activities under the indirect method. 31) FALSE We would subtract an increase in inventory and add a decrease in inventory to net income to arrive at net cash flows from operating activities under the indirect method. 32) TRUE 33) TRUE 34) FALSE Version 1

We would subtract a decrease in accounts payable from net income to arrive at net cash flows from operating activities under the indirect method. 35) TRUE 36) FALSE The sale of land is reported in the investing activities section of the statement of cash flows. 37) TRUE 38) TRUE 39) TRUE 40) FALSE The inflow of cash received from issuing common stock is reported as a financing activity. 41) TRUE 42) FALSE We report the payment of cash dividends as a cash outflow from financing activities. 43) FALSE We calculate cash return on assets as operating cash flows divided by average total assets. 44) TRUE 45) TRUE 46) TRUE 47) FALSE Income statement items that have no cash effect are simply not reported under the direct method. 48) TRUE 49) FALSE If accounts receivable increases, this indicates that revenues exceed cash receipts from customers. Version 1

50) TRUE 51) TRUE 52) TRUE 53) FALSE We deduct an increase in interest payable from interest expense in arriving at cash paid for interest under the direct method. 54) TRUE 55) TRUE 56) C 57) B 58) B 59) B 60) C 61) C 62) D 63) C 64) C 65) C 66) C 67) C The sale of land would be classified as a cash inflow from investing activities. 68) C 69) C 70) D 71) C 72) B 73) A 74) B Version 1

75) C 76) C 77) C 78) C 79) D 80) B 81) C 82) C 83) D 84) B 85) C 86) A 87) A 88) A 89) A 90) A 91) A 92) A (a) Decrease in accounts receivable and (g) Depreciation expense. 93) A (c) Increase in interest receivable, (e) Decrease in accounts payable, (f) Gain on the sale of equipment, (i) Decrease in utilities payable, (j) Increase in inventory. 94) A 95) A 96) A 97) A 98) B Net income Adjustments to reconcile net income to net cash flows from

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$230,000

operating activities: Decrease in accounts receivable Increase in accounts payable Net cash flows from operating activities

6,500 7,000 $243,500

99) C Net income Adjustments to reconcile net income to net cash flows from operating activities: Decrease in accounts receivable Increase in accounts payable Net cash flows from operating activities

$200,000

3,000 2,000 $205,000

100) D Net income Adjustments to reconcile net income to net cash flows from operating activities: Increase in accounts receivable Decrease in accounts payable Net cash flows from operating activities

$144,000

(10,000) (5,900) $128,100

101) A Net income Adjustments to reconcile net income to net cash flows from operating activities: Increase in accounts receivable Decrease in accounts payable Net cash flows from operating activities

$135,000

(1,000) (2,000) $132,000

102) B $520,000 + $74,000 = $594,000. The $40,000 cash borrowed is a financing activity. 103) C $450,000 + $70,000 = $520,000. The $50,000 cash borrowed is a financing activity. 104) C $210,000 + $6,200 + $8,000 − $2,800 = $221,400. 105) D $100,000 + $8,000 + $7,500 − $2,500 = $113,000. Version 1

106) C Net income Adjustments to reconcile net income to net cash flows from operating activities: Increase in inventory Decrease in accounts payable Net cash flows from operating activities

$218,000

(1,500) (3,000) $213,500

107) B Net income Adjustments to reconcile net income to net cash flows from operating activities: Increase in inventory Decrease in accounts payable Net cash flows from operating activities

$205,000

(5,000) (2,000) $198,000

108) A Net Income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Increase in prepaid insurance Increase in salaries payable Net Cash Flows from Operating Activities

$350,000

46,500 (61,000) 37,500 (3,100) 53,000 $422,900

109) C Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Increase in prepaid insurance Increase in salaries payable Net Cash Flows from Operating Activities

$250,000

45,000 (60,000) 30,000 (3,000) 50,000 $312,000

110) C Net income Adjustments to reconcile net income to net cash flows from operating activities:

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$300,000

Depreciation expense Decrease in accounts receivable Decrease in inventory Increase in interest payable Decrease in salaries payable

35,000 50,000 20,000 7,000 (75,000)

Net cash flows from operating activities

$337,000

111) C Net Income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Increase in accounts payable Net cash flows from operating activities

$125,000*

41,500 (1,000) 6,000 $171,500

*Net income = Total revenues of $870,000 − Total expenses of $745,000 = $125,000 112) B Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Increase in accounts payable

$130,000*

Net cash flows from operating activities

40,000 (10,000) 6,000 $166,000

*Net income = Total revenues of $850,000 − Total expenses of $720,000 = $130,000 113) C Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of asset Increase in prepaid rent Increase in inventory Increase in accounts payable Increase in salaries payable

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$225,000

10,000 1,400 (29,500) (81,000) 27,500 16,500 61

Net cash flows from operating activities

$169,900

114) B Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of asset Increase in prepaid rent Increase in inventory Increase in accounts payable Increase in salaries payable Net cash flows from operating activities

$115,000

6,000 1,000 (24,000) (50,000) 25,000 15,000 $ 88,000

115) C 116) B 117) B 118) A 119) B 120) C 121) B 122) B 123) B 124) D 125) D 126) B $8,800 = $9,200 + $1,800 − $3,900 + $1,700 127) C $(1,900) = $(5,400) + $3,500 128) D $2,400 = $4,600 − $2,200 129) D Cash received from customers Interest collected on investments Interest paid on debt Income taxes paid

$2,700 220 (340) (80)

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Purchase of inventory Operating expenses paid Net cash inflows from operating activities

(900) (700) $900

130) B Cash received from customers Interest collected on investments Interest paid on debt Income taxes paid Purchase of inventory Operating expenses paid Net cash inflows from operating activities

$1,800 200 (300) (80) (1,000) (500) $ 120

131) A Sale of land Purchase of equipment Net cash outflows from investing activities

$100 (4,500) $(4,400)

132) C Sale of land Purchase of equipment

$ 100 (4,000)

Net cash outflows from investing activities

$(3,900)

133) D Sale of common stock Issuance of debt securities Debt principal reduction Dividends on common stock Net cash inflows from financing activities

$580 2,400 (1,800) (240) $940

134) D Sale of common stock Issuance of debt securities Debt principal reduction Dividends on common stock Net cash inflows from financing activities

$ 600 2,000 (1,500) (200) $ 900

135) D Payment for machinery, $8,000. 136) B Receipt from the bank for long-term borrowing, $7,200 minus payment of dividends, $1,700. Version 1

137) A Receipt from the bank for long-term borrowing, $6,000, minus payment of dividends, $1,000. 138) A $30,000 (g) − $180,000 (d) = ($150,000) 139) A $40,000 (f) − $60,000 (a) = ($20,000) 140) C 141) A $100,000 (b) + $75,000 (d) − $20,000 (e) = $155,000 142) D 143) C 144) C (1), (2), and (3) are operating activities. (4), (5), and (6) are financing activities. (5) is a financing inflow, and (4) and (6) are financing outflows. Therefore, $40,000 − $8,000 − $10,000 = $22,000. 145) C Assets = Liabilities + Common Stock + Retained Earnings $962,500 = $445,000 + $380,000 + Retained Earnings Retained Earnings = $137,500 $137,500 = $0 + $227,500 − Dividends Dividends = $90,000 146) C Assets = Liabilities + Common Stock + Retained Earnings $970,000 = $560,000 + $350,000 + Retained Earnings Retained Earnings = $60,000 $60,000 = $0 + $90,000 − Dividends Dividends = $30,000 147) D Operating Cash

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Average Total Assets

= Cash Return on

Flows $150,000

($350,000 + $450,000)/2

Assets 37.5%

148) C Operating Cash Flows $150,000

Sales

Cash Flow to Sales

$800,000

18.8% (rounded)

149) A Sales $800,000

÷ ÷

Average Total Assets ($350,000 + $450,000)/2

= =

Asset Turnover 2.0 times

Average Total Assets

($750,000 + $800,000)/2

Cash Return on Assets 22.6% (rounded)

150) C Operating Cash Flows $175,000

151) B Operating Cash Flows $175,000

Sales

Cash Flow to Sales

$1,500,000

11.7% (rounded)

152) D Sales $1,500,000

÷ ÷

Average Total Assets ($750,000 + $800,000)/2

= =

Asset Turnover 1.9 times (rounded)

153) A Operating Cash ÷ Flows $50,000 ÷

Average Total Assets

Cash Return on Assets

($400,000 + $500,000)/2

11.1% (rounded)

154) B Operating Cash ÷ Flows $50,000 ÷

Sales

Cash Flow to Sales

1,100,000

4.5% (rounded)

155) C Sales $1,000,000

÷ ÷

Average Total Assets ($400,000 + $600,000)/2

= =

Asset Turnover 2.0 times

156) B 157) B 158) B

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Operating cash flows divided by average total assets equals 20%. Average total assets equal $850,000 [($800,000 + $900,000)/2]; therefore, operating cash flows must be $170,000 ($850,000 × 20%). 159) D Operating cash flows divided by average total assets equals 10%. Average total assets equal $500,000 [($450,000 + $550,000)/2]; therefore, operating cash flows must be $50,000 ($500,000 × 10%). 160) B 161) D 162) C Net cash flows for operating activities = 0.10 × [($300,000 + $350,000) ÷ 2] = $32,500. 163) A $140,000 + $30,000 decrease in accounts receivable = $170,000 164) C $100,000 + $30,000 decrease in accounts receivable = $130,000 165) C Sales − Increase in accounts receivable

$50 (2)

= Cash received from customers

$48

166) C Utilities Expense − Increase in Utilities Payable = Cash paid for utilities

$1,500 (200) $1,300

167) C Service Revenue − Increase in Accounts Receivable = Cash received from customers

$15,400 (500) $14,900

168) B Cost of goods sold − Decrease in inventory = Purchases − Increase in accounts payable

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$40 (1) 39 (3)

= Cash paid to suppliers

$36

169) D Operating expenses

$2,000,000

+ Increase in prepaid rent

50,000

= Cash paid for operating expenses

$2,050,000

170) A Income tax expense − Increase in income tax payable

$800,000 (20,000)

= Cash paid for income taxes

$780,000

171) C Sales − Increase in accounts receivable

$100 (3)

= Cash received from customers

$97

172) A Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable

$75 1 76 2

= Cash paid to suppliers

$78

173) C Operating expenses − Decrease in prepaid rent

$5,000,000 (40,000)

= Cash paid for operating expenses

$4,960,000

174) D Income tax expense − Increase in income tax payable

$1,700,000 (120,000)

Cash paid for income taxes

$1,580,000

175) B Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable = Cash paid to suppliers

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$520 20 540 7 $547

176) A Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable

$440 10 450 3

= Cash paid to suppliers

$453

177) C $106 million + $3 million decrease in income tax payable = $109 million. 178) D $80 million + $2 million decrease in income tax payable = $82 million. 179) C $170,000 = $180,000 − ($30,000 − $20,000) 180) A $X − ($15,000 − $5,000) = $50,000 Sales revenue = $60,000 181) A 182) C 183)The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities, essentially the very same activities reported in the income statement. Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Financing activities are cash flows resulting from the external financing of a business such as long-term liabilities and stockholders' equity.

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184) Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. Using the direct method, we adjust the items in the income statement to directly show the cash inflows and outflows from operations such as cash received from customers, and cash paid for inventory, salaries, rent, interest and taxes. The indirect method is more common in practice, while the direct method provides a more logical presentation of cash flows. 185) It is possible to report net income and negative operating cash flows at the same time. Increases in current assets and decreases in current liabilities both result in net income that is higher than operating cash flows. As one specific example, an increase in accounts receivable of $500,000 would result in net income exceeding operating cash flows by $500,000. 186) The $1,000 gain on sale of the investment is subtracted from net income in arriving at net operating cash flows. The sale of the investment is also reported as an $11,000 increase to cash flows from investing activities. This transaction has no effect on financing activities. 187) Return on assets has net income in the numerator while cash return on assets has cash flows from operations in the numerator. Both ratios divide by average total assets. Analysts often supplement their investigation of income statement and balance sheet amounts with cash flow ratios. Some cash flow ratios are derived by substituting net cash flows from operating activities in place of net income. Cash flow ratios offer additional insight in the evaluation of a company's profitability and financial strength.

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CHAPTER 12: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Match the following: Terms: A) Vertical analysis B) Growth stocks C) Profitability ratios D) Value stocks E) Solvency F) Horizontal analysis G) Liquidity Descriptions: 1) Analyzes trends in financial statement data for a single company over time. 2) Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios. 3) Expresses each item in a financial statement as a percentage of the same base amount measured in the same period. 4) Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts. 5) Refers to a company's ability to pay its current and long-term liabilities. 6) Have high expectations of future earnings and therefore usually trade at higher P/E ratios. 7) Measure the earnings or operating effectiveness of a company.

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Match the following:

Terms: A) Aggressive accounting practices B) Horizontal analysis C) Liquidity D) Other revenues and expenses E) Discontinued operation F) Vertical analysis G) Solvency H) Conservative accounting practices Descriptions: 1) Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts. 2) Accounting choices that result in reporting lower income, lower assets, and higher liabilities. 3) The sale or disposal of most long-term assets. 4) Accounting choices that result in reporting higher income, higher assets, and lower liabilities. 5) A tool to analyze trends in financial statement data for a single company over time. 6) The sale or disposal of a significant component of a company's operations. 7) A means to express each item in a financial statement as a percentage of a base amount measured in the same period. 8) A company's ability to pay its current and long-term liabilities.

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Match the following:

Terms: A) Current ratio B) Acid-test ratio C) Inventory turnover ratio D) Average collection period E) Average days in inventory F) Receivables turnover ratio G) Debt to equity ratio H) Times interest earned ratio Descriptions: 1) Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period. 2) Total liabilities divided by total stockholders' equity; measures a company's solvency risk. 3) Approximate number of days the average inventory is held. 4) Ratio that compares interest expense with income available to pay those charges. 5) Net sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected. 6) Cash, short-term investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities 7) Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities. 8) Approximate number of days the average accounts receivable balance is outstanding.

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Match the following:

Terms: A) Asset turnover B) Price-earnings (PE) ratio C) Profit margin D) Gross profit ratio E) Return on assets F) Return on equity Descriptions: 1) Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. 2) Compares a company's share price with its earnings per share. 3) Net income divided by average stockholders' equity; measures the income generated per dollar of equity. 4) Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. 5) Net sales divided by average total assets; which measures the sales per dollar of assets invested. 6) Net income divided by net sales; indicates the earnings per dollar of sales.

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Match the following:

Terms: A) Other revenues and expenses B) Quality of earnings C) Discontinued operation D) Aggressive accounting practices E) Conservative accounting practices Descriptions: 1) The sale or disposal of most long-term assets. 2) The sale or disposal of a significant component of a company's operations. 3) Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings. 4) Practices that result in reporting lower income, lower assets, and higher liabilities. 5) Practices that result in reporting higher income, higher assets, and lower liabilities.

Consider the following information: 2024

2023

Cash Accounts receivable Inventory Long-term assets

$600,000 950,000 720,000 2,200,000

$210,000 780,000 520,000 2,800,000

Total assets

$4,470,000

$4,310,000

Required: Perform a vertical analysis for both years. (Round each percentage to one decimal place.)

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Consider the following information: 2024

2023

Cash Accounts receivable Inventory Long-term assets

$500,000 900,000 700,000 2,200,000

$200,000 800,000 500,000 2,500,000

Total assets

$4,300,000

$4,000,000

Required: Perform a vertical analysis for both years. (Round each percentage to one decimal place.)

Consider the following information: 2024

2023

Cash Accounts receivable Inventory Long-term assets

$610,000 910,000 710,000 1,900,000

$220,000 750,000 540,000 2,300,000

Total assets

$4,130,000

$3,810,000

Required: Perform a horizontal analysis for both years; provide both the dollar amount and percentage change for each item. (Round each percentage to one decimal place.)

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Consider the following information: 2024

2023

Cash Accounts receivable Inventory Long-term assets

$500,000 900,000 700,000 2,200,000

$200,000 800,000 500,000 2,500,000

Total assets

$4,300,000

$4,000,000

Required: Perform a horizontal analysis for both years; provide both the dollar amount and percentage change for each item. (Round each percentage to one decimal place.)

10) Assume a company's sales are $1.2 million in 2023, $1.4 million in 2024, and $1.3 million in 2025. Required: What is the percentage change from 2023 to 2024? What is the percentage change from 2024 to 2025? (Be sure to indicate whether the percentage change is an increase or a decrease.)

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11) Assume a company's sales are $1.6 million in 2023, $1.8 million in 2024, and $1.7 million in 2025. Required: What is the percentage change from 2023 to 2024? What is the percentage change from 2024 to 2025? (Be sure to indicate whether the percentage change is an increase or a decrease.)

12) A company's sales are $620,000 in 2024. This represents a(n) 8% increase over sales in 2023. Required: What were sales in 2023?

13) A company's sales are $648,000 in 2024. This represents an 8% increase over sales in 2023. Required: What were sales in 2023?

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14) A company began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Required: Calculate the receivables turnover ratio for the year. (Round your answer to one decimal place.)

15) A company began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Required: Calculate the receivables turnover ratio for the year. (Round your answer to one decimal place.)

16) A company began the year with an inventory balance of $230,000, and had a year-end balance of $250,000. Sales of $900,000 generated a gross profit of $210,000. Required: Calculate the inventory turnover ratio for the year. (Round your answer to one decimal place.)

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17) A company began the year with an inventory balance of $180,000, and had a year-end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Required: Calculate the inventory turnover ratio for the year. (Round your answer to one decimal place.)

18) A company reports sales revenue of $2,200,000. Average inventory during the year was $110,000. The inventory turnover ratio for the year is 8.0. Required: What amount of gross profit would the company report in its income statement?

19) A company reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. Required: What amount of gross profit would the company report in its income statement?

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20) A company has a current ratio of 0.67 to 1, based on current assets of $2 million and current liabilities of $3 million. Required: 1. How, if at all, will a $570,000 cash purchase of inventory affect the current ratio? 2. How, if at all, will a $570,000 purchase of inventory on account affect the current ratio?

21) A company has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. Required: 1. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? 2. How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?

22)

The income statement and balance sheets for Laser World are provided below: LASER WORLD Income Statement For the Year Ended December 31, 2024

Sales revenue Cost of goods sold Gross profit Expenses: Operating expenses Depreciation expense Loss on sale of land Interest expense Income tax expense

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$2,230,000 1,540,000 690,000

348,000 64,000 4,900 22,000 55,000 11

Total expenses

493,900

Net income

$196,100 LASER WORLD Balance Sheets December 31 2024

2023

Cash Accounts receivable Inventory Prepaid rent Long-term assets:

$122,000 98,000 170,000 19,000

$106,000 75,000 150,000 19,000

Land Equipment Accumulated depreciation

310,000 330,000 (76,000)

250,000 280,000 (45,000)

Total assets

$973,000

$835,000

Accounts payable Interest payable Income tax payable Long-term liabilities:

$50,000 8,700 15,400

$59,000 7,700 12,800

Notes payable Stockholders' equity:

310,000

210,000

Common stock Retained earnings

170,000 418,900

170,000 375,500

Total liabilities and Stockholders' Equity

$973,000

$835,000

Assets Current assets:

Liabilities and Stockholders' Equity Current liabilities:

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Required: Assuming that all sales were on account, calculate the following risk ratios for 2024: (Round your answers to one decimal place.) 1. Receivables turnover ratio 2. Average collection period 3. Inventory turnover ratio 4. Average days in inventory 5. Current ratio 6. Acid-test ratio 7. Debt to equity ratio 8. Times interest earned ratio

23)

The income statement and balance sheets for Laser World are provided below: LASER WORLD Income Statement For the Year Ended December 31, 2024

Sales revenue Cost of goods sold Gross profit Expenses:

$2,200,000 1,500,000 700,000

Operating expenses Depreciation expense Loss on sale of land Interest expense Income tax expense Total expenses

350,000 70,000 5,000 25,000 60,000 510,000

Net income

$190,000 LASER WORLD Balance Sheets December 31

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2024

2023

Cash Accounts receivable Inventory Prepaid rent Long-term assets:

$120,000 90,000 120,000 10,000

$112,000 70,000 100,000 10,000

Land Equipment Accumulated depreciation

260,000 350,000 (70,000)

200,000 210,000 (42,000)

Total assets

$880,000

$660,000

Accounts payable Interest payable Income tax payable Long-term liabilities:

$55,000 8,000 15,000

$75,000 7,000 12,000

Notes payable Stockholders' equity:

400,000

300,000

Common stock Retained earnings

200,000 202,000

200,000 66,000

Total liabilities and Stockholders' Equity

$880,000

$660,000

Assets Current assets:

Liabilities and Stockholders' Equity Current liabilities:

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24)

The income statement and balance sheets for Worlds of Fun are provided below: Worlds of Fun Income Statement For the Year Ended December 31, 2024

Sales revenue Cost of goods sold Gross profit Expenses:

$2,312,500 1,510,000 802,500

Operating expenses Depreciation expense Loss on sale of land Interest expense Income tax expense Total expenses

341,000 61,000 4,500 25,000 56,000 487,500

Net income

$315,000 Worlds of Fun Balance Sheets December 31

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2024

2023

Cash Accounts receivable Inventory Prepaid rent Long-term assets:

$129,000 96,000 130,000 18,000

$109,000 74,000 110,000 18,000

Land Equipment Accumulated depreciation

270,000 420,000 (77,000)

210,000 250,000 (40,000)

Total assets

$986,000

$731,000

Accounts payable Interest payable Income tax payable Long-term liabilities:

$52,000 8,000 15,500

$76,000 7,000 12,500

Notes payable Stockholders' equity:

420,000

320,000

Common stock Retained earnings

210,000 280,500

210,000 105,500

Total liabilities and equity

$986,000

$731,000

Assets Current assets:

Liabilities and Stockholders' Equity Current liabilities:

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Earnings per share for the year ended December 31, 2024, is $1.50. The closing stock price on December 31, 2024, is $34.10. Required: Calculate the following profitability ratios for 2024:(Round your answers to one decimal place.) 1. Gross profit ratio 2. Return on assets 3. Profit margin 4. Asset turnover 5. Return on equity 6. Price-earnings ratio

25)

The income statement and balance sheets for Worlds of Fun are provided below: Worlds of Fun Income Statement For the Year Ended December 31, 2024

Sales revenue Cost of goods sold Gross profit Expenses:

$2,200,000 1,500,000 700,000

Operating expenses Depreciation expense Loss on sale of land Interest expense Income tax expense Total expenses

350,000 70,000 5,000 25,000 60,000 510,000

Net income

$190,000 Worlds of Fun Balance Sheets December 31

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2024

2023

Cash Accounts receivable Inventory Prepaid rent Long-term assets:

$120,000 90,000 120,000 10,000

$112,000 70,000 100,000 10,000

Land Equipment Accumulated depreciation

260,000 350,000 (70,000)

200,000 210,000 (42,000)

Total assets

$880,000

$660,000

Accounts payable Interest payable Income tax payable Long-term liabilities:

$55,000 8,000 15,000

$75,000 7,000 12,000

Notes payable Stockholders' equity:

400,000

300,000

Common stock Retained earnings

200,000 202,000

200,000 66,000

Total liabilities and equity

$880,000

$660,000

Assets Current assets:

Liabilities and Stockholders' Equity Current liabilities:

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Earnings per share for the year ended December 31, 2024, is $1.90. The closing stock price on December 31, 2024, is $30.40. Required: Calculate the following profitability ratios for 2024: (Round your answers to one decimal place.) 1. Gross profit ratio 2. Return on assets 3. Profit margin 4. Asset turnover 5. Return on equity 6. Price-earnings ratio

26) Barry's BBQ had sales revenue for the year of $500 million and net income of $45 million. Total assets were $80 million at the beginning of the year, and $90 million at the end of the year. Required: Calculate the following ratios: (Round your answers to one decimal place.) 1. Return on assets ratio 2. Profit margin ratio 3. Asset turnover ratio

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27) Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Required: Calculate the following ratios: (Round your answers to one decimal place.) 1. Return on assets ratio 2. Profit margin ratio 3. Asset turnover ratio

28) A company reports net income of $840,000, average total assets of $2,500,000, and average total liabilities of $490,000. Required: Calculate the following ratios: (Round your answers to one decimal place.) 1. Return on assets ratio 2. Return on equity ratio

29) A company reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Required: Calculate the following ratios: (Round your answers to one decimal place.) 1. Return on assets ratio 2. Return on equity ratio

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30) Phillip's Fun Center has several playground areas, go-karts, miniature golf, bumper boats, paintball, and laser tag. Required: Determine whether the company should report each of the following items as discontinued operations, other revenues, or other expenses: 1. The company sells an outdoor playground at a gain of $5,000. 2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new gokarts. 3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments. Laser tag is considered to be a separate business segment. 4. The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment.

31)

Consider each of the following accounting practices:

1. Increase the allowance for uncollectible accounts. 2. When costs are rising, change from FIFO to LIFO. 3. Increase the estimated useful life of equipment. Required: Classify each of the accounting practices listed above as conservative or aggressive.

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32) Consider each of the following accounting practices: 1. Choosing a shorter life for calculating depreciation. 2. The write-down of inventory. 3. Decrease the allowance for uncollectible accounts. 4. Reporting revenues sooner. Required: Classify each of the accounting practices listed above as conservative or aggressive.

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Answer Key Test name: Chap 12_6e_Spiceland_Problem Material 1) 1) F 2) D 3) A 4) G 5) E 6) B 7) C 2) 1) C 2) H 3) D 4) A 5) B 6) E 7) F 8) G 3) 1) C 2) G 3) E 4) H 5) F 6) B 7) A 8) D 4) 1) E 2) B 3) F 4) D 5) A 6) C 5) 1) A 2) C 3) B 4) E 5) D 6) 2024

Cash Accounts receivable

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2023

Amount

Percentage

Amount

$600,000 950,000

13.4 21.3

$210,000 780,000

Percentage 4.9 18.1

Inventory Long-term assets

720,000 2,200,000

16.1 49.2

520,000 2,800,000

12.1 65.0

Total assets

$4,470,000

100.0

$4,310,000

100.0

7) 2024 Cash Accounts receivable Inventory Long-term assets

Amount $500,000 900,000 700,000 2,200,000

Percentage 11.6 20.9 16.3 51.2

Total assets

$4,300,000

100.0

2023 Amount Percentage $200,000 5.0 800,000 20.0 500,000 12.5 2,500,000 62.5 $4,000,000

100.0

8) Year Cash Accounts receivable Inventory Long-term assets

2024 $610,000 910,000

2023 $220,000 750,000

Increase (Decrease) Amount Percentage $390,000 177.3 160,000 21.3

710,000 1,900,000

540,000 2,300,000

170,000 (400,000)

31.5 (17.4)

Total assets

$4,130,000

$3,810,000

$1,120,000

29.4

9) Year Cash Accounts receivable Inventory Long-term assets

2024 $500,000 900,000

2023 $200,000 800,000

Increase (Decrease) Amount Percentage $300,000 150.0 100,000 12.5

700,000 2,200,000

500,000 2,500,000

200,000 (300,000)

40.0 (12.0)

Total assets

$4,300,000

$4,000,000

$300,000

7.5

10)Percentage change from 2023 to 2024 = ($1.4 million − $1.2 million) ÷ $1.2 million = 16.7% increase. Percentage change from 2024 to 2025 = ($1.3 million − $1.4 million) ÷ $1.4 million = 7.1% decrease.

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11)Percentage change from 2023 to 2024 = ($1.8 million − 1.6 million) ÷ $1.6 million = 12.5% increase Percentage change from 2024 to 2025 = ($1.7 million − $1.8 million) ÷ $1.8 million = 5.6% decrease 12)$620,000 ÷ 1.08 = $574,074 13) $648,000 ÷ 1.08 = $600,000 14)Receivables turnover ratio = $870,000 / ($240,000 + $270,000)/2 = 3.4 times (rounded) 15)Receivables turnover ratio = $800,000 / ($250,000 + $280,000) / 2 = 3.0 times (rounded) 16)Inventory turnover ratio = $690,000* / ($230,000 + $250,000)/2 = 2.9 times (rounded) *$900,000 (sales) − $210,000 (gross profit) = $690,000 COGS 17)Inventory turnover ratio = $650,000* / ($180,000 + $200,000) / 2 = 3.4 times (rounded) *$800,000 (sales) − $150,000 (gross profit) = $650,000 COGS 18) Inventory turnover ratio = COGS* / $110,000 = 8.0 times*COGS = $110,000 × 8.0 = $880,000. Given sales of $2,200,000 and calculating COGS of $880,000, gross profit is $1,320,000. Sales − Cost of goods sold = Gross profit

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$2,200,000 880,000 $ 1,320,000

19)Inventory turnover ratio = COGS* / $200,000 = 8.0 times *

COGS = $200,000 × 8.0 = $1,600,000.

Given sales of $2,200,000 and calculating COGS of $1,600,000, gross profit is $600,000. Sales − Cost of goods sold = Gross profit

$2,200,000 1,600,000 $ 600,000

20)1. Current ratio before purchase of inventory: $2,000,000/$3,000,000 = 0.67 to 1 Current ratio after $570,000 cash purchase of inventory: ($2,000,000 + $570,000 inventory − $570,000 cash)/$3,000,000 = 0.67 to 1 A cash purchase of inventory will not affect the current ratio. 2. Current ratio after $570,000 purchase of inventory on account: ($2,000,000 + $570,000 inventory)/($3,000,000 + $570,000 accounts payable) = 0.72 to 1 A purchase of inventory on account will increase the current ratio.

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21)1.Current ratio before purchase of inventory: $3,000,000 / $4,000,000 = 0.75 to 1 Current ratio after $500,000 cash purchase of inventory: ($3,000,000 + $500,000 inventory − $500,000 cash) / $4,000,000 = 0.75 to 1 A cash purchase of inventory will not affect the current ratio. 2. Current ratio after $500,000 purchase of inventory on account: ($3,000,000 + $500,000 inventory) / ($4,000,000 + $500,000 accounts payable) = 0.78 to 1 A purchase of inventory on account will increase the current ratio. 22)Risk Ratios and Calculations 1. Receivables turnover ratio = $2,230,000/($98,000 + $75,000)/2 = 25.8 times 2. Average collection period = 365/25.8 = 14.1 days 3. Inventory turnover ratio = $1,540,000/($170,000 + $150,000)/2 = 9.6 times 4. Average days in inventory = 365/9.6 = 38.0 days 5. Current ratio = $409,000/$74,100 = 5.5 to 1 6. Acid-test ratio = ($122,000 + $98,000)/$74,100 = 3.0 to 1 7. Debt to equity ratio = $384,100/$588,900 = 65.2% 8. Times interest earned ratio = ($196,100 + $22,000 + $55,000)/$22,000 = 12.4 times

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23)Risk Ratios and Calculations 1. Receivables turnover ratio = $2,200,000 / ($90,000 + $70,000) / 2 = 27.5 times 2. Average collection period = 365 / 27.5 = 13.3 days 3. Inventory turnover ratio = $1,500,000 / ($120,000 + $100,000) / 2 = 13.6 times 4. Average days in inventory = 365 / 13.6 = 26.8 days 5. Current ratio = $340,000 / $78,000 = 4.4 to 1 6. Acid-test ratio = ($120,000 + $90,000) / $78,000 = 2.7 to 1 7. Debt to equity ratio = $478,000 / $402,000 = 118.9% 8. Times interest earned ratio = ($190,000 + $25,000 + $60,000) / $25,000 = 11.0 times 24)Profitability Ratios and Calculations 1. Gross profit ratio = $802,500/$2,312,500 = 34.7% 2. Return on assets = $315,000/($986,000 + $731,000)/2 = 36.7% 3. Profit margin = $315,000/$2,312,500 = 13.6% 4. Asset turnover = $2,312,500/($986,000 + $731,000)/2 = 2.7 times 5. Return on equity = $315,000/($490,500 + $315,500)/2 = 78.2% 6. Price-earnings ratio = $34.10/$1.50 = 22.7 times

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25)Profitability Ratios and Calculations 1. Gross profit ratio = $700,000 / $2,200,000 = 31.8% 2. Return on assets = $190,000 / ($880,000 + $660,000) / 2 = 24.7% 3. Profit margin = $190,000 / $2,200,000 = 8.6% 4. Asset turnover = $2,200,000 / ($880,000 + $660,000) / 2 = 2.9 times 5. Return on equity = $190,000 / ($402,000 + $266,000) / 2 = 56.9% 6. Price-earnings ratio = $30.40 / $1.90 = 16.0 26)(dollars in millions) Return on assets = $45/($80 + $90)/2 = 52.9% Profit margin = $45/$500 = 9.0% Asset turnover = $500/($80 + $90)/2 = 5.9 times 27)(dollars in millions) Return on assets = $20 / ($70 + $80) / 2 = 26.7% Profit margin = $20 / $200 = 10.0% Asset turnover = $200 / ($70 + $80) / 2 = 2.7 times 28)(dollars in millions) Return on assets = $840,000/$2,500,000 = 33.6% Return on equity = $840,000/$2,010,000* = 41.8% *($2,500,000 − $490,000)

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29)(dollars in millions) Return on assets = $800,000 / $2,400,000 = 33.3% Return on equity = $800,000 / $2,000,000* = 40.0% *($2,400,000 − $400,000) 30) 1. Other revenues 2. Other expenses 3. Discontinued operations 4. Other expenses 31)1. Conservative 2. Conservative 3. Aggressive 32)1. Conservative 2. Conservative 3. Aggressive 4. Aggressive

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CHAPTER 12 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) We can use ratios to help evaluate a firm's performance and financial position. ⊚ true ⊚ false

2) Vertical analysis expresses each item in a financial statement as a percentage of the same base amount measured in the same period. ⊚ true ⊚ false

Vertical analysis calculates the amount and percentage change of an account over time. ⊚ true ⊚ false

We use vertical analysis for income statement accounts, but not balance sheet accounts. ⊚ true ⊚ false

We use vertical analysis to express each income statement item as a percentage of sales. ⊚ true ⊚ false

For vertical analysis, we express each balance sheet item as a percentage of sales. ⊚ true ⊚ false

7) Horizontal analysis analyzes trends in financial statement data for a single company over time. ⊚ true ⊚ false

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8) If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis. ⊚ true ⊚ false

9) Using horizontal analysis, if the base year is negative and the following year is positive, the percentage change is just as useful as if the base year and the following year were both positive. ⊚ true ⊚ false

10) We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time. ⊚ true ⊚ false

11) We measure income statement accounts at a point in time and balance sheet accounts over a period of time. ⊚ true ⊚ false

12) Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. ⊚ true ⊚ false

13)

Every liquidity ratio is calculated using one or more current asset accounts. ⊚ true ⊚ false

14) Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's ability to pay its current and long-term liabilities.

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⊚ ⊚

true false

15) The receivables turnover ratio measures how many times, on average, a company collects its receivables during the year. ⊚ true ⊚ false

16) A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash. ⊚ true ⊚ false

17)

The average collection period converts the receivables turnover ratio into days. ⊚ true ⊚ false

18) A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly. ⊚ true ⊚ false

19) An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages. ⊚ true ⊚ false

20)

The average days in inventory converts the inventory turnover ratio into days. ⊚ true ⊚ false

21) A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.

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⊚ ⊚

22)

true false

The acid-test ratio is always smaller than or equal to the current ratio. ⊚ true ⊚ false

23) Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. ⊚ true ⊚ false

24) We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges. ⊚ true ⊚ false

25)

We calculate the times interest earned ratio by dividing net income by interest expense. ⊚ true ⊚ false

26)

The gross profit ratio is calculated as gross profit divided by net sales. ⊚ true ⊚ false

27)

Return on assets is calculated as net income divided by ending total assets. ⊚ true ⊚ false

28) Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income by net sales. ⊚ true ⊚ false Version 1

29) Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales divided by average total assets. ⊚ true ⊚ false

30) Return on equity is calculated by dividing the stock return by average stockholders' equity. ⊚ true ⊚ false

31) The price-earnings (PE) ratio compares a company's share price with its earnings per share. ⊚ true ⊚ false

32) Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE ratios. ⊚ true ⊚ false

33) Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios. ⊚ true ⊚ false

34)

A discontinued operation is the sale or disposal of any long-term asset. ⊚ true ⊚ false

35) We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue.

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⊚ ⊚

true false

36) We report income from discontinued operations separately, net of taxes, as the last item in an income statement before net income. ⊚ true ⊚ false

37) Managers can choose the location of where to report a loss in the income statement, as long as the loss is reported and deducted in calculating net income. ⊚ true ⊚ false

38) When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations. ⊚ true ⊚ false

39) Conservative accounting practices are those that result in reporting higher income, higher assets, and lower liabilities. ⊚ true ⊚ false

40) Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. ⊚ true ⊚ false

41) A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting. ⊚ true ⊚ false

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42)

Use of a longer useful life for depreciation is an example of conservative accounting. ⊚ true ⊚ false

43) Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. ⊚ true ⊚ false

44) Changes in accounting estimates usually have no effect on a company's underlying cash flows. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 45) Which of the following is not a common type of comparison in accounting? A) Comparisons of sales growth between companies. B) Comparisons of earnings per share between companies. C) Comparisons of earnings this year with earnings for the same company last year. D) Comparisons to industry.

46)

When using vertical analysis, we express income statement accounts as a percentage of: A) Net income. B) Gross profit. C) Sales. D) Total assets.

47)

When using vertical analysis, we express balance sheet accounts as a percentage of:

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A) Sales. B) Total assets. C) Total liabilities. D) Total stockholders' equity.

48) Which type of analysis expresses each item in a financial statement as a percentage of the same base amount measured in the same period? A) Ratio analysis B) Vertical analysis C) Horizontal analysis D) Diagonal analysis

49)

Common-size analysis is another term used for: A) Ratio analysis. B) Vertical analysis. C) Horizontal analysis. D) Diagonal analysis.

50) Which of the following types of analysis allows for the comparison of financial statement items between companies of different size? A) Horizontal analysis B) Vertical analysis C) Diagonal analysis D) Circular analysis

51)

Which of the following is an example of vertical analysis?

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A) Comparing gross profit across companies B) Comparing income statement items as a percentage of sales C) Comparing debt with industry averages D) Comparing the change in sales over time

52)

Comparing operating expenses as a percentage of sales is an example of: A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis.

53) To perform a vertical analysis of an income statement, you would divide each line item on the statement by: A) Sales. B) Net income. C) Total assets. D) Operating expenses.

54) To perform a vertical analysis of a balance sheet, you would divide each line item on the statement by: A) Total assets. B) Net income. C) Sales. D) Operating expenses.

55) Ronaldo Soccer Shop's income statement reports sales of $100,000, cost of goods sold of $46,000, operating expenses of $34,000, interest expense of $15,000, income tax expense of $2,000, and net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by: Version 1

A) $100,000. B) $46,000. C) $34,000. D) $3,000.

56)

Consider the following: Amount

Cash Accounts receivable Inventory Long-term assets

$300,000 500,000 800,000 3,400,000

6 10 16 68

Total assets

$5,000,000

100

The table provided above is an example of: A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis.

57)

Consider the following: Year

Cash Accounts receivable Inventory Long-term assets

2024 $300,000 500,000

2023 $800,000 200,000

Increase (Decrease) Amount % $(500,000) (62.5) 300,000 150.0

800,000 3,400,000

700,000 2,300,000

100,000 1,100,000

14.3 47.8

Total assets

$5,000,000

$4,000,000

$1,000,000

25.0

The table provided above is an example of:

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A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis.

58)

Which of the following include trend analysis and time-series analysis? A) Horizontal analysis B) Vertical analysis C) Ratio analysis D) Diagonal analysis

59) To calculate a year-to-year percentage change in any financial statement line item such as sales, you determine the difference between the current-year amount and the prior-year amount and divide that difference by: A) Net income. B) Total assets. C) the current year's amount. D) the prior year's amount.

60) Needle Company reports accounts receivable of $100,000 in 2023 and $250,000 in 2024. Using horizontal analysis, what would be the percentage increase or decrease in accounts receivable? A) 60% decrease B) 60% increase C) 150% decrease D) 150% increase

61)

The type of analysis used to analyze trends in financial statement data over time is:

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A) Horizontal analysis. B) Vertical analysis. C) Diagonal analysis. D) Both horizontal and vertical analysis.

62)

Horizontal analysis is used to analyze trends in financial statement data over time: A) for a single company. B) between two companies. C) for a single industry. D) None of the other answer choices are correct.

63)

Horizontal analysis examines trends in a company: A) over time. B) between income statement accounts in the same year. C) between balance sheet accounts in the same year. D) between income statement and balance sheet accounts in the same year.

64)

Which of the following is an example of horizontal analysis? A) Comparing cost of goods sold with sales B) Comparing net income across companies C) Comparing debt with equity D) Comparing the growth in sales over time

65)

Which of the following is an example of horizontal analysis?

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A) Comparing gross profit across companies B) Comparing gross profit with operating expenses C) Comparing assets with equity D) Comparing the change in sales over time

66)

Comparing changes in net income for one company over time is an example of: A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis.

67)

Which of the following statements is(are) correct?

A) The receivables turnover ratio measures how many times, on average, a company collects itsreceivables during the year. B) The inventory turnover ratio measures how many times, on average, a company sells its entire inventory during the year. C) The current ratio indicates whether a company has sufficient availability of current assets to pay current liabilities. D) All of the other answer choices are correct.

68)

Which of the following ratios is most useful in evaluating liquidity? A) Return on assets B) Return on equity C) Debt to equity ratio D) Current ratio

69)

Liquidity refers to:

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A) a company's ability to have sufficient cash (or other assets readily convertible into cash) to pay current liabilities. B) a company's ability to pay its current and long-term liabilities. C) a company's ability to generate profits on inventory sold. D) a company's ability to return cash to stockholders.

70)

The current ratio measures the: A) ability of a company to quickly sell its inventory to customers. B) amount of profits retained in the business. C) ability of a company to quickly collect cash from customers. D) ability of a company to pay its current liabilities as they become due.

71)

Which of the following ratios is most useful in evaluating liquidity? A) Acid-test ratio B) Return on equity C) Profit margin ratio D) Asset turnover

72)

Which of the following ratios is most useful in evaluating solvency? A) Debt to equity ratio B) Current ratio C) Receivables turnover ratio D) Inventory turnover ratio

73) Which of the following is a sign that a company can quickly turn its receivables into cash?

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A) A low receivables turnover ratio B) A high receivables turnover ratio C) A high average collection period D) Both a low receivables turnover ratio and a high average collection period

74) Which of the following is a sign that a company cannot quickly turn its receivables into cash? A) A high receivables turnover ratio B) A low receivables turnover ratio C) A low average collection period D) Both a high receivables turnover ratio and a low average collection period

75) Which of the following is a negative sign that a company is not selling its inventory quickly? A) A low inventory turnover ratio B) A high inventory turnover ratio C) A low average days in inventory D) Both a high inventory turnover ratio and a low average days in inventory

76)

Which of the following is a positive sign that a company is selling its inventory quickly? A) A low inventory turnover ratio. B) A high inventory turnover ratio. C) A low average days in inventory. D) Both a high inventory turnover ratio and a low average days in inventory.

77)

The current ratio is calculated as:

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A) Current assets divided by noncurrent assets. B) Current assets divided by current liabilities. C) Current liabilities divided by noncurrent liabilities. D) Current liabilities divided by current assets.

78)

The acid-test ratio is most similar to the: A) Current ratio. B) Debt to equity ratio. C) Times interest earned ratio. D) Inventory turnover ratio.

79)

The acid-test ratio equals: A) the liquidity ratio divided by the equity ratio. B) current assets minus inventory divided by current liabilities minus accounts payable. C) the sum of cash, net receivables, and current investments divided by current liabilities. D) cash divided by accounts payable.

80)

Which of the following is not a solvency ratio? A) Times interest earned ratio B) The debt to equity ratio C) The current ratio D) All of the other answer choices are correct

81)

When a company with a current ratio of 1.2 pays a current liability, its: A) Current ratio decreases. B) Current ratio increases. C) Current ratio remains unchanged. D) Debt to equity ratio increases.

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82) Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A) Increase the current ratio B) No change to the current ratio C) Decrease the current ratio D) Could either increase or decrease the current ratio

83) Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A) Increase the acid-test ratio B) No change to the acid-test ratio C) Decrease the acid-test ratio D) Could either increase or decrease the acid-test ratio

84) Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio? A) Increase the current ratio and increase the acid-test ratio B) No change to the current ratio and decrease the acid-test ratio C) Decrease the current ratio and decrease the acid-test ratio D) Increase the current ratio and decrease the acid-test ratio

85)

When a company sells land for cash and reports a $25,000 gain: A) its acid-test ratio decreases. B) its current ratio decreases. C) its debt to equity ratio decreases. D) the effect on its ratios cannot be determined from the given information.

86) Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase, its: Version 1

A) Current ratio decreases. B) Acid-test ratio decreases. C) Current ratio remains unchanged. D) Acid-test ratio remains unchanged.

87)

A partial balance sheet for Captain D's Sportswear is shown below:

(dollars in thousands) Assets:

Liabilities and Stockholder's Equity: Accounts payable $243 Other liabilities 85 Total current liabilities 328 Long-term liabilities 116 Total liabilities 444 Common stock 154 Retained earnings 191

Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets

$63 179 56 200 31 529

Property & Equipment, (net)

260

Total stockholders' equity

345

Total assets

$789

Total liabilities and equity

$789

What is the company’s current ratio? (Round your answer to two decimal places.) A) 0.67 B) 2.65 C) 1.19 D) 1.61

88)

A partial balance sheet for Captain D's Sportswear is shown below:

(dollars in thousands) Assets: Cash

Version 1

$60

Liabilities and Stockholder's Equity: Accounts payable $240

Accounts receivable (net) Investments Inventory Prepaid rent Total current assets

170 50 200 25 505

Other liabilities Total current liabilities Long-term liabilities Total liabilities Common stock Retained earnings

80 320 110 430 150 180

Property & Equipment, (net)

255

Total stockholders' equity

330

Total assets

$760

Total liabilities and equity

$760

What is the company’s current ratio? (Round your answer to two decimal places.) A) 1.98 B) 1.58 C) 1.17 D) 0.66

89)

A partial balance sheet for Captain D's Sportswear is shown below:

(dollars in thousands) Assets:

Liabilities and Stockholder's Equity: Accounts payable Other liabilities

$240 80

Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets

$60 170 50 200 25 505

Total current liabilities Long-term liabilities Total liabilities Common stock Retained earnings

320 110 430 150 180

Property & Equipment, (net)

255

Total stockholders' equity

330

Total assets

$760

Total liabilities and equity

$760

What is the acid-test ratio? (Round your answer to two decimal places.)

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A) 0.25 B) 0.88 C) 1.17 D) 1.58

90)

A partial balance sheet for Captain D's Sportswear is shown below:

(dollars in thousands) Assets:

Liabilities and Stockholder's Equity: Accounts payable $248 Other liabilities 84 Total current liabilities 332 Long-term liabilities 114 Total liabilities 446 Common stock 156 Retained earnings 189

Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets

$66 175 56 208 28 533

Property & Equipment, (net)

258

Total stockholders' equity

345

Total assets

$791

Total liabilities and equity

$791

What is the debt to equity ratio? (Round your answer to two decimal places.) A) 1.29 B) 2.36 C) 0.96 D) 0.56

91)

A partial balance sheet for Captain D's Sportswear is shown below:

(dollars in thousands) Assets:

Version 1

Liabilities and Stockholder's Equity:

Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets

$60 170 50 200 25 505

Accounts payable Other liabilities Total current liabilities Long-term liabilities Total liabilities Common stock Retained earnings

$240 80 320 110 430 150 180

Property & Equipment, (net)

255

Total stockholders' equity

330

Total assets

$760

Total liabilities and equity

$760

What is the debt to equity ratio? (Round your answer to two decimal places.) A) 0.33 B) 0.77 C) 1.17 D) 1.30

92)

Recent financial statement data for Bethell Foods Incorporated is shown below:

Current liabilities 10% Bonds, long-term Total liabilities

$ 180 360 540

Stockholders' equity Common stock

200

Retained earnings

280

Total stockholders' equity Total liabilities and equity

Income before interest and taxes Interest expense Income before income tax expense Income tax expense Net income

$125 36 89 27 $ 62

480 $1,020

What is the debt to equity ratio? (Round your answer to two decimal places.)

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A) 0.75 B) 1.13 C) 0.38 D) 1.80

93)

Recent financial statement data for Bethell Foods Incorporated is shown below:

Current liabilities 10% Bonds, long-term Total liabilities

$ 183 360 543

Stockholders' equity Common stock

209

Retained earnings

286

Total stockholders' equity Total liabilities and equity

Income before interest and taxes Interest expense Income before income tax expense Income tax expense

$150 36 114 35

Net income

$79

495 $1,038

What is the times interest earned ratio? (Round your answer to two decimal places.) A) 4.17 B) 3.17 C) 2.19 D) 10.00

94)

Recent financial statement data for Bethell Foods Incorporated is shown below:

Current liabilities 10% Bonds, long-term Total liabilities

Version 1

$ 180 360 540

Income before interest and taxes Interest expense Income before income tax expense

$125 36 89

Stockholders' equity

Income tax expense

Common stock

200

Retained earnings

280

Total stockholders' equity Total liabilities and equity

Net income

27 $ 62

480 $1,020

What is the times interest earned ratio? (Round your answer to two decimal places.) A) 3.47 B) 1.72 C) 2.47 D) 10.0

95) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$29,500 32,000 192,000 120,000 427,000 244,000 34,000

$45,000 39,000 195,000 109,000 411,000 235,000 34,000

What is the receivables turnover ratio for 2024? (Round your answer to two decimal places.) A) 5.15 times B) 14.47 times C) 6.56 times D) 4.07 times

Version 1

96) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the receivables turnover ratio for 2024? (Round your answer to two decimal places.) A) 2.85 times B) 4.70 times C) 5.00 times D) 10.63 times

97) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the average collection period for 2024? (Round your final answer to the nearest day.) A) 73 days B) 104 days C) 109 days D) 128 days

Version 1

98) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$48,000 27,000 193,000 121,000 433,000 248,000 36,500

$40,000 38,000 188,000 112,000 416,000 227,000 35,000

What is the inventory turnover ratio for 2024?(Round your answer to two decimal places.) A) 4.48 times B) 5.94 times C) 7.06 times D) 3.72 times

99) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the inventory turnover ratio for 2024? (Round your answer to two decimal places.)

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A) 3.62 times B) 3.96 times C) 4.07 times D) 6.03 times

100) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the average days in inventory for 2024? (Round your intermediate calculations to two decimal places and final answer to one decimal place.) A) 60.5 days B) 92.2 days C) 100.8 days D) 89.7 days

101) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity

Version 1

2024

2023

$48,000 28,000 197,000 123,000 436,000 242,000

$44,000 43,000 188,000 120,000 408,000 229,000

Net income

34,000

39,000

What is the debt to equity ratio for 2024? (Round your answer to one decimal place.) A) 80.2% B) 48.2% C) 93.5% D) 59.3%

102) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the debt to equity ratio for 2024? (Round your answer to one decimal place.) A) 77.1% B) 80.0% C) 40.0% D) 60.0%

103) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets

Version 1

2024

2023

$86,000 95,000 410,000 256,000 840,000

$67,000 73,000 384,000 219,000 775,000

Total stockholders' equity Net income

510,000 77,000

445,000 55,000

What is the receivables turnover ratio for 2024? (Round your answer to one decimal place.) A) 5.4 times B) 4.8 times C) 0.2 times D) 0.9 times

104) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the receivables turnover ratio for 2024? (Round your answer to one decimal place.) A) 5.3 times B) 5.6 times C) 5.0 times D) 0.2 times

105) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales

Version 1

2024

2023

$80,000 84,000 400,000

$72,000 70,000 372,000

Cost of goods sold Total assets Total stockholders' equity Net income

254,000 850,000 500,000 75,000

216,000 810,000 450,000 56,000

What is the average collection period for 2024? (Round your intermediate calculations to one decimal place and final answer to the nearest day.) A) 69 days B) 65 days C) 73 days D) 1,825 days

106) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$86,000 90,000 440,000 264,000 805,000 510,000 71,000

$78,000 74,000 380,000 226,000 770,000 440,000 59,000

What is the inventory turnover ratio for 2024? (Round your answer to one decimal place.) A) 3.2 times. B) 5.4 times. C) 2.9 times. D) 4.9 times.

107) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below: 2024

Version 1

2023

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the inventory turnover ratio for 2024? (Round your answer to one decimal place.) A) 3.0 times B) 5.2 times C) 3.3 times D) 3.6 times

108) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the average days in inventory for 2024? (Round all calculations to one decimal place.) A) 121.7 days B) 70.2 days C) 110.6 days D) 101.4 days

109) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Version 1

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$43,000 31,000 200,000 122,000 429,000 245,000 34,000

$43,000 36,000 188,000 119,000 415,000 236,000 31,000

What is the debt to equity ratio for 2024? A) 13.88% B) 8.06% C) 75.10% D) 28.22%

110) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the debt to equity ratio for 2024? A) 50.0% B) 60.0% C) 70.0% D) 80.0%

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111) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the gross profit ratio for 2024? A) 77.1% B) 80.0% C) 40.0% D) 60.0%

112) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the return on assets for 2024? (Round your answer to one decimal place.) A) 7.1% B) 7.8% C) 13.5% D) 44.7%

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113) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the profit margin for 2024? (Round your answer to one decimal place.) A) 17.1% B) 13.5% C) 7.6% D) 4.5%

114) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the asset turnover for 2024? (Round your answer to one decimal place.) A) 3.7 times B) 2.8 times C) 2.2 times D) 0.5 times

Version 1

115) Excerpts from Andre Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$40,000 28,000 190,000 114,000 425,000 240,000 32,500

$36,000 35,000 186,000 108,000 405,000 225,000 28,000

What is the return on equity for 2024? (Round your answer to one decimal place.) A) 17.1% B) 14.0% C) 12.6% D) 7.1%

116) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$83,000 95,000 490,000 262,000 835,000 505,000 78,000

$80,000 71,000 379,000 224,000 775,000 440,000 53,000

What is the gross profit ratio for 2024? (Round your answer to one decimal place.) A) 53.5%. B) 51.5%. C) 55.5%. D) 46.5%.

Version 1

117) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the gross profit ratio for 2024? (Round your answer to one decimal place.) A) 57.5%. B) 36.5%. C) 63.5%. D) 60.0%.

118) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$83,000 92,000 460,000 262,000 815,000 515,000 73,000

$79,000 77,000 378,000 221,000 750,000 430,000 50,000

What is the return on assets for 2024? (Round your answer to one decimal place.)

Version 1

A) 0.2% B) 9.3% C) 9.0% D) 1.5%

119) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the return on assets for 2024? (Round your answer to one decimal place.) A) 48.2% B) 9.3% C) 8.8% D) 9.0%

120) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

Version 1

2024

2023

$84,000 87,000 490,000 260,000 805,000 475,000 72,000

$78,000 78,000 373,000 221,000 780,000 460,000 59,000

What is the profit margin for 2024? (Round your answer to one decimal place.) A) 1.4% B) 3.2% C) 9.1% D) 14.7%

121) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$80,000 84,000 400,000 254,000 850,000 500,000 75,000

$72,000 70,000 372,000 216,000 810,000 450,000 56,000

What is the profit margin for 2024? (Round your answer to one decimal place.) A) 18.8% B) 9.0% C) 19.4% D) 15.1%

122) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets

Version 1

2024

2023

$80,000 84,000 400,000 254,000 850,000

$72,000 70,000 372,000 216,000 810,000

Total stockholders' equity Net income

500,000 75,000

450,000 56,000

What is the asset turnover for 2024? (Round your answer to one decimal place.) A) 3.7 times B) 2.8 times C) 2.2 times D) 0.5 times

123) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2024

2023

$86,000 92,000 440,000 258,000 815,000 485,000 76,000

$82,000 77,000 379,000 222,000 775,000 450,000 50,000

What is the return on equity for 2024? (Round your answer to one decimal place.) A) 15.7% B) 1.4% C) 3.1% D) 16.3%

124) Excerpts from Nationwide Company's December 31, 2024 and 2023, financial statements are presented below:

Accounts receivable Inventory Net sales

Version 1

2024

2023

$80,000 84,000 400,000

$72,000 70,000 372,000

Cost of goods sold Total assets Total stockholders' equity Net income

254,000 850,000 500,000 75,000

216,000 810,000 450,000 56,000

What is the return on equity for 2024? (Round your answer to one decimal place.) A) 16.7% B) 15.0% C) 15.8% D) 21.4%

125)

Consider the information provided below:

Sales Revenue Accounts Receivable Ending Inventory Cost of Goods Sold Sales Returns

$385,000 57,000 116,000 255,000 23,000

What is the company's gross profit? A) $130,000 B) $107,000 C) $111,000 D) $289,000

126)

Consider the information provided below:

Sales Revenue Accounts Receivable Ending Inventory Cost of Goods Sold Sales Returns

$320,000 50,000 100,000 250,000 20,000

What is the company's gross profit?

Version 1

A) $250,000 B) $70,000 C) $220,000 D) $50,000

127)

Return on assets equals: A) Gross profit ratio × Inventory turnover. B) Profit margin × Inventory turnover. C) Gross profit ratio × Asset turnover. D) Profit margin × Asset turnover.

128)

The profit margin ratio indicates the amount of net income achieved for each: A) collection on a receivable. B) dollar of inventory. C) dollar of total assets. D) dollar of sales.

129) Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is: A) 200%. B) 25%. C) 50%. D) 12.5%.

130) Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:

Version 1

A) 12.5%. B) 25%. C) 50%. D) 8 times.

131) Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is: A) 0.25 times. B) 0.5 times. C) 2 times. D) 8 times.

132) King Sporting Goods reports net income of $130,000, net sales of $580,000, and average assets of $1,200,000. The return on assets is: A) 4.5 times. B) 48.3%. C) 10.8%. D) 22.4%.

133) King Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is: A) 10%. B) 20%. C) 50%. D) 5 times.

134) King Sporting Goods reports net income of $180,000, net sales of $560,000, and average assets of $1,500,000. The profit margin is:

Version 1

A) 37.3%. B) 12.0%. C) 32.1%. D) 3.1 times.

135) King Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is: A) 10%. B) 20%. C) 50%. D) 5 times.

136) King Sporting Goods reports net income of $170,000, net sales of $590,000, and average assets of $1,530,000. The asset turnover is: A) 0.4 times. B) 0.1 times. C) 2.6 times. D) 9.0 times.

137) King Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is: A) 0.1 times. B) 0.5 times. C) 2 times. D) 5 times.

138)

The price-earnings (PE) ratio is calculated as:

Version 1

A) earnings per share divided by the stock price. B) retained earnings times the stock price. C) stock price divided by net income. D) stock price divided by earnings per share.

139) A company reports net income of $500,000, earnings per share of $1.50, and has a stock price of $45.00 at the end of the year. What is the company's price-earnings ratio? A) 30.0 B) 11,111.1 C) 67.5 D) 46.5

140)

Compared to growth stocks, value stocks' price-earnings ratio is typically: A) There is no relationship between the price-earnings ratios of growth and value stocks. B) the same. C) higher. D) lower.

141)

All of the following are profitability ratios except: A) Profit margin. B) Return on equity. C) Asset turnover. D) Current ratio.

142)

Below is information related to two companies:

Return on assets Debt to equity

Version 1

Company 1

Company 2

8.2% 67.2%

6.3% 53.4%

Based on the ratios above, what is generally true about these two companies? A) Company 1 has lower profitability and higher risk. B) Company 1 has higher profitability and higher risk. C) Company 1 has lower profitability and lower risk. D) Company 1 has higher profitability and lower risk.

143) Investors generally view which of the following as the measure most indicative of company success? A) Liquidity B) Solvency C) Employee satisfaction D) Profitability

144) Which of the following items would be reported at the very bottom of the income statement just before net income? A) Gain on the sale of long-term assets B) Discontinued operations C) Loss due to business restructuring D) Loss due to write-down of receivables

145) as:

The sale or disposal of a significant component of a company's operations is referred to

A) a discontinued operation. B) other gains and losses. C) other revenues and expenses. D) gain or loss on sale of assets.

146)

A discontinued operation refers to:

Version 1

A) the sale or disposal of a significant component of a company's operations. B) discontinued inventory items. C) inventory items that have been completed and sold. D) the sale of most long-term assets.

147)

What is the correct order to present the following items in the income statement? A) Other revenues and expenses, income tax expense, discontinued operations, net

income B) Other revenues and expenses, income tax expense, net income, discontinued operations C) Discontinued operations, net income, other revenues and expenses, income tax expense D) Discontinued operations, net income, income tax expense, other revenues and expenses

148) A company incurred a material loss due to the write-down of inventory. This loss should be reported as: A) other revenue. B) a loss from discontinued operations. C) other expense. D) a separate line item in retained earnings.

149)

A company incurred a material gain on the sale of land. This gain should be reported as: A) other revenue. B) a gain from discontinued operations. C) other expense. D) a separate line item in retained earnings.

150)

Which of the following statements is not true?

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A) We report any profits or losses on discontinued operations in the current year separately from profits and losses on the portion of the business that will continue. B) We report discontinued items separately, net of taxes, just before net income. C) The decision of whether to report a loss as part of continuing operations or discontinued operations depends on the preference of management.. D) When using a company's current earnings to estimate future earnings performance, investors normally exclude discontinued operations.

151)

Examples of discontinued operations include all of the following except: A) a disposal of a major geographical area. B) a disposal of a major piece of equipment. C) a disposal of a major line of business. D) a disposal of a major investment in which the company has significant influence.

152) Which of the following income statement items is least likely to persist into future periods? A) Sales revenue B) Discontinued operations C) Cost of goods sold D) Salaries expense

153) Bedtime Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did Bedtime Bookstores report the discontinued operations?

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A) Gain of $1,820,000 B) Loss of $280,000 C) Loss of $400,000 D) Gain of $1,700,000

154) Bedtime Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did Bedtime Bookstores report net income? A) $3,000,000 B) $1,820,000 C) $2,100,000 D) $1,700,000

155) Bedtime Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did Bedtime Bookstores report income before tax? A) $1,820,000 B) $3,000,000 C) $2,100,000 D) $1,700,000

156)

Quality of earnings refers to:

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A) positive net income. B) ability of reported earnings to reflect the company’s true earnings. C) an increasing trend in profitability. D) All of the other answer choices are correct.

157)

The usefulness of reported earnings to predict future earnings is often referred to as: A) Conservative accounting practices. B) Aggressive accounting practices. C) Quality of earnings. D) Horizontal analysis.

158)

Which of the following is a result of conservative accounting practices? A) Higher income, higher assets, and lower liabilities B) Lower income, higher assets, and lower liabilities C) Higher income, lower assets, and lower liabilities D) Lower income, lower assets, and higher liabilities

159)

Which of the following is a result of aggressive accounting practices? A) Lower income, higher assets, and higher liabilities B) Higher income, higher assets, and lower liabilities C) Lower income, lower assets, and higher liabilities D) Higher income, lower assets, and higher liabilities

160) The financial statements of a firm that uses more conservative accounting practices would be likely to report higher:

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A) profitability. B) dividends. C) liabilities. D) stockholders' equity.

161) The financial statements of a firm that uses more aggressive accounting practices would be likely to report: A) higher profitability. B) higher dividends. C) higher liabilities. D) lower assets.

162)

Which of the following is not an example of applying conservatism in accounting? A) Reporting contingent losses that are probable. B) Expensing all research and development costs as they are incurred. C) Using the lower of cost and net realizable value for inventory accounting. D) Increasing the useful life used in calculating depreciation.

163)

Which of the following is not an example of aggressive accounting practices? A) Reporting contingent losses that are probable B) Reporting research and development costs as assets C) Using a lower amount for estimated uncollectible accounts D) Increasing the estimated service life used in calculating depreciation

164)

Which of the following is a conservative accounting practice?

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A) Increasing the estimated service life used in calculating depreciation B) Waiting to report a litigation loss C) Adjusting the allowance for uncollectible accounts to a smaller amount D) Writing down inventory when its estimated selling price has fallen

165)

Which of the following is an aggressive accounting practice? A) Decreasing the estimated service life used in calculating depreciation B) Waiting to report a litigation loss C) Adjusting the allowance for uncollectible accounts to a larger amount D) Writing down inventory when its estimated selling price has fallen

166)

Which of the following is a conservative accounting practice? A) Changing from double-declining balance to straight-line depreciation B) Reporting sales revenue before it is actually earned C) Reporting the estimated allowance for uncollectible accounts for a larger amount D) Reporting inventory at net realizable value rather than lower of cost and net realizable

value

167)

Which of the following is an aggressive accounting practice? A) Changing from straight-line to double-declining balance depreciation B) Reporting sales revenue before it is actually earned C) Reporting the estimated allowance for uncollectible accounts for a larger amount D) Reporting inventory at the lower of cost and net realizable value

168)

Which of the following is a conservative accounting practice?

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A) Using of a longer estimated service life for calculating depreciation B) Waiting to report a litigation loss C) Reporting a lower amount for estimated uncollectible accounts D) Reporting an asset impairment in the current year rather than next year

169)

Which of the following is an aggressive accounting practice? A) Using a shorter estimated service life for calculating depreciation B) Waiting to report a litigation loss C) Reporting a higher amount for estimated uncollectible accounts D) Reporting an asset impairment in the current year rather than next year

170)

Which of the following would be an example of conservative accounting?

A) Estimating warranty costs to be 4% of sales instead of 9% of sales B) Estimating the percentage of uncollectible accounts as 6% of accounts receivable instead of 10% of accounts receivable C) Estimating that none of the inventory has a net realizable value below cost rather than estimating that some inventory has a net realizable value below cost D) Assessing the probability of a contingent liability as probable

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 171) Explain the difference between vertical and horizontal analysis.

172) Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.

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173) Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ?

174) Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations?

175) Explain the difference between conservative and aggressive accounting practices. Provide an example of a conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive.

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Answer Key Test name: Chap 12_6e_Spiceland 1) TRUE 2) TRUE 3) FALSE Horizontal analysis calculates the amount and percentage change of an account over time. 4) FALSE We use vertical analysis for income statement and balance sheet accounts. 5) TRUE 6) FALSE For vertical analysis, we express each balance sheet item as a percentage of total assets. 7) TRUE 8) TRUE 9) FALSE If the base year is negative and the following year is positive, the percentage change is not useful. 10) TRUE 11) FALSE We measure income statement accounts over a period of time and balance sheet accounts at a point in time. 12) TRUE 13) TRUE 14) FALSE Version 1

Liquidity refers to a company's ability to pay its current liabilities. Solvency refers to a company's ability to pay its current and long-term liabilities. 15) TRUE 16) FALSE A high receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash. 17) TRUE 18) FALSE A high inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly. 19) TRUE 20) TRUE 21) FALSE A high current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due. 22) TRUE 23) TRUE 24) TRUE 25) FALSE We calculate the times interest earned ratio by dividing net income before interest expense and income taxes by interest expense. 26) TRUE 27) FALSE Return on assets is calculated as net income divided by average total assets. 28) TRUE Version 1

29) TRUE 30) FALSE Return on equity is calculated by dividing net income by average stockholders' equity. 31) TRUE 32) TRUE 33) TRUE 34) FALSE A discontinued operation is the sale or disposal of a significant component of a business. 35) TRUE 36) TRUE 37) FALSE The location of a loss in the income statement depends on whether the item is required to be reported as part of continuing operations or discontinued operations. 38) TRUE 39) FALSE Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. 40) TRUE 41) TRUE 42) FALSE Use of a shorter useful life for depreciation is an example of conservative accounting. 43) TRUE 44) TRUE 45) B Version 1

46) C 47) B 48) B 49) B 50) B 51) B 52) A 53) A 54) A 55) A 56) A 57) B 58) A 59) D 60) D 61) A 62) A 63) A 64) D 65) D 66) B 67) D 68) D 69) A 70) D 71) A 72) A 73) B 74) B 75) A Version 1

76) D 77) B 78) A 79) C 80) C 81) B 82) B 83) C 84) B 85) C 86) B 87) D $529 ÷ $328 = 1.61 88) B $505 ÷ $320 = 1.58 89) B ($505 − $200 − $25) ÷ $320 = 0.88 90) A $446 ÷ $345 = 1.29 91) D $430 ÷ $330 = 1.30 92) B $540 ÷ $480 = 1.13 93) A ($79 + $35 + $36) ÷ $36 = 4.17 94) A ($62 + $27 + 36) ÷ $36 = 3.47 95) A Version 1

Receivables turnover = $192,000/($29,500 + $45,000)/2 = 5.15 times 96) C Receivables turnover = $190,000 / ($40,000 + $36,000) / 2 = 5.0 times 97) A Receivables turnover = $190,000 / ($40,000 + $36,000) / 2 = 5.0 times Average collection period = 365 ÷ 5.0 = 73 days 98) D Inventory turnover = $121,000/($27,000 + $38,000)/2 = 3.72 times 99) A Inventory turnover = $114,000 / ($28,000 + $35,000) / 2 = 3.62 times 100) C Inventory turnover = $114,000 / ($28,000 + $35,000)/2 = 3.62 times Average days in inventory = 365/3.62 = 100.8 days. 101) A Assets = Liabilities + Stockholders' equity $436,000 = Liabilities + $242,000 Liabilities = $194,000 Debt to equity ratio = $194,000 ÷ $242,000 = 80.2% 102) A Assets = Liabilities + Stockholders’ Equity $425,000 = Liabilities + $240,000 Liabilities = $185,000 Debt to equity ratio = $185,000 ÷ $240,000 = 77.1% 103) A Receivables turnover = $410,000/($86,000 + $67,000)/2 = 5.4 times 104) A Receivables turnover = $400,000 / ($80,000 + $72,000)/2 = 5.3 times 105) A Receivables turnover = $400,000 / ($80,000 + $72,000)/2 = 5.3 times Average collection period = 365 ÷ 5.3 = 69 days. Version 1

106) A Inventory turnover = $264,000/($90,000 + $74,000)/2 = 3.2 times 107) C Inventory turnover = $254,000 / ($84,000 + $70,000)/2 = 3.3 times 108) C Inventory turnover = $254,000 / ($84,000 + $70,000)/2 = 3.3 times Average days in inventory = 365/3.3 = 110.6 days 109) C Assets = Liabilities + Stockholders' Equity $429,000 = Liabilities + $245,000 Liabilities = $184,000 Debt to equity ratio = $184,000 ÷ $245,000 = 75.10% 110) C Assets = Liabilities + Stockholders’ Equity $850,000 = Liabilities + $500,000 Liabilities = $350,000 Debt to equity ratio = $350,000 ÷ $500,000 = 70.0% 111) C ($190,000 − $114,000) ÷ $190,000 = 40.0% 112) B $32,500 / ($425,000 + $405,000)/2 = 7.8% 113) A $32,500 ÷ $190,000 = 17.1% 114) D $190,000 / ($425,000 + $405,000)/2 = 0.5 times 115) B $32,500 / ($240,000 + $225,000)/2 = 14.0% 116) D ($490,000 − $262,000) ÷ $490,000 = 46.5% Version 1

117) B ($400,000 − $254,000) ÷ $400,000 = 36.5% 118) B $73,000/($815,000 + $750,000)/2 = 9.3% 119) D $75,000 / ($850,000 + $810,000)/2 = 9.0% 120) D $72,000 ÷ $490,000 = 14.7% 121) A $75,000 ÷ $400,000 = 18.8% 122) D $400,000 / ($850,000 + $810,000)/2 = 0.5 times 123) D $76,000/($485,000 + $450,000)/2 = 16.3% 124) C $75,000 / ($500,000 + $450,000)/2 = 15.8% 125) B [($385,000 − $23,000) − $255,000] = $107,000 126) D [($320,000 − $20,000) − $250,000] = $50,000 127) D 128) D 129) B $500,000/$2,000,000 = 25% 130) A $500,000/$4,000,000 = 12.5% 131) C $4,000,000/$2,000,000 = 2 times Version 1

132) C $130,000 ÷ $1,200,000 = 10.8% 133) A $100,000 ÷ $1,000,000 = 10% 134) C $180,000 ÷ $560,000 = 32.1% 135) B $100,000 ÷ $500,000 = 20% 136) A $590,000 ÷ $1,530,000 = 0.4 times 137) B $500,000 ÷ $1,000,000 = 0.5 times 138) D 139) A $45.00 ÷ $1.50 = 30.0 140) D 141) D 142) B 143) D 144) B 145) A 146) A 147) A 148) C 149) A 150) C 151) B 152) B Version 1

153) B 154) B $14,000,000 − $8,000,000 − $3,000,000 − $900,000 − $280,000 = $1,820,000 155) B $14,000,000 − $8,000,000 − $3,000,000 = $3,000,000 156) B 157) C 158) D 159) B 160) C 161) A 162) D 163) A 164) D 165) B 166) C 167) B 168) D 169) B 170) D 171) For vertical analysis, we express each item as a percentage of the same base amount measured in the same period, such as a percentage of sales in the income statement or as a percentage of total assets in the balance sheet. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time.

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172) We measure income statement accounts over a period of time (like a video), while we measure balance sheet accounts at a point in time (like a photograph). Therefore, ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. 173) The return on assets and the return on equity differ due to financial leverage — the amount of debt a company carries. If a company earns a return on investment above the interest cost of borrowing, then the additional debt will benefit investors in the company. The result, as is the case for Sideline Sports Products, is that the return on equity will exceed the return on assets. 174)Earnings persistence is the ability of current earnings to continue or persist into future years. Certain items are part of net income in the current year but are not expected to persist. We refer to these as onetime income items. A primary example is discontinued operations.

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175)(Note: Students' answers may differ.) Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. In contrast, aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory, the use of a shorter useful life for depreciation, and the reporting of a contingent litigation loss are all examples of conservative accounting. They are conservative because all of these practices report lower net income. A lower estimation of the allowance for uncollectible accounts, waiting to report an inventory write-down, choosing a longer useful life for depreciation, and waiting to report a litigation loss all are examples of more aggressive accounting. They are aggressive because all of these practices report higher net income.

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