TEST BANK for Financial Accounting 17th Edition by Carl S. Warren, Jefferson P. Jones & William Tayl

(Financial Accounting, 17e Carl Warren, Jefferson Jones, William Tayler) (Test Bank, Answer at the end of each Chapter) Chapter 01: Introduction to Accounting and Business

Indicate whether the statement is true or false. 1. A corporation is a business that is legally separate and distinct from its owners. a. True b. False 2. The role of accounting is to provide many different users with financial information to make economic decisions. a. True b. False 3. Investing activities are those activities by which the company obtains funds to start and operate the business. a. True b. False 4. Managerial accounting information is used by external and internal users equally. a. True b. False 5. Senior executives cannot be criminally prosecuted for the wrongdoings they commit on behalf of the companies where they work. a. True b. False 6. Financial accounting provides information to all users, while the main focus for managerial accounting is to provide information to management. a. True b. False 7. Proper ethical conduct implies that you only consider what's in your best interest. a. True b. False 8. Some major fraudulent acts committed by senior executives started as what they considered to be small ethical lapses that grew out of control. a. True b. False 9. A business is an organization in which basic resources or inputs, like materials and labor, are assembled and processed to provide outputs in the form of goods or services to customers. a. True b. False 10. Operating activities are those activities by which a company generates revenues from customers. a. True b. False Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 11. An example of a general-purpose financial statement would be a report about projected price increases related to transportation costs. a. True b. False 12. The Sarbanes-Oxley Act established standards for corporate responsibility and disclosure. a. True b. False 13. The main objective for all businesses is to maximize unrealized profits. a. True b. False 14. The primary role of accounting is to determine the amount of taxes a business will be required to pay to taxing entities. a. True b. False 15. The basic difference between manufacturing and retail companies is the completion level of the products they purchase for resale to customers. a. True b. False 16. Proprietorships have one owner and provide only services to their customers. a. True b. False 17. About 90% of the businesses in the United States are organized as corporations. a. True b. False 18. An example of an external user of accounting information is the federal government. a. True b. False 19. The Financial Accounting Standards Board (FASB) is the authoritative body that has primary responsibility for developing accounting principles. a. True b. False 20. The cost principle is the basis for entering the purchase price into the accounting records. a. True b. False 21. The monetary unit assumption requires that economic data be recorded in dollars for companies in the United States. a. True Powered by Cognero

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Chapter 01: Introduction to Accounting and Business b. False 22. If a building is appraised for $85,000, offered for sale at $90,000, and the buyer pays $80,000 cash for it, the buyer would record the building at $85,000. a. True b. False 23. The financial statements of a proprietorship should include the owner's personal assets and liabilities. a. True b. False 24. No significant differences exist between the accounting standards issued by the FASB and the IASB. a. True b. False 25. Generally accepted accounting principles regulate how and what financial information is reported by businesses. a. True b. False 26. The accounting equation can be expressed as Assets – Liabilities = Owner's Equity. a. True b. False 27. The rights or claims to the assets of a business may be subdivided into rights of creditors and rights of owners. a. True b. False 28. The owner’s rights to the assets rank ahead of the creditors' rights to the assets. a. True b. False 29. If the liabilities owed by a business total $300,000 and owner's equity is equal to $300,000, then the assets also total $300,000. a. True b. False 30. If total assets decreased by $30,000 during a specific period and owner's equity decreased by $35,000 during the same period, the period's change in total liabilities was a $65,000 increase. a. True b. False 31. If total assets increased by $190,000 during a specific period and liabilities decreased by $10,000 during the same period, the period's change in total owner's equity was a $200,000 increase. a. True b. False Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 32. If net income for a company was $50,000, $20,000 in owner withdrawals were made, and the owners invested an additional $10,000 in cash, the owners' equity increased by $40,000. a. True b. False 33. An account receivable is typically classified as a revenue. a. True b. False 34. An account receivable is a claim against a customer resulting from a sale on account. a. True b. False 35. Paying an account payable increases liabilities and decreases assets. a. True b. False 36. Receiving payments on an account receivable increases both equity and assets. a. True b. False 37. Withdrawals paid to owners decrease assets and increase equity. a. True b. False 38. Purchasing supplies on account increases liabilities and decreases equity. a. True b. False 39. Receiving a bill or otherwise being notified that an amount is owed is not recorded until the amount is paid. a. True b. False 40. Revenue is earned only when money is received. a. True b. False 41. Assets that are used up during the process of earning revenue are called expenses. a. True b. False 42. The excess of revenue over the expenses incurred in earning the revenue is called capital. a. True b. False 43. The primary financial statements of a proprietorship are the income statement, the statement of owners’ equity, the Powered by Cognero

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Chapter 01: Introduction to Accounting and Business cash budget, and the balance sheet. a. True b. False 44. An income statement is a summary of the revenues and expenses of a business as of a specific date. a. True b. False 45. A statement of owners’ equity reports the changes in owner's equity for a period of time. a. True b. False 46. The statement of cash flows consists of three sections: cash flows from operating activities, cash flows from income activities, and cash flows from equity activities. a. True b. False 47. The balance sheet represents the accounting equation. a. True b. False 48. Net income and net profit do not mean the same thing. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 49. Profit is the difference between a. assets and liabilities b. incoming cash and outgoing cash c. the assets purchased with cash contributed by the owner and the cash spent to operate the business d. the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services 50. Two common areas of accounting that respectively provide information to internal and external users are a. forensic accounting and financial accounting b. managerial accounting and financial accounting c. managerial accounting and environmental accounting d. financial accounting and tax accounting systems 51. Which of the following best describes accounting? a. records economic data but does not communicate the data to users according to any specific rules b. is an information system that provides reports to users regarding economic activities and condition of a business c. is of no use by individuals outside of the business Powered by Cognero

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Chapter 01: Introduction to Accounting and Business d. is used only for filling out tax returns and for financial statements for various types of governmental reporting requirements 52. Which type of accountant typically practices as an individual or as a member of a public accounting firm? a. Certified Public Accountant b. Certified Payroll Professional c. Certified Internal Auditor d. Certified Management Accountant 53. Financial reports are used by a. managers b. creditors c. investors d. all of these choices 54. All of the following are general-purpose financial statements except a(n) a. balance sheet b. income statement c. statement of owner's equity d. cash budget 55. Which of the following is a manufacturing business? a. General Motors b. Facebook c. American Airlines d. Target 56. Which of the following is a service business? a. Microsoft b. Dell Computers c. Facebook (Meta Platforms) d. Walmart 57. Which of the following groups of companies are all examples of a retail business? a. Delta Air Lines, Marriott, Gap b. Gap, Amazon.com, Delta Air Lines c. GameStop, Sony, Dell d. GameStop, Best Buy, Gap 58. Which of the following groups are considered to be internal users of accounting information? a. employees and customers b. customers and vendors c. employees and managers d. government entities and banks Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 59. All of the following are examples of external users of accounting information except a. government entities b. customers c. creditors d. managers 60. Which of the following is the best description of accounting’s role in business? a. Accounting provides owners with information regarding the market value of the company. b. Accounting provides information to managers to operate the business and to other users to make decisions regarding the economic condition of the company. c. Accounting helps in decreasing the credit risk of the company. d. Accounting is not responsible for providing any form of information to users. That is the role of the Information Systems Department. 61. Managerial accountants would be responsible for providing a. tax reports to government agencies b. profit reports to owners and management c. expansion of a product line report to management d. consumer reports to customers 62. Which of the following is not a certification for accountants? a. CIA b. CMA c. CISA d. CPI 63. Which of the following is a role of accounting in business? a. to provide reports to users about the economic activities and conditions of a business b. all of these choices c. to provide information to external users to determine the economic performance and condition of the business d. to assess the various informational needs of users and design a business' accounting system to meet those needs 64. Which of the following are guidelines for behaving ethically? I. Identify the consequences of a decision and its effect on others. II. Consider your obligations and responsibilities to those affected by your decision. III. Identify an ethical decision by using your personal ethical standards of honesty and fairness. a. I and II b. II and III c. I and III d. I, II, and III 65. Which of the following would not normally operate as a service business? a. pet groomer Powered by Cognero

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Chapter 01: Introduction to Accounting and Business b. grocery store c. lawn care company d. styling salon 66. Most businesses in the United States are a. proprietorships b. partnerships c. corporations d. cooperatives 67. Which of the following is not a business entity? a. entrepreneurship b. proprietorship c. partnership d. corporation 68. An entity that is organized according to state or federal statutes and in which ownership is divided into shares of stock is a a. proprietorship b. corporation c. partnership d. governmental unit 69. Which of the following is true regarding a limited liability company? a. makes up 10% of business organizations in the United States b. combines the attributes of a partnership and a corporation c. provides tax and legal liability advantages to the owners d. all of these choices 70. On May 20, White Repair Service extended an offer of $108,000 for land that had been priced for sale at $140,000. On May 30, White Repair Service accepted the seller’s counteroffer of $115,000. On June 20, the land was assessed at a value of $95,000 for property tax purposes. On July 4, White Repair Service was offered $150,000 for the land by a national retail chain. At what value should the land be recorded in White Repair Service’s records? a. $108,000 b. $95,000 c. $140,000 d. $115,000 71. Which type of business is most likely to obtain large amounts of resources by issuing stock? a. partnership b. corporation c. proprietorship d. government entity 72. Which of the following is not a characteristic of a corporation? Powered by Cognero

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Chapter 01: Introduction to Accounting and Business a. Corporations are organized as a separate legal taxable entity. b. Ownership is divided into shares of stock. c. Corporations experience an ease in obtaining large amounts of resources by issuing stock. d. A corporation’s resources are limited to its individual owners’ resources. 73. Within the United States, the dominant body in the primary development of accounting principles is the a. American Institute of Certified Public Accountants (AICPA) b. American Accounting Association (AAA) c. Financial Accounting Standards Board (FASB) d. Institute of Management Accountants (IMA) 74. The business entity assumption means that a. the owner is part of the business entity b. an entity is organized according to state or federal statutes c. an entity is organized according to the rules set by the FASB d. the business is an economic entity separate from its owners. 75. For accounting purposes, a business entity should be considered separate from its owners if the entity is a. a corporation b. a proprietorship c. a partnership d. all of these choices 76. The measurement principle requires that a. business transactions be consistent with the objectives of the entity b. the Financial Accounting Standards Board be fair and unbiased in its deliberations over new accounting standards c. accounting principles meet the objectives of the Securities and Exchange Commission d. amounts recorded in the financial statements be based on independently verifiable evidence 77. Karen Meyer owns and operates Crystal Cleaning Company. Recently, Meyer withdrew $10,000 from Crystal Cleaning, and she contributed $6,000, in her name, to the American Red Cross. The contribution of the $6,000 should be recorded on the accounting records of which of the following entities? a. Crystal Cleaning and the American Red Cross b. Karen Meyer's personal records and the American Red Cross c. Karen Meyer's personal records and Crystal Cleaning Company d. Karen Meyer's personal records, Crystal Cleaning Company, and the American Red Cross 78. Which of the following is an authoritative body in the United States that has the primary responsibility for developing accounting principles? a. FASB b. IRS c. SEC d. AICPA Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 79. Which of the following items relates to separating the reporting of business and personal economic transactions? a. cost principle b. monetary unit assumption c. business entity assumption d. measurement principle 80. Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $220,000. Focus Company initially offered to buy the land for $177,000. The companies settled on a purchase price of $212,000. On the same day, another piece of land on the same block sold for $232,000. Under the cost principle, at what amount should the land be recorded in the accounting records of Focus Company? a. $177,000 b. $212,000 c. $220,000 d. $232,000 81. Many countries outside of the United States use financial accounting standards issued by the a. AICPA b. SEC c. IASB d. FASB 82. The monetary unit assumption a. is only used in the financial statements of manufacturing companies b. is not important when applying the cost principle c. requires that different units be used for assets and liabilities d. requires that economic data be reported in yen in Japan or dollars in the United States 83. Which of the following is true of accounting principles? a. Financial accountants follow generally accepted accounting principles (GAAP). b. Following GAAP allows accounting information users to compare one company to another. c. All of these choices. d. The Financial Accounting Standards Board (FASB) has primary responsibility for developing accounting principles. 84. The initials GAAP stand for a. general accounting procedures b. generally accepted plans c. generally accepted accounting principles d. generally accepted accounting practices 85. Assets are a. always lower than liabilities b. equal to liabilities less owner's equity c. the same as expenses because they are acquired with cash d. financed by the owners and/or creditors Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 86. Debts owed by a business are referred to as a. accounts receivable b. expenses c. owner's equity d. liabilities 87. The accounting equation may be expressed as a. Assets = Expenses − Liabilities b. Assets + Liabilities = Owner's Equity c. Assets = Revenues − Liabilities d. Assets − Liabilities = Owner's Equity 88. The assets and liabilities of a company are $128,000 and $84,000, respectively. Owner's equity should equal a. $212,000 b. $44,000 c. $128,000 d. $84,000 89. If total liabilities decreased by $46,000 during a period of time and owner's equity increased by $60,000 during the same period, the amount and direction (increase or decrease) of the period's change in total assets is a a. $106,000 increase b. $14,000 increase c. $14,000 decrease d. $106,000 decrease 90. Which of the following is not a business transaction? a. make a sales offer b. sell goods for cash c. receive cash for services to be rendered later d. pay for supplies 91. A business paid $7,000 to a creditor for an amount owed. The effect of the transaction on the accounting equation was to a. increase an asset; decrease another asset b. decrease an asset; decrease a liability c. increase an asset; increase a liability d. increase an asset; increase owner's equity 92. Earning revenue a. increases assets; increases owner's equity b. increases assets; decreases owner's equity c. increases one asset; decreases another asset d. decreases assets; increases liabilities Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 93. The monetary value earned for selling goods or services to customers is called a. net profit b. net income c. capital d. revenue 94. Items purchased on account for future use in the business, such as supplies, are called a. prepaid liabilities b. revenues c. prepaid expenses d. liabilities 95. The asset created by a business when it makes a sale on account is termed a. accounts payable b. prepaid expense c. interest revenue d. accounts receivable 96. The debt created by a business when it makes a purchase on account is called an a. account payable b. account receivable c. asset d. expense payable 97. If total assets decreased by $88,000 during a period of time and owner's equity increased by $71,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities is a. a $17,000 increase b. an $88,000 decrease c. a $159,000 increase d. a $159,000 decrease 98. Cash withdrawals made by the owner for personal use a. increase expenses b. decrease expenses c. increase cash d. decrease owner's equity 99. How does paying a liability in cash affect the accounting equation? a. assets increase; liabilities decrease b. assets increase; liabilities increase c. assets decrease; liabilities decrease d. liabilities decrease; owner's equity increases 100. How does receiving a bill to be paid next month for services received affect the accounting equation? a. assets decrease; owner's equity decreases Powered by Cognero

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Chapter 01: Introduction to Accounting and Business b. assets increase; liabilities increase c. liabilities increase; owner's equity increases d. liabilities increase; owner's' equity decreases 101. How does the payment of rent for equipment affect the accounting equation? a. assets increase; assets decrease b. assets decrease; owner's equity decreases c. assets decrease; liabilities increase d. assets increase; owner's equity increases 102. Land, originally purchased for $30,000, is sold for $62,000 in cash. What is the effect of the sale on the accounting equation? a. assets increase by $62,000; owner's equity increases by $62,000 b. assets increase by $32,000; owner's equity increases by $32,000 c. assets increase by $62,000; liabilities decrease by $30,000; owner's equity increases by $32,000 d. assets increase by $30,000; no change in liabilities; owner's equity increases by $62,000 103. Which of the following accounts is a liability? a. Accounts Payable b. Accounts Receivable c. Wages Expense d. Service Revenue 104. As of the end of its accounting period, December 31, Year 1, Great Plains Company has assets of $940,000 and liabilities of $300,000. During Year 2, owners invested an additional $73,000 and made $33,000 in owner withdrawals from the business. What is the amount of net income during Year 2, assuming that as of December 31, Year 2, assets were $995,000 and liabilities were $270,000? a. $45,000 b. $50,000 c. $106,000 d. $370,000 105. Which of the following asset accounts is increased when a receivable is collected? a. Accounts Receivable b. Supplies c. Accounts Payable d. Cash 106. Transactions affecting owner's equity include a. owner investments and payment of liabilities b. owner investments, owner withdrawals, earning of revenues, and incurrence of expenses c. owner investments, earning of revenues, incurrence of expenses, and collection of accounts receivable d. owner withdrawals, earning of revenues, incurrence of expenses, and purchase of supplies on account 107. Juan Chavez is starting a computer programming business and has invested $15,000. Identify how the accounting Powered by Cognero

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Chapter 01: Introduction to Accounting and Business equation will be affected by the owner's investment. a. increase in assets (Cash) and increase in liabilities (Accounts Payable) b. increase in assets (Cash) and increase in owner's equity (Juan Chavez, Capital) c. increase in assets (Accounts Receivable) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and increase in assets (Accounts Receivable) 108. R. Ramos, the owner of Ramos Repair Services, is withdrawing cash from the business for personal use. How does this transaction affect the accounting equation? a. increase in assets (Accounts Receivable) and decrease in assets (Cash) b. decrease in assets (Cash) and decrease in owner's equity (R. Ramos, Drawing) c. decrease in assets (Cash) and decrease in liabilities (Accounts Payable) d. increase in assets (Cash) and decrease in owner's equity (R. Ramos, Drawing) 109. Which of the following transactions would be omitted from the books of Bobby's Lawn Service? a. Roberta, the owner, deposits $15,000 in a bank account in the name of Bobby's Lawn Service. b. Roberta provides services to customers, earning fees of $600. c. Roberta purchased hedge trimmers for Bobby's Lawn Service, agreeing to pay the supplier next month. d. Roberta pays her monthly personal credit card bill. 110. Which of the following is a business transaction? a. purchase supplies on account b. plan advertising for upcoming sale c. give employees a raise beginning next month d. submit estimate for construction project 111. The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n) a. prior period statement b. statement of owner's equity c. income statement d. balance sheet 112. Which of the following financial statements reports information as of a specific date? a. income statement b. statement of owner's equity c. statement of cash flows d. balance sheet 113. Four financial statements are usually prepared for a business. The statement of cash flows is usually prepared last. The statement of owner's equity (SOE), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement. In what order are these three statements prepared? a. I, SOE, B b. B, I, SOE c. SOE, I, B d. B, SOE, I Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 114. Liabilities are reported on the a. income statement b. statement of owner's equity c. statement of cash flows d. balance sheet 115. Cash investments made by the owner in the business are reported on the statement of cash flows in the a. financing activities section b. investing activities section c. operating activities section d. supplemental schedule 116. The ending balance of the owner's capital account appears in a. both the statement of owner's’ equity and the income statement b. only the statement of owner's’ equity c. both the statement of owner's equity and the balance sheet d. both the statement of owner's equity and the statement of cash flows 117. A financial statement user would determine if a company was profitable or not during a specific period of time by reviewing the a. income statement b. balance sheet c. statement of cash flows d. statement of owner's equity 118. If the owner wanted to know how money flowed into and out of the company, which financial statement would the owner use? a. income statement b. statement of cash flows c. balance sheet d. statement of owner's equity 119. The Assets section of the balance sheet normally presents assets in a. alphabetical order b. the order of largest to smallest dollar amounts c. the order in which they will be converted into cash or used in operations d. the order of smallest to largest dollar amounts 120. Which of the following statements regarding the ratio of liabilities to stockholders' equity is not true? a. A ratio of 1 indicates that liabilities equal stockholders' equity. b. Sole proprietorships can use this ratio but substitute total owner's equity for total stockholders' equity. c. The higher this ratio, the better able a business is to withstand poor business conditions and pay creditors. d. The lower this ratio, the better able a business is to withstand poor business conditions and pay creditors. Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 121. A company had the following data for two recent years: Dec. 31, Year 2 Dec. 31, Year 1 Total liabilities $128,250 $120,000 Total stockholders' equity 95,000 $80,000 Compute the ratio of liabilities to stockholders' equity for each year. Round to two decimal places. a. 1.50 and 1.07, respectively b. 1.35 and 1.50, respectively c. 1.07 and 1.19, respectively d. 1.19 and 1.35, respectively 122. Which of the following is not an example of a service business? a. tax preparation firm b. law firm c. health club and spa d. automobile dealer 123. Which of the following is an example of a retail business? a. book publisher b. hospital c. supermarket d. modular homebuilder 124. Which of the following is not an example of a manufacturing business? a. book printer b. men’s clothing store c. dressmaking company d. modular homebuilder 125. Which of the following comprises 70% of business entities in the United States? a. proprietorships b. partnerships c. corporations d. limited liability companies (LLCs) 126. Which of the following generates 90% of business revenues in the United States? a. proprietorships b. partnerships c. corporations d. limited liability companies (LLCs) 127. Which of the following is true of the partnership form of business? a. owned by two or more individuals b. organized as a separate legal taxable entity c. easy and cheap to organize Powered by Cognero

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Chapter 01: Introduction to Accounting and Business d. used by large businesses 128. Which of the following is true of the limited liability company (LLC) form of business? a. often used as an alternative to a partnership b. all of these choices c. offers tax and legal liability advantages for owners d. combines the attributes of a partnership and a corporation 129. The receipt of cash for services provided has what effect on the accounting equation? a. increases assets; increases liabilities b. increases liabilities; decreases owner's' equity c. increases assets; increases owner's equity d. decreases assets; decreases liabilities 130. The payment of cash to a creditor on account has what effect on the accounting equation? a. increases assets; increases liabilities b. increases liabilities; decreases owner's equity c. increases assets; decreases assets d. decreases assets; decreases liabilities 131. The receipt of cash from a credit customer on account has what effect on the accounting equation? a. increases assets; increases liabilities b. increases liabilities; decreases owner's' equity c. increases assets; decreases assets d. decreases assets; decreases liabilities 132. Owner withdrawals have what effect on the accounting equation? a. increases assets; increases liabilities b. increases liabilities; decreases owner's equity c. increases stockholders’ equity; decreases owner's equity d. decreases assets; decreases owner's equity 133. A purchase of supplies on credit has what effect on the accounting equation? a. increases assets; increases liabilities b. increases liabilities; decreases owner's' equity c. increases assets; increases owner's equity d. decreases assets; decreases liabilities 134. Borrowing money from the bank has what effect on the accounting equation? a. increases assets; decreases assets b. increases liabilities; decreases owner's equity c. decreases assets; decreases owner's equity d. increases assets; increases liabilities

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Chapter 01: Introduction to Accounting and Business 135. The purchase of equipment for cash has what effect on the accounting equation? a. increases assets; decreases assets b. increases liabilities; decreases owner's equity c. decreases assets; decreases owner's equity d. decreases assets; decreases liabilities 136. The using up of supplies on hand has what effect on the accounting equation? a. increases assets; increases liabilities b. increases liabilities; decreases owner's equity c. decreases assets; decreases owner's equity d. decreases assets; decreases liabilities 137. Which of the following statements should be prepared first? a. income statement b. balance sheet c. statement of owner's equity d. statement of cash flows 138. Which of the following statements should be prepared second? a. income statement b. balance sheet c. statement of owner's' equity d. statement of cash flows 139. Which of the following statements is a formal presentation of the accounting equation? a. income statement b. balance sheet c. statement of owner's equity d. statement of cash flows

140. Discuss internal and external users of accounting information. What areas of accounting provide them with information? Give an example of the type of report each type of user might use. 141. Companies such as Enron, Countrywide, and Xerox Corporation have been caught in the midst of ethical lapses that led to fines, firings, and criminal and/or civil prosecution. List and briefly describe two factors that are responsible for what went wrong in these companies. 142. List the five steps in the process by which accounting provides information to users. 143. Identify each of the following as either internal or external users of accounting information. A. B. C. D.

Payroll manager Bank President’s secretary Internal Revenue Service

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Chapter 01: Introduction to Accounting and Business E. F. G. H.

Raw material vendors Social Security Administration Health insurance provider Managerial accountant

144. For each of the following companies, identify whether it is a service, retail, or manufacturing business. A. B. C. D. E. F. G. H. I.

Kohl's Time Warner Cable General Motors Regal Cinemas Applebee’s Sony Best Buy Banana Republic H&R Block

145. What is the major difference between the objective of financial accounting and the objective of managerial accounting? 146. On May 7, Carpet Barn Company offered to pay $83,000 for land that had a selling price of $105,000. On May 15, Carpet Barn accepted a counteroffer of $95,000. On June 5, the land was assessed at a value of $115,000 for property tax purposes. On December 10, Carpet Barn Company was offered $135,000 for the land by another company. At what value should the land be recorded in Carpet Barn Company’s records? 147. Donner Company is selling a piece of land adjacent to its business. An appraisal reported the market value of the land to be $120,000. Focus Company initially offered to buy the land for $107,000. The companies settled on a purchase price of $115,000. On the same day, another piece of land on the same block sold for $122,000. Under the cost principle, what amount will be used to record this transaction in the accounting records? 148. Explain the meaning of the business entity assumption. 149. Darnell Company purchased $88,000 of computer equipment from Joseph Company. Darnell Company paid for the equipment using cash that had been obtained from the initial investment by Donnie Darnell. Which entity or entities (Darnell Company, Joseph Company, and Donnie Darnell) should record the transaction involving the computer equipment in their accounting records? 150. Discuss the characteristics of a limited liability company (LLC). 151. Explain the meaning of: (a) the measurement principle (b) the monetary unit assumption 152. Bob Johnson is the sole owner of Johnson’s Carpet Cleaning Service. Bob purchased a personal automobile for $10,000 cash plus he took out a loan for $20,000 in his name. Describe how this transaction is related to the business entity assumption. 153. Dave Ryan is the owner of Ryan's Arcade. At the end of its accounting period, December 31, Ryan's Arcade has assets of $450,000 and liabilities of $125,000. Using the accounting equation, determine the follow amounts: (a) Owner's equity as of December 31 of the current year Powered by Cognero

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Chapter 01: Introduction to Accounting and Business (b)

Owner's equity as of December 31 at the end of the next year, assuming that assets increased by $65,000 and liabilities increased by $35,000 during the year

154. Kramer Service has liabilities equal to one-fourth of its total assets. Kramer’s owner's equity is $45,000. Using the accounting equation, what is the amount of liabilities for Kramer? 155. Determine the missing amount for each of the following: Assets (a) $30,000 $53,000

Liabilities $38,000 (b) $32,000

Owner's Equity $45,000 $22,000 (c)

156. Determine the missing amount “X” for each of the following: Assets (a) (b) (c)

Liabilities $78,500 X $49,500

Owner's Equity $37,600 $53,280 X

X $145,000 $34,000

157. Use the accounting equation to answer each of the following independent questions. (a) At the beginning of the year, Norton's Travel Service had assets of $75,000, and owner's equity of $38,000. During the year, assets increased by $18,000, and liabilities increased by $4,000. What was the owner's equity at the end of the year? (b) At the beginning of the year, Turpin Industries had liabilities of $44,000 and owner's equity of $66,000. If assets increased by $10,000 and liabilities decreased by $5,000, what was the owner's equity at the end of the year? 158. On July 1 of the current year, the assets and liabilities of John Wong, DVM, are as follows: Cash, $27,000; Accounts Receivable, $12,300; Supplies, $3,100; Land, $35,000; Accounts Payable, $13,900. What is the amount of owner's equity as of July 1 of the current year? 159. At the end of its accounting period, December 31, of Year 1, Hsu’s Financial Services has assets of $575,000 and owner's equity of $335,000. Using the accounting equation and considering each case independently, determine the following amounts. (a) Hsu’s liabilities as of December 31, of Year 1. (b) Hsu’s liabilities as of December 31, of Year 2, assuming that assets increased by $56,000 and owner's equity decreased by $32,000. (c) Net income or net loss during Year 2, assuming that as of December 31, Year 2, assets were $592,000, liabilities were $450,000, and there were no additional investments or withdrawals. Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 160. Indicate whether each of the following accounts represents an asset, liability, or owner's equity: (a) (b) (c) (d) (e) (f)

Accounts Payable Wages Expense Chris Clark, Capital Accounts Receivable Chris Clark, Drawing Land

161. At December 31 of the current year, Martin Consultants has assets of $430,000 and liabilities of $205,000. Using the accounting equation and considering each case independently, determine the following: (a) Owner's equity as of December 31. (b) Owner's equity as of December 31 of the next year, assuming that assets increased by $12,000 and liabilities increased by $15,000. (c) Owner's equity as of December 31 of the next year, assuming that assets decreased by $8,000 and liabilities increased by $14,000. 162. Scott Industries The accountant for Scott Industries prepared the following list of account balances from the company’s records for the year ended December 31. Use this information to answer the questions that follow. Fees Earned Accounts Receivable Equipment Accounts Payable Salaries and Wages Expense Income Taxes Payable

$165,000 16,000 64,000 12,000 40,000 5,000

Cash Selling Expenses Sally Scott, Capital Interest Revenue Income Taxes Expense Rent Expense

$30,000 44,000 47,000 3,000 18,000 20,000

Determine the total assets at the end of the current year for Scott Industries. 163. Scott Industries The accountant for Scott Industries prepared the following list of account balances from the company’s records for the year ended December 31. Use this information to answer the questions that follow. Fees Earned Accounts Receivable Equipment Accounts Payable Salaries and Wages Expense Income Taxes Payable

$165,000 16,000 64,000 12,000 40,000 5,000

Cash Selling Expenses Sally Scott, Capital Interest Revenue Income Taxes Expense Rent Expense

$30,000 44,000 47,000 3,000 18,000 20,000

Determine the total liabilities at the end of the current year for Scott Industries. 164. Scott Industries The accountant for Scott Industries prepared the following list of account balances from the company’s records for the year ended December 31. Use this information to answer the questions that follow. Powered by Cognero

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Chapter 01: Introduction to Accounting and Business Fees Earned Accounts Receivable Equipment Accounts Payable Salaries and Wages Expense Income Taxes Payable

$165,000 16,000 64,000 12,000 40,000 5,000

Cash Selling Expenses Sally Scott, Capital Interest Revenue Income Taxes Expense Rent Expense

$30,000 44,000 47,000 3,000 18,000 20,000

Based on this information, is Scott Industries profitable? Explain your answer. 165. Daniels Company made the following selected transactions during May: 1. The owner, Jan Daniels, invested cash in the business, $55,000. 2. Paid creditors on account, $7,000. 3. Billed customers for services on account, $2,565. 4. Received cash from customers on account, $8,450. 5. Jan Daniels withdrew cash for personal use, $2,500. 6. Purchased supplies on account $160. Indicate the effect of each transaction on the accounting equation by: (a) Account type—(A)assets, (L)liabilities, (OE)owner's equity, (R)revenue, and (E)expense (b) Name of account (c) Amount of the transaction (d) Direction of change (increase or decrease) in the account affected Hint: Each transaction has two entries. Entry Account Name of Amount Type Account (c) (a) (b)

Entry Increase or Account Name of Decrease Type Account (d) (a) (b)

Amount (c)

Increase or Decrease (d)

1 2 3 4 5 6 166. Collins Landscape Services purchased various landscaping supplies on account to be used for landscape designs for its customers. How will this business transaction affect the accounting equation? 167. Ramirez Company paid its electric bill in the amount of $60. How will this transaction affect the accounting equation? 168. Indicate how the following transactions affect the accounting equation. (a) Purchase of supplies on account (b) Purchase of supplies for cash (c) Withdrawal of cash by owner for personal use. (d) Revenues received in cash (e) Sale made on account 169. (a) A vacant lot acquired for $83,000 cash is sold for $127,000 in cash. What is the effect of the sale on the Powered by Cognero

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Chapter 01: Introduction to Accounting and Business total amount of the seller’s (1) assets, (2) liabilities, and (3) owner's equity? (b) Assume that the seller owes $52,000 on a loan for the land. After receiving the $127,000 cash in (a), the seller pays the $52,000 owed. What is the effect of the payment on the total amount of the seller’s (1) assets, (2) liabilities, and (3) owner's equity? 170. Austin Land Company sold land for $85,000 in cash. The land was originally purchased for $65,000. At the time of the sale, $40,000 was still owed to Regions Bank. After the sale, Austin Land Company paid off the loan. Explain the effect of (a) the sale and (b) the payoff of the loan on the accounting equation. 171. There are four transactions that affect owners' equity. (a) What are the two types of transactions that increase owner's equity? (b) What are the two types of transactions that decrease owner's equity? 172. The assets and liabilities of Thompson Computer Services at March 31, the end of the current fiscal year, and its revenue and expenses for the year follow. Mike Thompson, Capital, had a balance of $180,000 at April 1, the beginning of the current year. During the year, the owner invested an additional $25,000. Use this information to answer the questions that follow. Accounts payable Accounts receivable Cash Fees earned Land Building

$ 2,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense Mike Thompson, Drawing

$ 1,030 1,240 1,670 23,550 16,570

Identify each of the following as resulting in an (1) increase to owners' equity or a (2) decrease to owners' equity. (a) (b) (c) (d) (e)

Fees earned Wages expense incurred Cash withdrawn by Mike Thompson for personal use. Additional investment in business made by Mike Thompson Supplies expense recognized

173. The assets and liabilities of Thompson Computer Services at March 31, the end of the current fiscal year, and its revenue and expenses for the year follow. Mike Thompson, Capital, had a balance of $180,000 at April 1, the beginning of the current year. During the year, the owner invested an additional $25,000. Use this information to answer the questions that follow. Accounts payable Accounts receivable Cash Fees earned Land Building

$ 2,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense Mike Thompson, Drawing

$ 1,030 1,240 1,670 23,550 16,570

Prepare an income statement for the current year ended March 31. Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 174. The assets and liabilities of Thompson Computer Services at March 31, the end of the current fiscal year, and its revenue and expenses for the year follow. Mike Thompson, Capital, had a balance of $180,000 at April 1, the beginning of the current year. During the year, the owner invested an additional $25,000. Use this information to answer the questions that follow. Accounts payable Accounts receivable Cash Fees earned Land Building

$ 2,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense Mike Thompson, Drawing

$ 1,030 1,240 1,670 23,550 16,570

Prepare a statement of owner's equity for the current year ended March 31. 175. The assets and liabilities of Thompson Computer Services at March 31, the end of the current fiscal year, and its revenue and expenses for the year follow. Mike Thompson, Capital, had a balance of $180,000 at April 1, the beginning of the current year. During the year, the owner invested an additional $25,000. Use this information to answer the questions that follow. Accounts payable Accounts receivable Cash Fees earned Land Building

$ 2,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense Mike Thompson, Drawing

$ 1,030 1,240 1,670 23,550 16,570

Prepare a balance sheet for the current year ended March 31. 176. The assets and liabilities of Thompson Computer Services at March 31, the end of the current fiscal year, and its revenue and expenses for the year follow. Mike Thompson, Capital, had a balance of $180,000 at April 1, the beginning of the current year. During the year, the owner invested an additional $25,000. Use this information to answer the questions that follow. Accounts payable Accounts receivable Cash Fees earned Land Building

$ 2,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense Mike Thompson, Drawing

$ 1,030 1,240 1,670 23,550 16,570

Use the following information to determine the net income or net loss: Beginning owner's equity Ending owner's equity Owner withdrawals

$58,000 30,000 25,000

177. A summary of cash flows for Linda's Design Services for the year ended December 31 follows: Cash receipts: Powered by Cognero

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Chapter 01: Introduction to Accounting and Business Cash received from customers Cash received from owner's investment

$83,990 25,000

Cash payments: Cash paid for expenses Cash paid for land Cash paid for supplies Cash paid for owner withdrawals

$27,000 47,000 410 5,000

Cash balance as of January 1

$40,600

Prepare a statement of cash flows for Linda's Design Services for the year ended December 31. 178. What information does the income statement give to business users? 179. What are the three sections of the statement of cash flows? 180. For each of the following items, indicate the financial statement on which they can be found. (Hint: Some of the items can be found on more than one financial statement.) A. Balance sheet B. Income statement C. Statement of cash flows D. Statement of owner's equity # 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Item Withdrawals Revenues Supplies Land Accounts payable Accounts receivable Operating activities Wages expense Net income Cash

181. Name and describe the four primary financial statements for a proprietorship. 182. A summary of cash flows for Evelyn's Event Planning for the year ended December 31 follows: Cash receipts: Cash received from customers Cash received from bank loan

$57,360 15,000

Cash payments: Cash paid for operating expenses Cash paid for equipment Cash paid for party supplies Cash paid for owner withdrawals Cash balance as of January 1

$12,120 18,070 9,480 12,000 $15,580

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Chapter 01: Introduction to Accounting and Business Prepare a statement of cash flows for Evelyn's Event Planning for the year ended December 31.

183. The assets and liabilities of Rocky's Day Spa at December 31 and expenses for the year are listed. The balance of Rocky Reed, Capital was $68,000 at January 1. Rocky invested an additional $10,000 in the business during the year. Net income for the year was $45,625. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

$ 4,375 Spa operating expense 8,490 Office expense 13,980 Spa supplies ??? Wages expense 56,000 Rocky Reed, drawing 2,130

$23,760 2,470 9,230 26,580 38,170

Prepare an income statement for Rocky's Day Spa for the current year ended December 31.

184. The assets and liabilities of Rocky's Day Spa at December 31 and expenses for the year are listed. The balance of Rocky Reed, Capital was $68,000 at January 1. Rocky invested an additional $10,000 in the business during the year. Net income for the year was $45,625. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

$ 4,375 Spa operating expense 8,490 Office expense ??? Spa supplies 98,435 Wages expense 56,000 Rocky Reed, drawing 2,130

$23,760 2,470 9,230 26,580 38,170

Prepare a balance sheet for Rocky's Day Spa for the year ended December 31. 185. The assets and liabilities of Rocky's Day Spa at December 31 and expenses for the year are listed. The balance in Rocky Reed, Capital was $68,000 at January 1. Rocky invested an additional $10,000 in the business during the year. Net income for the year was $45,625. Accounts payable Accounts receivable Cash Fees earned Spa furniture and equipment Computers

$ 4,375 Spa operating expense 8,490 Office expense 13,980 Spa supplies 98,435 Wages expense 56,000 Rocky Reed, drawing 2,130

$23,760 2,470 9,230 26,580 38,170

Prepare a statement of owner's equity for Rocky's Day Spa for the current year ended December 31. 186. Explain the interrelationship between the balance sheet and the statement of cash flows. 187. From the following list of accounts taken from Lamar’s accounting records, identify those that would appear on the income statement. (a)

Rent Expense

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Chapter 01: Introduction to Accounting and Business (b) (c) (d) (e) (f) (g)

Land Lamar Hill, Capital Fees Earned Lamar, Hill, Drawing Wages Expense Investments

188. Identify which of the following accounts would appear on a balance sheet. (a) (b) (c) (d) (e) (f) (g)

Cash Fees Earned Natalie West, Capital Wages Payable Rent Expense Supplies Land

189. Indicate whether each of the following activities would be reported on the statement of cash flows as an operating activity, an investing activity, or a financing activity. (a) (b) (c) (d) (e) (f) (g)

Cash paid for building Cash paid to suppliers Cash paid for owner withdrawals Cash received from customers Cash received from owner investments Cash received from the sale of a building Cash borrowed from a bank

190. For each of the following, determine the amount of net income or net loss for the year. (a) (b) (c)

(d)

Revenues for the year totaled $71,300 and expenses totaled $35,500. The owner invested an additional $15,000 in the business during the year. Revenues for the year totaled $220,500 and expenses totaled $175,000. The owner withdrew $40,000 for personal use during the year. Revenues for the year totaled $149,000 and expenses totaled $172,000. The owner invested an additional $12,000 in the business and withdrew $16,000 cash for personal use during the year. Revenues for the year totaled $198,150 and expenses totaled $174,200. The owner withdrew $35,000 cash for personal use during the year.

191. The total assets and total liabilities of Paul’s Pools and Palaces at the beginning and end of the current fiscal year are as follows: Total assets Total liabilities (a)

Jan. 1 $280,000 205,000

Dec. 31 $475,000 130,000

Determine the amount of net income earned during the year. No additional investments

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Chapter 01: Introduction to Accounting and Business (b)

(c)

(d)

or withdrawals were made. Determine the amount of net income during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts initially presented. However, the owner withdrew $53,000 in cash during the year and made no additional investments in the business. Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts initially presented. However, the owner invested an additional $35,000 cash in the business during the year and no owner withdrawals were made. Determine the amount of net income earned during the year. The assets and liabilities at the beginning and end of the year are unchanged from the amounts initially presented. However, the owner invested an additional $12,000 in August and made 12 monthly withdrawals of $1,500 each during the year.

192. Selected transaction data of a business for September are summarized as follows: Service sales charged to customers on account during September Cash received from cash customers for services performed in September Cash received from customers on account during September: Services performed and charged to customers prior to September Services performed and charged to customers during September Expenses incurred prior to September and paid during September Expenses incurred and paid in September Expenses incurred in September but not paid in September Expenses for supplies used and insurance (not included above) applicable to September

$33,000 28,000 13,000 18,000 6,500 36,250 5,000 2,000

Determine the following amounts for September: (a) total revenue, (b) total expenses, and (c) net income. 193. On March 1, the balance of Richard Carter, Capital was $150,000. During March, the owner withdrew $31,000 cash for personal use. The amounts of the various assets, liabilities, revenues, and expenses as of March 31 are as follows: Accounts payable Accounts receivable Cash Fees earned Insurance expense Land Miscellaneous expense Rent expense Salary expense Supplies Supplies expense Utilities expense

$10,250 45,950 23,840 64,950 1,275 88,400 1,210 9,000 20,300 900 525 2,800

Prepare (a) an income statement for March, (b) a statement of owner's equity for March, and (c) a balance sheet for Richard's Catering Company as of March 31. 194. Using the following accounts and their amounts, prepare an income statement for Bright Futures Company for the month ended August 31. The owner, Miyoshi Umeki, made no additional investments in the business during the year. Powered by Cognero

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Chapter 01: Introduction to Accounting and Business Telephone Expense Cash Accounts Payable Miyoshi Umeki, Drawing Fees Earned Rent Expense Supplies Accounts Receivable Computer Equipment Miyoshi Umeki, Capital (August 1) Wages Expense Utilities Expense Office Expense

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 17,600 14,320 4,800 750 420

195. Using the following accounts and their amounts, prepare a statement of owner's equity for Bright Futures Company for the month ended August 31. The owner, Miyoshi Umeki, made no additional investments in the business during the year. Telephone expense Cash Accounts Payable Miyoshi, Umeki, Drawing Fees Earned Rent Expense Supplies Accounts Receivable Computer Equipment Miyoshi Umeki, Capital (August 1) Wages Expense Utilities Expense Office Expense

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 17,600 14,320 4,800 750 420

196. Using the following accounts and their amounts, prepare a balance sheet for Bright Futures Company as of August 31. The owner, Miyoshi Umeki, made no additional investments in the business during the year. Telephone Expense Cash Accounts Payable Miyoshi Umeki, Drawing Fees Earned Rent Expense Supplies Accounts Receivable Computer Equipment Miyoshi Umeki, capital (August 1) Wages Expense Utilities Expense Office Expense Powered by Cognero

$ 1,150 3,000 1,540 800 15,700 1,400 140 1,500 17,600 14,320 4,800 750 420 Page 29

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Chapter 01: Introduction to Accounting and Business

197. The account balances of Awesome Travel Services at December 31 are listed. There were no additional investments or withdrawals by the owner during the year. Accounts Payable

$12,000

Accounts Receivable Cash Computer Equipment Fees Earned Rent Expense

14,000 18,000 21,000 78,000 10,000

Debra Hagedorn, capital (Jan. 1) Supplies Income Taxes Expense Utilities Expense Wages Expense Supplies Expense

$10,000 1,000 1,300 8,000 25,000 1,700

Prepare an income statement for the year ended December 31, a statement of owner's equity for the year ended December 31, and a balance sheet as of December 31.

198. Schultz Tax Services, a tax preparation business, had the following transactions during the month of June: 1. Received cash for providing accounting services, $3,000. 2. Billed customers on account for providing services, $7,000. 3. Paid advertising expense, $800. 4. Received cash from customers on account, $3,800. 5. Withdrew cash for owner’s personal use, $1,500. 6. Received telephone bill, $220. 7. Paid telephone bill, $220. Based on the information provided, compute the balance of Cash at June 30. Use the following format: Cash, June 1

$25,000

Plus cash receipts for June

____________

Minus cash payments for June

____________

Cash, June 30

____________

199. A company had the following data: Dec. 31, Year 2 Total liabilities $128,250 Total stockholders' equity 95,000

Dec. 31, Year 1 $120,000 80,000

(a) Compute the ratio of liabilities to stockholders' equity for each year. Round answers to two decimal places. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2? 200. Company G has a ratio of liabilities to stockholders’ equity of 0.12 and 0.28 for Year 1 and Year 2, respectively. In contrast, Company M has a ratio of liabilities to stockholders’ equity of 1.13 and 1.29 for the same period. Based on this information, which company's creditors are more at risk and why? Should the creditors of either company fear the risk of nonpayment? 201. The following data were taken from Miller Company’s balance sheet: Powered by Cognero

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Chapter 01: Introduction to Accounting and Business

Total liabilities Total stockholders' equity

Dec. 31, Year 2 $150,000 75,000

Dec. 31, Year 1 $105,000 60,000

(a) Compute the ratio of liabilities to stockholders' equity. Round answers to two decimal places. (b) Has the creditors’ risk increased or decreased from December 31, Year 1, to December 31, Year 2?

Indicate whether the statement is true or false. 202. Any 12-month accounting period adopted by a company is known as its fiscal year. a. True b. False 203. A fiscal year that ends when business activities have reached their lowest point is called the natural business year. a. True b. False 204. All businesses must use the calendar year (January 1 through December 31) as their fiscal year. a. True b. False 205. The majority of businesses end their fiscal year on December 31. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 206. Financial reports that allow users to identify the similarities and differences among reported items are said to demonstrate a. timeliness b. understandability c. comparability d. verifiability 207. Financial reports that are available to help users in decision making show a. timeliness b. understandability c. comparability d. verifiability 208. Relevant and faithful representation of accounting data is enhanced when financial reports are clear and concise. Such reports demonstrate a. timeliness b. understandability c. comparability d. verifiability Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 209. Financial reports are said to be verifiable when a. they are available in time to influence users' decisions b. they are formatted clearly and concisely c. they demonstrate the similarities and differences among reported items d. the data can be confirmed by a third party 210. A fiscal year for a business a. ordinarily begins on the first day of a month and ends on the last day of the following twelfth month b. is determined by the federal government c. always begins on January 1 and ends on December 31 of the same year d. should end at the height of the business's annual operating cycle 211. The natural business year is a a. fiscal year that ends when business activities are at their lowest point b. calendar year that ends when business activities are at their lowest point c. fiscal year that ends when business activities are at their highest point d. calendar year that ends when business activities are at their highest point 212. Resources owned by a business are known as a. debts b. liabilities c. assets d. equity 213. The rights of owners in a business are referred to as a. proprietor's equity b. owner's equity c. drawings d. equity in assets 214. The assets and owner's equity of a business are $159,000 and $95,000, respectively. Liabilities should equal a. $64,000 b. $46,000 c. $254,000 d. $95,000 215. The liabilities and owner's equity of a business are $132,000 and $244,000, respectively. Assets should equal a. $188,000 b. $132,000 c. $376,000 d. $112,000 216. Owner's equity at the beginning of the year for Atlas Services was $390,000, while its liabilities totaled $230,000. During the year, its assets increased by $75,000, and its liabilities decreased by $50,000. What is the amount of owner's Powered by Cognero

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Chapter 01: Introduction to Accounting and Business equity at the end of the year for Atlas Services? a. $107,000 b. $98,000 c. $415,000 d. $515,000 217. At the beginning of the year, Winton Company’s assets were $180,000, and its owner’s equity was $82,000. During the year, assets increased by $25,000, and liabilities increased by $9,000. What is the amount of owner's equity at the end of the year? a. $107,000 b. $98,000 c. $114,000 d. $116,000 218. The assets and liabilities of Bennett Designs at December 31, the end of the current year, and its revenue and expenses for the year are as follows: Accounts payable Accounts receivable Cash Fees earned Land Building

$ 42,000 10,340 21,420 73,450 47,000 157,630

Miscellaneous expense Office expense Supplies Wages expense

$ 1,030 1,240 1,670 23,550

What were the total assets on December 31? a. $238,060 b. $236,390 c. $309,840 d. $33,430 219. Redfox Pest Control Service had revenues of $425,000 and expenses of $338,000 for the current year, ended June 30. At the beginning of the year, Randall Foxx, Capital, had a balance of $180,000. During the year, Randall invested an additional $25,000 in the business and made withdrawals of $16,750 for personal use. What is the balance of Randall Foxx, Capital at the end of the year? a. $292,000 b. $267,250 c. $205,250 d. $275,250 220. Revenues for the year totaled $162,000 and expenses totaled $174,000. The owner invested an additional $15,000 in the business and withdrew $6,000 cash for personal use during the year. What was the net income or net loss for the year? a. $12,000 net income b. $(12,000) net loss c. $(18,000) net loss d. $(6,000) net loss 221. Purchasing equipment for use in business operations is Powered by Cognero

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Chapter 01: Introduction to Accounting and Business a. an operating activity b. an investing activity c. a financing activity d. both an investing and an operating activity 222. Obtaining funds to start and operate a business is a. an operating activity b. an investing activity c. a financing activity d. both an investing and a financing activity

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Chapter 01: Introduction to Accounting and Business Answer Key 1. True 2. True 3. False 4. False 5. False 6. True 7. False 8. True 9. True 10. True 11. False 12. True 13. False 14. False 15. True 16. False 17. False 18. True 19. True 20. True 21. True 22. False 23. False 24. False 25. True Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 26. True 27. True 28. False 29. False 30. False 31. True 32. True 33. False 34. True 35. False 36. False 37. False 38. False 39. False 40. False 41. True 42. False 43. False 44. False 45. True 46. False 47. True 48. False 49. d 50. b 51. b Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 52. a 53. d 54. d 55. a 56. c 57. d 58. c 59. d 60. b 61. c 62. d 63. b 64. d 65. b 66. a 67. a 68. b 69. d 70. d 71. b 72. d 73. c 74. d 75. d 76. d Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 77. b 78. a 79. c 80. b 81. c 82. d 83. c 84. c 85. d 86. d 87. d 88. b 89. b 90. a 91. b 92. a 93. d 94. c 95. d 96. a 97. d 98. d 99. c 100. d 101. b 102. b Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 103. a 104. a 105. d 106. b 107. b 108. b 109. d 110. a 111. c 112. d 113. a 114. d 115. a 116. c 117. a 118. b 119. c 120. c 121. b 122. d 123. c 124. b 125. a 126. c 127. a Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 128. b 129. c 130. d 131. c 132. d 133. a 134. d 135. a 136. c 137. a 138. c 139. b 140. Internal users of accounting information include managers and employees. The area of accounting that provides internal users with information is called managerial accounting or management accounting. Managerial accounting reports often include sensitive information, for example about customers, prices, or plans to expand the business. External users of accounting information include customers, creditors, banks, and government entities. These users are not directly involved in managing or operating the business. The area of accounting that provides external users with information is called financial accounting. General-purpose financial statements are one type of financial accounting report that is distributed to external users. 141. The two factors are: (1) failure in individual character and (2) company culture of greed and ethical indifference. Honesty, integrity, and fairness in the face of pressure to hide the truth are important characteristics of an ethical businessperson. The behavior and attitude of senior management set a firm’s culture. That culture in turn flows down to lower-level managers. 142. 1. Identify users. 2. Assess users’ information needs. 3. Design the accounting information system to meet users’ needs. 4. Record economic data about business activities and events. 5. Prepare accounting reports for users. 143. A. B. C. D. E. F.

Internal External Internal External External External

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Chapter 01: Introduction to Accounting and Business G. H.

External Internal

144. A. B. C. D. E. F. G. H. I.

Retail Service Manufacturing Service Service Service/Manufacturing Retail Retail Service

145. The objective of financial accounting is to provide information for the decision-making needs of external users. The objective of managerial accounting is to provide relevant and timely information for internal user's decision-making needs. 146. $95,000 147. $115,000 148. The business entity assumption limits the economic data in an accounting system to data related directly to the activities of the business. In other words, the business is viewed as an entity separate from its owners, creditors, or other businesses. 149. Darnell Company and Joseph Company 150. A limited liability company (LLC) combines the attributes of a partnership and a corporation. It is often used as an alternative to a partnership because it has tax and legal liability advantages for owners. 151. (a) The measurement principle requires that the amounts recorded in the accounting records be based on objective evidence. In exchanges between a buyer and a seller, both try to get the best price. Only the final agreed-upon amount is objective enough to be recorded in the accounting records. (b) The monetary unit assumption requires that financial reports be expressed in a single monetary unit, or currency. For example, economic data in the United States must be recorded in U.S. dollars. This provides a common measurement of the effects of economic events and transactions on an entity. 152. Under the business entity assumption, economic data are limited to the direct activities of the business. The business is viewed as separate from its owner. Therefore, when Bob buys a personal automobile, it is not listed on the books of Johnson’s Carpet Cleaning, unless Bob uses it in the business. In this case, the loan is a personal debt and not a liability of the company, and the cash is from Bob’s personal account and not the company’s account. 153. (a) $325,000 ($450,000 − $125,000) (b) $355,000 [($450,000 + $65,000) − ($125,000 + $35,000)]

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Chapter 01: Introduction to Accounting and Business 154. Assets = Liabilities + Owner's Equity 4X = X + $45,000 3X = $45,000 X = $15,000 in liabilities 155. (a) $83,000 ($38,000 + $45,000) (b) $8,000 ($30,000 – $22,000) (c) $21,000 ($53,000 – $32,000) 156. (a) $40,900 ($78,500 − $37,600) (b) $198,280 ($53,280 + $145,000) (c) $15,500 ($49,500 − $34,000) 157. (a) $75,000 − $38,000 = $37,000 beginning-of-year liabilities ($75,000 + $18,000) − ($37,000 + $4,000) = $52,000 end-of-year owner's equity (b) $44,000 + $66,000 = $110,000 beginning-of-year assets ($110,000 + $10,000) − ($44,000 − $5,000) = $81,000 end-of-year owner's equity 158. $63,500 ($27,000 Cash + $12,300 Accounts Receivable + $3,100 Supplies + $35,000 Land − $13,900 Accounts Payable = $63,500) 159. (a) $575,000 − $335,000 = $240,000 (b) ($575,000 + $56,000) − ($335,000 − $32,000) = $328,000 (c) $592,000 − $450,000 = $142,000 owner's equity Year 2 $335,000 − $142,000 = $193,000 net loss 160. (a) liability (b) owner's equity (c) owner's equity (d) asset (e) owner's equity (f) asset 161. (a) $430,000 − $205,000 = $225,000 (b) ($430,000 + $12,000) − ($205,000 + $15,000) = $222,000 (c) ($430,000 − $8,000) − ($205,000 + $14,000) = $203,000 162. $110,000 ($30,000 Cash + $16,000 Accounts Receivable + $64,000 Equipment = $110,000) 163. $17,000 Powered by Cognero

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Chapter 01: Introduction to Accounting and Business ($12,000 Accounts Payable + $5,000 Income Taxes Payable = $17,000) 164. ($165,000 Fees Earned + $3,000 Interest Revenue) − ($40,000 Salaries and Wages Expense + $44,000 Selling Expenses + $18,000 Income Taxes Expense + $20,000 Rent Expense) = $46,000 Net Income Scott Industries had net income for the period of $46,000. Since revenues exceeded expenses for the period, the company would be considered profitable. 165. Account Type (a) 1

A

2

A

3

A

4

A

5

A

6

A

Entry Entry Name Increase Account Name Increase or Amount Amount Decrease of or Type of Account Decrease Account (d) (c) (c) (d) (a) (b) (b) Cash $55,000 Increase SE Jan $55,000 Increase Daniels, Capital Cash $7,000 Decrease L Accounts $7,000 Decrease Payable Accounts $2,565 Increase R Fees $2,565 Increase Receivable Earned Cash $8,450 Increase A Accounts $8,450 Decrease Receivable Cash $2,500 Decrease SE Jan $2,500 Increase Daniels, Drawing Supplies $160 Increase L Accounts $160 Increase Payable

166. Increase assets (Supplies) and increase liabilities (Accounts Payable) 167. Decrease assets (Cash) and decrease owner's equity (Utilities Expense) 168. (a) Assets increase; liabilities increase (b) No net effect (asset decreases; asset increases) (c) Assets decrease; owner's equity decreases (d) Assets increase; owner's equity increases (e) Assets increase; owner's equity increases 169. (a) (1) Total assets increased $44,000 (2) No change in liabilities (3) Owner's equity increased $44,000 (b) (1) Total assets decreased $52,000 (2) Total liabilities decreased $52,000 (3) No change in owner's equity 170. (a) Total assets increase $20,000 (Cash increases by $45,000; Land decreases by $65,000) No change in liabilities Owner's equity increases $20,000 (Sales price - Cost of land) (b) Powered by Cognero

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Chapter 01: Introduction to Accounting and Business Total assets decrease by $40,000 (Cash paid) Total liabilities decrease by $40,000 (Loan payoff to Regions Bank) No change in owner's equity. 171. (a) Investments by the owner and revenues earned. (b) Withdrawals by the owner and expenses incurred. 172. (a) 1 (b) 2 (c) 2 (d) 1 (e) 2 173. Thompson Computer Services Income Statement For the Year Ended March 31 Fees earned Expenses:

$73,450 Wages expense Office expense Miscellaneous expense Total expenses

$23,550 1,240 1,030 (25,820) $47,630

Net income 174.

Thompson Computer Services Statement of Owner's Equity For the Year Ended March 31

Mike Thompson, capital April 1 Additional investment by owner Net income for the year Withdrawals

180,000 25,000 47,630 (16,570)

Mike Thompson, capital, March 31

$236,060

* $73,450 – $23,550 – $1,240 – $1,030 175. Thompson Computer Services Balance Sheet March 31 Assets Cash Accounts receivable Supplies Land Building Powered by Cognero

$ 21,420 10,340 1,670 47,000 157,630 Page 44

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Chapter 01: Introduction to Accounting and Business Total assets

$238,060 Liabilities

Accounts payable

$

2,000

Owner's Equity Mike Thompson, capital Total liabilities and owner's equity

236,060 $ 238,060

* $180,000 + $25,000 + $73,450 – $23,550 – $1,240 – $1,030 – $16,570 176. Ending owner's equity Beginning owner's equity Decrease in owner's equity Withdrawals Net loss

$ 30,000 (58,000) $(28,000) 25,000 $ (3,000)

177. Linda's Design Services Statement of Cash Flows For the Year Ended December 31 Cash flows from (used for) operating activities: Cash received from customers

$83,990

Cash paid for expenses and supplies

(27,410)

Net cash flows from operating activities

$ 56,580

Cash flows from (used for) investing activities: Cash paid for land

(47,000)

Cash flows from (used for) financing activities: Cash received from owner's investment

$25,000

Cash paid for owner withdrawals

(5,000)

Net cash flows from financing activities

20,000

Net increase in cash

$29,580

Cash balance, January 1

40,600

Cash balance, December 31

$70,180

178. The income statement reports the revenues and expenses for a period of time. The result is either a net income or a net loss. 179. Cash flows from (used for) operating activities Cash flows from (used for) investing activities Powered by Cognero

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Chapter 01: Introduction to Accounting and Business Cash flows from (used for) financing activities 180. # Answer 1. C, D 2. B 3. A 4. A 5. A 6. A 7. C 8. B 9. B, D 10. A, C

Item Withdrawals Revenues Supplies Land Accounts payable Accounts receivable Operating activities Wages expense Net income Cash

181. 1. Income statement: A summary of the revenue and expenses for a specific period of time, such as a month or a year. 2. Statement of owner's equity: A summary of the changes in owner's equity that have occurred during a specific period of time, such as a month or a year. 3. Balance sheet: A list of the assets, liabilities, and owner’s equity as of a specific date, usually at the close of the last day of a month or a year. 4. Statement of cash flows: A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. 182. Evelyn's Event Planning Statement of Cash Flows For the Year Ended December 31 Cash flows from (used for) operating activities: Cash received from customers Cash paid for expenses and supplies

$57,360 (21,600)

Net cash flows from operating activities

$35,760

Cash flows from (used for) investing activities: Cash paid for equipment Cash flow from (used for) financing activities: Cash received from bank loan Cash paid for owner's withdrawals Net cash flows from financing activities Net increase in cash Cash balance, January 1 Cash balance, December 31

(18,070)

$15,000 (12,000) 3,000 $20,690 15,580 $36,270

183. Rocky's Day Spa Income Statement Powered by Cognero

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Chapter 01: Introduction to Accounting and Business For the Year Ended December 31 Fees earned Expenses: Wages $26,580 expense Spa operating 23,760 expense Office expense 2,470 Total expenses Net income

$98,435

(52,810) $ 45,625

184. Rocky's Day Spa Balance Sheet December 31 Assets Cash Accounts receivable Spa supplies Computers Spa furniture and equipment Total assets Liabilities Accounts payable Owners' Equity Rocky Reed, capital Total liabilities and owner' equity

$13,980 8,490 9,230 2,130 56,000 $89,830 $ 4,375

85,455 $89,830

* $68,000 + $10,000 + $45,625 – $38,170

Rocky’s Day Spa Statement of Owner's Equity For the Year Ended December 31 _____________________________________________________________________ Rocky Reed, capital, January 1 $68,000 Additional investment by owner 10,000 Net income for the year 45,625 Withdrawals (38,170) Rocky Reed, capital, December 31 $85,455 185.

186. The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows. 187. (a), (d), (f) Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 188. (a), (c), (d), (f), (g) 189. (a) Investing (b) Operating (c) Financing (d) Operating (e) Financing (f) Investing (g) Financing 190. (a) $35,800 net income ($71,300 − $35,500) (b) $45,500 net income ($220,500 − $175,000) (c) $(23,000) net loss ($149,000 − $172,000) (d) $23,950 net income ($198,150 − $174,200) 191. (a) Owner's equity at end of year ($475,000 − $130,000) Owner's equity at beginning of year ($280,000 − $205,000) Net income

$345,000 75,000 $270,000

(b) Increase in owner's equity as in (a) Add withdrawals Net income

$270,000 53,000 $323,000

(c) Increase in owner's equity as in (a) Deduct additional investment Net income

$270,000 (35,000) $235,000

(d) Increase in owner's equity as in (a) Add withdrawals ($1,500 × 12) Deduct additional investment Net income

$270,000 18,000 (12,000) $276,000

192. (a) $61,000 ($33,000 + $28,000) (b) $43,250 ($36,250 + $5,000 + $2,000) (c) $17,750 ($61,000 − $43,250) 193. (a) Richard’s Catering Company Income Statement For the Month Ended March 31 Fees earned Operating expenses: Salary expense Rent expense Utilities expense Insurance expense Powered by Cognero

$64,950 $20,300 9,000 2,800 1,275 Page 48

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Chapter 01: Introduction to Accounting and Business Supplies expense Miscellaneous expense Total expenses Net income

525 1,210 (35,110) $29,840

(b) Richard’s Catering Company Statement of Owner's Equity For the Month Ended March 31 _______________________________________________________________ Richard Carter, capital, March 1 Net income for March Withdrawals

$150,000 29,840 (31,000)

Richard Carter, capital, March 31

$148,840

(c) Richard’s Catering Company Balance Sheet March 31 Assets Cash Accounts receivable Supplies Land Total assets

$ 23,840 45,950 900 88,400 $159,090 Liabilities

Accounts payable

$ 10,250 Owner's Equity

Richard Carter, capital

148,840

Total liabilities and owner's equity

$159,090

194. Bright Futures Company Income Statement For the Month Ended August 31 Fees earned Expenses: Wages expense Rent expense Telephone expense Utilities expense Office expense Powered by Cognero

$15,700 $4,800 1,400 1,150 750 420 Page 49

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Chapter 01: Introduction to Accounting and Business Total expenses Net income 195.

(8,520) $ 7,180 Bright Futures Company Statement of Owner's Equity For the Month Ended August 31

Miyoshi Umeki, Capital, August 1 Net income for August * Withdrawals Miyoski Umeki, capital, August 31

$14,320 (7,180) (800) $20,700

* $15,700 – $1,150 – $1,400 – $4,800 – $750 – $420 196. Bright Futures Company Balance Sheet August 31 Assets Cash $ 3,000 Accounts receivable 1,500 Supplies 140 Computer equipment 17,600 Total assets $22,240 Liabilities Accounts payable $ 1,540 Owner's' Equity Miyoshi Umeki, capital * 20,700 Total liabilities and owner's equity $22,240 * $14,320 + $15,700 – $1,150 – $1,400 – $4,800 – $750 – $420 – $800

197. Awesome Travel Services Income Statement For the Year Ended December 31 Fees earned Operating expenses: Wages expense $25,000 Rent expense 10,000 Utilities expense 8,000 Supplies expense 1,700 Income taxes 1,300 expense Total expenses Net income

$78,000

(46,000) $32,000

Awesome Travel Services Statement of Owner's Equity For the Year Ended December 31 _____________________________________________________________ Powered by Cognero

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Chapter 01: Introduction to Accounting and Business Debra Hagedorn, capital, January 1 Net income Debra Hagedorn, capital, December 31

$10,000 32,000 $42,000

Awesome Travel Services Balance Sheet December 31 Assets Cash Accounts receivable Supplies Computer equipment Total assets Liabilities Accounts payable Owner's Equity Debra Hagedorn, capital Total liabilities and owner's equity

$18,000 14,000 1,000 21,000 $54,000 $12,000 $42,000 $54,000

198. Cash, June 1 $25,000 Plus cash receipts for June 6,800 Minus cash payments for June 2,520 Cash, June 30 $29,280 199. (a) Dec. 31, Year 2 Total liabilities $128,250 Total stockholders' equity ÷95,000 Ratio of liabilities to stockholders' equity 1.35

Dec. 31, Year 1 $120,000 ÷80,000 1.50

(b) Decreased 200. Company M’s creditors are more at risk than are Company G’s creditors. The lower the ratio of liabilities to owner’s equity, the better able the company is to withstand poor business conditions and pay its obligations to creditors. Without additional information, it appears that the creditors of either company are well protected against the risk of nonpayment, because the ratios are relatively low for both. However, the fact that both ratios are increasing over the period should be monitored for downturns in business conditions. 201. (a) 12/31/Year 2: $150,000 ÷ $75,000 = 2.00 12/31/Year 1: $105,000 ÷ $60,000 = 1.75 (b) Increased Powered by Cognero

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Chapter 01: Introduction to Accounting and Business 202. True 203. True 204. False 205. True 206. c 207. a 208. b 209. d 210. a 211. a 212. c 213. b 214. a 215. c 216. d 217. b 218. a 219. d 220. b 221. b 222. c

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Chapter 02: Analyzing Transactions

Indicate whether the statement is true or false. 1. Accounts are records of increases and decreases in individual accounting equation elements. a. True b. False 2. A chart of accounts is a listing of accounts that make up the journal. a. True b. False 3. The chart of accounts should be the same for each business. a. True b. False 4. Accounts payable are accounts that you expect will be paid to you. a. True b. False 5. Consuming goods and services in the process of generating revenues results in expenses. a. True b. False 6. Prepaid expenses are an example of an expense. a. True b. False 7. Unearned revenues are an example of a liability. a. True b. False 8. Sonny Miller, Drawing is an expense account. a. True b. False 9. Accounts in the general ledger are usually maintained in alphabetical order. a. True b. False 10. Depending on the account title, the right side of the account is referred to as the credit side. a. True b. False 11. To determine the balance in an account, always subtract credits from debits. a. True b. False Powered by Cognero

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Chapter 02: Analyzing Transactions 12. An account in its simplest form has three parts to it: a title, an increase side, and a decrease side. a. True b. False 13. The T account got its name because it resembles the letter “T.” a. True b. False 14. The right side of a T account is known as a debit and the left side is known as a credit. a. True b. False 15. Debiting the cash account will increase the account. a. True b. False 16. A credit to the cash account will increase the account. a. True b. False 17. The cash account will always be debited. a. True b. False 18. The recording of cash receipts to the cash account will be done by debiting the account. a. True b. False 19. The recording of cash payments from the cash account is done by entering the amount as a credit. a. True b. False 20. The balance of the account can be determined by adding all of the debits, adding all of the credits, and adding the amounts together. a. True b. False 21. Liabilities are debts owed by the business entity. a. True b. False 22. The accounts payable account is listed in the chart of accounts as an asset. a. True b. False 23. A drawing account represents the amount of withdrawals made by the owner. Powered by Cognero

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Chapter 02: Analyzing Transactions a. True b. False 24. Revenues are equal to the difference between cash receipts and cash payments. a. True b. False 25. Expenses result from selling services or products to customers. a. True b. False 26. Owner's equity is reduced by the amount in the drawing account. a. True b. False 27. When an owner invests assets in the business, the capital account increases due to revenue being earned. a. True b. False 28. When an account receivable is collected in cash, the total assets of the business increase. a. True b. False 29. When an account payable is paid with cash, the owner's equity in the business decreases. a. True b. False 30. For a month's transactions for a typical medium-sized business, the salary expense account is likely to have only credit entries. a. True b. False 31. When a business receives an invoice from a creditor, no entry should be made until the invoice is paid. a. True b. False 32. A debit is abbreviated as Db. and a credit is abbreviated as Cr. a. True b. False 33. For a month's transactions for a typical medium-sized business, the accounts payable account is likely to have only credit entries. a. True b. False 34. Owner withdrawals decrease owner's equity and are listed on the income statement as a deduction from revenue. Powered by Cognero

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Chapter 02: Analyzing Transactions a. True b. False 35. The normal balance of revenue accounts is a credit. a. True b. False 36. The normal balance of the drawing account is a debit. a. True b. False 37. The normal balance of an expense account is a credit. a. True b. False 38. Expense accounts are increased by credits. a. True b. False 39. Revenue accounts are increased by credits. a. True b. False 40. Liability accounts are increased by debits. a. True b. False 41. Journalizing transactions using the double-entry bookkeeping system will eliminate fraud. a. True b. False 42. Transactions are listed in the journal chronologically. a. True b. False 43. Journalizing is the process of entering amounts in the ledger. a. True b. False 44. The process of recording a transaction in the journal is called journalizing. a. True b. False 45. Transactions are initially entered into a record called a journal. a. True b. False Powered by Cognero

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Chapter 02: Analyzing Transactions 46. The double-entry accounting system records each transaction twice. a. True b. False 47. The increase side of an account is also the side of the normal balance. a. True b. False 48. Journal entries include both debit(s) and credit(s) for each transaction. a. True b. False 49. A transaction that is recorded in the journal is called a journal entry. a. True b. False 50. Assets are increased with debits and decreased with credits. a. True b. False 51. Liabilities are increased with debits and decreased with credits. a. True b. False 52. Debits will increase unearned revenues and revenues. a. True b. False 53. All owner's equity accounts record increases to the accounts with credits. a. True b. False 54. Journalizing always eliminates fraudulent activity. a. True b. False 55. Journal entries can have more than two accounts as long as the debits equal the credits. a. True b. False 56. The process of transferring the data from the journal to the ledger accounts is called posting. a. True b. False 57. The posting reference notation used in the ledger is the account number. Powered by Cognero

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Chapter 02: Analyzing Transactions a. True b. False 58. The posting reference notation used in the journal is the page number. a. True b. False 59. A notation in the Post. Ref. column of the general journal indicates that the amount has been posted to the ledger. a. True b. False 60. The order of the flow of accounting data is (1) record in the ledger, (2) record in the journal, and (3) prepare the financial statements. a. True b. False 61. The process of transferring the debits and credits from the journal entries to the accounts is known as posting. a. True b. False 62. Postings made to four-column account forms show a new balance after each entry. a. True b. False 63. A trial balance determines the complete accuracy of the numbers. a. True b. False 64. Even when a trial balance is in balance, there may be errors in the individual accounts. a. True b. False 65. The totals at the bottom of the trial balance and the totals of the balance sheet both show equality and balancing and, therefore, all four totals should show the same amount. a. True b. False 66. A proof of the equality of debits and credits in the ledger at the end of an accounting period is called a balance sheet. a. True b. False 67. If the trial balance is in balance, it can be assumed that all journal entries were posted correctly and no errors were made. a. True b. False Powered by Cognero

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Chapter 02: Analyzing Transactions 68. Posting a part of a transaction to the wrong account will cause the trial balance totals to be unequal. a. True b. False 69. Journalizing a transaction with both the debit and the credit for $69 instead of $96 will cause the trial balance to be out of balance. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 70. Accounts a. do not reflect money amounts b. are not used by entities that manufacture products c. are records of increases and decreases in individual accounting equation elements d. are only used by large entities with many transactions 71. Accounts are classified in the general ledger a. chronologically b. alphabetically c. in accordance with their appearance in the financial statements d. with the accounts used most often listed first 72. Which of the following accounts is an owner's equity account? a. Cash b. Accounts Payable c. Prepaid Insurance d. Josh Smith, Capital 73. The increases in owner's equity attributable to selling services or products to customers are called a. assets b. liabilities c. revenues d. expenses 74. A chart of accounts is a. the same as a balance sheet b. usually a listing of accounts in alphabetical order c. usually a listing of accounts in financial statement order d. used in place of a ledger 75. The debit side of an account a. depends on whether the account is an asset, liability, or owner's equity account b. can be either side of the account depending on how the accountant set up the system c. is the right side of the account Powered by Cognero

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Chapter 02: Analyzing Transactions d. is the left side of the account 76. An account is said to have a debit balance if a. the amount of the debits exceeds the amount of the credits b. there are more entries on the debit side than on the credit side c. there are more entries on the credit side than on the debit side d. the first entry of the accounting period was posted on the debit side 77. Which side of the account increases the cash account? a. credit b. neither a debit nor a credit c. debit d. either a debit or a credit 78. Which of the following statement(s) concerning cash is (are) true? a. Cash will always have more debits than credits. b. Cash will never have a credit balance. c. Cash is increased with a debit. d. all of these choices 79. Which of the following statements regarding T accounts is true? a. The left side of a T account is called the debit side. b. The left side of a T account is called the credit side. c. The right side of a T account is called the debit side. d. Transactions are first recorded in T accounts and then posted to the journal. 80. A cash payment is journalized in the cash account as a. neither a debit nor a credit b. a credit c. a debit d. either a debit or a credit 81. The balance of an account is determined by a. adding all of the debits to all of the credits b. always subtracting the debits from the credits c. always subtracting the credits from the debits d. adding all of the debits, adding all of the credits, and then subtracting the smaller sum from the larger sum 82. A list of accounts used by a business is called the a. journal b. chart of accounts c. T chart d. debit listing

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Chapter 02: Analyzing Transactions 83. In the chart of accounts, the balance sheet accounts are normally listed in which order? a. liabilities, assets, owner's equity b. assets, liabilities, owner's equity c. owner's equity, assets, liabilities d. assets, owner's equity, liabilities 84. In which order are the accounts listed in the chart of accounts? a. assets, expenses, liabilities, owner's equity, revenues b. owner's equity, assets, liabilities, revenues, expenses c. assets, liabilities, owner's equity, revenues, expenses d. assets, liabilities, revenues, expenses, owner's equity 85. Which of the following are the correct parts of a T account? a. title, date, total b. date, debit side, credit side c. title, debit side, credit side d. title, debit side, total 86. The chart of accounts is designed to a. alphabetize the accounts to make reading easier for financial statement users b. organize accounts in order of dollar amount to simplify the accounting information for users c. summarize the transactions and determine ending account balances d. meet the information needs of a company's managers and other users of its financial statements 87. Which group of accounts is composed of only assets? a. Cash, Accounts Payable, Buildings b. Accounts Receivable, Revenue, Cash c. Prepaid Expenses, Buildings, Patents d. Unearned Revenues, Prepaid Expenses, Cash 88. Which of the following statements regarding assets is true? a. Assets include both physical and intangible items. b. Assets include only physical items. c. Assets are the personal property of the owner(s) of a business. d. Assets are not increased as a result of selling products or services to customers. 89. Which of the following statements regarding liabilities is not true? a. Liabilities are debts owed to outsiders. b. Account titles of liabilities often include the term “payable.” c. Cash received before a service is performed creates a liability. d. Liabilities include accumulated depreciation. 90. Owner's equity will be reduced by a. revenues Powered by Cognero

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Chapter 02: Analyzing Transactions b. expenses c. owner withdrawals d. both expenses and owner withdrawals 91. The accounts in the ledger of Monroe Entertainment follow. All accounts have normal balances. Accounts Payable Accounts Receivable Supplies Prepaid Insurance Cash Office Equipment Beth Monroe, Drawing Unearned Rent

$1,500 1,800 500 2,000 3,200 1,800 1,200 1,600

Fees Earned Insurance Expense Rent Expense Land Wages Expense Beth Monroe, Capital

$8,600 1,300 1,500 8,000 1,400 14,700

Total assets are a. $17,300 b. $13,500 c. $13,000 d. $9,800 92. The accounts in the ledger of Monroe Entertainment follow. All accounts have normal balances. Accounts Payable Accounts Receivable Supplies Prepaid Insurance Cash Office Equipment Beth Monroe, Drawing Unearned Rent

$1,500 1,800 500 2,000 3,200 1,800 1,200 1,600

Fees Earned Insurance Expense Rent Expense Land Wages Expense Beth Monroe, Capital

$8,600 1,300 1,500 8,000 1,400 14,700

Total liabilities are a. $1,500 b. $3,100 c. $7,300 d. $14,300 93. In a basic chart of accounts, each account number has two digits. The first digit indicates the major account group to which the account belongs. Which of the following correctly identifies the major account groups typically represented by the numbers 1 through 5? a. 1-Assets, 2-Liabilities, 3-Owner's Equity, 4-Expenses, 5-Revenues b. 1-Assets, 2-Liabilities, 3-Owner's Equity, 4-Revenues, 5-Expenses c. 1-Assets, 2-Owner's Equity, 3-Revenues, 4-Expenses, 5-Drawings d. 1-Owner's Equity, 2-Drawings, 3-Revenues, 4-Expenses, 5-Capital 94. Which of the following entries journalizes Shawn Petty's investment of cash in the business? a. debit Shawn Petty, Capital; credit Accounts Receivable b. debit Cash; credit Shawn Petty, Capital Powered by Cognero

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Chapter 02: Analyzing Transactions c. debit Shawn Petty, Drawing; credit Cash d. debit Fees Earned; credit Shawn Petty, Capital 95. A debit may signify a(n) a. decrease in asset accounts b. decrease in liability accounts c. increase in the owner's capital account d. decrease in the owner's drawing account 96. Which of the following types of accounts have a normal credit balance? a. assets and liabilities b. liabilities and expenses c. revenues and owner's capital d. owner's capital and owner's drawing 97. Which of the following groups of accounts have a normal debit balance? a. revenues, liabilities, and owner's equity b. owner's equity and assets c. liabilities and owner's equity d. assets and expenses 98. Which of the following is not a purpose for the journal? a. to show increases and decreases in accounts b. to show the chronological order of transactions c. to show a complete transaction in one place d. to help locate errors 99. A credit may signify a a. decrease in assets b. decrease in liabilities c. decrease in owner's capital d. decrease in revenue 100. A debit signifies a decrease in a. assets b. expenses c. owner's withdrawals d. revenues 101. Which of the following applications of the rules of debit and credit is correct? a. Decrease Prepaid Insurance with a credit and the normal balance is a credit. b. Increase Accounts Payable with a credit and the normal balance is a debit. c. Increase Equipment with a debit and the normal balance is a debit. d. Decrease Cash with a debit and the normal balance is a credit. Powered by Cognero

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Chapter 02: Analyzing Transactions 102. Which of the following describes the classification and normal balance of the fees earned account? a. asset, credit b. liability, credit c. owner's equity, debit d. revenue, credit 103. The classification and normal balance of the accounts payable account is a. an asset with a credit balance b. a liability with a credit balance c. owner's equity with a credit balance d. revenue with a credit balance 104. The classification and normal balance of the owner's drawing account is a. an expense with a credit balance b. an expense with a debit balance c. a liability with a credit balance d. owner's equity with a debit balance 105. In which of the following types of accounts are decreases recorded by debits? a. assets b. liabilities c. expenses d. owner's drawing 106. In which of the following types of accounts are decreases recorded by credits? a. liabilities b. owner's equity c. assets d. revenues 107. A credit balance in which of the following accounts would indicate a likely error? a. Fees Earned b. Salary Expense c. Marc Gonzales, Capital d. Accounts Payable 108. A debit balance in which of the following accounts would indicate a likely error? a. Salaries Expense b. Notes Payable c. Accounts Receivable d. Supplies 109. Which of the following entries journalizes the payment of an account payable? a. debit Cash; credit Accounts Payable Powered by Cognero

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Chapter 02: Analyzing Transactions b. debit Accounts Receivable; credit Cash c. debit Cash; credit Supplies Expense d. debit Accounts Payable; credit Cash 110. Which of of the following entries journalizes an owner's withdrawal? a. debit J. Smith, Capital; credit Cash b. debit J. Smith, Drawing; credit Cash c. debit Salaries Expense; credit Cash d. debit Salaries Expense; credit Salaries Payable 111. Office supplies were sold by Janer's Cleaning Service at cost to another repair shop, with cash received. Which of the following entries for Janer's Cleaning Service journalizes this transaction? a. debit Office Supplies; credit Cash b. debit Office Supplies; credit Accounts Payable c. debit Cash; credit Office Supplies d. debit Accounts Payable; credit Office Supplies 112. Office supplies purchased by Janer's Cleaning Service on account were returned. The office supplies had not yet been paid for. Which of the following entries for Janer's Cleaning Service journalizes this transaction? a. debit Cash; credit Office Supplies b. debit Office Supplies; credit Accounts Receivable c. debit Accounts Payable; credit Office Supplies d. debit Office Supplies; credit Accounts Payable 113. Cash was paid by Janer's Cleaning Service to creditors on account. Which of the following entries for Janer's Cleaning Service journalizes this transaction? a. debit Cash; credit Supplies Expense b. debit Accounts Payable; credit Cash c. debit Accounts Receivable; credit Cash d. debit Accounts Payable; credit Accounts Receivable 114. Which of the following entries journalizes the acquisition of office supplies on account? a. debit Office Supplies; credit Cash b. debit Cash; credit Office Supplies c. debit Office Supplies; credit Accounts Payable d. debit Accounts Receivable; credit Office Supplies 115. Which of the following entries journalizes the payment of insurance for the current month? a. debit Cash; credit Insurance Expense b. debit Insurance Expense; credit Cash c. debit Insurance Expense; credit Accounts Receivable d. debit Prepaid Insurance; credit Cash 116. Which of the following entries journalizes the receipt of cash from clients on account? a. debit Accounts Payable; credit Fees Earned Powered by Cognero

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Chapter 02: Analyzing Transactions b. debit Accounts Receivable; credit Fees Earned c. debit Accounts Receivable; credit Cash d. debit Cash; credit Accounts Receivable 117. Which of the following entries journalizes the receipt of cash from cash customers for services provided? a. debit Fees Earned; credit Cash b. debit Fees Earned; credit Accounts Receivable c. debit Cash; credit Fees Earned d. debit Accounts Receivable; credit Fees Earned 118. Which of the following entries journalizes the receipt of cash for 2 months' rent? The cash was received in advance of providing the service. a. debit Prepaid Rent; credit Rent Revenue b. debit Cash; credit Unearned Rent c. debit Cash; credit Prepaid Rent d. debit Cash; credit Rent Expense 119. A client has a massage and asks the company bookkeeper to mail her the bill. The bookkeeper should make which entry to journalize the invoice? a. No entry until the cash is received b. debit Fees Earned; credit Accounts Receivable c. debit Cash; credit Fees Earned d. debit Accounts Receivable; credit Fees Earned 120. Which of the following abbreviations is correct? a. Debit, Dr; Credit, Cd b. Debit, Db; Credit, Cr c. Debit, Db; Credit, Cd d. Debit, Dr; Credit, Cr 121. Which of the following is a correct rule of debits and credits? a. Assets, expenses, and drawings are increased by debits. b. Assets are decreased by credits and have a normal debit balance. c. Liabilities, revenues, and owner's equity are increased by credits. d. All of these choices. 122. Gently Laser Clinic purchased laser equipment for $8,500 and paid $2,250 down, with the remainder to be paid later. The correct entry would be a. Equipment 2,250 Cash 2,250 b. Cash 2,250 Accounts Payable 6,250 Equipment 8,500 c. Equipment Expense 8,500 Accounts Payable 2,250 Powered by Cognero

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Chapter 02: Analyzing Transactions Cash d. Equipment Accounts Payable Cash

6,250 8,500 6,250 2,250

123. A transaction can first be found in the accounting records in the a. chart of accounts b. income statement c. balance sheet d. journal 124. The process of recording a transaction in the journal is called a. balancing b. journalizing c. posting d. summarizing 125. May

23

Cash Richard Hagedorn, Capital Invested cash in the business.

22,000 22,000

This journal entry will a. increase Richard Hagedorn, Capital and decrease Cash b. increase Cash and decrease Richard Hagedorn, Capital c. increase Cash and increase, Richard Hagedorn, Capital d. decrease Cash and decrease Richard Hagedorn, Capital 126. May

24

Land Cash Purchased land for business.

105,000 105,000

What effects does this journal entry have on the accounts? a. increase Cash and increase Land b. decrease Cash and increase Land c. decrease Cash and decrease Land d. increase Cash and decrease Land 127. Mar.

10

Accounts Payable Cash Paid creditors on account.

800 800

What effects does this journal entry have on the accounts? a. decrease Accounts Payable and increase Cash b. increase Accounts Payable and decrease Cash Powered by Cognero

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Chapter 02: Analyzing Transactions c. increase Accounts Payable and increase Cash d. decrease Accounts Payable and decrease Cash 128. Which of the following groups of accounts includes only accounts that increase with a credit? a. Land; Accounts Payable; J. Brown, Drawing b. Accounts Payable; Unearned Revenue; J. Brown, Capital c. J. Brown, Drawing; Accounts Receivable; Unearned Revenue d. Cash; Accounts Receivable; J. Brown, Capital 129. In accordance with the debit and credit rules, which of the following is true? a. Debits increase assets. b. Credits increase assets. c. Debits increase both assets and owner's capital. d. Credits increase both assets and liabilities. 130. All of the following accounts are increased with a debit except a. Unearned Revenues b. Land c. Accounts Receivable d. Cash 131. Which of the following owner's equity accounts follows the same debit and credit rules as liabilities? a. expense accounts only b. owner's drawing account only c. revenue, owner's capital accounts d. expense and owner's drawing accounts 132. The payment of monthly rent requires which of the following entries? a. debit Cash; debit Rent Expense b. credit Cash; credit Rent Expense c. debit Rent Expense; credit Cash d. credit Rent Expense; debit Cash 133. Expenses follow the same debit and credit rules as a. revenues b. assets c. none of these choices d. liabilities 134. Net income will result when a. revenues (credits) > expenses (debits) b. revenues (debits) > expenses (credits) c. expenses (credits) = revenues (debits) d. revenues (credits) = expenses (debits) Powered by Cognero

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Chapter 02: Analyzing Transactions 135. Which of the following will increase owner's equity? a. expenses > revenues b. owner withdraws cash c. revenues > expenses d. cash received from customers on account 136. Which of the following transactions increases owner's equity? a. Supplies are purchased on account. b. Services are provided on account. c. Cash is received from customers on account. d. Utility bill will be paid next month. 137. Which of the following groups of accounts are increased with a debit? a. assets, liabilities, owner's equity b. assets, owner's drawing, expenses c. assets, revenues, expenses d. assets, liabilities, revenues 138. Which of the following groups of accounts increase with a credit? a. owner's capital, revenues, expenses b. assets, owner's capital, revenues c. liabilities, owner's capital, revenues d. none of these choices 139. Which of the following statements regarding normal balances of accounts is true? a. All accounts have a normal debit balance. b. The normal balance of all accounts will have either a positive or a negative balance. c. Accounts that have a normal debit balance will only have debit entries, never credit entries. d. The normal balance is on the increase side of the account. 140. Which of the following statements regarding a double-entry accounting system is not true? a. The accounting equation remains in balance. b. The sum of all debits is always equal to the sum of all credits in each journal entry. c. Each business transaction will have two debits. d. Every transaction affects at least two accounts. 141. Mar.

6 Cash 2,500 Unearned Fees 2,500 ????????????. Which of the following is the best explanation for this journal entry? a. Received cash for services performed. b. Received cash for services to be performed in the future. c. Paid cash in advance for services to be performed. d. Performed services for which cash is owed. Powered by Cognero

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Chapter 02: Analyzing Transactions 142. Apr.

14

Equipment 15,000 Cash 5,000 Notes Payable 10,000 ????????????. Which of the following is the best explanation for this journal entry? a. Purchased equipment; paid cash of $5,000, with the remainder to be paid in the future. b. Purchased equipment; paid cash of $10,000, with the remainder to be received in the future. c. Purchased equipment with cash. d. Purchased equipment on account. 143. The process of transferring debits and credits from journal entries to the accounts is called a. sliding b. transposing c. journalizing d. posting 144. The posting process includes the transfer of which of the following data from the journal to the account? a. date, amount (debit or credit) b. date, amount (debit or credit), journal page number c. amount (debit or credit), account number d. date, amount (debit or credit), account number 145. The Post. Ref. columns are used to trace transactions from the accounts to the journal. What will be entered in the Post. Ref. column of (1) the journal and (2) the account? a. (1) amount of the debit or credit and (2) journal page number b. (1) journal page number and (2) date of the transaction c. (1) journal page number and (2) account number d. (1) account number and (2) journal page number 146. The chart of accounts for Corwin Computer Services includes the following: Account Name Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue L. Corwin, Capital L. Corwin, Drawing Fees Earned Salaries Expense Rent Expense

Account Number 11 13 15 21 24 31 32 41 54 56

Page 3 of the journal contains the following entry: Powered by Cognero

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Chapter 02: Analyzing Transactions Description Prepaid Insurance Cash

Post. Ref.

Debit

Credit 1,530 1,530

Use this above information to answer the questions that follow. What posting reference will be found in the cash account? a. 11 b. 15 c. 3 d. 13 147. The chart of accounts for Corwin Computer Services includes the following: Account Name

Account Number 11 13 15 21 24 31 32 41 54 56

Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue L. Corwin, Capital L. Corwin, Drawing Fees Earned Salaries Expense Rent Expense Page 3 of the journal contains the following entry: Description Prepaid Insurance Cash

Post. Ref.

Debit

Credit 1,530 1,530

Use this above information to answer the questions that follow. What posting reference will be found in the prepaid insurance account? a. 11 b. 15 c. 3 d. 13 148. The chart of accounts for Corwin Computer Services includes the following: Account Name Cash Accounts Receivable Prepaid Insurance Accounts Payable Unearned Revenue L. Corwin, Capital Powered by Cognero

Account Number 11 13 15 21 24 31 Page 19

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Chapter 02: Analyzing Transactions L. Corwin, Drawing Fees Earned Salaries Expense Rent Expense

32 41 54 56

Page 3 of the journal contains the following entry: Description Prepaid Insurance Cash

Post. Ref.

Debit

Credit 1,530 1,530

Use this above information to answer the questions that follow. What posting references will be found in the journal entry? a. 15, 11 b. 15, 3 c. 11, 3 d. 3, 15 149. The chart of accounts for Miguel Beauty Services includes the following: Account Name Account Number Cash 11 Accounts Receivable 13 Prepaid Insurance 15 Accounts Payable 21 Unearned Revenue 24 M. Serio, Capital 31 M. Serio, Drawing 32 Fees Earned 41 Salaries Expense 54 Rent Expense 56 Page 3 of the journal contains the following transaction: Description Cash Fees Earned

Post. Ref.

Debit

Credit 640 640

What posting references will be found in the journal entry? a. 41, 3 b. 3, 11 c. 11, 41 d. 11, 3 150. The chart of accounts for Miguel Beauty Services includes the following: Account Name Cash Accounts Receivable Powered by Cognero

Account Number 11 13 Page 20

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Chapter 02: Analyzing Transactions Prepaid Insurance Accounts Payable Unearned Revenue M. Serio, Capital M. Serio, Drawing Fees Earned Salaries Expense Rent Expense

15 21 24 31 32 41 54 56

Page 5 of the journal contains the following transaction: Description Salaries Expense Cash

Post. Ref.

Debit

Credit 525 525

What is posting reference will be found in the salaries expense account? a. 5 b. 11 c. 54 d. 21 151. Which of the following balances is always due to an error? a. Office Equipment—credit balance of $500 b. M. Serio, Capital—debit balance of $1,000 c. M. Serio, Drawing—debit balance of $2,500 d. Accounts Payable—debit balance of $600 152. Which of the following errors, each considered individually, would cause the trial balance totals to be unequal? a. A transaction was not posted. b. A payment of $67 for insurance was posted as a debit of $76 to Prepaid Insurance and a credit of $76 to Cash. c. A payment of $4,450 to a creditor was posted as a debit of $4,500 to Accounts Payable and a credit of $450 to Cash. d. Cash received from customers on account was posted as a debit of $720 to Cash and a credit of $720 to Accounts Payable. 153. Proof that the dollar amount of the debits equals the dollar amount of the credits in the ledger means a. all of the information from the journal was correctly transferred to the ledger b. all accounts have their correct balances in the ledger c. only the journal is accurate; the ledger may be incorrect d. only that the debit dollar amounts equal the credit dollar amounts 154. That the total dollar amount of the debits equals the total dollar amount of the credits in the ledger accounts can be verified through a(n) a. chart of accounts b. trial balance c. income statement Powered by Cognero

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Chapter 02: Analyzing Transactions d. balance sheet 155. Randomly listed are the steps for preparing a trial balance: (1) Verify that the total of the Debit column equals the total of the Credit column. (2) List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance. (3) List the name of the company, the title of the trial balance, and the date the trial balance is prepared. (4) Total the Debit and Credit columns of the trial balance. What is the proper order of these steps? a. (3), (2), (4), (1) b. (2), (3), (4), (1) c. (3), (2), (1), (4) d. (4), (3), (2), (1) 156. A trial balance is prepared to a. prove that there were no errors made in journalizing transactions in the journal b. prove that no errors were made in posting to the ledger c. prove that each account balance is correct d. discover errors that affect the equality of debits and credits 157. The accounts in the ledger of Monroe Entertainment are as follows. All accounts have normal balances. Accounts Payable Accounts Receivable Prepaid Insurance Cash Beth Monroe, Drawing

$1,500 1,800 2,000 3,200 1,200

Fees Earned Insurance Expense Land Wages Expense Beth Monroe, Capital

$3,600 1,300 3,000 1,400 8,800

When the trial balance is prepared, the total of the debits will be a. $13,900 b. $11,200 c. $12,700 d. $9,700 158. Which of the following is an internal report that will determine if the total of the debit balances equals the total of the credit balances in the ledger? a. chart of accounts b. income statement c. trial balance d. horizontal analysis 159. An overpayment error was discovered in computing and paying the wages of a Jamison Tree Trimming employee. When Jamison receives cash from the employee for the amount of the overpayment, which of the following entries will Jamison make? a. debit Cash; credit Wages Expense b. debit Wages Payable; credit Wages Expense Powered by Cognero

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Chapter 02: Analyzing Transactions c. debit Wages Expense; credit Cash d. debit Cash; credit Wages Payable 160. If the two totals of a trial balance are not equal, it could be due to a. failure to journalize a transaction b. recording the same erroneous amount for both the debit and the credit parts of a transaction c. an error in determining the account balances, such as a balance being incorrectly computed d. journalizing the same transaction more than once 161. Which of the following errors could cause the trial balance totals to be unequal? a. posting the debit portion of a journal entry incorrectly when the credit portion of the entry is correctly posted b. failure to journalize a transaction or to post a transaction c. journalizing the same transaction more than once d. journalizing the same erroneous amount for both the debit and credit parts of a transaction 162. The purchase of supplies on account was journalized and posted as a debit to Supplies for $500 and a credit to Accounts Receivable for $500. The correcting entry would include a a. credit to Accounts Receivable for $500 b. credit to Accounts Receivable for $1,000 c. credit to Accounts Payable for $500 d. credit to Accounts Payable for $1,000 163. McNally Industries has a condensed income statement as shown. Sales Total operating expenses Net income

Year 2 $198,000 163,000 $ 35,000

Year 1 $165,500 147,500 $ 18,000

Using horizontal analysis, compute the amount and percent change for sales. Round percentage to one decimal place. a. $32,500, 19.6% b. $(32,500), (19.6)% c. $32,500, 16.4% d. $(32,500), (16.4)% 164. Richardson Company has a condensed income statement as shown. Sales Total operating expenses Net income

Year 2 $150,000 133,000 $ 17,000

Year 1 $165,500 147,500 $ 18,000

Using horizontal analysis, calculate the amount and percent change for sales. Round percentages to one decimal place. a. $15,500, 19.6% b. $(15,500), (10.3)% c. $15,500, 10.3% Powered by Cognero

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Chapter 02: Analyzing Transactions d. $(15,500), (9.4)% 165. Which of the following statements regarding a horizontal analysis is not true? a. A horizontal analysis is used to compare an item in a current statement with the same item in prior statements. b. A horizontal analysis can be performed on a balance sheet and income statement, but not on a statement of cash flows. c. If Fees Earned in Year 1 is $125,000 and Fees Earned in Year 2 is $143,750, a horizontal analysis will indicate a 15% increase over this period. d. When two statements are compared in horizontal analysis, the earlier statement is used as the base for computing the amount and the percent of change. 166. Unearned Rent belongs with which of the following account groups? a. assets b. liabilities c. owner's equity d. revenues 167. Prepaid Insurance belongs with which of the following account groups? a. assets b. liabilities c. revenues d. expenses 168. Which of the following accounts has a normal credit balance? a. Yura Wun, Capital b. Accounts Receivable c. Copyrights d. Supplies Expense 169. Which of the following accounts has a normal debit balance? a. Jay Tesarkee, Capital b. Accounts Receivable c. Accounts Payable d. Interest Revenue

170. The chart of accounts classifies the accounts to make identification of the accounts easier. Describe the numbering system businesses use in setting up the chart of accounts. 171. On January 31, the cash account balance was $96,750. During January, cash receipts totaled $305,000 and cash payments totaled $375,880. Determine the cash balance on January 1. 172. Organize the following accounts into the usual sequence of a chart of accounts. Miscellaneous Expense Accounts Payable Powered by Cognero

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Chapter 02: Analyzing Transactions Accounts Receivable Cash Melissa Manus, Capital Fees Earned Prepaid Rent Salaries Expense Unearned Revenue Melissa Manus, Drawing 173. Given the following data: Cash payments during April Cash account balance, April 1 Cash account balance, April 30 Accounts receivable account balance, April 1 Accounts receivable account balance, April 30 Fees billed to customers during April (a) (b)

$63,000 25,500 31,750 22,500 15,250 45,000

Determine the cash receipts for April. Determine the cash received from customers on account.

174. Selected accounts from the ledger of Garrison Company follow.

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Account Supplies Fees Earned G. Garrison, Capital Accounts Payable Salaries Expense G. Garrison, Drawing Accounts Receivable Equipment Notes Payable

Type of Account _______ _______ _______ _______ _______ _______ _______ _______ _______

Increase Side ________ ________ ________ ________ ________ ________ ________ ________ ________

(a) In the Type of Account column, indicate the nature of each account, using the following abbreviations: Asset A Liability L None of these N

Revenue R Expense E

(b) In the Increase Side column, indicate the increase side of each account by inserting Dr. or Cr.

175. All nine transactions for Dalton Survey for September, the first month of operations, are journalized in the following T accounts: Powered by Cognero

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Chapter 02: Analyzing Transactions

(1) (7) (9)

(4)

Cash 20,000 (3) 6,900 (5) 4,700 (6) (8)

Theo Dalton, Capital (1) 20,000

7,500 2,600 5,500 2,000

Accounts Receivable 4,900 (9) 4,700

(3)

Supplies 7,500

(2)

Equipment 4,500

(5)

Accounts Payable 2,600(2)

Theo Dalton, Drawing (8) 2,000 Fees Earned (4) (7) (6)

4,900 6,900

Operating Expenses 5,500

4,500

Indicate the following for each debit and credit: (a) (b)

The type of account affected (asset, liability, equity, drawing, revenue, or expense) The effect on the account, using "+" for increase and "−" for decrease

Present your answers in the following format: Transaction

Account Debited Type Effect

Account Credited Type Effect

176. On June 1, the cash account balance was $96,750. During June, cash receipts totaled $305,000 and the June 30 balance was $75,880. Determine the cash payments made during June. 177. On January 1, Marjorie Walker established a catering service. Listed are accounts to use for transactions (a) through (d), each identified by a number. Following this list are the transactions that occurred during the first month of operations. Indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate boxes. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Accounts Payable Notes Payable Marjorie Walker, Capital Marjorie Walker, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense

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Chapter 02: Analyzing Transactions 16.

Miscellaneous Expense

Transactions a. The owner invested cash in the business. b. Paid rent for the period of January 3 to the end of the month. c. Purchased a truck for $30,000 with a cash down payment of $5,000 and the remainder on a note. d. Purchased equipment on account.

Account(s) Debited

Account(s) Credited

178. On January 1, Marjorie Walker established a catering service. Listed are accounts to use for transactions (a) through (e), each identified by a number. Following this list are the transactions that occurred in Walker’s first month of operation. Indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate boxes. 1. Cash 2. Accounts Receivable 3. Supplies 4. Prepaid Insurance 5. Equipment 6. Truck 7. Accounts Payable 8. Notes Payable 9. Marjorie Walker, Capital 10. Marjorie Walker, Drawing 11. Fees Earned 12. Wages Expense 13. Rent Expense 14. Utilities Expense 15. Truck Expense 16. Insurance Expense 17. Miscellaneous Expense Transactions a. Purchased supplies for cash. b. Paid the annual premiums on property and casualty insurance. c. Received cash from customers on account. d. Paid a creditor on account. e. Received cash from customer for services provided.

Account(s) Debited

Account(s) Credited

179. On January 1, Marjorie Walker established a catering service. Listed are accounts to use for transactions (a) through (f), each identified by a number. Following this list are the transactions that occurred in Walker’s first month of operations. Indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate boxes. Powered by Cognero

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Chapter 02: Analyzing Transactions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Truck Accounts Payable Notes Payable Marjorie Walker, Capital Marjorie Walker, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Truck Expense Insurance Expense Miscellaneous Expense

Transactions Account(s) Debited a. Recorded jobs completed on account and sent invoices to customers. b. Received an invoice for truck expenses to be paid in February. c. Paid utilities expense d. Received cash from customers on account. e. Paid employee wages. f. Owner withdrew cash for personal use.

Account(s) Credited

180. Listed are accounts to use for transactions (a) through (d), each identified by a number. Following this list are the transactions. Indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate boxes. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Cash Accounts Receivable Office Supplies Prepaid Insurance Truck Equipment Building Land Accounts Payable Unearned Service Revenue Notes Payable Joe Gannet, Capital Joe Gannet, Drawing Service Revenue Office Supplies Expense

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Chapter 02: Analyzing Transactions 16. 17. 18.

Insurance Expense Utilities Expense Miscellaneous Expense

Transactions a. Utility bill is received and immediately paid. b. Paid a creditor on account. c. Bought a 3-year insurance policy and paid in full. d. Received $7,000 from a contract to perform accounting services over the next 2 years.

Account(s) Debited

Account(s) Credited

181. Set up T accounts for Cash; Accounts Receivable; Supplies; Accounts Payable; Ray Potter, Capital; Ray Potter, Drawing; Professional Fees; and Operating Expenses. (a)

In the T accounts, journalize the following transactions of Potter Pool Services for June, identifying each entry by number: (1) Invested $12,500 cash in the business. (2) Purchased supplies on account, $6,250. (3) Paid operating expenses, $5,500. (4) Billed clients for fees, $7,440. (5) Received cash from cash clients, $4,700. (6) Paid creditors on account, $1,400. (7) Received $3,100 from clients on account. (8) Withdrew $1,500 cash for personal use.

(b)

Prepare a trial balance as of June 30 for Potter Pool Services.

(c)

Assuming that supplies expense (which has not been recorded) is $1,500 for June, determine the following: (1) Net income for the month. (2) Owner's equity as of June 30.

182. On September 1, Erika Company purchased land for $47,500 cash. Journalize the entry for this transaction. 183. On October 10, Nikle Company purchased supplies for $1,800 on account. On October 25, Nikle Company paid the invoice. (a) Journalize the entry for the purchase on account. (b) Journalize the entry for the payment of the invoice. 184. On October 17, Nikle Company purchased a building and a plot of land for $750,000. The building was valued at $500,000, while the land carried a value of $250,000. Nikle paid $300,000 down in cash and signed a note payable for the balance. Journalize the entry for this transaction. 185. On December 1, Nikle Company made a cash payment of $200,000 on a note payable that was generated in the purchase of a building and land. Journalize the entry for this transaction. Powered by Cognero

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Chapter 02: Analyzing Transactions 186. On January 7, Ella Fanning invested $45,000 in JumpStart. Journalize the entry for this transaction. 187. On August 30, JumpStart paid the following expenses: August rent, $2,300 August’s utility bill, $525 Employee wages, $1,750 Parking lot cleaning fee, $275 Journalize these payments as one journal entry. 188. On October 30, Ella Fanning withdrew $3,330 cash from JumpStart for personal use. Journalize the entry for this transaction. 189. Use the following identification codes to indicate the effects of each transaction on the accounting equation. An example is given before the first transaction. I-Increase D-Decrease NE-No effect Assets

=

Example The owner invests in his new business by giving equipment valued at $3,500. I (a) Cash sales are made. _____ (b) Equipment is purchased on credit. _____ (c) Payment is made for the equipment purchased on credit in (b). _____ (d) The company sold excess supplies to another company on credit. _____ (e) Cash is collected from customers for accounts receivable balances. _____

Liabilities

+

Owner's Equity

NE _____

I _____

_____

_____

_____

_____

_____

_____

_____

_____

190. Journalize the following transactions for Newman & Associates. Omit explanations. Mar. 1 Invoiced clients for services provided in February, $800. 9

Purchased office furniture, $1,060, and office supplies, $160, on account from Corner Office, Inc.

15

Paid Corner Office, Inc. for the purchase of March 9.

31

Paid utility (electricity) bill for the month, $430.

31

Paid employee salaries, $1,850.

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191. For each of the following accounts, mark a D if it normally has a debit balance and a C if it normally has a credit balance. _____1. Notes Payable _____2. Mortgage Payable _____3. Jeff Weldon, Drawing _____4. Accounts Receivable _____5. Jeff Weldon, Capital _____6. Rent Revenue _____7. Unearned Revenue _____8. Utility Expense _____9. Automobiles 192. Increases and decreases in various types of accounts are listed. In each case, indicate with Dr. or Cr. (a) whether the change in the account would be recorded as a debit or a credit and (b) whether the normal balance of the account is a debit or a credit.

(1) Increase in Tim Goins, Capital (2) Increase in Tim Goins, Drawing (3) Decrease in Accounts Receivable (4) Increase in Note Payable (5) Increase in Accounts Payable (6) Decrease in Supplies (7) Decrease in Salaries Expense (8) Increase in Accounts Receivable (9) Increase in Cash (10) Decrease in Land

(a) Recorded As ________ ________ ________ ________ ________ ________ ________ ________ ________ ________

(b) Normal Balance _______ _______ _______ _______ _______ _______ _______ _______ _______ _______

193. Journalize the following selected transactions for April, identifying each entry by letter: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Owner, Debra Lee, invested $18,000 cash and giving a note. Purchased equipment for $27,000, paying $10,000 in cash and giving a note payable for the remainder. Paid $2,300 for rent for April. Purchased $1,500 of supplies on account. Recorded $9,800 of fees earned on account. Received $7,500 in cash for fees earned. Paid $1,200 to creditors on account. Paid wages of $3,425. Received $7,900 from customers on account. Owner, Debra Lee, withdrew $1,875 cash for personal use.

194. On January 12, JumpStart purchased $870 in office supplies. (a) Journalize this transaction, assuming JumpStart paid cash. Powered by Cognero

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Chapter 02: Analyzing Transactions (b) (1) Journalize this transaction, assuming JumpStart purchased the supplies on account. (b) (2) Journalize the entry on January 28 for payment of the amount due. 195. Journalize the purchase of a truck on April 4 for $85,700, paying $15,000 cash and giving a note payable for the remainder. Omit explanation. 196. On November 10, JumpStart provides $2,900 in services to clients. At the time of service, the clients paid $600 in cash and put the balance on account. (a) Journalize the performance of these services. (b) On November 20, journalize the receipt of an additional $900 from clients in payment on their accounts. (c) Determine the accounts receivable balance on November 30. 197. Journalize the following selected transactions for January. Explanations may be omitted. Jan.

1 2 3 4 5 6 7 8

Owner, Todd Crawford, invested $14,000 cash in business. Received cash for providing accounting services, $9,500. Billed customers for services provided on account, $4,200. Paid advertising expense, $700. Received cash from customers on account, $2,500. Owner, Todd Crawford withdrew $1,010 for personal use. Purchased supplies on account, $500. Paid utility (telephone) bill, $900.

198. On December 1, JumpStart provided $2,800 in services to clients. (a) Journalize this transaction, assuming the clients paid cash at the time the services were rendered. (b)(1) Journalize this transaction, assuming the services were rendered on account. (b)(2) Assume that the clients paid $1,200 of the amount on account on December 30. Journalize this transaction. 199. Analyze the effect of the following transactions on the accounting equation. (a) (b) (c) (d) (e) (f)

Paid $725 to a vendor for supplies purchased previously on account. Performed $850 of services and billed the customer. Received a utility bill for $395 and will pay it next month. Withdrew $145 cash for personal use. Paid $315 in salaries to employees. Collected $730 of cash from customers on account.

Select your answers from the following list of the possible effects of a transaction on the accounting equation: (1) (2) (3) (4) (5) (6)

Assets, Dr.; Assets, Cr. Assets, Dr.; Owner's Equity, Cr. Assets, Dr.; Liabilities, Cr. Liabilities, Dr.; Assets, Cr. Owner's Equity, Dr.; Assets, Cr. Owner's Equity, Dr.; Liabilities, Cr.

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Chapter 02: Analyzing Transactions Put the appropriate number next to each transaction. 200. Journalize the entry on October 12 for fees earned on account, $14,600. Omit explanation. 201. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries when journalizing business transactions during the month. Also, indicate the normal balance of each account. 1. 2. 3.

Fees Earned Utilities Expense Accounts Payable

4. 5. 6.

Supplies Cash Accounts Receivable

202. Journalize the entries to correct the following errors: (a) (b)

A purchase of supplies for $500 on account was recorded and posted as a debit to Supplies for $200 and as a credit to Accounts Receivable for $200. A receipt of $2,500 from fees earned was recorded and posted as a debit to Fees Earned for $2,500 and a credit to Cash for $2,500.

203. On November 30, the company accountant discovers that $550 of a transaction recording the purchase of office supplies was really office equipment. Prepare the journal entry to correct this situation. 204. The following errors took place in journalizing and posting transactions: a. b.

Owner withdrawals of $5,000 were recorded as a debit to Office Expense and a credit to Cash. A receipt of $7,800 from credit customers on account was recorded as a debit to Cash and a credit to Fees Earned.

Journalize the entries to correct the errors. Omit the explanations. 205. For each of the following errors, considered individually, indicate whether the error would cause the trial balance totals to be unequal. If the error would cause the trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. (a) (b) (c)

Payment of a cash withdrawal of $6,800 was journalized and posted as a debit of $8,600 to Salaries Expense and a credit of $8,600 to Cash. A fee of $9,780 earned was debited to Accounts Receivable for $7,980 and credited to Fees Earned for $9,780. A payment of $3,000 to a creditor was posted as a credit of $3,000 to Accounts Payable and a credit of $3,000 to Cash.

206. The unadjusted trial balance for Dawson Designs follows:

Cash Powered by Cognero

Dawson Designs Unadjusted Trial Balance For the Month of January Debits 23,000

Credits Page 33

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Chapter 02: Analyzing Transactions Accounts Receivable Prepaid Insurance Equipment Accounts Payable Salaries Payable Dee Dawson, Capital Dee Dawson, Drawing Service Revenue Salary Expense Miscellaneous Expense

49,700 11,300 150,500 6,050 4,250 110,000 18,500 236,600 98,930 4,970 424,020

424,020

(a) Identify the errors in the trial balance. All accounts have normal balances. (b) Prepare a corrected trial balance.

207. Prepare a trial balance, listing the following accounts in proper sequence. The accounts (all normal balances) were taken from the ledger of Sophie Designs on April 30. Accounts Payable Accounts Receivable Cash Sophie Sanchez, Capital Sophie Sanchez, Drawing Equipment Fees Earned

$ 4,100 3,450 6,700 17,800 7,500 14,500 45,425

Miscellaneous Expense Rent Expense Salary Expense Supplies Supplies Expense Utilities Expense

$ 850 11,500 14,000 3,125 1,700 4,000

208. Complete the following for Winslow’s Auto Body: (a) List the errors in the following trial balance. All accounts have normal balances. (b) What would be the new totals of the trial balance after errors are corrected? What would be the balance of Accounts Receivable? Winslow’s Auto Body Trial Balance For the Month Ended April 30 Cash Accounts Receivable Supplies Equipment Prepaid Insurance Accounts Payable Jerry Winslow, Capital Jerry Winslow, Drawing Fees Earned Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Powered by Cognero

19,475 ? 1,000 15,000 500 2,500 17,000 1,000 49,600 14,500 9,000 1,400 3,900 250 55,000

81,575 Page 34

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Chapter 02: Analyzing Transactions

209. Answer the following questions for each of the errors listed, considered individually: (a) (b) (c)

Did the error cause the trial balance totals to be unequal? What is the amount of the difference between the trial balance totals (where applicable)? Which of the trial balance totals, debit or credit, is the larger (where applicable)?

Present your answers in columnar form, using the following headings: Error Totals Difference in Totals Larger of Totals (identifying number) (equal or unequal) (amount) (debit or credit) Errors: (1) A withdrawal of $3,000 cash by owner was recorded as a debit of $3,000 to Salary Expense and a credit of $3,000 to Cash. (2) A $650 purchase of supplies on account was recorded as a debit of $1,650 to Equipment and a credit of $1,650 to Accounts Payable. (3) A purchase of equipment for $3,450 on account was not recorded. (4) An $870 receipt on account was recorded as an $870 debit to Cash and an $780 credit to Accounts Receivable. (5) A payment of $1,530 cash on account was recorded only as a credit to Cash. (6) Cash sales of $8,500 were recorded as a credit of $8,500 to Cash and a credit of $8,500 to Fees Earned. (7) The debit to record a $4,000 cash receipt on account was posted twice; the credit was posted once. (8) The credit to record a $300 cash payment on account was posted twice; the debit was posted once. (9) The debit balance of $7,400 in Accounts Receivable was recorded in the trial balance as a debit of $7,200.

210. All nine transactions for Ralston Sporting Goods for September, the first month of operations, are recorded in the following T accounts: (1) (7) (9)

Cash 25,000 (3) 11,900 (5) 9,700 (6) (8)

Accounts Receivable (4) 9,900 (9) (3)

(2)

R. Ralston, Capital (1) 25,000

12,500 7,600 10,500 7,000 9,700

(8)

Supplies 12,500

Equipment 9,500

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R. Ralston, Drawing 7,000 Fees Earned (4) (7)

(6)

9,900 11,900

Operating Expenses 10,500 Page 35

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Chapter 02: Analyzing Transactions

(5)

Accounts Payable 7,600 (2) 9,500

Prepare an unadjusted trial balance, listing the accounts in their proper order. 211. Lewis Company has condensed income statements as follows: Fees earned Expenses: Wages expense Rent expense Utilities expense Total expenses Net income

Year 2 $ 178,400

Year 1 $ 162,500

$(100,000) (33,000) (30,000) $(163,000) $ 15,400

$ (92,500) (30,000) (25,000) $(147,500) $ 15,000

Prepare a horizontal analysis of Lewis Company’s income statements. Comment on the changes, both favorable and unfavorable. 212. Nebraska Technologies has condensed income statements as follows: Fees earned Expenses: Wages expense Rent expense Utilities expense Total expenses Net income

Year 2 $ 158,400

Year 1 $ 162,500

$ (80,000) (28,000) (30,000) $(138,000) $ 20,400

$ (92,500) (30,000) (25,000) $(147,500) $ 15,000

Prepare a horizontal analysis of Nebraska Technologies'income statements. Comment on the changes, both favorable and unfavorable.

Indicate the answer choice that best completes the statement or answers the question. 213. A journal with a Debit and Credit column for recording transactions is known as a a. debit and credit journal b. normal journal c. two-column journal d. summary journal 214. The accounts in the ledger of Nilles Consulting Co. are listed as follows. All accounts have normal balances. Cash Accounts Receivable Prepaid Insurance Powered by Cognero

$5,500 Barbara Nilles, Capital 6,400 Barbara Nilles, Drawing 1,000 Fees Earned

$15,800 1,000 6,800 Page 36

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Chapter 02: Analyzing Transactions Accounts Payable Unearned Rent Office Equipment Land

1,800 Wages Expense 1,800 Insurance Expense 3,600 Utilities Expense 5,000

2,100 1,300 300

When the trial balance is prepared, the total of the credits will be a. $15,800 b. $21,300 c. $22,600 d. $26,200 215. Faso Fabricating and Spinoza Fabrication are in the same industry and are located in the same region of the country. They have condensed income statements as follows:

Sales Total operating expenses Net income

Faso Fabricating Year 2 Year 1 $ 362,000 $ 338,000 (285,000) (245,000) $ 77,000 $ 93,000

Spinoza Fabrication Year 2 Year 1 $ 422,000 $ 395,000 (305,000) (285,000) $ 117,000 $ 110,000

Using horizontal analysis, compute the percentage change in sales for each company. a. Faso: 27.5%; Spinoza: 27.8% b. Faso: 6.6%; Spinoza: 6.4% c. Faso: 7.1%; Spinoza: 6.8% d. Faso: 16.3%; Spinoza: 7.0% 216. Faso Fabricating and Spinoza Fabrication are in the same industry and are located in the same region of the country. They have condensed income statements as follows:

Sales Total operating expenses Net income

Faso Fabricating Year 2 Year 1 $ 362,000 $ 338,000 (285,000) (245,000) $ 77,000 $ 93,000

Spinoza Fabrication Year 2 Year 1 $ 422,000 $ 395,000 (305,000) (285,000) $ 117,000 $ 110,000

Using horizontal analysis, compute the percentage change in net income for each company. a. Faso: (17.2)%; Spinoza: (6.4)% b. Faso: (17.2)%; Spinoza: 6.4% c. Faso: 17.2%; Spinoza: (6.4)% d. Faso: 17.2%; Spinoza: 6.4%

217. Faso Fabricating and Spinoza Fabrication are in the same industry and are located in the same region of the country. They have condensed income statements as follows: Faso Fabricating Powered by Cognero

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Chapter 02: Analyzing Transactions Sales Total operating expenses Net income

Year 2 $362,000 (285,000) $ 77,000

Year 1 $338,000 (245,000) $ 93,000

Year 2 $422,000 (305,000) $117,000

Year 1 $395,000 (285,000) $110,000

(a) Prepare a horizontal analysis for the two companies. (b) Analyze the changes from Year 1 to Year 2 for both companies.

218. During May, $245,000 was paid to creditors on account, and purchases on account were $210,500. Assuming the May 31 balance of Accounts Payable was $62,800, what was the account balance on May 1? 219. On October 1, the accounts receivable balance was $208,400. During October, $298,500 was collected from customers on account. Assuming the October 31 balance was $125,300, determine the fees billed to customers on account during October. 220. Complete the following for Wickers Restoration Services. (a) Journalize the following selected transactions for May in a two-column journal, identifying each entry by number. Explanations may be omitted. (b) Prepare T accounts for each account used and post the journal entries to these accounts, placing the appropriate number to the left of each amount to identify the transactions. (c) Prepare an unadjusted trial balance as of May 31. (d) Determine the net income for May. (e) Determine the retained owner's capital at the end of May, assuming this was the first month of business. (1) Renae Rawlings invested $48,000 cash in the business. (2) Paid rent on office for the month, $880. (3) Purchased supplies on account, $1,750. (4) Earned fees, receiving cash, $12,600. (5) Paid creditor on account, $1,000. (6) Paid automobile expenses for month, $375, and miscellaneous expenses, $250. (7) Paid office salaries for the month, $3,900. (8) Earned fees that the customer will pay next month, $2,400. (9) Determined that the cost of supplies used was $280. (10) Renae Rawlings withdrew $2,400 cash for personal use.

221. The accounts in the ledger of Devers Gym as of August 31 are listed in alphabetical order as follows. All accounts have normal balances. The balance of Cash has been omitted. Prepare an unadjusted trial balance, listing the accounts in proper sequence and inserting the missing figure for Cash. Accounts Payable Accounts Receivable Cash Dani Devers, Capital Dani Devers, Drawing Fees Earned Insurance Expense Land Miscellaneous Expense Powered by Cognero

$36,200 63,450 ? 102,300 5,000 180,600 4,200 125,000 4,500

Notes Payable Prepaid Insurance Rent Expense Supplies Supplies Expense Unearned Rent Utilities Expense Wages Expense

$125,000 16,800 42,000 3,000 9,500 18,000 16,700 94,000 Page 38

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Chapter 02: Analyzing Transactions

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Chapter 02: Analyzing Transactions Answer Key 1. True 2. False 3. False 4. False 5. True 6. False 7. True 8. False 9. False 10. False 11. False 12. True 13. True 14. False 15. True 16. False 17. False 18. True 19. True 20. False 21. True 22. False 23. True 24. False 25. False Powered by Cognero

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Chapter 02: Analyzing Transactions 26. True 27. False 28. False 29. False 30. False 31. False 32. False 33. False 34. False 35. True 36. True 37. False 38. False 39. True 40. False 41. False 42. True 43. False 44. True 45. True 46. False 47. True 48. True 49. True 50. True 51. False Powered by Cognero

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Chapter 02: Analyzing Transactions 52. False 53. False 54. False 55. True 56. True 57. False 58. False 59. True 60. False 61. True 62. True 63. False 64. True 65. False 66. False 67. False 68. False 69. False 70. c 71. c 72. d 73. c 74. c 75. d 76. a Powered by Cognero

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Chapter 02: Analyzing Transactions 77. c 78. c 79. a 80. b 81. d 82. b 83. b 84. c 85. c 86. d 87. c 88. a 89. d 90. d 91. a 92. b 93. b 94. b 95. b 96. c 97. d 98. d 99. a 100. d 101. c 102. d Powered by Cognero

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Chapter 02: Analyzing Transactions 103. b 104. d 105. b 106. c 107. b 108. b 109. d 110. b 111. c 112. c 113. b 114. c 115. b 116. d 117. c 118. b 119. d 120. d 121. d 122. d 123. d 124. b 125. c 126. b 127. d Powered by Cognero

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Chapter 02: Analyzing Transactions 128. b 129. a 130. a 131. c 132. c 133. b 134. a 135. c 136. b 137. b 138. c 139. d 140. c 141. b 142. a 143. d 144. b 145. d 146. c 147. c 148. a 149. c 150. a 151. a 152. c 153. d Powered by Cognero

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Chapter 02: Analyzing Transactions 154. b 155. a 156. d 157. a 158. c 159. a 160. c 161. a 162. c 163. a 164. d 165. b 166. b 167. a 168. a 169. b 170. A chart of accounts is set up by assigning 2-digit numbers to each of the accounts for use as references. The first digit indicates the major account group of the ledger in which the account is located. Accounts beginning with 1 represent assets; 2, liabilities; 3, owner's equity; 4, revenue; 5, expenses. The second digit indicates the location of the account within its group. Large companies may have additional digits to accommodate a large number of accounts. 171. ??? + $305,000 − $375,880 = $96,750 ??? = $96,750 – $305,000 + $375,880 Cash balance at January 1 is $167,630. 172. Cash Accounts Receivable Prepaid Rent Accounts Payable Unearned Revenue Melissa Manus, Capital Melissa Manus, Drawing Fees Earned Powered by Cognero

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Chapter 02: Analyzing Transactions Salaries Expense Miscellaneous Expense 173. (a) $69,250 ($31,750 + $63,000 − $25,500) (b) $52,250 ($22,500 + $45,000 − $15,250) 174. (1) (2) (3) (4) (5) (6) (7) (8) (9)

Type of Account A R N L E N A A L

Increase Side Dr. Cr. Cr. Cr. Dr. Dr. Dr. Dr. Cr.

175. Transaction (1) (2) (3) (4) (5) (6) (7) (8) (9)

Account Debited Type Effect asset + asset + asset + asset + liability − expense + asset + drawing + asset +

Account Credited Type Effect equity + liability + asset − revenue + asset − asset − revenue + asset − asset −

176. $75,880 = $96,750 + $305,000 − ? Cash payments = $325,870 177. Transactions a. b. c. d.

Account(s) Debited 1 13 6 5

Account(s) Credited 9 1 1, 8 7

178. Transactions a. b. c. d.

Account(s) Debited 3 4 1 7

Account(s) Credited 1 1 2 1

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Chapter 02: Analyzing Transactions e. 179. Transactions a. b. c. d. e. f.

1

11

Account(s) Debited 2 15 14 1 12 10

Account(s) Credited 11 7 1 2 1 1

180. Debit 17 9 4 1

a. b. c. d.

Credit 1 1 1 10

181. (a) (1) (5) (7) Bal. (4) Bal. (2)

(6)

Cash 12,500 (3) 4,700 (6) 3,100 (8) 11,900

Ray Potter, Capital (1) 12,500

5,500 1,400 1,500

Accounts Receivable 7,440 (7) 3,100 4,340

(8)

Supplies 6,250

Ray Potter, Drawing 1,500 Professional Fees (4) 7,440 (5) 4,700 Bal. 12,140

Accounts Payable 1,400 (2) 6,250 Bal. 4,850

(3)

Operating Expenses 5,500

(b) Potter Pool Services Unadjusted Trial Balance June 30 Cash Accounts Receivable Supplies Accounts Payable Ray Potter, Capital Ray Potter, Drawing Professional Fees Operating Expenses Powered by Cognero

11,900 4,340 6,250 4,850 12,500 1,500 12,140 5,500 Page 48

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Chapter 02: Analyzing Transactions 29,490

29,490

(c) (1) $6,640 ($12,140 − $5,500) (2) $17,640 ($12,500 + $6,640 − $1,500)

182. Sept. 1 Land Cash Purchased land for the company.

47,500 47,500

183. (a) Oct. 10 Supplies Accounts Payable Purchased supplies on account.

1,800 1,800

(b) Oct. 25 Accounts Payable Cash Paid for supplies on account. 184. Oct. 17 Building Land Cash Notes Payable Purchased building and land with cash down payment. 185. Dec. 1 Notes Payable Cash Made payment on note payable.

186. Jan. 7

187. Aug. 30

1,800 1,800

500,000 250,000 300,000 450,000

200,000 200,000

Cash Ella Fanning, Capital Invested cash in the business.

45,000

Rent Expense Utilities Expense Wages Expense Maintenance Expense Cash Paid expenses.

2,300 525 1,750 275

45,000

4,850

188. Powered by Cognero

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Chapter 02: Analyzing Transactions Oct. 30

Ella Fanning, Drawing Cash Withdrew cash for personal use.

3,330 3,330

189. Assets (a) (b) (c)

(d)

(e)

Cash sales are made.

I Equipment is purchased on credit. I Payment is made for the equipment purchased on credit in (b). D The company sold excess supplies to another company on credit. __I, D*__ Cash is collected from customers for accounts receivable balances. ___I, D*_

=

Liabilities

+

Owner's Equity

NE

I

I

NE

D

NE_

___ NE_ _

__ NE ___

___ NE_ _

___ NE_ __

__

*NE is also acceptable. The increase in an asset account and the decrease in an asset account net to no effect on total assets. 190. Mar. 1

9

Accounts Receivable Fees Earned

800

Office Furniture Office Supplies Accounts Payable

1,060 160

800

1,220

15 Accounts Payable Cash

1,220

31 Utilities Expense Cash

430

31 Salaries Expense Cash

1,850

1,220

430

1,850

191. 1. C 2. C 3. D 4. D 5. C 6. C 7. C 8. D 9. D 192. (a) Powered by Cognero

(b) Page 50

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Chapter 02: Analyzing Transactions (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Cr. Dr. Cr. Cr. Cr. Cr. Cr. Dr. Dr. Cr.

193. (a) Cash Debra Lee, Capital

Cr. Dr. Dr. Cr. Cr. Dr. Dr. Dr. Dr. Dr.

18,000 18,000

(b) Equipment Cash Notes Payable

27,000

(c) Rent Expense Cash

2,300

(d) Supplies Accounts Payable

1,500

(e) Accounts Receivable Fees Earned

9,800

(f) Cash Fees Earned

7,500

(g) Accounts Payable Cash

1,200

(h) Wages Expense Cash

3,425

(i) Cash Accounts Receivable

7,900

(j) Debra Lee, Drawing Cash

1,875

194. (a) Jan. 12 (b)(1) Jan. 12

10,000 17,000

2,300

1,500

9,800

7,500

1,200

3,425

7,900

1,875

Office Supplies Cash

870

Office Supplies Accounts Payable

870

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870

870 Page 51

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Chapter 02: Analyzing Transactions (b)(2) Jan. 28

195. Apr. 4

Accounts Payable Cash

870

Truck

85,700

870

Cash Notes Payable 196. (a) Nov. 10

(b) Nov. 20

15,000 70,700

Cash Accounts Receivable Fees Earned

600 2,300

Cash Accounts Receivable

900

2,900

900

(c) Original invoices Cash paid upon completion Original amount on accounts receivable November 20 payment Accounts receivable balance, November 30

$2,900 (600) $2,300 (900) $1,400

197. Date

Description

Post. Ref.

Debit

Credit

Jan. 1 Cash Todd Crawford, Capital

14,000

2 Cash Revenues

9,500

3 Accounts Receivable Revenues

4,200

4 Advertising Expense Cash

700

5 Cash Accounts Receivable

2,500

14,000

9,500

4,200

700

2,500

Todd Crawford, Drawing Cash

1,010

7 Supplies Accounts Payable

500

6

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1,010

500 Page 52

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Chapter 02: Analyzing Transactions 8 Utilities Expense Cash

198. (a) Dec. 1

(b)(1) Dec. 1 (b)(2) Dec. 30

900 900

Cash Fees Earned

2,800

Accounts Receivable Fees Earned Cash Accounts Receivable

2,800

2,800

2,800 1,200 1,200

199. Transaction (a) (b) (c) (d) (e) (f) 200. Oct. 12

Accounts Receivable Fees Earned

Effect on the Accounting Equation 4 2 6 5 5 1

14,600 14,600

201. 1. Credit entries only, normal credit balance 2. Debit entries only, normal debit balance 3. Both debit and credit entries, normal credit balance 4. Both debit and credit entries, normal debit balance 5. Both debit and credit entries, normal debit balance 6. Both debit and credit entries, normal debit balance 202. (a) Accounts Receivable Supplies Supplies Accounts Payable (b) Cash Fees Earned

203. Nov. 30

Office Equipment Office Supplies

200 200 500 500 5,000 5,000

550 550

204. Powered by Cognero

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Chapter 02: Analyzing Transactions a. b.

Owner, Drawing Office Expense

5,000

Fees Earned Accounts Receivable

7,800

5,000 7,800

205. (a) The totals are equal. (b) The totals are unequal. The credit total is higher by $1,800. (c) The totals are unequal. The credit total is higher by $6,000. 206. (a) 1. The debit column is added incorrectly; the sum is actually $289,780. 2. The trial balance should be dated January 31, rather than “For the Month of January” 3. The Accounts Receivable balance should be in the Debits column. 4. The Accounts Payable balance should be in the Credits column. 5. The Drawing balance should be in the Debits column. 6. The Miscellaneous Expense balance should be in the Debits column. (b) Dawson Designs Unadjusted Trial Balance January 31 Debits Cash 23,000 Accounts Receivable 49,700 Prepaid Insurance 11,300 Equipment 150,500 Accounts Payable Salaries Payable Dee Dawson, Capital Dee Dawson, Drawing 18,500 Service Revenue Salary Expense 98,930 Miscellaneous Expense 4,970 356,900

Credits

6,050 4,250 110,000 236,600

356,900

207. Sophie Designs Trial Balance April 30 Cash Accounts Receivable Supplies Equipment Accounts Payable Sophie Sanchez, Capital Sophie Sanchez, Drawing Fees Earned Powered by Cognero

6,700 3,450 3,125 14,500 4,100 17,800 7,500 45,425 Page 54

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Chapter 02: Analyzing Transactions Salary Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense

14,000 11,500 4,000 1,700 850 67,325 67,325

208. (a) (1) (2) (3) (4) (5)

In the heading, the date should be April 30, not for a period of time. The Cash balance should be a debit. The Accounts Receivable balance is missing. The Supplies balance should be a debit. The Prepaid Insurance balance should be a debit and this account should follow Supplies. (6) The owner's capital balance should be a credit. (7) The owner's drawing balance should be a debit. (8) The Rent Expense balance should be a debit. (9) Utilities Expense should appear after Supplies Expense. (10) The trial balance does not balance.

(b)

209. Error (1) (2) (3) (4) (5) (6) (7) (8) (9)

The new total for credits would be $69,100 ($2,500 Accounts Payable + $49,600 Fees Earned + $17,000 Capital). The balance of Accounts Receivable would be $3,075 ($69,100 total credits − $66,025 corrected debits).

Totals equal equal equal unequal unequal unequal unequal unequal unequal

Difference in Totals — — — $ 90 1,530 17,000 4,000 300 200

Larger of Totals — — — debit credit credit debit credit credit

210. Ralston Sporting Goods Unadjusted Trial Balance September 30 Cash Accounts Receivable Supplies Equipment Accounts Payable R. Ralston, Capital R. Ralston, Drawing Fees Earned Operating Expenses Powered by Cognero

9,000 200 12,500 9,500 1,900 25,000 7,000 21,800 10,500 Page 55

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Chapter 02: Analyzing Transactions 48,700

48,700

211. Increase/(Decrease )

Fees earned Expenses: Wages expense Rent expense Utilities expense Total expenses Net income

Year 2 Year 1 Amount Percent $178,400 $162,500 $15,900 9.8% $(100,000) $ (92,500) (33,000) (30,000) (30,000) (25,000) $(163,000) $(147,500) $ 15,400 $ 15,000

$ 7,500 3,000 5,000 $15,500 $ 400

8.1% 10.0% 20.0% 10.5% 2.7%

While the change in fees earned is favorable, it is not sufficient to offset the rising expenses, resulting in a smaller percentage increase in net income.

212. Increase/(Decrease ) Year 2 Year 1 Amount Percent Fees earned $158,400 $162,500 $ (4,100) (2.5)% Expenses: Wages expense $ (80,000) $ (92,500) $(12,500) (13.5)% Rent expense (28,000) (30,000) (2,000) (6.7)% Utilities expense (30,000) (25,000) 5,000 20.0% Total expenses $138,000 $147,500 $ (9,500) (6.4)% $ 20,400 $ 15,000 $ 5,400 36.0% Net income The change in fees earned is unfavorable, but that is more than offset by the declines in operating expenses, with the exception of utilities, which increased over the period. Despite the 2.5% drop in fees earned, the net effect was a favorable increase in net income of 36%, which was in large part spurred by the drop in wages expense.

213. c 214. d 215. c 216. b 217. (a)

Sales Total operating Powered by Cognero

Year 2 $ 362,000 (285,000)

Faso Fabricating Increase/(Decrease) Year 1 Amount $ 338,000 $ 24,000 (245,000) 40,000

Percent 7.1% 16.3% Page 56

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Chapter 02: Analyzing Transactions expense Net income

Sales Total operating expense Net income

$

77,000

$

93,000

$(16,000)

(17.2)%

Year 2 $422,000 (305,000)

Spinoza Fabrication Increase/(Decrease) Year 1 Amount Percent $395,000 $27,000 6.8% $395,000 20,000 7.0%

$117,000

$110,000

$7,000

6.4%

(b) Faso had the slightly higher percentage sales growth from Year 1 to Year 2. Total operating expenses for both companies grew at a higher percentage than the growth in sales. For Faso, the large percentage increase in operating expenses resulted in a substantial decline in net income from Year 1 to Year 2.

218. ??? + $210,500 − $245,000 = $62,800 Accounts Payable balance at May 1 is $97,300. 219. $208,400 + ??? − $298,500 = $125,300 Fees billed to customers on account during October is $215,400. 220. (a) (1) Cash Renae Rawlings, Capital (2) Rent Expense Cash

48,000 48,000 880 880

(3) Supplies Accounts Payable

1,750

(4) Cash Fees Earned

12,600

(5) Accounts Payable Cash

1,000

(6) Automobile Expense Miscellaneous Expense Cash

1,750 12,600 1,000 375 250 625

(7) Wages Expense Cash

3,900

(8) Accounts Receivable Fees Earned

2,400

(9) Supplies Expense

280

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3,900 2,400

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Chapter 02: Analyzing Transactions Supplies

280 2,400

(10) Renae Rawlings, Drawing Cash

2,400

(b)

Bal.

Cash 48,000 (2) 12,600 (5) (6) (7) (10) 51,795

(8)

Accounts Receivable 2,400

(3) Bal.

Supplies 1,750 (9) 1,470

(1) (4)

(5)

Fees Earned (4) 12,600 (8) 2,400 Bal. 15,000

880 1,000 625 3,900 2,400

280

(2)

Rent Expense 880

(6)

Automobile Expense 375

Accounts Payable 1,000 (3) 1,750 Bal. 750

Wages Expense (7) 3,900

Renae Rawlings, Capital (1)

48,000

Renae Rawlings, Drawing (10) 2,400

(9)

Supplies Expense 280

(6)

Miscellaneous Expense 250

(c) Wickers Restoration Services Unadjusted Trial Balance May 31 Cash Accounts Receivable Supplies Accounts Payable

51,795 2,400 1,470 750 48,000

Renae Rawlings, Capital Renae Rawlings, Drawing

2,400

Fees Earned Rent Expense Automobile Expense Wages Expense

880 375 3,900

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15,000

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Chapter 02: Analyzing Transactions Supplies Expense Miscellaneous Expense

280 250 63,750

63,750

(d) Net income = $15,000 – $880 – $375 – $3,900 – $280 – $250 = $9,315 (e) Capital at May 31 = Starting Capital + Investment + Net Income – Withdrawals = $0 + $48,000 + $9,315 – $2,400 = $54,915

221. Devers Gym Unadjusted Trial Balance August 31 Cash Accounts Receivable Supplies Prepaid Insurance Land Accounts Payable Unearned Rent Notes Payable

77,950 63,450 3,000 16,800 125,000 36,200 18,000 125,000 102,300

Dani Devers, Capital Dani Devers, Drawing Fees Earned Insurance Expense Wages Expense Supplies Expense Rent Expense Utilities Expense Miscellaneous Expense

5,000 180,600 4,200 94,000 9,500 42,000 16,700 4,500 462,100

462,100

NOTE: The order of expenses may vary.

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Chapter 03: The Adjusting Process

Indicate whether the statement is true or false. 1. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting. a. True b. False 2. Generally accepted accounting principles require the accrual basis of accounting. a. True b. False 3. The revenue recognition principle states that revenue should be recorded in the same period as the cash is received. a. True b. False 4. The system of accounting where revenues are recorded when services have been performed or products have been delivered to customers and expenses are recorded when they are incurred is called the cash basis of accounting. a. True b. False 5. The matching principle requires expenses be recorded in the same period that the related revenue is recorded. a. True b. False 6. For most large businesses, the cash basis of accounting will provide accurate financial statements for user needs. a. True b. False 7. An example of deferred revenue is Unearned Rent. a. True b. False 8. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned. a. True b. False 9. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account. a. True b. False 10. The revenue recognition principle requires that the reporting of revenue be included in the period when cash for the service is received. a. True b. False 11. Revenues and expenses should be recorded in the period to which they relate. a. True Powered by Cognero

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Chapter 03: The Adjusting Process b. False 12. The matching principle supports matching expenses with the related revenues. a. True b. False 13. The updating of accounts before financial statements are prepared is called the adjusting process. a. True b. False 14. Adjusting entries affect balance sheet accounts to the exclusion of income statement accounts. a. True b. False 15. Adjusting entries affect only expense and asset accounts. a. True b. False 16. An adjusting entry would adjust revenue so that it is reported in the period earned and not when cash is received. a. True b. False 17. An adjusting entry would adjust an expense account so that the expense is reported in the period incurred. a. True b. False 18. An adjusting entry to accrue an incurred expense will affect total liabilities. a. True b. False 19. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded. a. True b. False 20. Deferrals are recorded transactions that delay the recognition of an expense or revenue. a. True b. False 21. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been incurred but not recorded. a. True b. False 22. Unearned revenue is a liability. a. True Powered by Cognero

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Chapter 03: The Adjusting Process b. False 23. The systematic allocation of land's cost to expense is called depreciation. a. True b. False 24. The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation account is termed the book value of the asset. a. True b. False 25. The balance in the accumulated depreciation account is the sum of the depreciation expense recorded in past periods. a. True b. False 26. Accumulated depreciation accounts are liability accounts. a. True b. False 27. Accumulated depreciation is reported on the income statement. a. True b. False 28. A contra asset account for Land will normally appear on the balance sheet. a. True b. False 29. Depreciation Expense is reported on the balance sheet as an addition to the related asset. a. True b. False 30. A company pays $36,000 for 12 months' rent on October 1, recording the prepayment as an asset. The adjusting entry on December 31 is a debit to Rent Expense for $9,000 and a credit to Prepaid Rent for $9,000. a. True b. False 31. A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting entry on December 31 is a debit to Unearned Subscription Revenue for $150 and a credit to Subscription Revenue for $150. a. True b. False 32. A business depreciates its equipment by $500 per year. The adjusting entry on December 31 is a debit to Depreciation Expense for $500 and a credit to Equipment for $500. a. True b. False Powered by Cognero

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Chapter 03: The Adjusting Process 33. A company pays an employee $3,000 for a 5-day workweek, Monday–Friday. The adjusting entry on December 31, which is a Wednesday, is a debit to Wages Expense for $1,800 and a credit to Wages Payable for $1,800. a. True b. False 34. A business receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by December 31, the adjusting entry made at that time is a debit to Cash for $2,500 and a credit to Ticket Revenue for $2,500. a. True b. False 35. A company realizes that the last 2 days' revenue for the month was billed but not recorded. The adjusting entry on December 31 is a debit to Accounts Receivable and a credit to Fees Earned. a. True b. False 36. At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount of the journal entry required to journalize insurance expense will be $4,000 if the amount of unexpired insurance applicable to future periods is $2,000. a. True b. False 37. A fixed asset’s market value is reflected on the balance sheet. a. True b. False 38. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and owner's equity will be understated for the period. a. True b. False 39. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets at the end of the period will be understated. a. True b. False 40. If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent earned is inadvertently omitted, the net income for the period will be understated. a. True b. False 41. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the end of the period will be understated. a. True b. False 42. Adjusting journal entries are dated on the last day of the period. a. True Powered by Cognero

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Chapter 03: The Adjusting Process b. False 43. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always be overstated. a. True b. False 44. The financial statements are prepared from the unadjusted trial balance. a. True b. False 45. The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable. This error will be detected when the adjusted trial balance is prepared. a. True b. False 46. The adjusted trial balance verifies that total debits equal total credits before the adjusting entries are prepared. a. True b. False 47. Vertical analysis compares each item in a financial statement with a total amount from the same statement. a. True b. False 48. When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net income. a. True b. False 49. Vertical analysis is useful for analyzing financial statement changes over time. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 50. The revenue recognition principle a. is not in conflict with the cash method of accounting b. determines when revenue is credited to a revenue account c. states that revenue is not recorded until the cash is received d. controls all revenue reporting for the cash basis of accounting 51. The matching principle a. addresses the relationship between the journal and the balance sheet b. determines whether the normal balance of an account is a debit or credit c. requires that the dollar amount of debits equal the dollar amount of credits on a trial balance d. states that the revenues and related expenses should be reported in the same period Powered by Cognero

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Chapter 03: The Adjusting Process 52. Using accrual accounting, revenues are recorded a. when cash is received without regard to when the services are performed or products have been delivered to customers b. when a service has been performed or products have been delivered to customers without regard to when cash is received c. when cash is received at the time services are performed or products have been delivered to customers d. only if cash is received after the services are performed or products have been delivered to customers 53. Using accrual accounting, expenses are recorded and reported only a. when they are incurred, whether or not cash is paid b. when they are incurred and paid at the same time c. if they are paid before they are incurred d. if they are paid after they are incurred 54. The accounting principle upon which deferrals and accruals are based is a. matching b. cost c. price-level adjustment d. conservatism 55. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry? a. decreases the balance of an owner's equity account b. increases the balance of a liability account c. increases the balance of an asset account d. decreases the balance of an expense account 56. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which of the following describes the effect of the debit portion of the entry? a. increases the balance of a contra asset account b. increases the balance of an asset account c. decreases the balance of a owner's equity account d. increases the balance of an expense account 57. Prior to the adjusting process, accrued expenses have a. not yet been incurred, paid, or recorded b. been incurred, not paid, but have been recorded c. been incurred, not paid, and not recorded d. been paid but have not yet been incurred 58. Prior to the adjusting process, accrued revenue has a. been earned and cash received b. been earned and not recorded as revenue c. not been earned but recorded as revenue Powered by Cognero

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Chapter 03: The Adjusting Process d. not been recorded as revenue but cash has been received 59. Prepaid expenses have a. not yet been recorded as expenses but have been paid b. been recorded as expenses and paid c. been incurred and paid d. not yet been recorded as expenses or paid 60. Deferred revenue is revenue that is a. earned and the cash has been received b. earned but the cash has not been received c. not earned and the cash has not been received d. not earned but the cash has been received 61. Adjusting entries are a. the same as correcting entries b. needed to bring accounts up to date and match revenue and expense c. optional under generally accepted accounting principles d. rarely needed in large companies 62. Adjusting entries affect at least one a. income statement account and one balance sheet account b. revenue account and the owner's drawing account c. asset and one owner's equity account d. revenue account and one owner's equity account 63. The term used to describe an expense that has not been paid and has not yet been recognized in the accounts by a routine entry is a. prepaid b. deferred c. accrued d. matched 64. Which of the following is not a characteristic of the accrual basis of accounting? a. Revenues and expenses are reported in the period in which cash is received or paid. b. Revenues are reported when services have been performed or products have been delivered to customers. c. The accrual basis of accounting supports the matching concept. d. Expenses are reported in the same period as the revenues to which they relate. 65. Generally accepted accounting principles require that companies use which basis of accounting? a. cash basis b. deferral basis c. accrual basis d. account basis Powered by Cognero

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Chapter 03: The Adjusting Process 66. The cash basis of accounting records revenues and expenses when the cash is exchanged while the accrual basis of accounting a. records revenues when they are earned and expenses when they are paid b. records revenues when they are earned and expenses when they are incurred c. records revenues when cash is received and expenses when they are incurred d. records revenues and expenses when the company needs to apply for a loan 67. By matching revenue earned during the accounting period to related incurred expenses a. net income or loss will always be underestimated b. net income or loss will always be overestimated c. net income or loss will be properly reported on the income statement d. net income or loss will not be determined 68. Adjusting entries always include a. only income statement accounts b. only balance sheet accounts c. the cash account d. at least one income statement account and one balance sheet account 69. Prepaid expenses are eventually expected to become a. expenses when their future economic value expires or is used up b. revenues when services are performed c. expenses in the period when they are paid d. revenues when the liability is no longer owed 70. Which of the following is considered to be unearned revenue? a. theater tickets sold last month for yesterday’s performance b. theater tickets sold yesterday on credit for yesterday’s performance c. theater tickets that were not sold for the current performance d. theater tickets sold for next month’s performance 71. Which of the following is an example of accrued revenue? a. snow removal services that have been paid for 3 months in advance b. snow removal services that have been provided but have not been billed or paid c. an agreement that has been signed for snow removal services for the next 3 months d. snow removal services that have been provided and paid on the same day 72. Which of the following is considered to be an accrued expense? a. A computer technician installed the latest software updates and was paid on the same day. b. A computer technician has been paid in advance to install software updates as they become available. c. A computer technician has just signed an agreement with you regarding pricing for future work. d. A computer technician has installed the latest software updates, but you have not received an invoice or made payment. 73. Which of the following accounts would likely be included in an accrual adjusting entry? Powered by Cognero

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Chapter 03: The Adjusting Process a. Insurance Expense b. Prepaid Rent c. Interest Expense d. Unearned Rent 74. Which of the following accounts would likely be included in a deferral adjusting entry? a. Interest Revenue b. Unearned Revenue c. Salaries Payable d. Accounts Receivable 75. If there is a balance in the prepaid rent account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. revenue d. liability 76. If there is a balance in the unearned subscriptions account after adjusting entries are made, it represents a(n) a. deferral b. accrual c. expense d. revenue 77. The unexpired insurance at the end of the fiscal period represents a(n) a. accrued asset b. accrued liability c. accrued expense d. deferred expense 78. The general term used to indicate delaying the recognition of an expense already paid or of a revenue for which cash has already been received is a. depreciation b. deferral c. accrual d. inventory 79. Which account would normally not require an adjusting entry? a. Wages Expense b. Accounts Receivable c. Accumulated Depreciation d. Cash 80. The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which represents 4 months' rent paid on December 1. The adjusting entry required on December 31 is a. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000 Powered by Cognero

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Chapter 03: The Adjusting Process b. debit Prepaid Rent, $24,000; credit Rent Expense, $8,000 c. debit Rent Expense, $24,000; credit Prepaid Rent, $8,000 d. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000 81. The balance in the office supplies account on January 1 was $7,000, supplies purchased during January were $3,000, and the supplies on hand at January 31 were $2,000. The amount to be used for the appropriate month-end adjusting entry is a. $4,300 b. $12,000 c. $5,000 d. $8,000 82. Which of the following is the proper adjusting entry, based on a prepaid insurance account balance before adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April 30? a. debit Insurance Expense, $3,000; credit Prepaid Insurance, $3,000 b. debit Insurance Expense, $14,000; credit Prepaid Insurance, $14,000 c. debit Prepaid Insurance, $11,000; credit Insurance Expense, $11,000 d. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000 83. The entry to adjust for the cost of supplies used during the accounting period is a. debit Supplies Expense; credit Supplies b. debit Owner's Capital; credit Supplies c. debit Accounts Payable; credit Supplies d. debit Supplies; credit Owner's Capital 84. Buster Industries pays weekly salaries of $30,000 on Friday for a 5-day workweek ending on that day. The adjusting entry necessary at the end of the fiscal period ending on Tuesday is a. debit Salaries Payable, $12,000; credit Cash, $12,000 b. debit Salary Expense, $12,000; credit James Buster, Drawing, $12,000 c. debit Salary Expense, $12,000; credit Salaries Payable, $12,000 d. debit James Buster, Drawing, $12,000; credit Cash, $12,000 85. The difference between the balance of a fixed asset account and the related accumulated depreciation account is termed a. historical cost b. contra asset c. book value d. market value 86. The adjusting entry to journalize the depreciation of a building for the fiscal period is a. debit Depreciation Expense; credit Building b. debit Depreciation Expense; credit Accumulated Depreciation c. debit Accumulated Depreciation; credit Depreciation Expense d. debit Building; credit Depreciation Expense Powered by Cognero

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Chapter 03: The Adjusting Process 87. As time passes, fixed assets other than land lose their capacity to provide useful services. To account for this decrease in usefulness, the cost of fixed assets is systematically allocated to expense through a process called a. equipment allocation b. depreciation c. accumulation d. matching 88. The entry to adjust the accounts for salaries accrued at the end of the accounting period is a. debit Salaries Payable; credit Cash b. debit Cash; credit Salaries Payable c. debit Salaries Payable; credit Salaries Expense d. debit Salaries Expense; credit Salaries Payable 89. The supplies account had a balance of $4,400 at the beginning of the year and was debited during the year for $2,400, representing the total of supplies purchased during the year. If $400 of supplies are on hand at the end of the year, the supplies expense to be reported on the income statement for the year is a. $400 b. $2,000 c. $6,800 d. $6,400 90. Smokey Company purchases a 1-year insurance policy on July 1 for $3,600. The adjusting entry on December 31 is a. debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800 b. debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500 c. debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100 d. debit Prepaid Insurance, $1,800; credit Cash, $1,800 91. Gracie Services made a prepaid rent payment of $2,800 on January 1. The monthly rent is $700. The amount of prepaid rent that would appear on the January 31 balance sheet after adjustment is a. $2,100 b. $700 c. $2,800 d. $1,400 92. Accumulated Depreciation and Depreciation Expense are classified, respectively, as a. expense, contra asset b. asset, contra liability c. revenue, asset d. contra asset, expense 93. The type of account and normal balance of Prepaid Insurance is a. asset, credit b. asset, debit c. contra asset, credit d. contra asset, debit Powered by Cognero

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Chapter 03: The Adjusting Process 94. The type of account and normal balance of Unearned Fees is a. revenue, credit b. expense, debit c. liability, credit d. liability, debit 95. Data for an adjusting entry described as "accrued wages, $2,020" require a a. debit to Wages Expense and a credit to Wages Payable b. debit to Wages Payable and a credit to Wages Expense c. debit to Accounts Receivable and a credit to Wages Expense d. debit to Drawing and a credit to Wages Payable 96. Supplies are recorded as assets when purchased. Therefore, the credit to Supplies in the adjusting entry is for the amount of supplies a. still on hand b. purchased c. used d. required for the next accounting period 97. The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a. owner's equity b. an asset c. a contra asset d. a liability 98. Which of the following is an example of a prepaid expense? a. Supplies b. Accounts Receivable c. Unearned Subscriptions d. Unearned Fees 99. Accrued revenues would appear on the balance sheet as a. assets b. liabilities c. owner's capital d. prepaid expenses 100. Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet as a. an asset b. a liability c. a contra asset d. owner's equity 101. Prepaid rent, representing rent for the next 6 months' occupancy, would be reported on the tenant's balance sheet as Powered by Cognero

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Chapter 03: The Adjusting Process a(n) a. asset b. liability c. owner's equity account d. contra liability 102. Accrued expenses are ordinarily reported on the balance sheet as a. assets b. liabilities c. fixed assets d. prepaid expenses 103. Fees payable would appear on the balance sheet as a(n) a. asset b. liability c. fixed asset d. unearned revenue 104. The adjusting entry for gym memberships earned that were previously recorded in the unearned gym memberships account is a. debit Unearned Gym Memberships; credit Gym Memberships Revenue b. debit Gym Memberships Revenue; credit Unearned Gym Memberships c. debit Unearned Gym Memberships; credit Prepaid Gym Memberships d. debit Gym Memberships Expense; credit Unearned Gym Memberships 105. Which of the following pairs of accounts could not appear in the same adjusting entry? a. Fees Earned and Unearned Fees b. Interest Income and Interest Expense c. Rent Expense and Prepaid Rent d. Salaries Payable and Salaries Expense 106. The unearned rent account has a balance of $72,000. If $18,000 of the $72,000 is unearned at the end of the accounting period, the amount of the adjusting entry is a. $18,000 b. $90,000 c. $54,000 d. $36,000 107. The following adjusting journal entry does not include an explanation. Select the best explanation for the entry. Unearned Fees 7,500 Fees Earned ????????????????. a. Record payment of fees earned. b. Record fees earned at the end of the month. Powered by Cognero

7,500

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Chapter 03: The Adjusting Process c. Record fees that have not been earned at the end of the month. d. Record payment of fees to be earned. 108. The following adjusting journal entry does not include an explanation. Select the best explanation for the entry. Supplies Expense Supplies ????????????????. a. Record supplies used. b. Record purchase of supplies. c. Reduce supplies expense. d. Record sale of supplies.

730 730

109. The following adjusting journal entry found in the journal is missing an explanation. Select the best explanation for the entry. Wages Expense 4,500 Wages Payable 4,500 ????????????????. a. Record payment of wages. b. Record wages paid last month. c. Record wages paid in advance. d. Record wages expense incurred and to be paid next month. 110. What effect will this adjustment have on the accounting records? Unearned Fees 6,375 Fees Earned 6,375 a. increase net income b. increase revenues reported for the period c. decrease liabilities d. all of these choices 111. What effect will this adjusting journal entry have on the accounting records? Supplies Expense Supplies a. increase income b. decrease net income c. decrease expenses d. increase assets

760 760

112. What effect will the following adjusting journal entry have on the accounting records? Depreciation Expense Accumulated Depreciation a. increase net income Powered by Cognero

2,150 2,150

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Chapter 03: The Adjusting Process b. increase revenues c. decrease expenses d. decrease net book value 113. How will the following adjusting journal entry affect the accounting equation? Unearned Subscriptions 11,500 Subscriptions Earned 11,500 a. increase assets and increase revenues b. increase liabilities and increase revenues c. decrease liabilities and increase revenues d. decrease liabilities and decrease revenues 114. Which of the following statements regarding depreciation is not true? a. Depreciation allocates the cost of a fixed asset over its estimated life. b. Depreciation expense reflects the decrease in market value each year. c. Depreciation is an allocation not a valuation method. d. Depreciation expense does not measure changes in market value. 115. The account type and normal balance of Prepaid Expense is a. revenue, credit b. expense, debit c. liability, credit d. asset, debit 116. The account type and normal balance of Unearned Revenue is a. revenue, credit b. expense, debit c. liability, credit d. asset, debit 117. Which of the following is an example of an accrued expense? a. salary owed but not yet paid b. fees received but not yet earned c. supplies on hand d. a 2-year premium paid on a fire insurance policy 118. The net book value of a fixed asset is determined by the original cost a. less accumulated depreciation b. less market value c. less accumulated depreciation plus depreciation expense d. plus accumulated depreciation 119. The balance in the supplies account before adjustment at the end of the year is $6,250. The proper adjusting entry if the amount of supplies on hand at the end of the year is $1,500 would be Powered by Cognero

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Chapter 03: The Adjusting Process a. debit Supplies, $1,500; credit Supplies Expense, $1,500 b. debit Supplies Expense, $4,750; credit Supplies, $4,750 c. debit Supplies Expense, $1,500; credit Supplies, $1,500 d. debit Supplies, $4,750; credit Supplies Expense, $4,750 120. For the year ended December 31, Orion Realty mistakenly omitted adjusting entries for $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. For the year ended December 31, what is the effect of these errors on revenues, expenses, and net income? a. Revenues are overstated by $4,200. b. Net income is overstated by $2,300. c. Expenses are overstated by $6,500. d. Expenses are understated by $3,500. 121. A business pays biweekly salaries of $20,000 every other Friday for a 10-day work period ending on that day. The adjusting entry necessary at the end of the fiscal period ending on the second Wednesday of the pay period includes a a. debit to Salary Expense of $8,000 b. debit to Salaries Payable of $8,000 c. credit to Salary Expense of $16,000 d. credit to Salaries Payable of $16,000 122. A business pays biweekly salaries of $20,000 every other Friday for a 10-day work period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30, and the proper adjusting entry is journalized at the end of the fiscal period (December 31). The entry for the payment of the payroll on Friday, January 10, includes a a. debit to Salary Expense of $16,000 b. debit to Salary Expense of $4,000 c. credit to Salaries Payable of $16,000 d. credit to Salaries Payable of $4,000 123. The net income reported on the income statement is $58,000. However, adjusting entries have not been made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net income, as corrected, is a. $56,700 b. $58,000 c. $55,800 d. $54,500 124. At the end of the fiscal year, the usual adjusting entry to journalize expired prepaid insurance was omitted. Which of the following statements is true? a. Total assets at the end of the year will be understated. b. Owner's equity at the end of the year will be understated. c. Net income for the year will be overstated. d. Insurance expense will be overstated. 125. At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true? Powered by Cognero

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Chapter 03: The Adjusting Process a. Total assets will be understated at the end of the current year. b. The balance sheet and income statement will be misstated, but the statement of owner's equity will be correct for the current year. c. Net income will be overstated for the current year. d. Total liabilities and total assets will be understated. 126. The adjusting entry for used supplies was omitted at the end of the year. This would affect the income statement by having a. expenses understated and therefore net income overstated b. revenues understated and therefore net income understated c. expenses understated and therefore net income understated d. expenses overstated and therefore net income understated 127. Which of the following accounts would most likely appear on an adjusted trial balance but probably would not appear on the unadjusted trial balance? a. Fees Earned b. Accounts Receivable c. Unearned Fees d. Depreciation Expense 128. Which of the steps in the accounting process would be completed last? a. preparing the adjusted trial balance b. posting c. preparing the financial statements d. journalizing 129. When is the adjusted trial balance prepared? a. before adjusting journal entries are posted b. after adjusting journal entries are posted c. after the adjusting journal entries are journalized d. before the adjusting journal entries are journalized 130. What is the purpose of the adjusted trial balance? a. to verify that all of the adjusting entries have been posted b. to verify that the net income (loss) is correctly reported c. to verify that no adjusting journal entry has been omitted d. to verify that the debits and credits balance 131. Which of the following statements regarding vertical analysis is not true? a. Vertical analysis may be prepared for several periods to analyze changes in relationships over time. b. In a vertical analysis of a balance sheet, each asset item is stated as a percent of total assets. c. In a vertical analysis of an income statement, each item is stated as a percent of total expenses. d. Major differences between a company’s vertical analysis and industry averages should be investigated. 132. Two abbreviated income statements for Toby Sam Enterprises follow: Powered by Cognero

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Chapter 03: The Adjusting Process Toby Sam Enterprises Income Statements For the Years Ended December 31

Fees earned Expenses Net income

Year 2 $674,350 (472,045) $202,305

Year 1 $520,600 (338,390) $182,210

Using vertical analysis, determine by how much net income would increase or decrease as a percentage of revenue. a. increase by 5% b. increase by 111% c. decrease by 5% d. decrease by 111% 133. A retainer fee received from a client for future legal representation is an example of a(n) a. prepaid expense b. accrued expense c. unearned revenue d. accrued revenue 134. Payment for a 6-month trade magazine subscription is an example of a(n) a. prepaid expense b. accrued expense c. unearned revenue d. accrued revenue 135. A magazine publisher receiving payment covering a 6-month magazine subscription is an example of a(n) a. prepaid expense b. accrued expense c. unearned revenue d. accrued revenue 136. Providing tutoring services for a student that will be invoiced next month is an example of a(n) a. prepaid expense b. accrued expense c. unearned revenue d. accrued revenue 137. Receiving 6 months of rental payments from a tenant is an example of a(n) a. prepaid expense b. accrued expense c. unearned revenue d. accrued revenue Powered by Cognero

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Chapter 03: The Adjusting Process 138. Paying 6 months of rental payments to the landlord is an example of a(n) a. prepaid expense b. accrued expense c. unearned revenue d. accrued revenue 139. Signing a contract to provide tutoring services beginning next month is an example of a. an accrued revenue b. an accrued expense c. an unearned revenue d. none of these choices 140. If no adjustment was made for supplies used up during the month, what effect would this have on the balance sheet? a. Assets and owner's equity would be overstated. b. Assets and owner's equity would be understated. c. Assets would be overstated, and owner's equity would be understated. d. Liabilities would be understated, and owner's equity would be overstated. 141. Wages are paid every Friday for the 5-day work week. The month ended on Tuesday, and no adjustment was recorded. What effect would this have on the balance sheet? a. Assets and owner's equity would be overstated. b. Liabilities and owner's equity would be understated. c. Assets would be overstated, and liabilities would be understated. d. Liabilities would be understated, and owner's equity would be overstated. 142. Services provided to customers on the last day of the month were not billed. What effect would this have on the balance sheet? a. Assets and owner's equity would be overstated. b. Assets and owner's equity would be understated. c. Assets would be overstated and liabilities would be understated. d. Liabilities would be understated and owner's equity would be overstated. 143. An attorney has earned half of a retainer fee that was received and recorded last month. No adjustment was recorded for the amount earned. What effect would this have on the balance sheet? a. Assets and liabilities would be overstated. b. Liabilities and owner's equity would be understated. c. Assets would be overstated, and liabilities would be understated. d. Liabilities would be overstated, and owner's equity would be understated.

144. Explain the difference between the accrual basis of accounting and the cash basis of accounting. 145. Indicate with a Yes or No whether or not each of the following accounts would, under normal circumstances, require an adjusting entry. Powered by Cognero

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Chapter 03: The Adjusting Process 1. Cash 2. Prepaid Expenses 3. Depreciation Expense 4. Accounts Payable 5. Accumulated Depreciation 6. Equipment 146. Classify the following items as: (1) prepaid expense, (2) unearned revenue, (3) accrued expense, or (4) accrued revenue. (a) Fees received but not yet earned (b) Fees earned but not yet received (c) Paid premium on a 1-year insurance policy (d) Property tax owed to be paid beginning of next year 147. List the four basic types of accounts that require adjusting entries and give an example of each. 148. Under the accrual basis of accounting, some accounts in the ledger require updating at the end of the period. Discuss the three main reasons for this updating and give an example of each. 149. Explain the difference between accrued revenues and unearned revenues. Give an example of each.

150. Explain the difference between accrued expenses and prepaid expenses. Give an example of each. 151. For each of the following, journalize the necessary adjusting entry: (a)

(b)

(c)

(d)

A business pays weekly salaries of $22,000 on Friday for a 5-day work week ending on that day. Journalize the necessary adjusting entry at the end of the fiscal period, assuming that the fiscal period ends (1) on Tuesday or (2) on Wednesday. The balance in the prepaid insurance account before adjustment at the end of the year is $18,000. Journalize the adjusting entry required under each of the following alternatives: (1) the amount of insurance expired during the year is $5,300 or (2) the amount of unexpired insurance applicable to a future period is $2,700. On July 1 of the current year, a business pays $54,000 to the city for license taxes for the coming fiscal year. The same business is also required to pay an annual property tax at the end of the year. The estimated amount of the current year's property tax allocated to July is $4,800. (1) Journalize the two adjusting entries required to bring the accounts affected by the taxes up to date as of July 31. (2) What is the amount of tax expense for July? The estimated depreciation on equipment for the year is $32,000.

152. Listed below are accounts to use for transactions (a) through (j), each identified by a number. Following this list are the transactions. Indicate for each transaction the accounts that should be debited and credited by placing the account number(s) in the appropriate box. 1. Accounts Payable 2. Accounts Receivable 3. Accumulated Depreciation—Office Equipment 4. Building 5. Cash 6. Renaldo Ocasio, Capital Powered by Cognero

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Chapter 03: The Adjusting Process 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Depreciation Expense—Office Equipment Renaldo Ocasio, Drawing Fees Earned Insurance Expense Insurance Payable Interest Expense Interest Payable Interest Receivable Land Notes Payable Office Supplies Office Supplies Expense Prepaid Insurance Unearned Fees Utilities Expense Utilities Payable

Transactions a. Received and immediately paid utility bill. b. Paid a creditor on account. c. Bought a 3-year insurance policy and paid in full. d. Made an entry to adjust for the expired portion of the insurance premium. e. Received $7,000 from a contract to perform accounting services over the next 2 years. f. Made an entry to adjust for half of the services performed in (e). g. Purchased office supplies, paying part cash and charging the balance on account. h. Borrowed money from a bank and signed a note payable due in 6 months. i. Recorded 1 month’s accrued interest on the note payable. j. Recorded depreciation on office equipment.

Account(s) Debited

Account(s) Credited

153. The following trial balances are available for REM Consulting Services at year-end: Accounts Cash Accounts Receivable Prepaid Insurance Supplies Machines Powered by Cognero

Unadjusted Trial Balance Debit Credit 13,000 1,500 600 3,800 30,000

Adjusted Trial Balance Debit Credit 13,000 1,800 200 3,000 30,000 Page 21

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Chapter 03: The Adjusting Process Accumulated Depreciation Wages Payable Unearned Fees Renae Martin, Capital Renae Martin, Drawing Fees Earned Wages Expense Depreciation Expense Supplies Expense Insurance Expense

12,000

17,500 900 6,500 24,000

6,700 24,000 4,800

4,800 25,000

14,000

67,700

67,700

25,500 14,900 5,500 800 400 74,400

74,400

(a) Reconstruct the adjusting entries and give a brief explanation of each. (b) What is the amount of net income? 154. Zoey Bella Realty has a payroll of $10,000 for a 5-day work week. Its employees are paid each Friday for the 5-day work week. Journalize the adjusting entry on December 31, assuming the year ends on a Thursday. 155. A 1-year insurance policy was purchased on June 1 for $2,400. Journalize the adjusting entry on December 31.

156. Depreciation on an office building is $2,800. Journalize the adjusting entry on December 31. 157. Gizmo Company purchased a 1-year insurance policy on October 1 for $1,800. Journalize the adjusting entry on December 31. 158. The supplies account had a beginning balance of $1,750. Supplies purchased during the period totaled $3,500. At the end of the period before adjustment, $350 of supplies were on hand. Journalize the adjusting entry for supplies. 159. On January 1, Good Dog Mart purchased a 2-year liability insurance policy for $22,800 cash. The purchase was recorded to Prepaid Insurance. Journalize the January 31 adjusting entry. 160. Good Dog Mart records depreciation for equipment. Depreciation for the period ending December 31 is $1,400 for office equipment and $2,650 for production equipment. Journalize the two entries for depreciation. 161. On March 1, a business paid $3,600 for a 12-month liability insurance policy. On April 1, the business entered into a 2-year rental contract for equipment at a total cost of $18,000. Determine the following amounts: (a) Insurance expense for the month of March (b) Balance of prepaid insurance as of March 31 (c) Equipment rent expense for the month of April (d) Balance of prepaid equipment rental as of April 30 162. On January 1, Newman Legal Services estimated its property tax to be $5,100 for the year. (a) (b) (c)

How much should the company accrue each month for property taxes? Compute the balance in Property Tax Payable as of August 31. Journalize the adjusting journal entry for September.

163. On January 1, Power House Co. prepaid the annual rent of $10,140. Journalize this transaction. Powered by Cognero

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Chapter 03: The Adjusting Process 164. On December 1, a company received $18,000 for a service contract to be performed from December 1 through April 30. (a) Journalize the service contract. (b) Assuming the work is performed evenly throughout the contract period, journalize the adjusting journal entry on December 31. 165. On December 31, the balance in the office supplies account is $1,385. A physical count shows $435 worth of supplies on hand. Journalize the adjusting entry for supplies. 166. Depreciation on equipment for the year is $6,300. (a) Journalize the adjusting entry, assuming the company prepares adjustments once a year. (b) Journalize the adjusting entry, assuming the company prepares adjustments on a monthly basis. 167. The business determines that the interest expense on a note payable for the period ending December 31 is $775. This amount is payable on January 1. Journalize the entries required on December 31 and January 1. 168. On January 2, Good Dog Mart prepaid $30,000 rent for the year and recorded the prepayment in an asset account. Journalize the January 31 adjusting entry for rent expense. 169. The prepaid insurance account had a beginning balance of $6,600 and was debited for $2,300 for premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $4,100. 170. The balance in the unearned fees account before adjustment at the end of the year is $10,250. Journalize the adjusting entry required if the amount of unearned fees at the end of the year is $3,125. 171. At the end of the current year, fees of $3,700 have been earned but have not been billed to clients. Journalize the adjusting entry for the accrued fees. 172. Masters Training Academy pays weekly salaries of $18,000 on Friday for a 5-day work week ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Wednesday. 173. The estimated amount of depreciation on equipment for the current year is $5,300. Journalize the adjusting entry for the depreciation. 174. On November 1, clients of Adler Designs prepaid $4,250 for services to be provided in the future at a rate of $85 per hour. (a) Journalize the receipt of cash. (b) As of November 30, Adler Designs shows that 15 hours of services have been provided on this agreement. Journalize the necessary adjusting entry. (c) Determine the total unearned fees in hours and dollars at November 30. 175. Journalize the following transactions and adjustments for Austin Company: (a)

Austin Company pays daily wages of $645 (Monday–Friday). Paydays are every other Friday. Journalize the Monday, January 31 adjusting entry, assuming that the previous payday was Friday, January 21.

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Chapter 03: The Adjusting Process (b)

Journalize the entry for Austin Company’s payroll on Friday, February 4.

(c)

Annual depreciation expense on the company’s fixed assets is $39,600. Journalize the adjusting entry to recognize depreciation for the month of January.

(d)

The company’s office supplies account shows a debit balance of $3,755. A count of office supplies on hand on January 31 shows $635 worth of supplies on hand. Journalize the January 31 adjusting entry for Office Supplies.

176. On December 15, Adler Designs hired an independent contractor for a project. The contractor completed the project on December 29 and submitted an invoice for $2,425 which was due on January 15. The amount was duly paid on January 15. (a) Journalize the entry or entries necessary for these transactions. (b) Explain why you prepared this/these journal entries and the effect on the income statement(s). 177. On November 15, Adler Designs purchased an advertising campaign for the month of December. Adler Designs paid cash of $2,700 in advance. The advertising campaign ran in December and was completed on December 31. (a) Journalize all necessary entries for the advertising campaign for November and December. (b) Explain why you prepared this/these journal entries. 178. On January 2, Safe Motorcycling Monthly received a check for $72 from a subscriber for a 12-month subscription. The January issue was mailed on January 15. Journalize the necessary entries for the month of January. 179. Journalize the required adjusting entries on December 31 based on the following data. Omit explanations. Fees accrued but not billed, $6,300. Supplies account balance on December 31, $4,750; supplies on hand, $960. Wages accrued but not paid, $2,700. Depreciation of office equipment, $1,650. Rent expired during year, $10,800. 180. Journalize adjusting entries for the following items: (a)

(b) (c)

(d) (e)

The beginning balance of the supplies account was $245. During the month, the business bought additional supplies in the amount of $735. At the end of the month a physical inventory showed $343 of unused supplies. The business has a 12% note payable in the amount of $17,000 due in 6 months. The interest expense of $170 for the month has not been recorded. The business has two employees. The manager is paid on the fifteenth day of every month for work performed during the first half of the month and on the first day of the following month for the work performed during the second half of the month. His monthly salary is $5,500. The other employee is paid $650 for each 5-day work week (Monday–Friday). The last day of the month fell on Thursday. The unearned fees account shows a balance of $46,000. According to the manager 60% of that amount has been earned. At the end of the month $5,700 of services had been performed but not yet billed.

181. Based upon the differences between the unadjusted and adjusted trial balances, reconstruct and journalize the six Powered by Cognero

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Chapter 03: The Adjusting Process entries to adjust the accounts at December 31. (Hint: One of the accounts was affected by two different adjusting entries.) Unadjusted Trial Balance

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation Wages Payable Unearned Fees Angel Adams, Capital Fees Earned Wages Expense Supplies Expense Insurance Expense Depreciation Expense

Debit Balances 5,000 32,000 3,600 4,000 11,000

Credit Balances

Adjusted Trial Balance Debit Balances 5,000 32,600 100 1,400 11,000

1,700 2,000 3,500 22,000 75,000

8,900 22,000 69,000 44,300

99,900

Credit Balances

46,300 3,500 2,600 1,700 99,900

104,200

104,200

182. Bloom's Nursery and Landscape Services pays biweekly salaries of $40,000 every other Friday for a 10-day work period ending on that day. The last payday of December is Friday, December 27. Assuming the next pay period begins on Monday, December 30, journalize the adjusting entry necessary at the end of the fiscal period (December 31). 183. A business pays biweekly salaries of $20,000 every other Friday for a 10-day work period ending on that day. The last payday of December is Friday, December 27. Assume the next pay period begins on Monday, December 30 and the proper adjusting entry is journalized at the end of the fiscal period (December 31). Journalize the entry for the payment of the payroll on Friday, January 10. 184. At January 31, the end of the first month of the year, the usual adjusting entry transferring expired insurance to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31? Also indicate whether the items in error will be overstated or understated. 185. At the end of April, the first month of the company's year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for April and (b) the balance sheet as of April 30. Also indicate whether the items in error will be overstated or understated. 186. Salaries of $6,400 are paid for a 5-day work week on Friday. Journalize the adjusting entry that is required if the month ends on Thursday. 187. Accrued salaries of $600 owed to employees for December 29, 30, and 31 are not taken into consideration in preparing the financial statements for the year ended December 31. Indicate which items will be erroneously stated, because of the error, on (a) the income statement for the year and (b) the balance sheet as of December 31. Also indicate Powered by Cognero

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Chapter 03: The Adjusting Process whether the items in error will be overstated or understated. 188. For the year ended December 31, Beard Clinical Supplies mistakenly omitted adjusting entries for (1) $9,800 of unearned revenue that was earned, (2) earned revenue that was not billed of $10,200, and (3) accrued wages of $7,000. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income. 189. On January 1, Adler Designs had a debit balance of $1,450 in the office supplies account. During the month, Adler Designs purchased $115 and $160 of office supplies and journalized the purchases to the asset account. On January 31, an inspection of the office supplies cabinet shows that only $350 of office supplies remains. Journalize the January 31 adjusting entry for office supplies. 190. For the year ended June 30, Island Clinical Services mistakenly omitted adjusting entries for (1) $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. What is the combined effect of these errors on (a) revenues, (b) expenses, and (c) net income for the year ended June 30? 191. On December 31, a business estimates depreciation on equipment used during the first year of operations to be $2,900. (a) Journalize the adjusting entry required on December 31. (b) If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of December 31? 192. At the end of the fiscal year, the following adjusting entries were omitted: (a)

No adjusting entry was made to transfer the $1,750 of prepaid insurance from the asset account to the expense account. (b) No adjusting entry was made for accrued fees of $525 for services provided to customers. Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered individually, by inserting the dollar amount in the appropriate spaces. Insert 0 if the error does not affect the item.

(1) Assets at Dec. 31 would be

Error (a) Error (b) Overstated Understated Overstated Understated $______ $______ $______ $______

(2) Liabilities at Dec. 31 would be

$______

$______

$______

$______

(3) Net income for the year would be $______

$______

$______

$______

(4) Owner's equity at Dec. 31 would be

$______

$______

$______

$______

193. Jordon James started JJJ Consulting on January 1. The following are the account balances at the end of the first month of business before adjusting entries were made: Accounts Payable Accounts Receivable Cash Consulting Revenue Equipment Jordon James, Capital Jordon James, Drawing Powered by Cognero

$

300 750 6,300 4,925 7,000 15,000 1,375 Page 26

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Chapter 03: The Adjusting Process Prepaid Rent Supplies

4,000 800

Adjustment data: Supplies on hand at the end of the month, $200 Unbilled consulting revenue, $700 Rent expense for the month, $1,000 Depreciation on equipment, $90 (a) Journalize the required adjusting entries, adding accounts as needed. (b) Prepare an adjusted trial balance for JJJ Consulting as of January 31. 194. Complete the missing items in this Summary of Adjustments chart: Prepaid Expenses Financial Statement Impact Examples Adjusting Entry If Adjusting Entry Is Omitted Supplies, Dr. Expense Income Statement: (a) Cr. Asset Revenues: No effect Expenses: Understated Net income: (b) Balance Sheet: Assets: (c) Liabilities: (d) Owner's equity: Overstated Unearned Revenues Financial Statement Impact If Examples Adjusting Entry Adjusting Entry Is Omitted Unearned rent, (f) Income Statement: (e) Revenues: (g) Expenses: No effect Net income: (h) Balance Sheet: Assets: (i) Liabilities: Overstated Owner's equity: (j) Accrued Revenues Financial Statement Impact If Examples Adjusting Entry Adjusting Entry Is Omitted Interest income Dr. Asset Income Statement: due on a note, Cr. Revenue Revenues: (l) (k) Expenses: (m) Net income: Understated Balance Sheet: Assets: (n) Liabilities: (o) Owner's equity: Understated Accrued Expenses Financial Statement Impact If Adjusting Entry Examples Adjusting Entry Is Omitted Interest due on a (q) Income Statement: Powered by Cognero

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Chapter 03: The Adjusting Process note payable, (p)

Revenues: No effect Expenses: (r) Net income: (s) Balance Sheet: Assets: (t) Liabilities: Understated Owner's equity: (u)

195. For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. (a) The adjustment for unearned fees of $3,260 was journalized as a debit to Accounts Payable for $3,260 and a credit to Fees Earned of $3,260. (b) The adjustment for supplies expense of $425 was journalized as a debit to Supplies Expense for $542 and a credit to Supplies for $425. 196. Using the following adjusted account balances for Garry’s Tree Service, prepare a trial balance as of December 31. Cash Supplies Accounts Payable Garry Motz, Capital Wage Expense Machinery Wages Payable Service Revenue Rent Expense Unearned Revenue Accumulated Depreciation—Machinery Prepaid Rent Garry Motz, Drawing

$25,000 1,000 7,000 32,910 2,000 18,350 3,600 21,000 11,500 1,500 7,340 12,200 3,300

197. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The entry for $975 of supplies used during the period was journalized as a debit to Supplies Expense for $795 and credit to Supplies for $975. 198. Indicate whether the following error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much. The adjustment for accrued fees of $1,170 was journalized as a debit to Accounts Receivable for $1,170 and a credit to Fees Earned for $1,107. 199. What is the purpose of an adjusted trial balance? What type(s) of errors does it detect? What type(s) of errors does it not detect? 200. Two abbreviated income statements for Midnight Enterprises follow: Midnight Enterprises Powered by Cognero

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Chapter 03: The Adjusting Process Income Statements For the Years Ended December 31 Year 2 $674,350 (472,045) $202,305

Fees earned Expenses Net income

Year 1 $520,600 (338,390) $182,210

(a) Prepare a vertical analysis of Midnight Enterprises’ income statements. (b) Does the vertical analysis indicate favorable or unfavorable changes? 201. Two income statements for Danielle’s Design Services follow: Danielle’s Design Services Income Statements For the Years Ended December 31

Fees earned Expenses: Wages expense Rent expense Supplies expense Miscellaneous expense Total expenses Net income

Year 2 $765,340

Year 1 $696,520

$(254,000) (120,000) (76,500) (11,680) $(462,180) $303,160

$(214,600) (108,000) (98,715) (16,420) $(437,735) $258,785

(a) Prepare a vertical analysis of Danielle’s Design Services' income statements. (b) What types of changes are indicated: favorable or unfavorable? (c) What other information would enhance the analysis?

Indicate the answer choice that best completes the statement or answers the question. 202. If the effect of the debit portion of an adjusting entry is to increase the balance of an asset account, which of the following describes the effect of the credit portion of the entry? a. increases the balance of a revenue account b. decreases the balance of a liability account c. increases the balance of an expense account d. decreases the balance of a revenue account 203. If the effect of the credit portion of an adjusting entry is to increase the balance of a revenue account, which of the following describes the effect of the debit portion of the entry? a. increases the balance of a contra revenue account b. decreases the balance of an asset account c. increases the balance of an owner's equity account d. decreases the balance of a liability account 204. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the Powered by Cognero

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Chapter 03: The Adjusting Process following describes the effect of the debit portion of the entry? a. increases the balance of a contra expense account b. increases the balance of an owner's equity account c. decreases the balance of an asset account d. decreases the balance of a liability account 205. What is the correct debit and credit to journalize the adjusting entry for $800 of fees earned but not yet billed or paid? a. debit Accounts Receivable and credit Fees Earned for $800 b. debit Fees Earned and credit Accounts Receivable for $800 c. debit Unearned Income and credit Fees Earned for $800 d. debit Fees Earned and credit Unearned Income for $800 206. Data for an adjusting entry described as "accrued revenue, $3,100" require a a. debit to Unearned Income and a credit to Accounts Receivable b. debit to Fees Earned and a credit to Accounts Receivable c. debit to Accounts Receivable and a credit to Fees Earned d. debit to Fees Earned and a credit to Revenue 207. Data for an adjusting entry described as "accrued taxes, $950" require a a. debit to Taxes Expense and a credit to Unpaid Taxes Expense b. debit to Owner's Capital and a credit to Taxes Expense c. debit to Taxes Payable and a credit to Taxes Expense d. debit to Taxes Expense and a credit to Taxes Payable 208. The following adjusting journal entry is missing an explanation. Select the best explanation for the entry. Taxes Expense 3,850 Taxes Payable 3,850 ????????????????. a. Record payment of taxes. b. Record taxes expense incurred and to be paid in next period. c. Record taxes paid in advance. d. Record tax bill received from government. 209. At the end of December, a business has accrued $1,450 of interest on a loan, on which it will not make another payment until the next year. The adjusting entry necessary would be journalized as a a. debit to Interest Payable and a credit to Interest Expense of $1,450 b. debit to Prepaid Interest and a credit to Interest Expense of $1,450 c. debit to Interest Expense and a credit to Interest Payable of $1,450 d. debit to Interest Expense and a credit to Prepaid Interest of $1,450 210. The following adjusting journal entry is missing an explanation. Select the best explanation for the entry. Interest Expense 2,200 Interest Payable 2,200 ????????????????. Powered by Cognero

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Chapter 03: The Adjusting Process a. Record accrual of interest on loan. b. Record payment of interest on loan. c. Record interest due on account. d. Record interest expense paid. 211. At the end of the fiscal year, the usual adjusting entry to recognize accrued revenues was omitted. Which of the following statements is true? a. Total assets will be understated at the end of the current year. b. The balance sheet and income statement will be misstated but the statement of owner's equity will be correct for the current year. c. Net income will be overstated for the current year. d. Total liabilities will be understated. 212. At the end of the fiscal year, the usual adjusting entry to accrue wages due on the last day of the fiscal period was omitted. Which of the following statements is true? a. Total assets will be understated at the end of the current year. b. The balance sheet and income statement will be misstated but the statement of owner's equity will be correct for the current year. c. Net income will be overstated for the current year. d. Total assets and total liabilities will be understated. 213. The estimated amount of depreciation on office equipment for the current year is $3,500. The correct adjusting entry to journalize this depreciation is a. debit Depreciation Expense for $3,500; credit Office Equipment for $3,500 b. debit Accumulated Depreciation—Office Equipment for $3,500; credit Office Equipment for $3,500 c. debit Depreciation Expense for $3,500; credit Accumulated Depreciation—Office Equipment for $3,500 d. debit Office Equipment for $3,500; credit Depreciation Expense for $3,500 214. If the equipment account has a balance of $80,400 and its accumulated depreciation account has a balance of $22,500, the book value of the equipment is a. $102,900 b. $80,400 c. $57,900 d. $22,500 215. The balance of the building account is $4,500,000, and the balance in the accumulated depreciation—building account is $2,400,000. What is the book value of the building? a. $2,400,000 b. $2,100,000 c. $4,500,000 d. $6,900,000 216. A vertical analysis of two income statements for Danielle’s Design Services follows: Danielle’s Design Services Powered by Cognero

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Chapter 03: The Adjusting Process Income Statements For the Years Ended December 31 Year 2 Amount Percent $765,340 100.0%

Fees earned Operating expenses: Wages expense $(254,000) Rent expense (120,000) Supplies expense (76,500) Miscellaneous expense (11,680) Total operating expenses $(462,180) Net income $303,160 *Differences due to rounding

Year 1 Amount Percent $696,520 100.0%

(33.2)% $(214,600) (15.7)% (108,000) (10.0)% (98,715)

(30.8)% (15.5)% (14.2)%

(1.5)%

(16,420)

(2.4)%

(60.4)% $(437,735) 39.6% $258,785

(62.8)%* 37.1%*

Which of the following analyses reflects the data given? a. Wages expense and rent expense show a favorable trend, while supplies expense and miscellaneous expense show an unfavorable trend. b. Wages expense and rent expense show an unfavorable trend, while supplies expense and miscellaneous expense show a favorable trend. c. Wages expense and supplies expense show a favorable trend, while rent expense and miscellaneous expense show an unfavorable trend. d. Wages expense, miscellaneous expense, rent expense, and supplies expense all show an unfavorable trend.

217. The unadjusted and adjusted trial balances for Ellen’s Coiffures follow. Assume that all balances in the Unadjusted Trial Balance column and the amounts of the adjustments are correct. Further assume that $400 of insurance expired during the year. Locate the errors in the accountant’s adjusting entries, assuming that none of the accounts was affected by more than one adjusting entry.

Unadjusted Trial Balance

Adjusted Trial Balance

Debit Credit Debit Credit Balances Balances Balances Balances Cash 6,000 6,000 Accounts Receivable 2,800 2,800 Salon Supplies 1,400 2,000 Prepaid Insurance 800 400 Salon Equipment 42,000 38,000 Accumulated Depreciation 18,000 18,000 Accounts Payable 1,250 2,500 Wages Payable 600 Ellen Roe, Capital 20,185 20,185 Powered by Cognero

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Chapter 03: The Adjusting Process Salon Revenue Wages Expense Rent Expense Utilities Expense Depreciation Expense Salon Supplies Expense Insurance Expense Miscellaneous Expense

48,000 28,500 2,200 485

87,435

87,435

48,000 28,500 2,200 485 4,000 600 400 3,250 88,635

89,825

218. Softex and Sanibel Solutions manufacture cotton products. Their abbreviated income statements for a recent year follow: Revenues Cost of services (expense) Selling, general, and administrative expenses Depreciation and other expenses Net income

Softex Sanibel Solutions $2,456,000 $ 1,985,000 (1,375,360) (1,046,000) (785,920) (592,500) (103,500) $ 191,220

(119,100) $ 227,400

(a) Complete vertical analyses for the two companies. Round to one decimal place. (b) Based on your analyses, how does Softex compare to Sanibel Solutions?

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Chapter 03: The Adjusting Process Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. True 8. True 9. False 10. False 11. True 12. True 13. True 14. False 15. False 16. True 17. True 18. True 19. False 20. True 21. True 22. True 23. False 24. True 25. True Powered by Cognero

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Chapter 03: The Adjusting Process 26. False 27. False 28. False 29. False 30. True 31. True 32. False 33. True 34. False 35. True 36. True 37. False 38. False 39. False 40. True 41. False 42. True 43. False 44. False 45. False 46. False 47. True 48. False 49. True 50. b 51. d Powered by Cognero

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Chapter 03: The Adjusting Process 52. b 53. a 54. a 55. b 56. d 57. c 58. b 59. a 60. d 61. b 62. a 63. c 64. a 65. c 66. b 67. c 68. d 69. a 70. d 71. b 72. d 73. c 74. b 75. a 76. a Powered by Cognero

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Chapter 03: The Adjusting Process 77. d 78. b 79. d 80. a 81. d 82. d 83. a 84. c 85. c 86. b 87. b 88. d 89. d 90. a 91. a 92. d 93. b 94. c 95. a 96. c 97. b 98. a 99. a 100. a 101. a 102. b Powered by Cognero

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Chapter 03: The Adjusting Process 103. b 104. a 105. b 106. c 107. b 108. a 109. d 110. d 111. b 112. d 113. c 114. b 115. d 116. c 117. a 118. a 119. b 120. b 121. d 122. a 123. d 124. c 125. c 126. a 127. d Powered by Cognero

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Chapter 03: The Adjusting Process 128. c 129. b 130. d 131. c 132. c 133. c 134. a 135. c 136. d 137. c 138. a 139. d 140. c 141. d 142. b 143. d 144. The accrual basis of accounting reports revenues and expenses in the period in which a service is performed or a product is delivered and the associated expense incurred, regardless of when cash is received. The cash basis of accounting reports revenues and expenses when cash is received or paid. 145. 1. No 2. Yes 3. Yes 4. Yes 5. Yes 6. No 146. (a) (2) unearned revenue (b) (4) accrued revenue (c) (1) prepaid expense (d) (3) accrued expense 147. 1. Prepaid (or deferred) expenses; example: prepaid insurance 2. Unearned (or deferred) revenues; example: an attorney’s retainer fee 3. Accrued revenues; example: unpaid interest earned on a note receivable Powered by Cognero

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Chapter 03: The Adjusting Process 4. Accrued expenses; example: unpaid wages owed to employees 148. 1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also, the amount of supplies on hand on a day-to-day basis is normally not needed. 2. Some revenues and expenses may be unrecorded at the end of the accounting period. For example, a company may have provided services to customers that it has not billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period even though the employees have earned their wages in the current period. 3. Some revenues and expenses are incurred as time passes rather than as separate transactions. For example, rent received in advance (unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense with the passage of time.

149. Accrued revenues are revenues that have been earned but not recorded in the accounts. Unearned revenues are payments that have been received for services or goods to be provided in the future. Examples will vary but may include the following: Accrued revenue—services performed for clients that have not yet been billed Unearned revenue—rental payments received by a landlord in advance 150. Accrued expenses are expenses that have been incurred but not recorded in the accounts. Prepaid expenses are expenses for which payment has been made and for which economic benefits will be enjoyed in future accounting periods. Examples will vary but may include the following: Accrued expense—unpaid wages due to employees Prepaid expense—insurance policy purchased to cover future periods 151. (a) (1) Salary Expense ($22,000 ÷ 5 × 2) Salaries Payable (2) Salary Expense ($22,000 ÷ 5 × 3) Salaries Payable (b) (1) Insurance Expense Prepaid Insurance (2) Insurance Expense ($18,000 – $2,700) Prepaid Insurance (c) (1) Taxes Expense ($54,000 ÷ 12) Prepaid License Taxes Taxes Expense Property Taxes Payable

8,800 8,800 13,200 13,200 5,300 5,300 15,300 15,300 4,500 4,500 4,800 4,800

(2) $9,300 ($4,500 + $4,800) Powered by Cognero

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Chapter 03: The Adjusting Process (d) Depreciation Expense Accumulated Depreciation— Equipment 152. Transactions a. b. c. d. e. f. g. h. i. j.

Account(s) Debited 21 1 19 10 5 20 17 5 12 7

32,000 32,000

Account(s) Credited 5 5 5 19 20 9 5, 1 16 13 3

153. (a) Accounts Receivable Fees Earned Accrued fees.

300 300

Insurance Expense Prepaid Insurance Expired insurance.

400

Supplies Expense Supplies Supplies used ($3,800 – $3,000).

800

400

Depreciation Expense Accumulated Depreciation Depreciation expense.

800

5,500 5,500

Wages Expense Wages Payable Accrued wages.

900

Unearned Fees Fees Earned Fees earned ($6,700 – $6,500).

200

900

200

(b) $25,500 – $14,900 – $400 – $800 – $5,500 = $3,900 154. $10,000 ÷ 5 = $2,000 per day; $2,000 × 4 days = $8,000 Date Dec. 31

Description Wages Expense

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Post. Ref.

Debit 8,000

Credit Page 41

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Chapter 03: The Adjusting Process Wages Payable

8,000

155. $2,400 ÷ 12 = $200 per month; $200 × 7 months = $1,400 Date Dec. 31

Description Post. Ref. Insurance Expense Prepaid Insurance

Debit 1,400

Credit 1,400

156. Date Dec. 31

Description Depreciation Expense Accum. Depr.—Office Building

Post. Debit Credit Ref. 2,800 2,800

157. $1,800 ÷ 12 = $150 per month; $150 × 3 months = $450 Post. Ref.

Date

Description

Dec. 31

Insurance Expense Prepaid Insurance

Debit

Credit 450 450

158. $1,750 + $3,500 − $350 = $4,900 Supplies Expense Supplies

4,900 4,900

159. $22,800 ÷ 24 = $950 per month Jan. 31

Insurance Expense

950

Prepaid Insurance

950

160. Dec. 31 Depreciation Expense—Office Equipment Accum. Depr.—Office Equipment Dec. 31 Depreciation Expense—Store Equipment Accum. Depr.—Store Equipment

1,400 1,400 2,650 2,650

161. (a) $300 ($3,600 ÷ 12) (b) $3,300 ($3,600 – $300) (c) $750 ($18,000 ÷ 24) (d) $17,250 ($18,000 – $750) 162. (a) $425 ($5,100 ÷ 12) (b) $3,400 ($425 × 8) (c) Property Tax Expense Powered by Cognero

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Chapter 03: The Adjusting Process Property Tax Payable 425 Record property tax accrual for September. 163. Jan. 1 Prepaid Rent 10,140 Cash Prepaid annual rent. 164. Dec. 1

10,140

Cash

18,000 Unearned Fees

Dec. 31

18,000

Unearned Fees Fees Earned *$18,000 ÷ 5 months

3,600 3,600*

165. $1,385 − $435 = $950 Dec. 31 Office Supplies Expense Office Supplies

950 950

166. (a) Depreciation Expense Accumulated Depr.—Equipment (b) Depreciation Expense ($6,300 ÷ 12) Accumulated Depr.—Equipment 167. Dec. 31

Interest Expense

6,300 6,300 525 525

775

Interest Payable Jan.

1 Interest Payable

775 775

Cash 168. Jan. Rent Expense ($30,000 ÷ 31 12) Prepaid Rent

169. Dec. Insurance Expense 31 Prepaid Insurance

775

2,500 2,500

4,800* 4,800

*$6,600 + $2,300 − $4,100 170. Unearned Fees ($10,250 – $3,125) 7,125 Powered by Cognero

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Chapter 03: The Adjusting Process Fees Earned 171. Accounts Receivable Fees Earned

7,125

3,700 3,700

172. Salaries Expense [($18,000 ÷ 5) × 3] Salaries Payable 173. Depreciation Expense Accumulated Depreciation 174. (a) Nov. 1

10,800 10,800

5,300 5,300

Cash Unearned Service Fees

(b) Nov. 30 Unearned Service Fees ($85 × 15) Service Fees (c) Original prepaid fees November service fees earned Balance of unearned service fees

4,250 4,250 1,275 1,275

$4,250 ÷ $85 per hour = 1,275 ÷ $85 per hour = $2,975

175. (a) Jan. 31 Wages Expense ($645 × 6 days) Wages Payable

3,870 3,870

(b) Feb. 4 Wages Expense (4 × $645) 2,580 Wages Payable 3,870 Cash Payment of February 4 payroll. (c) Jan. 31

Depreciation Expense ($39,600 ÷ 12) Accumulated Depreciation January depreciation.

3,300

Office Supplies Expense ($3,755 − $635) Office Supplies Office supplies used.

3,120

(d) Jan. 31

176. (a) Dec. 29

Jan. 15 Powered by Cognero

50 hours 15 hours 35 hours

6,450

3,300

3,120

Professional Services Expense Accounts Payable

2,425

Accounts Payable

2,425

2,425

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Chapter 03: The Adjusting Process Cash (b)

2,425

The first journal entry is required for the expense of the independent contractor in the period in which the services were received. This journal entry created an expense on December’s income statement and a liability on December’s balance sheet. The second entry was to pay the contractor when the payment was due. This removed the liability by resolving it with a cash payment. This journal entry did not affect January’s income statement.

177. (a) Nov. 15 Prepaid Advertising Cash Dec. 31 Advertising Expense Prepaid Advertising (b)

2,700 2,700 2,700 2,700

Under the matching concept, the expense should be recorded in the month of December when the advertising campaign ran, even though the cash was paid in November. Thus, the November journal entry creates an asset, prepaid advertising. The December 31 entry recognizes the advertising expense in December and eliminates the asset.

178. Jan. 2

Cash

72 Unearned Subscriptions

Jan. 15 (or 31)

Unearned Subscriptions Subscriptions Revenues

72 6 6

The second entry can be made either on January 15 when the issue is mailed or on January 31 with the other adjusting entries. 179. Date Dec. 31

31

31

31

31

Description Accounts Receivable Revenues

Post. Debit Credit Ref. 6,300 6,300

Supplies Expense ($4,750 – $960) Supplies

3,790

Wages Expense Wages Payable

2,700

Depreciation Expense Accumulated Depreciation

1,650

Rent Expense

10,800

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3,790

2,700

1,650

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Chapter 03: The Adjusting Process Prepaid Rent 180. (a)

(b)

(c)

(d)

(e)

10,800

Supplies Expense ($245 + $735 – $343) Supplies

637

Interest Expense [($17,000 × 12%) ÷ 12] Interest Payable

170

637

170

Wages and Salary Expense Wages and Salary Payable {($5,500 ÷ 2) + [($650 ÷ 5) × 4]}

3,270

Unearned Fees Fees Earned ($46,000 × 60%)

27,600

Accounts Receivable Fees Earned

5,700

3,270

27,600

5,700

181. Dec. 31 Accounts Receivable Fees Earned

600 600

31 Supplies Expense Supplies

3,500

31 Insurance Expense Prepaid Insurance

2,600

3,500

2,600

31 Depreciation Expense 1,700 Accumulated Depreciation 1,700 31 Unearned Fees Fees Earned

5,400

31 Wages Expense Wages Payable

2,000

5,400

2,000

182. $40,000 ÷ 10 days = $4,000 per day $4,000 per day × 2 days = $8,000 Date

Description

Dec. 31

Salary Expense Salary Payable

Post. Ref.

Debit

Credit

8,000 8,000

183. Accrued Salaries for December = $20,000 ÷ 10 days = $2,000 per day; $2,000 per day × 2 days = $4,000 Powered by Cognero

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Chapter 03: The Adjusting Process Salary Expense through January 10 = $20,000 – $4,000 = $16,000 Post. Date Description Debit Credit Ref. Jan. 10 Salary Expense 16,000 Salary Payable 4,000 Cash 20,000 184. (a) Insurance expense (or expenses) will be understated. Net income will be overstated. (b) Prepaid insurance (or assets) will be overstated. Shareholders' equity will be overstated. 185. (a) Rent revenue (or revenues) will be understated. Net income will be understated. (b) Owner's equity at the end of the period will be understated. Unearned rent (or liabilities) will be overstated.

186. Salaries Expense [($6,400 ÷ 5) × 4] Salaries Payable

5,120 5,120

187. (a) Salary expense (or expenses) will be understated. Net income will be overstated. (b) Salaries payable (or liabilities) will be understated. Owner's equity will be overstated.

188. (a) Revenues were understated by $20,000 ($9,800 + $10,200). (b) Expenses were understated by $7,000. (c) Net income was understated by $13,000 ($20,000 − $7,000). 189. Jan. 31

Office Supplies Expense Office Supplies

1,375* 1,375

*($1,450 + $115 + $160) – $350

190. (a) Revenues were understated by $4,200. (b) Expenses were understated by $6,500 ($1,500 +$5,000). (c) Net income was overstated by $2,300 ($6,500 − $4,200). 191. (a) Depreciation Expense Accumulated Depreciation—Equipment

2,900 2,900

(b) (1) Depreciation expense (or expenses) would be understated. Powered by Cognero

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Chapter 03: The Adjusting Process Net income would be overstated. (2) Accumulated depreciation would be understated, and total assets would be overstated. Owner's equity would be overstated. 192.

(1) Assets at Dec. 31 would be

Error (a) Error (b) Overstated UnderstatedOverstated Understated $1,750 0 0 $525

(2) Liabilities at Dec. 31 would be

0

0

0

0

(3) Net income for the year would be

$1,750

0

0

$525

(4) Owner's equity at Dec. 31 would be

$1,750

0

0

$525

193. (a) Supplies Expense Supplies

600 600

Accounts Receivable Consulting Revenue

700 700

Rent Expense Prepaid Rent

1,000 1,000

Depreciation Expense Accum. Depr.— Equipment

90 90

(b) JJJ Consulting Adjusted Trial Balance January 31 Accounts Cash Accounts Receivable Supplies Prepaid Rent Equipment Accumulated Depreciation—Equipment Accounts Payable Jordon James, Capital Jordon James, Drawing Consulting Revenue Depreciation Expense Powered by Cognero

Debit Balances

Credit Balances 6,300 1,450 200 3,000 7,000 90 300 15,000 1,375 5,625 90 Page 48

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Chapter 03: The Adjusting Process Rent Expense Supplies Expense

194. (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u)

1,000 600 21,015

21,015

Prepaid rent or Prepaid insurance Overstated Overstated No effect Fee or magazine subscription received in advance Dr. Liability, Cr. Revenue Understated Understated No effect Understated Services performed but not yet billed Understated No effect Understated No effect Unpaid wages Dr. Expense, Cr. Liability Understated Overstated No effect Overstated

195. (a) The trial balance totals will still be equal, but the balances of Unearned Fees and Accounts Payable will be incorrect as the debit should have been made to Unearned Fees instead of Accounts Payable. (b) The debit total exceeds the credit total by $117. 196. Garry’s Tree Service Adjusted Trial Balance December 31

Cash Supplies Prepaid Rent Machinery Accumulated Depreciation—Machinery Accounts Payable Wages Payable Unearned Revenue Garry Motz, Capital Powered by Cognero

Debit Credit Balances Balances $25,000 1,000 12,200 18,350 $7,340 7,000 3,600 1,500 32,910 Page 49

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Chapter 03: The Adjusting Process Garry Motz, Drawing Service Revenue Wage Expense Rent Expense

3,300 21,000 2,000 11,500 $73,350

$73,350

197. The totals will be unequal with the credit total higher by $180 ($975 − $795). 198. The totals will be unequal with a debit total higher by $63 ($1,170 − $1,107). 199. The purpose of an adjusted trial balance is to make sure that debits equal credits before financial statements are prepared. If a debit is incorrectly posted as a credit or vice versa, the error will be detected. Likewise, if the debit(s) and credit(s) for a posted transaction do not equal, that error will be detected. Errors that will not be detected include omitting a required adjusting entry or posting a debit or credit for the correct amount to the wrong account. 200. (a) Midnight Enterprises Income Statements For the Years Ended December 31

Fees earned Expenses Net income

Year 2 Amount $674,350 (472,045) $202,305

Year 1 Percent Amount Percent 100% $520,600 100% (70)% (338,390) (65)% 30% $182,210 35%

(b) The vertical analysis indicates unfavorable changes from Year 1 to Year 2 as the expenses of the business as a percent of fees earned have increased and net income has decreased. 201. (a) Danielle’s Design Services Income Statements For the Years Ended December 31 Year 2

Year 1

Amount Percent Amount Fees earned $765,340 100.0% $696,520 Expenses: Wages expense $(254,000) (33.2)% $(214,600) Rent expense (120,000) (15.7)% (108,000) Supplies expense (76,500) (10.0)% (98,715) Miscellaneous expense (11,680) (1.5)% (16,420) Total expenses $(462,180) (60.4)% $(437,735) Net income $303,160 39.6% $258,785 *Differences due to rounding Powered by Cognero

Percent 100.0% (30.8)% (15.5)% (14.2)% (2.4)% (62.8)%* 37.2%*

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Chapter 03: The Adjusting Process (b) The vertical analysis shows both favorable and unfavorable changes. The increase in wages expense of 2.4% (33.2% − 30.8%) is unfavorable. The decreases in supplies expense of 4.2% (14.2% − 10.0%) and miscellaneous expense of 0.9% (2.4% − 1.5%) are both favorable. Rent as a percentage of fees earned stayed relatively constant. The net result is favorable—an increase in net income as a percentage of fees earned from 37.2% to 39.6%. (c) The analysis could be enhanced by comparisons with industry averages.

202. a 203. d 204. c 205. a 206. c 207. d 208. b 209. c 210. a 211. a 212. c 213. c 214. c 215. b 216. b 217. Error 1: Salon Supplies should have been credited for $600. Error 2: Salon Equipment should not have been adjusted; the adjustment should have been a $4,000 credit to Accumulated Depreciation—Salon Equipment. Error 3: No change should have been made to Accounts Payable; its adjusted trial balance column should be $1,250. Error 4: Wages Expense should have been debited for $600 to complete the accrual adjustment for accrued wages. The changes result in an adjusted trial balance debit and credit of $92,035. 218. (a)

Revenues Cost of services (expense) Selling, general, and Powered by Cognero

Softex Amount Percent $ 2,456,000 100.0% (1,375,360) (56.0)%

Sanibel Solutions Amount Percent $ 1,985,000 100.0% (1,046,000) (52.7)% Page 51

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Chapter 03: The Adjusting Process administrative expenses Depreciation and other expenses Net income

(785,920)

(32.0)%

(592,500)

(29.8)%

(103,500) $ 191,220

(4.2)% 7.8%

(119,100) $ 227,400

(6.0)% 11.5%

(b) Softex has greater revenues than Sanibel. However, by all comparative measures, Sanibel is better at controlling its expenses, and as a result, has a greater actual and percentage net income.

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Chapter 04: The Accounting Cycle

Indicate whether the statement is true or false. 1. Cross-referencing by letter the debit and credit of each adjustment on the end-of-period spreadsheet is useful in reviewing the effect of the adjustments on the unadjusted account balances. a. True b. False 2. When accounts do not appear in the unadjusted trial balance of the end-of-period spreadsheet but are needed to enter adjustments, they are simply added to the Account Title column. a. True b. False 3. Once the adjusted trial balance is in balance, the accounts flow into the financial statements. a. True b. False 4. The income statement is prepared from the Adjusted Trial Balance or Income Statement columns of the end-of-period spreadsheet. a. True b. False 5. After analyzing transactions, the next step would be to post the transactions in the ledger. a. True b. False 6. There is really no benefit in preparing financial statements in any particular order. a. True b. False 7. On the income statement, miscellaneous expense is usually presented as the last expense without regard to the dollar amount. a. True b. False 8. The usual presentation of the statement of owner’s equity is (1) Beginning balance, (2) Net income or loss, (3) Owner withdrawals, (4) Owner investments, (5) Ending balance. a. True b. False 9. Cash and other assets that may reasonably be expected to be realized in cash, sold, or consumed through the normal operations of a business, usually longer than 1 year, are called current assets. a. True b. False 10. The difference between a classified balance sheet and one that is not classified is that the classified one has subheadings. a. True Powered by Cognero

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Chapter 04: The Accounting Cycle b. False 11. Prepaid Insurance is an example of a current asset. a. True b. False 12. Land is an example of a plant asset. a. True b. False 13. Liabilities that will be due within 1 year or less and that are to be paid out of current assets are called current liabilities. a. True b. False 14. The amount of net income for a period appears on both the income statement and the balance sheet for that period. a. True b. False 15. Accrued taxes payable are generally reported on the balance sheet as a current liability. a. True b. False 16. Office Equipment is an example of a current asset account. a. True b. False 17. Owner’s capital and withdrawals are reported in the “Owner’s Equity” section of the balance sheet. a. True b. False 18. Prepaid expenses that benefit a relatively short period of time are listed on the balance sheet as current assets. a. True b. False 19. Unearned revenues that will be earned in a relatively short period of time are listed on the balance sheet as current assets. a. True b. False 20. Accrued expenses are ordinarily listed on the balance sheet as current assets. a. True b. False 21. Accrued revenues are ordinarily listed on the balance sheet as current liabilities. a. True Powered by Cognero

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Chapter 04: The Accounting Cycle b. False 22. Examples of temporary accounts are Supplies and Prepaid Expenses, which are in the ledger for just a short time before they expire. a. True b. False 23. Accumulated Depreciation is a permanent account. a. True b. False 24. The owner’s drawing account is a temporary account. a. True b. False 25. Balance sheet accounts are referred to as real or permanent accounts. a. True b. False 26. Journalizing and posting the adjusting and closing entries updates the ledger for the new accounting period. a. True b. False 27. During closing, revenue accounts are closed by debiting the revenue account and crediting the owner’s capital account. a. True b. False 28. The accumulated depreciation account is closed to the owner’s capital account. a. True b. False 29. The owner’s drawing account is closed to the owner’s capital account. a. True b. False 30. The trial balance prepared after all the closing entries have been posted is called an adjusted trial balance. a. True b. False 31. Entries required to close the balances of the temporary accounts at the end of the period are called final entries. a. True b. False 32. Journalizing and posting closing entries must be completed before financial statements can be prepared. Powered by Cognero

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Chapter 04: The Accounting Cycle a. True b. False 33. During the closing process, income statement accounts are closed and end the period with a zero balance. a. True b. False 34. Closing entries are entered directly on the end-of-period spreadsheet. a. True b. False 35. The post-closing trial balance will generally have fewer accounts than the trial balance. a. True b. False 36. A post-closing trial balance contains only asset and liability accounts. a. True b. False 37. A post-closing trial balance should be prepared before the financial statements are prepared. a. True b. False 38. Asset, liability, and owner’s equity accounts are real accounts and do not get closed at the end of the period. a. True b. False 39. The owner’s drawing account is a permanent account. a. True b. False 40. All income statement accounts will be closed at the end of the period. a. True b. False 41. Accounts reported on the balance sheet that are carried forward from year to year are known as permanent accounts. a. True b. False 42. Balance sheet accounts are not considered real accounts. a. True b. False 43. Real accounts are not permanent accounts. a. True b. False Powered by Cognero

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Chapter 04: The Accounting Cycle 44. It is not necessary to post the closing entries to the general ledger. a. True b. False 45. The closing process is sometimes referred to as closing the books. a. True b. False 46. Once an account has been closed for the period, it is ready for use in the following period. a. True b. False 47. The last step of the accounting cycle is to prepare a post-closing trial balance. a. True b. False 48. The most important output of the accounting cycle is the financial statements. a. True b. False 49. The accounting cycle begins with preparing an unadjusted trial balance. a. True b. False 50. Financial statements should be prepared before the closing entries are journalized and posted. a. True b. False 51. The unadjusted, adjusted, and post-closing trial balances are prepared during the accounting cycle of a period. a. True b. False 52. The balances of the equity accounts from the Adjusted Trial Balance columns of the end-of-period spreadsheet are extended to the Statement of Owner’s Equity columns. a. True b. False 53. The end-of-period spreadsheet is not considered a part of the formal accounting records. a. True b. False 54. The end-of-period spreadsheet is a tool that accountants can use to summarize adjusting entries and the account balances for the financial statements. a. True b. False Powered by Cognero

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Chapter 04: The Accounting Cycle 55. The trial balance may be listed on the end-of-period spreadsheet instead of being prepared separately. a. True b. False 56. The totals of the Adjusted Trial Balance columns on an end-of-period spreadsheet will always be the sum of the Trial Balance column totals and the Adjustments column totals. a. True b. False 57. An end-of-period spreadsheet heading is dated for a period of time. a. True b. False 58. On the end-of-period spreadsheet, the owner’s capital and drawing account balances are extended to the Balance Sheet columns. a. True b. False 59. After the account balances have been extended from the Adjusted Trial Balance columns on the end-of-period spreadsheet, the difference between the initial totals of the Balance Sheet Debit and Credit columns is the net income or net loss. a. True b. False 60. After the net income or net loss is entered on the end-of-period spreadsheet, the Balance Sheet Debit column total must equal the Balance Sheet Credit column total. a. True b. False 61. A net loss is shown on the end-of-period spreadsheet in both the Income Statement Credit column and the Balance Sheet Credit column. a. True b. False 62. Net income is shown on the end-of-period spreadsheet in the Income Statement Debit column and the Balance Sheet Credit column. a. True b. False 63. If the totals of the Income Statement Debit and Credit columns of an end-of-period spreadsheet are $27,000 and $29,000, respectively, after all account balances have been extended, the amount of the net loss is $2,000. a. True b. False 64. Since adjustments are entered on the end-of-period spreadsheet, it is not necessary to record them in the journal or post them to the ledger. Powered by Cognero

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Chapter 04: The Accounting Cycle a. True b. False 65. The chart of accounts, the journal, and the ledger are essential parts of the accounting system. a. True b. False 66. Working capital is the ratio of the current assets of a business to its current liabilities. a. True b. False 67. The current ratio is more useful than working capital in making comparisons across companies or with industry averages. a. True b. False 68. The statement of cash flows can be prepared by classifying the cash transactions found in the cash account in the general ledger into operating, investing, and financing activities. a. True b. False 69. The primary alternative to the accrual basis of accounting is the deferral basis of accounting. a. True b. False 70. GAAP requires the cash basis of accounting. a. True b. False 71. Accrual accounting better reports the underlying operating performance of a business because it better matches the revenues of a period with the expenses incurred in generating those revenues. a. True b. False 72. The cash basis of accounting requires that adjusting entries be made at the end of the accounting period. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 73. What is the major difference between the unadjusted trial balance and the adjusted trial balance? a. The adjusted trial balance will show the net income (loss) as an additional account. b. Unlike the adjusted trial balance, the unadjusted trial balance will continue with the end-of-period processing even if it is not in balance. c. The adjusted trial balance includes the postings of the adjustments for the period in the balance of the accounts. Powered by Cognero

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Chapter 04: The Accounting Cycle d. The adjusted trial balance will be used to record the adjustments for the period. 74. Once the adjusting entries are posted, the adjusted trial balance is prepared to a. verify that the debits and credits are in balance b. verify that the net income correctly flows into the statement of owner’s equity from the income statement c. verify that the net income (loss) is correct for the period d. verify the correct flow of accounts into the financial statements 75. Accumulated depreciation appears on the a. balance sheet in the “Current assets” section b. balance sheet in the “Property, plant, and equipment” section c. balance sheet in the “Long-term liabilities” section d. income statement as an operating expense 76. Notes receivable due in 180 days appear on the a. balance sheet in the “Current assets” section b. balance sheet in the “Long-term liabilities” section c. balance sheet in the “Current liabilities” section d. income statement as an expense 77. Unearned fees appear on the a. balance sheet in the “Current assets” section b. balance sheet as a current liability c. balance sheet in the “Owner’s Equity” section d. income statement as revenue 78. Which of these fixed asset accounts will not have a related contra asset account? a. Office Equipment b. Land c. Delivery Equipment d. Building 79. Prepaid insurance is reported on the balance sheet as a a. current asset b. fixed asset c. current liability d. long-term liability 80. The first item appearing on the statement of owner’s equity is a. net income b. the ending balance of the capital account c. owner withdrawals d. the beginning balance of the capital account

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Chapter 04: The Accounting Cycle 81. The statement of owner’s equity should be prepared a. before the income statement and after the balance sheet b. before the income statement and balance sheet c. after the income statement and balance sheet d. after the income statement and before the balance sheet 82. The income statement should be prepared a. before the statement of owner’s equity and balance sheet b. after the statement of owner’s equity and before the balance sheet c. after the statement of owner’s equity and balance sheet d. after the balance sheet and before the statement of owner’s equity 83. Use the adjusted trial balance for Stockton Company to answer the questions that follow. Stockton Company Adjusted Trial Balance December 31 Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable T. Rawlings, Capital T. Rawlings, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense

7,530 2,100 700 13,700 1,100 1,900 4,300 13,940 790 9,250 2,500 1,960 775 250 185 30,490

30,490

Determine the net income (loss) for the period. a. net income $9,250 b. net loss $790 c. net loss $5,670 d. net income $3,580 84. Use the adjusted trial balance for Stockton Company to answer the questions that follow. Stockton Company Adjusted Trial Balance Powered by Cognero

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Chapter 04: The Accounting Cycle December 31 Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable T. Rawlings, Capital T. Rawlings, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense

7,530 2,100 700 13,700 1,100 1,900 4,300 13,940 790 9,250 2,500 1,960 775 250 185 30,490

30,490

Determine the owner’s capital ending balance. a. $13,150 b. $16,730 c. $7,480 d. $22,400 85. Use the adjusted trial balance for Stockton Company to answer the questions that follow. Stockton Company Adjusted Trial Balance December 31 Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable T. Rawlings, Capital T. Rawlings, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense Powered by Cognero

7,530 2,100 700 13,700 1,100 1,900 4,300 13,940 790 9,250 2,500 1,960 775 250 185 Page 10

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Chapter 04: The Accounting Cycle 30,490

30,490

Determine the total assets. a. $25,130 b. $16,830 c. $22,930 d. $24,030 86. Use the adjusted trial balance for Stockton Company to answer the questions that follow. Stockton Company Adjusted Trial Balance December 31 Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable T. Rawlings, Capital T. Rawlings, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense

7,530 2,100 700 13,700 1,100 1,900 4,300 13,940 790 9,250 2,500 1,960 775 250 185 30,490

30,490

Determine the current assets. a. $23,030 b. $10,330 c. $21,930 d. $8,630 87. Use the adjusted trial balance for Stockton Company to answer the questions that follow. Stockton Company Adjusted Trial Balance December 31 Cash Powered by Cognero

7,530 Page 11

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Chapter 04: The Accounting Cycle Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable T. Rawlings, Capital T. Rawlings, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense

2,100 700 13,700 1,100 1,900 4,300 13,940 790 9,250 2,500 1,960 775 250 185 30,490

30,490

Determine the total liabilities for the period. a. $1,900 b. $6,200 c. $4,300 d. $20,240 88. The balance sheet should be prepared a. before the income statement and the statement of owner’s equity b. before the income statement and after the statement of owner’s equity c. after the income statement and the statement of owner’s equity d. after the income statement and before the statement of owner’s equity 89. The income statement will present a. revenues less expenses (ordered largest to smallest amount) with miscellaneous expense listed last b. revenues less expenses (ordered smallest to largest amounts) with miscellaneous expense listed last c. revenues less expenses (ordered in alphabetical order) d. revenues less expenses (order is not important) 90. The classified balance sheet will show which asset subsections? a. current assets and other equity b. current assets and property, plant, and equipment c. current liabilities and short-term assets d. other revenues and property, plant, and equipment 91. The classified balance sheet will show which liability subsections? a. current liabilities and long-term liabilities b. current liabilities and other liabilities c. other liabilities and long-term liabilities Powered by Cognero

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Chapter 04: The Accounting Cycle d. current liabilities and mid-term liabilities 92. Debts listed as current liabilities are those that a. will be paid in less than 1 year b. are due to be paid in 1 or more years c. are the most recently recorded d. are owed to the owner and will never be paid 93. In the accounting equation, owner’s equity is a. added to assets and the two are equal to liabilities b. added to liabilities and the two are equal to assets c. subtracted from liabilities and the net amount is equal to assets d. equal to the total of assets and liabilities 94. Balance sheet accounts a. represent amounts accumulated during a specific period of time b. are permanent accounts c. have zero balances after the closing entries have been posted d. are not affected by adjustments 95. Which of the following statements is true? a. The balance in the revenue accounts after closing agrees with the revenue shown on the income statement. b. The balance in the drawing account after closing agrees with the amount of withdrawals reported on the statement of owner’s equity. c. The balance of Owner’s Capital after closing agrees with the amount reported on the statement of owner’s equity and the balance sheet. d. The trial balance taken after closing can be used to prepare the statement of owner’s equity and the balance sheet. 96. Which of the following is not true about closing entries? a. There are two closing entries that update the owner’s capital account. b. The closing entries are dated the last day of the accounting period. c. All real accounts are closed at the end of the period. d. By closing nominal accounts at the end of the period to zero, it is possible to isolate next period’s information correctly. 97. What is the goal of the closing process? a. to verify that all adjustments have been made b. to move all income statement and drawing accounts to the owner’s capital account c. to move all equity accounts to the owner’s capital account d. to end the accounting period with a profit 98. Which of the following is true of closing entries? a. Owner’s Capital is not involved in the entry. b. Owner’s Capital is always debited. Powered by Cognero

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Chapter 04: The Accounting Cycle c. Owner’s Capital is always credited. d. Owner’s Capital may be debited or credited. 99. What is the first account that should be listed in the post-closing trial balance? a. Accounts Payable b. Accounts Receivable c. Cash d. Fees Earned 100. Which of the following account groups contain only temporary accounts? a. Cash, Owner’s Drawing, Wages Payable b. Prepaid Insurance, Equipment, Fees Earned c. Service Revenue, Owner’s Drawing, Owner’s Capital d. Rent Revenue, Fees Earned, Miscellaneous Expense 101. When there are two closing entries, the first one is to close revenues and expenses to _________, and the second one is to close _________ to Owner’s Capital. a. Owner’s Capital; Owner’s Drawing b. Owner’s Drawing; Owner’s Capital c. Cash; Owner’s Drawing d. none of these choices 102. Closing entries a. need not be journalized if adjusting entries are prepared b. need not be posted if the financial statements are prepared from the end-of-period spreadsheet c. are not needed if adjusting entries are prepared d. must be journalized and posted 103. Closing entries are dated in the journal as of a. the date they are actually journalized, although they are generally prepared after the end of the accounting period b. the last day of the accounting period c. the first day of the accounting period, although they are actually journalized well after the beginning of the accounting period d. the first day of the subsequent accounting period 104. Which of these accounts would be closed by posting a debit to it? a. Unearned Revenue b. Fees Earned c. Owner’s Drawing d. Miscellaneous Expense 105. Which of the following accounts should be closed at the end of the fiscal year? a. Service Revenue b. Equipment Powered by Cognero

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Chapter 04: The Accounting Cycle c. Prepaid Insurance d. Unearned Rent 106. Which of the following accounts will not be closed at the end of the fiscal year? a. Utilities Expense b. Fees Earned c. Prepaid Insurance d. Insurance Expense 107. Which of the following accounts will be credited to close it? a. Rent Revenue b. Fees Earned c. Accumulated Depreciation d. Depreciation Expense 108. The entry to close a debit in the appropriate insurance account at the end of the accounting period is a. debit Owner’s Capital; credit Prepaid Insurance b. debit Prepaid Insurance; credit Owner’s Capital c. debit Insurance Expense; credit Owner’s Capital d. debit Owner’s Capital; credit Insurance Expense 109. Which of the following accounts ordinarily appears on the post-closing trial balance? a. Fees Earned b. Supplies Expense c. Owner’s Drawing d. Unearned Rent 110. Diane's Designs purchased a 1-year liability insurance policy on March 1 of a year for $8,400 and recorded it as a prepaid expense. Which of the following amounts would be recorded as insurance expense during the adjusting process at the end of Diane’s first month of operations on March 31? a. $8,400 b. $840 c. $700 d. $7,700 111. The following accounts were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet: Accumulated Depreciation Fees Earned Depreciation Expense Insurance Expense Prepaid Insurance Supplies Supplies Expense

$ 3,200 17,400 1,300 400 4,800 900 3,800

Net income for the period is Powered by Cognero

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Chapter 04: The Accounting Cycle a. $5,500 b. $11,900 c. $17,400 d. $8,700 112. The following is a summary of selected transactions in the ledger accounts of Alberto’s Plumbing Services for the current calendar year-end. Alberto Diaz, Capital 12/31 3,500 1/1 6,500 12/31 15,000

3/30 9/30

Alberto Diaz, Drawing 1,650 12/31 1,850

3,500

Net income for the period is a. $3,500 b. $21,500 c. $15,000 d. $25,000 113. The journal entry to close Fees Earned, $750, and Rent Revenue, $175, during the year-end closing process would involve a. debits to the two revenue accounts b. credits to the two revenue accounts c. a debit to a general revenue account d. a credit to a general revenue account 114. Shores Sports rents canoes and kayaks. The adjusted trial balance at December 31 follows: Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Tommy Kiedis, Capital Tommy Kiedis, Drawing Rental Revenue Service Revenue Wages Expense Depreciation Expense Utilities Expense Powered by Cognero

Debit 1,500 2,000 100 1,600 2,800 15,000

Credit

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,300 19,000 1,800 320 Page 16

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Chapter 04: The Accounting Cycle Insurance Expense Maintenance Expense Income Tax Expense

700 9,000 2,700 58,520

58,520

The entry required to close the revenue and expense accounts at the end of the period includes a a. debit to Tommy Kiedis, Capital for $33,520 b. credit to Tommy Kiedis, Capital for $33,520 c. debit to Tommy Kiedis, Capital for $4,780 d. credit to Tommy Kiedis, Capital for $4,780 115. Use this end-of-period spreadsheet to answer the questions that follow. Finley Company End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr. Accounts Payable Wages Payable Jo Finley, Capital Jo Finley, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense

Adjusted Trial Balance Debit Credit 48,000

Income Statement

Balance Sheet

Debit

Debit 48,000

Credit

18,000 6,000 57,000

18,000 6,000 57,000 18,000

18,000

25,000

25,000

6,000

6,000

33,000

33,000

3,000

3,000 155,000

Net income

155,000

63,000 27,000

63,000 27,000

15,000

15,000

237,000

Credit

237,000

105,000 50,000

155,000

132,000

82,000 50,000

155,000

155,000

132,000

132,000

The effect of closing revenues and expenses to Jo Finley, Capital will be to a. increase Jo Finley, Capital by $50,000 Powered by Cognero

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Chapter 04: The Accounting Cycle b. decrease Jo Finley, Capital by $50,000 c. increase Jo Finley, Capital by $237,000 d. decrease Jo Finley, Capital by $237,000 116. Use this end-of-period spreadsheet to answer the questions that follow. Finley Company End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr. Accounts Payable Wages Payable Jo Finley, Capital Jo Finley, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense

Adjusted Trial Balance Debit Credit 48,000

Income Statement

Balance Sheet

Debit

Debit 48,000

Credit

18,000 6,000 57,000

18,000 6,000 57,000 18,000

18,000

25,000

25,000

6,000

6,000

33,000

33,000

3,000

3,000 155,000

Net income

155,000

63,000 27,000

63,000 27,000

15,000

15,000

237,000

Credit

237,000

105,000 50,000

155,000

132,000

82,000 50,000

155,000

155,000

132,000

132,000

The journal entry to close revenues and expenses would involve a. debits to the expense accounts and Jo Finley, Capital and a credit to Fees Earned b. debits to the expense accounts and credits to Jo Finley, Capital and Fees Earned c. a debit to Fees Earned and credits to the expense accounts and Jo Finley, Capital d. debits to Fees Earned and Jo Finley, Capital and credits to the expense accounts 117. Use this end-of-period spreadsheet to answer the questions that follow. Finley Company Powered by Cognero

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Chapter 04: The Accounting Cycle End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr. Accounts Payable Wages Payable Jo Finley, Capital Jo Finley, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense

Adjusted Trial Balance Debit Credit 48,000

Income Statement

Balance Sheet

Debit

Debit 48,000

Credit

18,000 6,000 57,000

18,000 6,000 57,000 18,000

18,000

25,000

25,000

6,000

6,000

33,000

33,000

3,000

3,000 155,000

155,000

63,000 27,000

63,000 27,000

15,000

15,000

237,000

Credit

237,000

Net income

105,000 50,000

155,000

132,000

82,000 50,000

155,000

155,000

132,000

132,000

The entry to close Jo Finley, Drawing would be a. debit Jo Finley, Drawing, $3,000; credit Salary Expense, $3,000 b. debit Salary Expense, $3,000; credit Jo Finley, Drawing, $3,000 c. debit Jo Finley, Capital, $3,000; credit Jo Finley, Drawing, $3,000 d. debit Jo Finley, Drawing, $3,000; credit Jo Finley, Capital, $3,000 118. Use this end-of-period spreadsheet to answer the questions that follow. Finley Company End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash

Adjusted Trial Balance Debit Credit 48,000

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Income Statement

Balance Sheet

Debit

Debit 48,000

Credit

Credit Page 19

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Chapter 04: The Accounting Cycle Accounts Receivable Supplies Equipment Accumulated Depr. Accounts Payable Wages Payable Jo Finley, Capital Jo Finley, Drawing Fees Earned Salary Expense Rent Expense Depreciation Expense

18,000 6,000 57,000

18,000 6,000 57,000 18,000

18,000

25,000

25,000

6,000

6,000

33,000

33,000

3,000

3,000 155,000

63,000 27,000

63,000 27,000

15,000

15,000

237,000 Net income

155,000

237,000

105,000 50,000

155,000

132,000

82,000 50,000

155,000

155,000

132,000

132,000

The ending balance of the capital account is a. $47,000 b. $80,000 c. $83,000 d. $86,000 119. Which of the following lists the steps of the accounting cycle in proper sequence (some steps may be missing)? a. analyze and record transactions, post transactions to the ledger, prepare a trial balance, prepare financial statements, journalize closing entries, analyze adjustment data, and prepare adjusting entries b. prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, and post transactions to the ledger c. analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, prepare adjusting entries, prepare financial statements, journalize closing entries and post to the ledger, and prepare a post-closing trial balance d. prepare financial statements, journalize closing entries and post to the ledger, analyze and record transactions, post transactions to the ledger, prepare a trial balance, analyze adjustment data, and prepare adjusting entries 120. In the accounting cycle, the last step is a. preparing the financial statements b. journalizing and posting the adjusting entries Powered by Cognero

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Chapter 04: The Accounting Cycle c. preparing a post-closing trial balance d. journalizing and posting the closing entries 121. Of the following steps of the accounting cycle, which step should be completed first? a. Closing entries are journalized and posted to the ledger. b. Transactions are posted to the ledger. c. Adjusting entries are journalized and posted to the ledger. d. Financial statements are prepared. 122. Of the following steps of the accounting cycle, which step should be completed last? a. An adjusted trial balance is prepared. b. Transactions are posted to the ledger. c. An unadjusted trial balance is prepared. d. Adjusting entries are journalized and posted to the ledger. 123. The accounting cycle requires preparation of three trial balances. In what order should they be prepared? a. post-closing, unadjusted, adjusted b. unadjusted, post-closing, adjusted c. unadjusted, adjusted, post-closing d. post-closing, adjusted, unadjusted 124. During the end-of-period processing, which of the following best describes the logical order of steps? a. preparation of adjustments, adjusted trial balance, financial statements b. preparation of income statement, adjusted trial balance, balance sheet c. preparation of adjusted trial balance, cross-referencing, journalizing d. preparation of adjustments, adjusted trial balance, posting 125. The post-closing trial balance differs from the adjusted trial balance in that it does not a. take into account closing entries b. take into account adjusting entries c. include balance sheet accounts d. include income statement accounts 126. The end-of-period spreadsheet a. is an integral part of the accounting cycle b. eliminates the need to rewrite the financial statements c. is a working paper that is required d. is used to summarize account balances and adjustments for the financial statements 127. Which of the following steps is not aided by preparation of the end-of-period spreadsheet? a. preparing the adjusted trial balance b. posting to the general ledger c. preparing the financial statements d. journalizing the closing entries Powered by Cognero

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Chapter 04: The Accounting Cycle 128. An end-of-period spreadsheet includes columns for a. adjusting entries b. closing entries c. reversing entries d. adjusting and closing entries 129. When the end-of-period spreadsheet is complete, the Adjustments columns should have a. total credits greater than total debits if a net income was earned b. total debits greater than total credits if a net loss was incurred c. total debits greater than total credits if a net income was earned d. total debits equal to total credits 130. The difference between the totals of the Adjusted Trial Balance Debit and Credit columns on the end-of-period spreadsheet a. is the amount of net income or loss b. indicates there is an error on the end-of-period spreadsheet c. is the amount of the owner’s capital d. is the difference between revenue and expenses 131. Net income appears on the end-of-period spreadsheet in the a. Balance Sheet Debit column b. Adjustments Debit column c. Income Statement Debit column d. Income Statement Credit column 132. A net loss appears on the end-of-period spreadsheet in the a. Balance Sheet Debit column b. Balance Sheet Credit column c. Income Statement Debit column d. Adjustments Credit column 133. After net income is entered on the end-of-period spreadsheet, the Balance Sheet Debit and Credit columns must a. be the same amount as the total amount of the Income Statement Debit and Credit columns b. equal each other c. be the same amount as the total amount in the Adjusted Trial Balance Debit and Credit columns d. not be equal to each other and need not be the same total amounts as any other pair of columns on the end-ofperiod spreadsheet 134. Which of the following statements indicates that a business earned a net income for the period? a. The sum of the credits exceeds the sum of the debits in the Balance Sheet columns on the end-of-period spreadsheet. b. The sum of the credits exceeds the sum of the debits in the Income Statement columns on the end-of-period spreadsheet. c. The sum of the debits exceeds the sum of the credits in the Income Statement columns on the end-of-period spreadsheet. Powered by Cognero

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Chapter 04: The Accounting Cycle d. Cash inflows exceed cash outflows. 135. For which of these titles would an amount appear in the Income Statement columns of the end-of-period spreadsheet? a. Cash b. Prepaid Insurance c. Unearned Revenue d. Net Loss 136. For which of these accounts would an amount not appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Anita Garcia, Capital b. Service Revenue c. Unearned Revenue d. Cash 137. For which of these accounts would an amount appear in the Balance Sheet columns of the end-of-period spreadsheet? a. Consulting Revenue b. Prepaid Insurance c. Rent Expense d. Fees Earned 138. Daniel Company's end-of-period spreadsheet at the end of July has $4,950 in the Balance Sheet Credit column for Accumulated Depreciation. The end-of-period spreadsheet at the end of August has $7,600 in the Balance Sheet Credit column for Accumulated Depreciation. What is the amount of the depreciation expense adjustment for the month of August? a. $12,550 b. $7,600 c. $4,950 d. $2,650 139. Which of the following items does not appear on the end-of-period spreadsheet? a. adjusting entries b. the unadjusted trial balance c. closing entries d. the drawing account 140. An indication that the end-of-period spreadsheet columns are in balance and the spreadsheet is complete is the a. word "Total" written at the bottom of each pair of columns b. double rule under each pair of columns c. circles around each total d. final figures written in ink 141. After all of the account balances have been extended to the Balance Sheet columns of the end-of-period spreadsheet, the totals of the Debit and Credit columns are $36,755 and $32,735, respectively. What is the amount of net income or net loss for the period? Powered by Cognero

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Chapter 04: The Accounting Cycle a. $4,020 net income b. $36,755 net loss c. $4,020 net loss d. $32,735 net income 142. After all of the account balances have been extended to the Income Statement columns of the end-of-period spreadsheet, the totals of the Debit and Credit columns are $77,500 and $83,900, respectively. What is the amount of the net income or net loss for the period? a. $6,400 net income b. $6,400 net loss c. $83,900 net income d. $77,500 net loss 143. On September 1, a business pays rent for 12 months in advance and debits an asset account. At year-end, the adjusting entry on the end-of-period spreadsheet would a. increase an expense account b. decrease a liability account c. increase an asset account d. decrease an expense account 144. On March 1, a business collects revenue in advance for the next 12 months and credits a liability account. The adjusting entry at year-end on the end-of-period spreadsheet would a. increase a liability account b. decrease an asset account c. decrease a revenue account d. decrease a liability account 145. Which of the following is not an essential part of the accounting records? a. journal b. ledger c. chart of accounts d. end-of-period spreadsheet 146. After all of the account balances have been extended to the Balance Sheet columns of the end-of-period spreadsheet, the Debit and Credit columns show totals of $37,686 and $41,101, respectively. This indicates that a. the company has revenue of $41,101 for the period. b. the company has a net loss of $3,415 for the period. c. the company has a net income of $3,415 for the period. d. the amounts are out of balance and need to be corrected. 147. The Income Statement columns of the end-of-period spreadsheet show that debits total $55,800 and credits total $77,520. What does this information mean to the accountant? a. There is a net income of $21,720. b. There is a net loss of $21,720. c. The accounts are out of balance, indicating an error has been made. Powered by Cognero

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Chapter 04: The Accounting Cycle d. The accounts have not been updated. 148. The cash account shows a credit entry of $900,000 for the purchase of equipment. This transaction would be classified as which of the following? a. operating activity. b. investing activity. c. financing activity. d. none of these choices 149. A cash account shows a credit entry of $4,000 for an owner withdrawal. This transaction would be classified as which of the following? a. operating activity b. investing activity c. financing activity d. none of these choices 150. Selected ledger entries from the books of Solomon’s Electrical Services follow: Dick Solomon, Capital 5,000 1/1 6/1 12/31

12/31

3/31 9/30

Dick Solomon, Drawing 2,500 12/31 2,500

100,000 50,000 30,000 5,000

The $30,000 credit to Dick Solomon, Capital on December 31 must represent a. owner withdrawals b. net income c. net loss d. an additional investment in the business 151. Selected ledger entries from the books of Solomon’s Electrical Services follow: Dick Solomon, Capital 5,000 1/1 6/1 12/31

12/31

3/31 9/30

Dick Solomon, Drawing 2,500 12/31 2,500

100,000 50,000 30,000 5,000

The balance in the capital account that will appear on the financial statements as of December 31 is a. $160,000 b. $170,000 c. $175,000 d. $180,000 Powered by Cognero

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Chapter 04: The Accounting Cycle 152. Moringa Products Co. had owner’s capital of $1,250,000 on January 1. During the year, the owner invested an additional $75,000 in the business. Owner withdrawals of $48,000 were made. For the year ended December 31, Moringa reported a net income of $287,500. What is the owner’s capital balance on December 31? a. $335,500 b. $1,564,500 c. $2,405,500 d. $2,480,500 153. Astin Company has current assets of $82,530, total assets of $242,050, total net income of $58,240, current liabilities of $72,120, and total liabilities of $205,300. Astin Company's working capital is a. $10,410 b. $24,920 c. $36,570 d. $68,650 154. Astin Company has current assets of $82,530, total assets of $242,050, net income of $58,240, current liabilities of $72,120, and total liabilities of $205,300. Astin Company’s current ratio is a. 1.9 b. 1.2 c. 1.1 d. 1.4 155. What does working capital measure? a. the excess of a business’s assets over its liabilities b. the excess of a business’s current assets over its total liabilities c. the excess of a business’s current assets over its current liabilities d. the excess of a business’s net income over its current liabilities 156. The formula for the current ratio is a. current assets multiplied by current liabilities b. assets multiplied by liabilities c. current assets divided by current liabilities d. assets divided by liabilities 157. Classify the following journal entry: Cash 450 Fees Earned 450 a. transaction entry b. adjusting entry c. closing entry d. none of these choices 158. Classify the following journal entry: Kim Lee, Capital 6,500 Powered by Cognero

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Chapter 04: The Accounting Cycle Kim Lee, Drawing

6,500

a. transaction entry b. adjusting entry c. closing entry d. none of these choices 159. Classify the following journal entry: Unearned Revenue 985 Fees Earned 985 a. transaction entry b. adjusting entry c. closing entry d. none of these choices 160. Classify the following journal entry: Fees Earned 780 Rent Expense 200 Supplies Expense 180 Utilities Expense 110 Miscellaneous Expense 107 Jose Casio, Capital 183 a. transaction entry b. adjusting entry c. closing entry d. none of these choices 161. Classify the following journal entry: Accounts Receivable 325 Fees Earned 325 a. transaction entry b. adjusting entry c. closing entry d. none of these choices 162. Which of the following statements is true of the accrual basis of accounting? a. Revenues are recorded when cash is received. b. Expenses are recorded when cash is paid. c. The accrual basis of accounting eliminates the need for adjusting entries. d. Revenues are recorded when earned. 163. Which of the following statements is not true of the accrual basis of accounting? a. The accrual basis of accounting follows the revenue recognition principle. Powered by Cognero

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Chapter 04: The Accounting Cycle b. The accrual basis of accounting ignores the expense recognition principle. c. The accrual basis of accounting requires adjusting entries at the end of the accounting period. d. The accrual basis of accounting is required by GAAP. 164. A cash account shows a debit entry of $3,000 for the receipt of cash from customers. This transaction would be classified as which of the following? a. operating activity b. investing activity c. financing activity d. none of these choices 165. The result of a business's current assets divided by its current liabilities is its a. current ratio b. working capital c. current net income d. current equity

Enter the appropriate value to answer the question or solve the problem. 166. Alpha Company has current assets of $74,524, total assets of $203,310, net income of $67,913, current liabilities of $60,100, and total liabilities of $150,600. What is Alpha Company's working capital? 167. Alpha Company has current assets of $74,524, total assets of $203,310, total net income of $67,913, current liabilities of $60,100, and total liabilities of $150,600. What is Alpha Company's current ratio rounded to one decimal place?

168. You evaluate loan requests as part of your job at Eastwood National Bank. One loan request you received is from Surfer Dude Supplies, a small business. Tony Meadows, the owner, is requesting $105,000 and brings you a trial balance (or statement of accounts) for his first year of operations ended December 31. While you are willing to work with Tony, how would you explain to him that a complete set of financial statements from his accountant would be more useful for evaluating the loan request? 169. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for the first year of operations ended December 31. What three accounts do you think should be relabeled for greater clarity?

Cash Billings Due from Others Office Supplies Powered by Cognero

Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 Page 28

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Chapter 04: The Accounting Cycle Trucks Equipment Amounts Owed to Others Investment in Business Service Revenues Wages Expense Rent Expense Insurance Expense Utilities Expenses Miscellaneous Expenses

36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000

110,000

170. You have just accepted your first job out of college, which requires you to evaluate loan requests at Eastwood National Bank. The first loan request you receive is from Richard Enterprises. Richard Tracy, the owner, is requesting $105,000 and brings you the following trial balance (or statement of accounts) for the first year of operations ended December 31. Which of the following accounts do you think might need to be adjusted before an accurate set of financial statements could be prepared?

Cash Billings Due from Others Office Supplies Trucks Equipment Amounts Owed to Others Investment in Business Service Revenues Wages Expense Rent Expense Insurance Expense Utilities Expense Miscellaneous Expense

Richard Enterprises Statement of Accounts December 31 2,050 15,070 7,470 36,370 8,090 2,850 33,500 73,650 30,050 7,330 2,400 700 470 110,000

110,000

171. The following accounts appear in an adjusted trial balance of Blaine Auto Services. Indicate whether each account would be reported in the (a) Current assets, (b) Property, plant, and equipment, (c) Current liabilities, (d) Long-term liabilities, or (e) Owner’s Equity section of the December 31 balance sheet of Blaine Auto Services. 1. Harry Blaine, Capital 2. Accumulated Depreciation 3. Unearned Revenues 4. Mortgage Payable 5. Equipment 6. Notes Payable (due in 2 years) Powered by Cognero

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Chapter 04: The Accounting Cycle 7. 8.

Cash Accounts Receivable

172. Describe a classified balance sheet. 173. The following balance sheet contains errors. Mark Brock Services Balance Sheet For the Year Ended December 31

Assets Current assets: Cash Accounts payable Supplies Prepaid insurance Land Total current assets

Property, plant, and equipment: Building Equipment Total property, plant, and equipment

$ 7,170 7,500 2,590 800 24,000 $ 42,060

$43,700 29,250 72,950

Total assets

$131,510

Liabilities Current liabilities: Accounts receivable

$10,000

Accum. depr.—building

12,525

Accum. depr.—equipment

7,340

Net income

11,500

Total liabilities

$ 41,365

Owner’s Equity Wages payable

$ 1,500

Mark Brock, capital

88,645

Total owner’s equity Total liabilities and owner’s equity

90,145 $131,510

(a) List the errors in the balance sheet and (b) prepare a corrected balance sheet. 174. Indicate whether each of the following would be reported in the financial statements as a (a) current asset, (b) current Powered by Cognero

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Chapter 04: The Accounting Cycle liability, (c) revenue, or (d) expense: (1) (2) (3) (4)

Supplies Unearned Fees Prepaid Advertising Advertising Expense

(5) (6) (7) (8)

Supplies Expense Prepaid Insurance Accounts Payable Fees Earned

175. The following accounts were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30 for Finnegan Co.: Accumulated Depreciation Fees Earned Depreciation Expense Rent Expense Prepaid Insurance Supplies Supplies Expense

$32,000 78,000 7,250 34,000 6,000 400 1,800

Prepare an income statement. 176. The following data were taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for April 30 for Abigail Trucking: Accounts Payable Accounts Receivable Accumulated Depreciation—Trucks Cash A. Smith, Capital Prepaid Insurance Prepaid Rent Salaries Payable Trucks Supplies Unearned Fees

$ 42,600 83,400 28,000 ? 315,000 6,500 12,000 12,500 206,000 4,700 5,000

Prepare a classified balance sheet. 177. Indicate whether each of the following would be reported in the financial statements as a (a) current asset, (b) property, plant, and equipment, (c) current liability, (d) revenue, or (e) expense: (1) (2) (3) (4) (5) (6) (7) (8) (9)

Truck Accumulated depreciation Telephone expense Fees earned Wages payable Prepaid insurance Office supplies Dining expense Unearned rent

178. List and describe the purpose of the two closing entries. Powered by Cognero

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Chapter 04: The Accounting Cycle 179. Beachside Realty rents condominiums and furnishings. The adjusted trial balance on December 31 follows: Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Barbara Rose, Capital Barbara Rose, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

Debit 1,500 2,000 100 1,600 2,800 15,000

Credit

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Journalize the entry required to close the revenue and expense accounts at the end of the period. 180. Prior to adjustment on August 31, Salary Expense has a debit balance of $298,500. Salaries owed but not paid as of the same date total $4,200. Journalize the entries to record the following: a. Accrued salaries as of August 31. b. The effect of closing Salary Expense as of August 31.

181. Beachside Realty rents condominiums and furnishings. The company's adjusted trial balance on December 31 follows: Debit Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Powered by Cognero

Credit

1,500 2,000 100 1,600 2,800 15,000 3,000 Page 32

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Chapter 04: The Accounting Cycle Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Barbara Rose, Capital Barbara Rose, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

Explain the first step of the closing process using Beachside Realty's adjusted trial balance.

182. Beachside Realty rents condominiums and furnishings. The company's adjusted trial balance on December 31 follows: Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Barbara Rose, Capital Barbara Rose, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

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Debit 1,500 2,000 100 1,600 2,800 15,000

Credit

3,000 2,400 3,920 2,700 500 7,700 2,000 37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 58,520

58,520

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Chapter 04: The Accounting Cycle Journalize the entry required to close the owner’s drawing account at the end of the period. 183. Identify which of the following accounts should be closed with a debit and which should be closed with a credit to Owner’s Capital at the end of the fiscal year. If it is not closed to Owner’s Capital, mark as n/a. 1. Utilities Payable 2. Utilities Expense 3. Supplies 4. Supplies Expense 5. Fees Earned 6. Unearned Fees 7. Accounts Receivable 8. Owner’s Drawing 9. Owner’s Capital 10. Accumulated Depreciation—Equipment 11. Depreciation Expense—Equipment 12. Equipment 13. Prepaid Insurance 14. Insurance Expense 184. Seaside Realty rents condominiums and furnishings. The adjusted trial balance at December 31 follows: Cash Accounts Receivable Interest Receivable Prepaid Insurance Notes Receivable (long-term) Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Payable Income Taxes Payable Unearned Rent Fees Scott Keynes, Capital Scott Keynes, Drawing Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense

Debit 5,500 2,000 100 1,600 2,800 15,000

Credit

3,000 2,400 3,920 2,700 500 7,700 2,000 40,000 2,200 100 20,000 1,800 320 700 8,000 2,700 62,520

62,520

Journalize the closing entry required to transfer the income or loss at the end of the period.

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Chapter 04: The Accounting Cycle 185. After the accounts have been adjusted on January 31, the end of the fiscal year, the following balances are taken from the ledger of Harrison's Dog Walking Service: G. Harrison, Capital G. Harrison, Drawing Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense

$349,000 6,000 124,600 29,000 43,000 7,300 5,700

Journalize the two entries required to close the accounts. 186. On the basis of the following data taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for the year ended March 31 for Banes Domino's Repair Shop, journalize the two closing entries. Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Banes Domino, Capital Banes Domino, Drawing Fees Earned Salaries Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense

30,000 45,200 5,000 169,900 32,000 12,500 71,600 47,000 510,000 244,500 48,000 25,000 9,500 2,000 626,100

626,100

187. After all adjustments have been made, but before the accounts have been closed, the following balances were taken from the ledger of Ramona’s Designs: Accounts Payable Accounts Receivable Cash Depreciation Expense Equipment Insurance Expense Prepaid Insurance Rent Expense

$ 27,600 64,500 17,150 13,500 165,000 2,510 6,275 32,700

R. Waters, Capital R. Waters, Drawing Salaries Expense Salaries Payable Service Revenue Supplies Supplies Expense

$ 99,500 48,000 41,390 8,150 186,000 1,500 2,500

Journalize the entries to close the appropriate accounts. 188. On the basis of the following information taken from the Adjusted Trial Balance columns of the end-of-period spreadsheet for the month ended September 30, journalize the closing entries for Perez Roofing. Cash Accounts Receivable Powered by Cognero

22,500 3,575 Page 35

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Chapter 04: The Accounting Cycle Office Supplies Repair Parts Machinery Accumulated Depreciation Accounts Payable Notes Payable J. Perez, Capital J. Perez, Drawing Service Revenue Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense

2,850 3,785 17,750 3,250 1,150 6,500 2,500 1,750 47,200 4,840 1,275 925 1,350 60,600

60,600

189. The following adjusted trial balance is the result of the adjustments made at the end of the month of March for Martin Services. Use these adjusted values to journalize the closing entries for Martin Services. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable D. Martin, Capital D. Martin, Drawing Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense

24,750 5,750 3,525 4,785 9,750 2,150 3,550 7,500 19,725 6,250 36,500 6,425 1,465 5,150 1,575 69,425

69,425

190. The following adjusted trial balance is the result of the adjustments made at the end of the month of July for Ladonna Douglas Company. Utilize these adjusted values to journalize the closing entries for Ladonna Douglas Company. Cash Accounts Receivable Office Supplies Store Supplies Machinery Accumulated Depreciation Accounts Payable Notes Payable Ladonna Douglas, Capital Ladonna Douglas, Drawing Service Revenue Wages Expense Powered by Cognero

34,750 9,750 2,525 4,785 10,750 2,150 14,300 11,500 53,725 13,250 41,500 37,425 Page 36

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Chapter 04: The Accounting Cycle Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense

3,000 2,750 1,465 2,150 575 123,175

123,175

191. The following is the adjusted trial balance for Miller Company: Miller Company Adjusted Trial Balance December 31 Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable B. Miller, Capital B. Miller, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense

8,130 3,300 2,750 10,400 2,200 2,700 1,000 11,200 4,870 36,600 12,450 4,900 3,475 2,150 1,275 53,700

53,700

Journalize the closing entries and prepare the post-closing trial balance. 192. List the following steps in the accounting cycle in the order in which they should be done. - Closing entries are journalized and posted to the ledger. - An unadjusted trial balance is prepared. - An optional end-of-period spreadsheet (work sheet) is prepared. - A post-closing trial balance is prepared. - Adjusting entries are journalized and posted to the ledger. - Transactions are analyzed and recorded in the journal. - Adjustment data are assembled and analyzed. - Financial statements are prepared. - An adjusted trial balance is prepared. - Transactions are posted to the ledger. 193. Kirk Enterprises offers rug cleaning services to business clients. Kirk’s unadjusted trial balance on July 31 is provided in the following end-of-period spreadsheet:

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Chapter 04: The Accounting Cycle

Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31

Cash Prepaid Insurance Accounts Receivable Supplies Equipment Accum. Depreciation Unearned Revenue Accounts Payable Wages Payable J. Kirk, Capital J. Kirk, Drawing Service Revenue Advertising Expense Wage Expense Insurance Expense Supplies Expense Depreciation Expense

Unadjusted Trial Balance Debit Credit 36,000 12,000 56,000 12,000 60,000 12,000 20,000 32,000

Adjustments Debit

Credit

Adjusted Trial Balance Debit Credit

84,000 4,000 80,000 28,000 20,000

228,000

228,000

Enter the adjustments in the work sheet based on the following adjustment data and extend the updated balances to the Adjusted Trial Balance columns. (a) Depreciation expense, $1,000 (b) Wages accrued but not paid, $2,000. (c) Supplies on hand, $8,000. (d) Of the unearned revenue, 75% has been earned. (e) Unexpired insurance at July 31, $9,000.

194. Kirk Enterprises offers rug cleaning services to business clients. Using the following adjustment data and spreadsheet, journalize the required adjusting entries. Adjustments: (a) Depreciation expense, $1,000. (b) Wages accrued but not paid, $2,000. (c) Supplies on hand, $8,000. (d) Of the unearned revenue, 75% has been earned. (e) Unexpired insurance at July 31, $9,000. Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31 Powered by Cognero

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Chapter 04: The Accounting Cycle Unadjusted Trial Balance Cash Prepaid Insurance Accounts Receivable Supplies Equipment Accum. Depreciation Unearned Revenue Accounts Payable Wages Payable J. Kirk, Capital J. Kirk, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense

Debit 36,000 12,000 56,000 12,000 60,000

Adjustments

Credit

Debit

Credit

Adjusted Trial Balance Debit Credit

12,000 20,000 32,000 84,000 4,000 80,000 28,000 20,000

______

______

228,000

228,000

195. The balances for the following accounts appeared in the Adjusted Trial Balance columns of the end-of-period spreadsheet. Indicate whether each balance should be extended to (a) the Income Statement columns or (b) the Balance Sheet columns. (1) (2) (3) (4) (5) (6)

Salaries Payable Fees Earned Accounts Payable Rey Mercado, Capital Supplies Expense Unearned Rent

(7) (8) (9) (10) (11) (12)

Rey Mercado, Drawing Equipment Accounts Receivable Accumulated Depreciation Salary Expense Depreciation Expense

196. The following revenue and expense account balances were taken from the Income Statement columns of the end-ofperiod spreadsheet for Fraser Services Co. for the year ended December 31: Depreciation Expense Insurance Expense Miscellaneous Expense Rent Expense Service Revenue Supplies Expense Utilities Expense Wages Expense

$ 4,950 2,900 1,200 24,000 92,500 3,150 5,000 63,750

Prepare an income statement. 197. Based on the following end-of-year spreadsheet, prepare an income statement for Austin Enterprises for the year ended December 31. Austin Enterprises Powered by Cognero

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Chapter 04: The Accounting Cycle

Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depr.—Equip. Accounts Payable Wages Payable T. Austin, Capital T. Austin, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense

End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Balance Income Statement Debit Credit Debit Credit 26,500 7,000 1,000 18,500 5,000 11,000 1,000 8,000 2,000 59,500 59,500 19,000 19,000 7,000 7,000 3,500 _____ 3,500 84,500 84,500 29,500 59,500

Net income

30,000 59,500

59,500

Balance Sheet Debit Credit 26,500 7,000 1,000 18,500 5,000 11,000 1,000 8,000 2,000

55,000

25,000

55,000

30,000 55,000

198. Journalize the required closing entries from the following end-of-period spreadsheet. Austin Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Balance Account Title Debit Cash 26,500 Accounts Receivable 7,000 Supplies 1,000 Equipment 18,500 Accum. Depr. — Equip. Accounts Payable Wages Payable T. Austin, Capital T. Austin, Drawing 2,000 Fees Earned Wages Expense 19,000 Rent Expense 7,000 Depreciation 3,500 Expense 84,500 Net income Powered by Cognero

5,000

Balance Sheet Debit Credit 26,500 7,000 1,000 18,500 5,000

11,000 1,000 8,000

11,000 1,000 8,000

Credit

Income Statement Debit Credit

2,000 59,500

59,500 19,000 7,000 3,500

84,500 29,500 30,000 59,500

59,500 55,000 59,500 55,000

25,000 30,000 55,000 Page 40

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Chapter 04: The Accounting Cycle 199. Complete the following end-of-period spreadsheet for Danilo Enterprises. Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31

Account Title Cash Accounts Receivable Supplies Equipment Accum. Depr.— Equip. Accounts Payable Wages Payable E. Danilo, Capital E. Danilo, Drawing Fees Earned Wages Expense Rent Expense Depreciation Expense

Adjusted Trial Balance Debit Credit 14,500 7,500

Income Statement Debit

Credit

Balance Sheet Debit

Credit

500 20,500 15,000 9,500 3,060 18,240 1,000 34,000 18,000 9,300 8,500 79,800

_____ 79,800

200. Explain how net income or loss is determined when using an end-of-period spreadsheet. 201. If end-of-period spreadsheets are not considered part of the formal accounting records, why are they used? 202. The balances of the following accounts appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet. Indicate whether each balance should be extended to (a) an Income Statement column or (b) a Balance Sheet column. 1. Owner’s Capital 2. Owner’s Drawing 3. Depreciation Expense 4. Accumulated Depreciation 5. Fees Earned 6. Unearned Fees 7. Supplies 8. Supplies Expense 203. The end-of-period spreadsheet for the current year for Jamal Company shows Balance Sheet columns with a debit total of $630,430 and a credit total of $614,210. This is before the amount for net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet, what is the amount of net income or net loss? Powered by Cognero

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Chapter 04: The Accounting Cycle 204. The end-of-period spreadsheet for the current year for Jamal Company shows Balance Sheet columns with a debit total of $614,210 and a credit total of $630,430. This is before the amount for net income or net loss has been included. In preparing the income statement from the end-of-period spreadsheet, what is the amount of net income or net loss? 205. Determine the current ratio for each of the following businesses. Round to one decimal place. Which business has the best short-term solvency position? Company Alpha Company Beta Company Gamma Company Delta Company

Current Assets

Total Assets

Current Liabilities

Total Liabilities

Net Income

Current Ratio

$74,524 $168,672

$60,100

$150,600

$94,958

$207,536 $290,290

$152,600

$203,000 $207,536

$60,125

$66,929

$32,500

$52,700

$95,335 $182,520

$82,900

$135,200 $105,283

$36,725

206. The following information is available from the records of LoopTech Services. On January 1, Velma Morgan, Capital had a balance of $392,500. During the year, no additional owner investments were made, and $25,000 of owner withdrawals were made. For the year ended December 31, LoopTech reported a net loss of $38,700. Prepare a statement of owner’s equity for the year ended December 31. 207. The current ratio for the past 3 years for Xpert Styling is: Current ratio

Year 3 3.7

Year 2 3.5

Year 1 3.4

What does the change in the current ratio from Year 1 to Year 3 indicate? 208. In recent financial statements, Dunedin Company had net income of $49,340 million and $9,800 million of depreciation-related expense. If Dunedin had used the cash basis of accounting, its net income would be approximately $60,000 million. Why would Dunedin’s net income be higher if it had used the cash basis? 209. Given the following entries in the cash account, prepare the statement of cash flows for Smith Consulting Services for the month ended May 31, 20Y4. Cash May 1 Received owner’s investment 10 Received fees from clients 30 Received fees from clients

50,000 30,000 40,000

May 31 Balance

67,000

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May 5 Paid accounts payable 20 Paid operating expenses 25 Purchased office equip. 30 Paid owner’s withdrawal

10,000 20,000 15,000 8,000

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Chapter 04: The Accounting Cycle Answer Key 1. True 2. True 3. True 4. True 5. False 6. False 7. True 8. False 9. False 10. True 11. True 12. True 13. True 14. False 15. True 16. False 17. False 18. True 19. False 20. False 21. False 22. False 23. True 24. True 25. True Powered by Cognero

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Chapter 04: The Accounting Cycle 26. True 27. True 28. False 29. True 30. False 31. False 32. False 33. True 34. False 35. True 36. False 37. False 38. True 39. False 40. True 41. True 42. False 43. False 44. False 45. True 46. True 47. True 48. True 49. False 50. True 51. True Powered by Cognero

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Chapter 04: The Accounting Cycle 52. False 53. True 54. True 55. True 56. False 57. True 58. True 59. True 60. True 61. False 62. True 63. False 64. False 65. True 66. False 67. True 68. True 69. False 70. False 71. True 72. False 73. c 74. a 75. b 76. a Powered by Cognero

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Chapter 04: The Accounting Cycle 77. b 78. b 79. a 80. d 81. d 82. a 83. d 84. b 85. c 86. b 87. b 88. c 89. a 90. b 91. a 92. a 93. b 94. b 95. c 96. c 97. b 98. d 99. c 100. d 101. a 102. d Powered by Cognero

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Chapter 04: The Accounting Cycle 103. b 104. b 105. a 106. c 107. d 108. d 109. d 110. c 111. b 112. c 113. a 114. d 115. a 116. c 117. c 118. b 119. c 120. c 121. b 122. a 123. c 124. a 125. d 126. d 127. b Powered by Cognero

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Chapter 04: The Accounting Cycle 128. a 129. d 130. b 131. c 132. a 133. b 134. b 135. d 136. b 137. b 138. d 139. c 140. b 141. a 142. a 143. a 144. d 145. d 146. b 147. a 148. b 149. c 150. c 151. c 152. b 153. a Powered by Cognero

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Chapter 04: The Accounting Cycle 154. c 155. c 156. c 157. a 158. c 159. b 160. c 161. a 162. d 163. b 164. a 165. a 166. 167. 1.2 168. A set of financial statements provides useful information concerning the economic condition of a business. For example, the balance sheet describes the financial condition of the business as of a given date and is useful in assessing its financial soundness and liquidity. The income statement describes the results of operations for a period and indicates the profitability of the business. The statement of owner’s equity describes the changes in the owner’s interest in the business for a period. Each of these statements is useful in evaluating whether to extend credit to the business. 169. The following items should be relabeled for greater clarity: Billings Due from Others—Accounts Receivable Amounts Owed to Others—Accounts Payable Investment in Business—Richard Tracy, Capital 170. The following adjustments might be necessary before an accurate set of financial statements can be prepared: ∙ No office supplies expense is shown. The office supplies account should be adjusted for the supplies used during the year. ∙ No depreciation expense is shown for the trucks or equipment accounts. An adjusting entry should be prepared for depreciation expense on each of these assets. ∙ An inquiry should be made as to whether any accrued expenses, such as wages or utilities, exist at the end of the year. ∙ An inquiry should be made as to whether any prepaid expenses, such as rent or insurance, exist at the end of the year. ∙ An inquiry should be made as to whether any unearned revenue exists at the end of the year. Powered by Cognero

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Chapter 04: The Accounting Cycle 171. 1. (e) Owner’s Equity 2. (b) Property, plant, and equipment 3. (c) Current liabilities 4. (d) Long-term liabilities 5. (b) Property, plant, and equipment 6. (d) Long-term liabilities 7. (a) Current assets 8. (a) Current assets

172. A classified balance sheet shows subsections for assets and liabilities. Assets are commonly divided into two sections: (1) current assets and (2) property, plant, and equipment. Liabilities are commonly divided into (1) current liabilities and (2) long-term liabilities. 173. (a) (1) Date of statement should be "December 31" not "For the Year Ended December 31." (2) Accounts payable should be a current liability. (3) Land is a fixed asset and should be listed as property, plant, and equipment. (4) Accumulated depreciation should be deducted from the related fixed asset in the “Property, plant, and equipment” section. (5) An adding error was made in determining the amount of total assets. (6) Accounts receivable should be a current asset. (7) Net income would be reported on the income statement. (8) Wages payable should be a current liability. (b) A corrected balance sheet would be as follows: Mark Brock Services Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Supplies Prepaid insurance Total current assets Property, plant, and equipment: Land Building Accum. depr.—building Equipment Accum. depr.—equipment Total property, plant, and equipment Powered by Cognero

$ 7,170 10,000 2,590 800 $20,560 $24,000 43,700 (12,525) 29,250 (7,340) 77,085 Page 50

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Chapter 04: The Accounting Cycle Total assets Liabilities Current liabilities: Accounts payable Wages payable Total liabilities Owner’s Equity Mark Brock, capital Total liabilities and owner’s equity

$97,645

$7,500 1,500 $9,000 88,645 $97,645

174. (1) current asset (2) current liability (3) current asset (4) expense (5) expense (6) current asset (7) current liability (8) revenue 175. Finnegan Co. Income Statement For the Period Ended April 30 Fees earned Expenses: Rent expense Depreciation expense Supplies expense Total expenses Net income

$78,000 $34,000 7,250 1,800 (43,050) $34,950

176. Abigail Trucking Balance Sheet April 30 Assets Current assets: Cash Accounts receivable Supplies Prepaid insurance Prepaid rent Total current assets Property, plant, and equipment: Trucks Accum. depr. Total property, plant, and equipment Powered by Cognero

$ 90,500 83,400 4,700 6,500 12,000 $197,100

$206,000 (28,000) 178,000 Page 51

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Chapter 04: The Accounting Cycle Total assets

$375,100 Liabilities

Current liabilities: Accounts payable Salaries payable Unearned fees Total liabilities

$42,600 12,500 5,000 $ 60,100 Owner’s Equity

A. Smith, capital Total liabilities and owner’s equity

315,000 $375,100

177. (1) (b) property, plant, and equipment (2) (b) property, plant, and equipment (3) (e) expense (4) (d) revenue (5) (c) current liability (6) (a) current asset (7) (a) current asset (8) (e) expense (9) (c) current liability 178. 1. Close revenue and expense accounts to the owner’s capital account. 2. Close the owner’s drawing account to the owner’s capital account. At the beginning of the next period, temporary accounts should have zero balances. To achieve a zero balance, temporary account balances are transferred to permanent accounts at the end of the accounting period. The entries that transfer these balances are called closing entries and the transfer process is called the closing process. The first closing entry has the effect of moving net income or loss to the owner’s capital account. The second closing entry has the effect of deducting the owner’s withdrawals from the owner’s capital account. 179. Dec. 31

Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Barbara Rose, Capital

37,000 1,200 100 19,000 1,800 320 700 9,000 2,700 4,780

180. a. Salary Expense Salaries Payable

4,200

b. Owner’s Capital Salary Expense

302,700

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4,200

302,700 Page 52

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Chapter 04: The Accounting Cycle

181. The three revenue accounts are debited, and the six expense accounts are credited. Because the total revenue for the period exceeds the total expenses, Barbara Rose, Capital is credited for $4,780, the amount of net income. 182. Dec. 31

183. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Barbara Rose, Capital Barbara Rose, Drawing

2,000 2,000

Utilities Payable Utilities Expense Supplies Supplies Expense Fees Earned Unearned Fees Accounts Receivable Owner’s Drawing Owner’s Capital Accumulated Depreciation—Equipment Depreciation Expense—Equipment Equipment Prepaid Insurance Insurance Expense

184. Dec. 31 Rent Fees Earned Furniture Rental Revenue Interest Revenue Wages Expense Depreciation Expense Utilities Expense Insurance Expense Maintenance Expense Income Tax Expense Scott Keynes, Capital

185. Jan. 31 Fees Earned Wages Expense Rent Expense Supplies Expense Miscellaneous Expense G. Harrison, Capital Powered by Cognero

n/a debit n/a debit credit n/a n/a debit n/a n/a debit n/a n/a debit

40,000 2,200 100 20,000 1,800 320 700 8,000 2,700 8,780

124,600 29,000 43,000 7,300 5,700 39,600 Page 53

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Chapter 04: The Accounting Cycle 31 G. Harrison, Capital G. Harrison, Drawing

186. Mar. 31 Fees Earned Salaries Expense Rent Expense Depreciation Expense Supplies Expense Miscellaneous Expense Banes Domino, Capital 31 Banes Domino, Capital Banes Domino, Drawing

6,000 6,000

510,000 244,500 48,000 25,000 9,500 2,000 181,000 47,000 47,000

187. Service Revenue Depreciation Expense Insurance Expense Rent Expense Salaries Expense Supplies Expense R. Waters, Capital

186,000

R. Waters, Capital R. Waters, Drawing

48,000

13,500 2,510 32,700 41,390 2,500 93,400

48,000

188. Sept. 30

Service Revenue

47,200

Wages Expense Office Supplies Expense Repair Parts Expense Depreciation Expense J. Perez, Capital

4,840 1,275 925 1,350 38,810

30 J. Perez, Capital J. Perez, Drawing

1,750 1,750

189. Mar. 31

Service Revenue Wages Expense Office Supplies Expense Store Supplies Expense Depreciation Expense D. Martin, Capital

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36,500 6,425 1,465 5,150 1,575 21,885 Page 54

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Chapter 04: The Accounting Cycle 31 D. Martin, Capital D. Martin, Drawing

6,250 6,250

190. July 31

Service Revenue Ladonna Douglas, Capital Wages Expense Rent Expense Advertising Expense Office Supplies Expense Store Supplies Expense Depreciation Expense

41,500 5,865

31 Ladonna Douglas, Capital Ladonna Douglas, Drawing

13,250

191. Fees Earned Wages Expense Rent Expense Utilities Expense Depreciation Expense Miscellaneous Expense B. Miller, Drawing B. Miller, Capital B. Miller, Drawing

37,425 3,000 2,750 1,465 2,150 575

13,250

36,600 12,450 4,900 3,475 2,150 1,275 12,350 4,870 4,870

Miller Company Post-Closing Trial Balance December 31 Cash Accounts Receivable Prepaid Expenses Equipment Accumulated Depreciation Accounts Payable Notes Payable B. Miller, Capital Total

8,130 3,300 2,750 10,400

24,580

2,200 2,700 1,000 18,680 24,580

192. 1. Transactions are analyzed and recorded in the journal. Powered by Cognero

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Chapter 04: The Accounting Cycle 2. 3. 4. 5. 6. 7. 8. 9. 10.

Transactions are posted to the ledger. An unadjusted trial balance is prepared. Adjustment data are assembled and analyzed. An optional end-of-period spreadsheet (work sheet) is prepared. Adjusting entries are journalized and posted to the ledger. An adjusted trial balance is prepared. Financial statements are prepared. Closing entries are journalized and posted to the ledger. A post-closing trial balance is prepared.

193.

Kirk Enterprises End-of-Period Spreadsheet For the Year Ended July 31

Cash Prepaid Insurance Accounts Receivable Supplies Equipment Accum. Depreciation Unearned Revenue Accounts Payable Wages Payable J. Kirk, Capital J. Kirk, Drawing Service Revenue Advertising Expense Wages Expense Insurance Expense Supplies Expense Depreciation Expense

Unadjusted Trial Balance Debit Credit 36,000

Adjustments Debit

12,000

Adjusted Trial Balance Debit Credit 36,000

Credit

(e) 3,000

56,000

9,000 56,000

12,000 60,000

(c) 4,000

12,000

8,000 60,000

(a) 1,000

13,000

20,000 (d) 15,000

5,000

32,000

32,000 (b) 2,000

2,000 84,000

84,000 4,000

4,000 80,000

(d) 15,000

28,000

28,000

20,000

228,000

95,000

228,000

(b) 2,000

22,000

(e) 3,000

3,000

(c) 4,000

4,000

(a) 1,000 25,000

1,000 25,000

231,000

231,000

194. (a)

Adjusting Entries Depreciation Expense Accumulated Depreciation

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1,000 1,000 Page 56

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Chapter 04: The Accounting Cycle (b)

(c)

(d)

(e)

Wages Expense Wages Payable

2,000

Supplies Expense Supplies

4,000

Unearned Revenue Service Revenue

15,000

Insurance Expense Prepaid Insurance

3,000

2,000

4,000

15,000

3,000

195. (a) Income Statement columns: 2, 5, 11, 12 (b) Balance Sheet columns: 1, 3, 4, 6, 7, 8, 9, 10 196. Fraser Services Co. Income Statement For the Year Ended December 31 Service revenue Operating expenses: Wages expense Rent expense Utilities expense Depreciation expense Supplies expense Insurance expense Miscellaneous expense Total operating expenses Net loss

$ 92,500 $63,750 24,000 5,000 4,950 3,150 2,900 1,200 (104,950) $ (12,450)

197. Austin Enterprises Income Statement For the Year Ended December 31 Fees earned Expenses: Wages expense Rent expense Depreciation expense Total expenses Net income

$59,500 $19,000 7,000 3,500 (29,500) $30,000

198. Powered by Cognero

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Chapter 04: The Accounting Cycle Closing Entries Dec. 31 Fees Earned Wages Expense Rent Expense Depreciation Expense T. Austin, Capital 31 T. Austin, Capital T. Austin, Drawing

59,500 19,000 7,000 3,500 30,000 2,000 2,000

199. Danilo Enterprises End-of-Period Spreadsheet For the Year Ended December 31 Adjusted Trial Income Balance Sheet Balance Statement Account Title Debit Credit Debit Credit Debit Credit Cash 14,500 14,500 Accounts 7,500 7,500 Receivable Supplies 500 500 Equipment 20,500 20,500 Accum. 15,000 15,000 Depr.— Equip. Accounts 9,500 9,500 Payable Wages 3,060 3,060 Payable E. Danilo, 18,240 18,240 Capital E. Danilo, Drawing 1,000 1,000 Fees Earned 34,000 34,000 Wages 18,000 18,000 Expense Rent Expense 9,300 9,300 Depreciation 8,500 _____ 8,500 Expense 79,800 79,800 35,800

34,000 44,000

45,800

35,800

1,800 1,800 35,800 45,800

45,800

Net loss

200. The difference between the total debits and total credits of the Income Statement columns indicates the amount of net income or loss. This difference should be compared to the difference between the total debits and total credits of the Powered by Cognero

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Chapter 04: The Accounting Cycle Balance Sheet columns. They should be the same amounts but opposite from each other. If the debits are more than the credits in the Income Statement columns, signifying a net loss, then the credits should be higher than the debits in the Balance Sheet columns by the same amount. If the credits are more than the debits in the Income Statement columns, signifying a net income, then the debits should be higher than the credits in the Balance Sheet columns by the same amount. 201. The end-of-period spreadsheets are tools used by accountants to collect and summarize data for various analysis and reports. 202. 1. Balance Sheet column 2. Balance Sheet column 3. Income Statement column 4. Balance Sheet column 5. Income Statement column 6. Balance Sheet column 7. Balance Sheet column 8. Income Statement column 203. Net Income = Total Debits – Total Credits = $630,430 – $614,210 = $16,220 204. Net Loss = Total Debits – Total Credits = $614,210 – $630,430 = $(16,220) 205. Gamma Company has the best short-term solvency position because its current ratio is the highest. Gamma Company's current ratio is computed as its current assets divided by its current liabilities, or $60,125 ÷ $32,500 = 1.9. Thus, its current assets are 1.9 times its current liabilities, meaning that, of all the companies shown, Gamma Company is best able to pay its current liabilities as they come due. Current Total Current Total Net Current Company Assets Assets Liabilities Liabilities Income Ratio Alpha $74,524 $168,672 $60,100 $150,600 $94,958 1.2 Company Beta $207,536 $290,290 $152,600 $203,000 $207,536 1.4 Company Gamma $60,125 $66,929 $32,500 $52,700 $36,725 1.9 Company Delta $95,335 $182,520 $82,900 $135,200 $105,283 1.2 Company 206.

LoopTech Services Statement of Owner’s Equity For the Year Ended December 31

Velma Morgan, capital, January 1 Net loss for the year Withdrawals Balances, December 31

$392,500 (38,700) (25,000) $328,800

207. The ratio is increasing, meaning the company's solvency is improving. 208. Because depreciation-related expense does not involve a cash payment, it is not deducted in arriving at Dunedin’s estimated cash basis net income of $60,000 million. As a result, Dunedin’s accrual net income of $49,340 million is lower Powered by Cognero

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Chapter 04: The Accounting Cycle than its estimated cash basis net income of $60,000 million. Almost all of this difference of $10,660 million ($60,000 – $49,340) is due to the depreciation-related expense of $9,800 million. 209. Smith Consulting Services Statement of Cash Flows For the Month Ended May 31, 20Y4 Cash flows from (used in) operating activities: Cash received from clients $70,000 Cash paid for expenses and to creditors (30,000) Net cash flows from operating activities Cash flows from (used in) investing activities: Cash paid for office equipment Cash flows from (used in) financing activities: Cash received from owner’s investment $50,000 Cash paid for owner withdrawals (8,000) Net cash flows from financing activities Net increase in cash Cash balance, May 1, 20Y4 Cash balance, May 31, 20Y4

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$40,000 (15,000)

42,000 $67,000 0 $67,000

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Chapter 05: Accounting for Retail Businesses

Indicate whether the statement is true or false. 1. The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements. a. True b. False 2. In a retail business, sales minus operating expenses equals net income. a. True b. False 3. Cost of goods sold is the amount that a retail business pays for producing the merchandise it intends to sell. a. True b. False 4. Service businesses provide services for income, while a retail business sells merchandise. a. True b. False 5. In retail businesses, inventory is reported as a current asset. a. True b. False 6. Under a periodic inventory system, the cost of inventory on hand at the end of the accounting period is determined by a physical count of the inventory. a. True b. False 7. Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts. a. True b. False 8. In a perpetual inventory system, the inventory account is only used to reflect the beginning inventory. a. True b. False 9. Freight in is the amount paid by the company to deliver merchandise sold to a customer. a. True b. False 10. Freight in is considered a cost of purchasing inventory. a. True b. False 11. The cost of inventory is limited to the purchase price less any purchases discounts. a. True Powered by Cognero

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Chapter 05: Accounting for Retail Businesses b. False 12. Under the perpetual inventory system, when a sale is made, both the sale and cost of goods sold are recorded. a. True b. False 13. If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. a. True b. False 14. When merchandise that was sold is returned, a credit to Customer Refunds Payable is made. a. True b. False 15. In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Goods Sold is debited as part of the transaction. a. True b. False 16. Customer Refunds Payable is an account used to record expected merchandise returns from customers. a. True b. False 17. Estimated Returns Inventory is an account used when adjusting for expected merchandise returns in the next period. a. True b. False 18. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. a. True b. False 19. Most retailers record all credit card sales as credit sales. a. True b. False 20. The fees associated with credit card sales are periodically recorded as expenses. a. True b. False 21. A seller may grant a buyer a reduction in selling price for early payment of a sales invoice, and this is called a sales discount. a. True b. False 22. A sales discount encourages customers to pay accounts more quickly than if a discount were not available. a. True Powered by Cognero

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Chapter 05: Accounting for Retail Businesses b. False 23. Inventory normally has a debit balance. a. True b. False 24. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount. a. True b. False 25. In a perpetual inventory system, merchandise returned to vendors reduces the inventory account. a. True b. False 26. Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to journalize the purchase will include a debit to Cash and a credit to Sales. a. True b. False 27. Purchases of merchandise are typically credited to the inventory account under the perpetual inventory system. a. True b. False 28. Even if borrowing has to be done to pay within the discount period, it is generally advantageous for the buyer to take advantage of purchases discounts. a. True b. False 29. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. a. True b. False 30. A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called a cash discount. a. True b. False 31. Sellers and buyers are required to record trade discounts. a. True b. False 32. If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination. a. True b. False Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 33. A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of $750. a. True b. False 34. When merchandise is sold for $600 plus 6% sales tax, the sales account should be credited for $636. a. True b. False 35. The abbreviation FOB stands for "free on board." a. True b. False 36. Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The sales amount recorded under the net method is $3,528. a. True b. False 37. If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. a. True b. False 38. When the terms of sale are FOB shipping point, the buyer pays the freight charges. a. True b. False 39. Merchandise costing $3,500 is purchased with terms FOB destination, 2/10, n/30, with prepaid freight costs of $125. If payment is made within 10 days, the amount of the purchases discount is $70. a. True b. False 40. The chart of accounts for a retail business would include an account called Delivery Expense. a. True b. False 41. When companies use a perpetual inventory system, journalizing the purchase of inventory will include a debit to Purchases. a. True b. False 42. Most companies will not take a purchases discount, because 1% or 2% discounts are insignificant. a. True b. False 43. The seller may prepay the freight costs even though the terms are FOB shipping point. a. True b. False Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 44. The seller records the sales tax as part of the sales amount. a. True b. False 45. A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. a. True b. False 46. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business. a. True b. False 47. Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer. a. True b. False 48. Because many companies use computerized accounting systems, periodic inventory is widely used. a. True b. False 49. If the perpetual inventory system is used, an account entitled Cost of Goods Sold is included in the general ledger. a. True b. False 50. Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point. a. True b. False 51. On a single-step income statement, the total of all expenses is deducted from the total of all revenues. a. True b. False 52. The form of the balance sheet in which assets, liabilities, and owner’s equity are presented in a downward sequence is called the report form. a. True b. False 53. Sales is equal to the cost of goods sold less the gross profit. a. True b. False 54. Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as “Other revenue” on the multiple-step income statement. Powered by Cognero

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Chapter 05: Accounting for Retail Businesses a. True b. False 55. In a multiple-step income statement, the dollar amount for operating income is always the same as net income. a. True b. False 56. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and operating income are not readily available. a. True b. False 57. Gross profit minus selling expenses equals net income. a. True b. False 58. On the income statement for a retail business, sales will be reduced by administrative expenses to arrive at operating income. a. True b. False 59. When comparing a retail business to a service business, the financial statement that changes the most is the balance sheet. a. True b. False 60. Cost of goods sold is listed with the selling expenses on a multiple-step income statement. a. True b. False 61. Other revenue and expenses are items that are not related to the primary operating activity. a. True b. False 62. The asset turnover ratio measures how effectively a business is using its assets to generate sales. a. True b. False 63. Under the periodic inventory system, the cost of goods sold is equal to the beginning inventory plus the cost of merchandise purchased plus the ending inventory. a. True b. False 64. In a periodic inventory system, the cost of merchandise purchased includes the cost of freight in. a. True b. False Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 65. In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account. a. True b. False 66. Under the periodic inventory system, the cost of goods sold is recorded when sales are made. a. True b. False 67. Under a periodic inventory system, the accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 68. Inventory is classified on the balance sheet as a a. current liability b. current asset c. long-term asset d. long-term liability 69. Which of the following is not a difference between a retail business and a service business? a. in what is sold b. the inclusion of gross profit on the income statement c. accounting equation d. inventory included on the balance sheet 70. In a retail business, operating income plus operating expenses is equal to a. cost of goods sold b. cost of merchandise c. sales d. gross profit 71. Which of these terms applies to the excess of sales over cost of goods sold? a. gross profit b. operations c. net income d. gross sales 72. The inventory system employing accounting records that continuously disclose the amount of inventory is called a. retail b. periodic c. physical d. perpetual Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 73. Compute the gross profit for Jefferson Company based on the following: Sales Selling expenses Cost of goods sold a. $495,500 b. $183,500 c. $721,500 d. $226,000

$764,000 42,500 538,000

74. Compute operating income for Jonas Company based on the following data: Sales $764,000 Operating expenses 52,500 Cost of goods sold 538,000 a. $485,500 b. $711,500 c. $173,500 d. $226,000 75. Gross profit is equal to a. sales plus cost of goods sold b. sales plus selling expenses c. sales less selling expenses d. sales less cost of goods sold 76. When comparing a retail business to a service business, the financial statement that changes the most is the a. balance sheet b. income statement c. statement of owner’s equity d. statement of cash flows 77. On May 1, Dollar Co. sold merchandise to Pound Co. on account, $25,500, terms net 45. The cost of the goods sold was $19,500. The entry to journalize the sale will include a a. debit to Sales for $25,500 b. credit to Accounts Receivable for $19,500 c. credit to Sales for $19,500 d. debit to Accounts Receivable for $25,500 78. The primary difference between the periodic and perpetual inventory systems is that a a. periodic system determines the inventory on hand only with a physical count at the end of the accounting period b. periodic system keeps a record showing the inventory on hand at all times c. periodic system provides an easy means to determine inventory shrinkage d. periodic system records the cost of the sale on the date the sale is made Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 79. Using a perpetual inventory system, the entries to journalize the sale of merchandise on account and the corresponding cost of goods sold include a a. debit to Sales b. debit to Inventory c. credit to Inventory d. credit to Accounts Receivable 80. Merchandise is ordered on November 10; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 13 with credit terms of n/30; the merchandise is received by the buyer on November 18; and the entry is made in the buyer's accounts on November 20. The credit period begins with what date? a. November 10 b. November 13 c. November 18 d. November 20 81. Using a perpetual inventory system, the entry to journalize the return from a customer of merchandise sold on account includes a a. credit to Customer Refunds Payable b. debit to Inventory c. credit to Inventory d. debit to Cash 82. If merchandise sold on account is returned to the seller, the seller acknowledges the return by issuing a a. sales invoice b. purchase invoice c. credit memo d. debit memo 83. The arrangements between buyer and seller as to when payments for merchandise are to be made are called a. credit terms b. net cash c. cash on demand d. gross cash 84. In credit terms of 3/15, n/45, the "3" represents the a. number of days in the discount period b. full amount of the invoice c. number of days when the entire amount is due d. percent of the purchases discount 85. Merchandise with a sales price of $5,000 is sold on account with terms 2/10, n/30. The entry to journalize the sale under the net method would include a a. debit to Cash for $5,000 b. debit to Customer Refunds Payable for $100 c. credit to Sales for $4,900 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses d. debit to Accounts Receivable for $4,880 86. Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for $25,000. What is the amount of sales discount allowable? a. $260 b. $500 c. $460 d. $150 87. Which of the following accounts has a normal credit balance? a. Accounts Receivable b. Sales c. Inventory d. Delivery Expense 88. The entry to journalize the return of merchandise from a customer would include a a. debit to Sales b. credit to Sales c. debit to Customer Refunds Payable d. debit to Estimated Returns Inventory 89. Sales to customers who use bank credit cards such as MasterCard and VISA are usually journalized by a a. debit to Bank Credit Card Sales, a debit to Credit Card Expense, and a credit to Sales b. debit to Cash and a credit to Sales c. debit to Cash, a credit to Credit Card Expense, and a credit to Sales d. debit to Sales, a debit to Credit Card Expense, and a credit to Cash 90. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as a. sales on account b. sales returns c. cash sales d. sales when the credit card company remits the cash 91. When a buyer returns merchandise purchased for cash, the buyer will journalize the transaction as a a. debit to Inventory and a credit to Cash b. debit to Cash and a credit to Inventory c. debit to Cash and a credit to Sales d. debit to Sales and a credit to Accounts Payable 92. When merchandise purchased on account is returned under the perpetual inventory system, the buyer will debit a. Inventory b. Purchases Returns and Allowances c. Accounts Payable d. Accounts Receivable Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 93. When purchases of merchandise are made on account with a perpetual inventory system, the transaction is journalized with which entry? a. debit Accounts Payable and credit Inventory b. debit Inventory and credit Accounts Payable c. debit Inventory and credit Cash Discounts d. debit Inventory and credit Purchases 94. Using a perpetual inventory system, the entry to journalize the purchase of $30,000 of merchandise on account would include a a. debit to Accounts Payable b. debit to Inventory c. credit to Inventory d. credit to Sales 95. Using a perpetual inventory system, the entry to journalize the return of merchandise purchased on account includes a a. debit to Cost of Goods Sold b. credit to Accounts Payable c. credit to Inventory d. credit to Sales 96. In recording the cost of goods sold for cash, based on data available from perpetual inventory records, the journal entry would a. debit Cost of Goods Sold and credit Sales b. debit Cost of Goods Sold and credit Inventory c. debit Inventory and credit Cost of Goods Sold d. debit Accounts Receivable and credit Inventory 97. The amount of the total cash paid to the seller for merchandise purchased for consumption would normally include a. only the list price b. only the sales tax c. the list price plus the sales tax d. the list price less the sales tax 98. Norfolk Sporting Goods purchases merchandise with a catalog list price of $30,000. The retailer receives a 30% trade discount and credit terms of 2/10, n/30. What amount should Norfolk debit to the inventory account? a. $21,000 b. $20,580 c. $30,000 d. $29,400 99. An invoice received included the following information: merchandise price, $12,000; terms 1/10, n/eom; FOB shipping point with prepaid freight of $900. Assuming that a credit for merchandise returned of $500 is granted prior to payment and that the invoice is paid within the discount period, what amount of cash should be paid by the buyer? a. $12,285 b. $11,500 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses c. $10,480 d. $11,385 100. Which of the following accounts usually has a debit balance? a. Accounts Payable b. Sales Tax Payable c. Sales d. Inventory 101. Merchandise is sold for cash. The selling price of the merchandise is $6,000, and the sale is subject to a 7% state sales tax. The entry to journalize the sale would include a credit to a. Cash for $6,000 b. Sales for $6,420 c. Sales Tax Payable for $420 d. Sales for $5,580 102. If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB buyer 103. If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as a. FOB shipping point b. FOB destination c. FOB n/30 d. FOB seller 104. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned 105. When goods are shipped FOB destination and the seller pays the freight charges, the buyer a. journalizes a reduction for the cost of the merchandise b. journalizes a reimbursement to the seller c. does not take a discount d. makes no journal entry for the freight 106. Pierce Company sold merchandise on account to Stanton Company, terms FOB shipping point, n/ 30, for $20,000. Pierce prepaid the $500 shipping charge. Which of the following entries does Pierce make to journalize this sale? a. debit Accounts Receivable—Stanton Company for $20,000; credit Sales for $20,000 b. debit Accounts Receivable—Stanton Company for $20,000; credit Sales for $20,000 and debit Accounts Receivable—Stanton Company for $500; credit Cash for $500 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses c. debit Accounts Receivable—Stanton Company for $20,500; credit Sales for $20,500 d. debit Accounts Receivable—Stanton Company for $20,000; credit Sales for $20,000 and debit Delivery Expense for $500; credit Cash for $500 107. Emma Co. sold merchandise on account to Isabella Co., terms FOB shipping point, 2/10, /30, for $15,000. Emma Co. prepaid the $750 shipping charge. Using the perpetual inventory method, which of the following entries will Isabella Co. make to journalize the payment for the merchandise if it pays within the discount period? a. debit Accounts Payable—Emma Co. for $15,000; credit Cash for $15,000 b. debit Accounts Payable—Emma Co. for $15,450; credit Cash for $15,450 c. debit Accounts Payable—Emma Co. for $15,000; debit Freight In for $750; credit Cash for $15,750 d. debit Accounts Payable—Emma Co. for $15,750; credit Inventory for $300; credit Cash for $15,450 108. Cumberland Co. sells $2,000 of inventory to Hancock Co. for cash. Cumberland paid $1,250 for the merchandise. Under a perpetual inventory system, which of the following journal entries would be made? a. debit Cash for $2,000; credit Inventory for $1,250 b. debit Cash for $2,000; credit Sales for $2,000 and debit Cost of Goods Sold for $1,250; credit Inventory for $1,250 c. debit Cash for $1,250; credit Sales for $1,250 d. debit Accounts Receivable for $2,000; credit Sales for $2,000 and debit Cost of Goods Sold for $1,250; credit Inventory for $1,250 109. Jacob Co. purchases merchandise on account from Isaiah Co. for $9,700, receiving an invoice dated May 1 with terms 1/15, net 45. What is the amount of the available purchases discount, and by what date must the invoice be paid in order for Jacob Co. to take advantage of the discount? a. $194, May 15 b. $194, May 16 c. $97, May 15 d. $97, May 16 110. Kaden Co. purchases merchandise on account from Jase Co. for $9,600, receiving an invoice dated July 15 with terms 1/15, net 45. If Kaden Co. chooses not to take the discount, by what date must the payment be made? a. July 30 b. August 29 c. August 15 d. July 25 111. To encourage a buyer to pay before the end of the credit period, the seller may offer a a. purchases discount b. sales discount c. trade discount d. payment discount 112. Taking advantage of a 2/10, n/30 purchases discount is equal to a yearly savings rate of approximately a. 2% b. 24% Powered by Cognero

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Chapter 05: Accounting for Retail Businesses c. 20% d. 36% 113. Who is responsible for the freight costs when the terms are FOB shipping point? a. the ultimate customer b. the buyer c. the seller d. either the seller or the buyer 114. Who is responsible for the freight cost when the terms are FOB destination? a. the seller b. the buyer c. the ultimate customer d. either the buyer or the seller 115. A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15% trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay this invoice within the discount period? a. $30,000 b. $24,900 c. $29,400 d. $24,990 116. What type of company would normally offer trade discounts to its customers? a. service company b. retailer c. wholesaler d. online retailer 117. Which of the following accounts will only be found in the chart of accounts of a retail business? a. Sales b. Accounts Receivable c. Inventory d. Accounts Payable 118. Which of the following items would not affect the cost of inventory purchased during the period? a. quantity discounts b. purchases discounts c. freight in d. sales commissions 119. If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the terms are a. consigned b. n/30 c. FOB shipping point Powered by Cognero

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Chapter 05: Accounting for Retail Businesses d. FOB destination 120. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are a. n/30 b. FOB shipping point c. FOB destination d. consigned 121. If merchandise sells for $3,500, with terms 3/15, n/45, and the cost of the inventory sold is $2,100, the amount charged to sales under the net method of recording sales discounts is a. $3,395 b. $3,500 c. $2,037 d. $2,100 122. Under the perpetual inventory system, all purchases of merchandise are debited to a. Inventory b. Cost of Goods Sold c. Inventory Available for Sale d. Purchases 123. When the perpetual inventory system is used, the inventory sold is debited to a. Supplies Expense b. Cost of Goods Sold c. Inventory d. Sales 124. Under a perpetual inventory system, a. accounting records continuously disclose the amount of inventory b. increases in inventory resulting from purchases are debited to Purchases c. there is no need for a year-end physical count d. the purchases returns and allowances account is credited when goods are returned to vendors 125. The entry to journalize the receipt of inventory purchased for cash in a perpetual inventory system would be a. Inventory 1,500 Cash 1,500 b. Office Supplies 1,500 Cash 1,500 c. Purchases 1,500 Accounts Payable 1,500 d. Cash 1,500 Accounts Receivable 1,500 126. Which of the following items should not be included in the cost of ending inventory? a. purchased units in transit, shipped FOB shipping point Powered by Cognero

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Chapter 05: Accounting for Retail Businesses b. purchased units in transit, shipped FOB destination c. units on hand in the warehouse d. sold units in transit, not invoiced, and shipped FOB destination 127. Corbit Company sold merchandise for $10,000 cash. The cost of the goods sold was $7,590. The entries to journalize this transaction under the perpetual inventory system would be a. Cash 10,000 Inventory 10,000 Cost of Goods Sold Sales b. Cash Sales Cost of Goods Sold Inventory c. Cash Sales Cost of Goods Sold Inventory d. Cash Sales Cost of Goods Sold Inventory

7,590 7,590 10,000 10,000 7,590 7,590 10,000 10,000 10,000 10,000 7,590 7,590 7,590 7,590

128. Abbey Co. sold merchandise to Gomez Co. on account, $35,000, terms n/45. The cost of the goods sold was $24,500. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,700. What is the amount of gross profit earned by Abbey Co. on these transactions? a. $10,500 b. $30,772 c. $8,600 d. $31,400 129. What is a major difference between the periodic and perpetual inventory systems? a. Under the periodic inventory system, the purchase of inventory will be debited to the purchases account. b. Under the periodic inventory system, no journal entry is made at the time of the sale of inventory for the cost of the inventory. c. Under the periodic inventory system, all adjustments such as purchases returns and allowances and discounts are reconciled at the end of the accounting period. d. all of these choices 130. Generally, the revenue account for a retail business is entitled a. Sales b. Fees Earned c. Gross Sales d. Gross Profit Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 131. Which account is not classified as a selling expense? a. Sales Salaries b. Delivery Expense c. Cost of Goods Sold d. Advertising Expense 132. President's salaries, depreciation of office furniture, and office supplies are a. selling expenses b. miscellaneous expenses c. administrative expenses d. inventory expenses 133. Expenses that are incurred directly or entirely in connection with the selling of merchandise are classified as a. selling expenses b. general expenses c. other expenses d. administrative expenses 134. When the perpetual inventory system is used, the inventory sold is shown on the income statement as a. cost of goods sold b. purchases c. purchases returns and allowances d. net purchases 135. Merchandise is purchased for $6,000 on September 2, terms 2/10, n/30, FOB destination. Freight costs paid by the seller total $200. What is the required payment if paid on September 12? a. $6,120 b. $5,940 c. $6,090 d. $5,880 136. Under the periodic inventory system, the entry to journalize the purchase of inventory would include a debit to a. Inventory b. Purchases c. Accounts Payable d. Cost of Merchandise Purchased 137. Using the following information for a periodic inventory system, what is the amount of net income (loss)? Purchases Inventory, September 1 Administrative expense Rent revenue Powered by Cognero

$32,000 5,700 910 1,200

Selling expense Inventory, September 30 Sales Interest expense

$

960 6,370 63,000 1,040 Page 17

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Chapter 05: Accounting for Retail Businesses a. $29,510 b. $29,960 c. $28,310 d. $29,350 138. Using the following information for a periodic inventory system, what is the amount of gross profit? Purchases Inventory, September 1 Administrative expense Rent revenue

$32,000 5,700 910 1,200

Selling expense Inventory, September 30 Sales Interest expense

$

960 6,370 63,000 1,040

a. $25,300 b. $31,670 c. $30,600 d. $62,840 139. Using the following information for a periodic inventory system, what is the amount of operating income? Purchases Inventory, September 1 Administrative expense Rent revenue

$32,000 5,700 910 1,200

Selling expense Inventory, September 30 Sales Interest expense

$

960 6,370 63,000 1,040

a. $31,670 b. $29,960 c. $28,760 d. $29,800 140. Multiple-step income statements show a. gross profit but not operating income b. neither gross profit nor operating income c. both gross profit and operating income d. operating income but not gross profit 141. The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called the a. multiple-step income statement b. revenue statement c. operating income statement d. single-step income statement 142. Which of the following accounts should be closed to Owner’s Capital at the end of the fiscal year? a. Inventory b. Accumulated Depreciation Powered by Cognero

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Chapter 05: Accounting for Retail Businesses c. Customer Refunds Payable d. Cost of Goods Sold 143. If the physical count of inventory revealed $158,000 of inventory on hand and the inventory records reported $163,000, what would be the necessary adjusting entry to journalize inventory shrinkage? a. debit Inventory for $158,000; credit Cost of Goods Sold for $158,000 b. debit Inventory for $5,000; credit Cost of Goods Sold for $5,000 c. debit Cost of Goods Sold for $163,000; credit Inventory for $158,000 d. debit Cost of Goods Sold for $5,000; credit Inventory for $5,000 144. Inventory shrinkage is recorded when a. merchandise is returned by a buyer b. merchandise purchased from a seller is incomplete or short c. merchandise is returned to a seller d. there is a difference between a physical count of inventory and inventory records 145. Bradford Company had sales of $700,000 for a year. The total assets at the beginning of the year were $240,000, and the total assets at the end of the year were $280,000. The asset turnover ratio is a. 2.69 b. 0.40 c. 2.92 d. 0.34 146. Bountiful Company had sales of $650,000 and cost of goods sold of $200,000 during a year. Total assets at the beginning of the year were $175,000 and at the end of the year were $167,000. The asset turnover ratio is a. 3.00 b. 3.80 c. 0.29 d. 0.26 147. A company using the periodic inventory system has the following account balances: Inventory (beginning of the year), $3,600; Freight In, $650; Purchases, $10,700; Purchases Returns and Allowances, $1,950; Purchases Discounts, $330. The cost of merchandise purchased is a. $12,670 b. $9,070 c. $8,420 d. $17,230 148. A company using the periodic inventory system has inventory costing $210 on hand at the beginning of a period. During the period, merchandise costing $635 is purchased. At year-end, inventory costing $160 is on hand. The cost of goods sold for the year is a. $795 b. $685 c. $265 d. $635 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 149. Which of the following accounts will not be found in the “Cost of goods sold” section of the income statement for a company using the periodic inventory method? a. Purchases b. Freight In c. Selling Expense d. Inventory 150. Where are selling and administrative expenses found on the multiple-step income statement? a. before gross profit b. after sales and before gross profit c. after net income and before expenses d. after gross profit 151. Under the periodic inventory system, the entry to journalize the cost of goods sold at the point of sale will include which of the following? a. none of these choices b. a debit to Cost of Goods Sold c. a credit to Inventory d. a credit to Purchases 152. Under the periodic inventory system, closing entries will include a. debits to Sales, Purchases Returns and Allowances, and Purchases Discounts b. credits to the Allowance for Doubtful Accounts c. adjustments to the inventory account to match physical inventory d. all of these choices 153. The proper entry to journalize the receipt of inventory purchased on account in a periodic inventory system would be a. Inventory 1,600 Accounts Payable 1,600 b. Office Supplies 1,600 Accounts Payable 1,600 c. Purchases 1,600 Accounts Payable 1,600 d. Purchases 1,600 Accounts Receivable 1,600 154. Given the following information, what is the cost of goods sold? Purchases Inventory, September 1 Administrative expense Rent revenue a. $32,400 b. $32,670 c. $31,330 d. $38,370 Powered by Cognero

$32,000 5,700 910 1,200

Selling expense Inventory, September 30 Sales Interest expense

$

960 6,370 63,000 1,040

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Chapter 05: Accounting for Retail Businesses

155. Discuss the following statement: “Operating cycles for all retail businesses are the same, with similar profit margins.” Include an example(s) to illustrate your explanation. 156. Describe the major differences in preparing the financial statements for a service business and a retail business. 157. During the current year, merchandise is sold for $137,500 cash and $425,600 on account. The cost of the goods sold is $322,325. What is the amount of the gross profit? 158. During the current year, merchandise is sold for $117,500 cash and $241,750 on account. The cost of the goods sold is $157,400. What is the amount of the gross profit? 159. During the current year, merchandise is sold for $86,000 cash and for $93,950 on account. The cost of the goods sold is $76,240. What is the amount of the gross profit? 160. Travis Company purchased merchandise on account from a supplier for $5,700, terms 2/10, net 30. Travis Company paid for the merchandise within the discount period. Under a perpetual inventory system, journalize the entries required for these transactions. 161. On March 25, Osgood Company sold merchandise on account, $10,000, terms n/30. The applicable sales tax percentage is 7.5%. Journalize this transaction. 162. Journalize the following merchandise transactions. The company uses the perpetual inventory system. (a) (b)

Sold merchandise on account, $17,300, with terms n/30. The cost of the merchandise sold was $12,600. Received payment.

163. Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. Freight Paid by Freight Terms Seller $4,500 $140 FOB shipping point, 2/10, net 30 $7,650 $200 FOB destination, 1/10, net 45

Merchandise (a) (b)

Returns and Allowances $1,200 $450

164. Sampson Co. sold merchandise to Batson Co. on account, $46,000, terms 2/15, n/ 45. The cost of the goods sold is $38,500. Batson Co. paid the invoice within the discount period. Journalize the entries for both Sampson and Batson for these transactions. Assume that both Sampson and Batson use a perpetual inventory system and that Sampson Co. uses the net method of recording sales discounts. 165. Which of the following costs would be included in inventory? (a) Purchase price (b) Insurance in transit FOB shipping point (c) Freight for delivery FOB shipping point Powered by Cognero

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Chapter 05: Accounting for Retail Businesses (d) (e) (f)

Repair due to negligence of receiving clerk Receiving department employee salary Cost of processing purchase orders

166. Journalize the following transactions for Armour Company under both the periodic and perpetual inventory systems. Oct. 7. Sold $1,200 of merchandise on credit to Rondo Distributors, terms n/30. The cost of the merchandise was $720. 8. Purchased merchandise, $10,000; terms FOB shipping point, 2/15, n/30; with prepaid freight charges of $525 added to the invoice.

167. For each of the following, determine the cost of inventory reported on the balance sheet. (a) The total inventory on hand at the end of the year as determined by taking a physical inventory is $62,000. Of the $62,000, $8,000 has been sold FOB destination and is awaiting pickup by the carrier. (b) The total inventory counted at the end of the year was $63,000. Excluded from the count were purchases of $6,000 in transit under FOB shipping point terms. (c) The total inventory counted at the end of the year was $75,000. Excluded from the count were purchases of $5,000 in transit under FOB destination terms. 168. Using the perpetual inventory system, journalize the entries for the following selected transactions: (a) Sold merchandise on account for $12,000, terms n/30. The cost of the goods sold was $6,500. (b) Sold merchandise to customers who used MasterCard and VISA, $9,500. The cost of the goods sold was $5,300. (c) Sold merchandise to customers who used American Express, $2,900. The cost of the goods sold was $1,700. (d) Received and paid an invoice from National Clearing House Credit Co. for $460, representing a service fee for processing MasterCard, VISA, and American Express sales. 169. Merchandise with a list price of $4,200 and costing $2,300 is sold on account, subject to the following terms: FOB destination, n/30. The seller prepays the freight costs of $85 (debit Delivery Expense for the freight costs). Prior to payment for the goods, the seller issues a credit memo for $750 to the customer for merchandise costing $425 that is returned. Payment is received within the credit period. The company uses a perpetual inventory system. Journalize the foregoing transactions of the seller in the following sequence: (a) Sold the merchandise, recognizing the sale and cost of goods sold. (b) Paid the freight charges. (c) Issued the credit memo. (d) Received payment from the customer. 170. Journalize the following transactions from the perspective of both the seller and the buyer. Both use a perpetual inventory system. (a) (b) (c)

Seller sold merchandise on account to the buyer, $4,750, terms n/30, FOB shipping point. The cost of the merchandise is $2,850. The seller prepays the freight of $75. Buyer returns $700 of merchandise as defective. The cost of the merchandise is $420. Buyer pays the balance owed for the purchase.

171. Details of a purchase invoice and related credit memo are summarized as follows: Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Invoice:

Cost of merchandise listed on purchase invoice Prepaid freight charge added to invoice Terms, FOB shipping point, 1/10, n/eom

$6,500 150

Credit memo: Cost of merchandise returned

$1,500

Assume that the credit memo was received prior to payment and that the invoice is paid within the discount period. Determine the following: (a) (b) (c)

Amount of the cash discount allowed. Amount to be paid by the purchaser if the discount is taken. Cost of the merchandise to the purchaser if the discount is not taken.

172. Conquest Company uses a perpetual inventory system. Conquest purchased $1,500 of merchandise on account and payment was made within the discount period. The credit terms were 2/10, n/30. Journalize Conquest’s (a) purchase and (b) payment. 173. Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point, 1/10, n/30. The seller prepaid freight costs of $100. Prior to payment, $1,600 of the merchandise is returned. The invoice is paid within the discount period. The buyer uses a perpetual inventory system. Journalize the foregoing transactions of the buyer in the following sequence: (a) (b) (c)

Purchased the merchandise. Recorded receipt of the credit memo for merchandise returned. Paid the amount owed.

174. Details of invoices for purchases of merchandise are as follows:

(a) (b) (c) (d)

Merchandise $2,800 7,600 1,400 500

Freight $45 60 55 50

Terms FOB shipping point, 1/10, n/30 FOB destination, n/30 FOB shipping point, 2/10, n/30 FOB destination, 1/10, n/30

Returns and Allowances $200 800 600 0

Determine the amount to be paid in full settlement of each invoice, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. 175. Journalize the entries for the following selected transactions: (a) (b)

Sold $900 of merchandise on account, subject to 7% sales tax. The cost of the goods sold was $510. Paid $436 to the state sales tax department for taxes collected.

176. Gadget Palace is a retailer that sells unique hardware. Gadget Palace uses a perpetual inventory system. Journalize the following transactions: July 5 Purchased inventory from Turbo Tools for $11,400.00 with terms 2/10, n/30. 6 Paid Fast Truck Transport $75 in freight on the July 5 order. 8 Received a credit memo from Turbo Tools for $215 for damaged merchandise. 15 Paid Turbo Tools the balance due.

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Chapter 05: Accounting for Retail Businesses 177. Marshall Supplies is a janitorial supply store that uses a perpetual inventory system. Journalize the following transactions: July 4 Purchased inventory for sale from Tidy Wholesalers for $8,500 with terms 1/10, n/30. 5 Paid Express Transfer $45 in freight on the July 4 order. 7 Purchased an additional $11,985 in inventory from Tidy Wholesalers with terms 1/10, n/30. 13 Paid Tidy Wholesalers the balance due on both invoices. 178. Bargain Wholesalers sells pet supplies to retailers, including Pet World Supplies. Bargain Wholesalers uses a perpetual inventory system and records sales discounts using the net method. Journalize the following transactions on the books of Bargain Wholesalers: May Sold inventory on account to Pet World Supplies for $8,250, terms 1/10, n/30. The 4 cost of the merchandise sold was $5,755. 7 Sold inventory on account to Pet World Supplies for $10,985, terms 1/10, n/30. The cost of the merchandise sold was $6,925. 13 Received payment on account from Pet World Supplies for the balance due on both invoices. 179. Journalize the following transactions on the books of Monroe Sales. Monroe uses a perpetual inventory system and the net method of recording sales discounts. (a) Mar. 15. Sold merchandise to Garrison Brewer on account, $9,525, terms of 2/10, n/30. The cost of goods sold was $6,905.00. (b) Mar. 20. Issued a credit memo for $125 to Garrison Brewer due to merchandise that was the wrong color. The cost of the returned merchandise was $65.00. (c) Mar. 25. Received payment on account from Garrison Brewer for the balance owed. 180. Journalize the following transactions assuming a perpetual inventory system: May 5. 12. 14.

Purchased merchandise from Archie Co., $6,000, terms FOB shipping point, 2/10, n/30. Prepaid freight costs of $100 were added to the invoice. Issued a debit memo to Archie Co. for $2,500 of merchandise returned from purchase on May 5. Paid Archie Co. for invoice of May 5, less debit memo of May 12.

181. Journalize the following selected transactions for Sparky’s Pet Shop. Assume Sparky’s uses a perpetual inventory system. Omit entry explanations. Date Transaction Aug. 1. Purchased $6,000 of merchandise on account, terms 2/10, n/30. 3. Returned $1,500 of merchandise purchased on August 1 due to defects. 7. Recorded cash sales for the first week of August, $9,750. The cost of the merchandise sold was $4,000. 10. Sold merchandise on account to a local breeder for $500, terms n/30. The cost of the merchandise sold was $200. 11. Paid for the purchase of August 1, less the return. 20. Received payment on account for the sale of August 10. 182. Journalize the following transactions for both Abbott Co. (seller) and Dalton Co. (buyer). Assume both of the companies use the perpetual inventory system. July 3.

Abbott Co. sold merchandise on account to Dalton Co., $7,500, terms FOB shipping

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Chapter 05: Accounting for Retail Businesses 5. 9. 31.

point, n/eom. The cost of the goods sold was $4,400. Dalton Co. paid $275 freight charges on purchase from Abbott Co. Abbott Co. issued Dalton Co. a credit memo for merchandise returned, $2,250. The cost of the merchandise returned was $1,325. Abbott Co. received payment from Dalton Co. for purchase of July 3.

183. Using the list of accounts provided, construct a chart of accounts for a retail business that uses a perpetual inventory system and rents out a portion of its building, assigning account numbers and arranging the accounts in balance sheet and income statement order (1 for assets, and so on). Each account number should have three digits. Assets and liabilities should be in order of liquidity; operating expenses should be in alphabetical order. Accounts Payable Accounts Receivable Accumulated Depr.— Equipment Advertising Expense Cash Cost of Goods Sold Customer Refunds Payable Delivery Expense Depreciation Expense— Equipment Equipment Estimated Returns Inventory

Interest Expense Inventory

Supplies Expense Unearned Rent

Land

Utilities Expense

Notes Payable Owner’s Capital Owner’s Drawing Rent Revenue Salaries Expense Salaries Payable Sales Supplies

184. Journalize the following transactions for Evans Company. Assume the company uses a perpetual inventory system. (a) (b) (c) (d)

Sold merchandise for $645. The cost of goods sold was $375. Sold merchandise for $432 and accepted VISA as the form of payment. The cost of goods sold was $195. Sold merchandise on account for $670, terms n/30. The cost of goods sold was $438. Paid credit card fees for the month, $85.

185. Abbey Co. sold merchandise to Gomez Co. on account, $70,000, terms n/45. The cost of the goods sold was $49,000. Abbey Co. issued a credit memo to Gomez Co. for $7,200 for merchandise returned that originally cost $3,400. Gomez Co. paid the invoice within the credit period. What amount of gross profit is earned by Abbey Co. on these transactions? 186. Compute the gross profit for Jonas Company based on the following data: Sales Selling expenses Cost of goods sold

$764,000 52,500 538,000

187. Which of the following accounts would be included in the chart of accounts of a retail business using the (a) periodic inventory system, (b) perpetual inventory system, or (c) both systems? (1) Purchases (2) Inventory (3) Sales (4) Purchases Discounts Powered by Cognero

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Chapter 05: Accounting for Retail Businesses (5) Cost of Goods Sold (6) Freight In (7) Delivery Expense 188. Journalize the following transactions assuming the company uses a perpetual inventory system: July 3. Sold merchandise on account for $3,750 terms n/eom. The cost of the goods sold was $2,000. 5. Issued a credit memo for $1,050 for merchandise returned from the sale on July 3. The cost of the merchandise returned was $610. 12. Received payment on account for the amount due on the sale of July 3, less the return of July 5. 17. Sold merchandise for $7,000 plus 6% sales tax to cash customers. The cost of the goods sold was $3,830. 189. Using the following data taken from Hsu’s Imports, which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended March 31. Inventory, April 1 Inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in

$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250

190. Using the following data taken from Hsu’s Imports, which uses a periodic inventory system, prepare the “Cost of goods sold” section of the income statement for the year ended March 31. Inventory, April 1 Inventory, March 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in

$ 193,250 180,100 1,079,600 51,200 18,500 1,860,000 19,250

191. Using the following data taken from Payton Company, which uses a periodic inventory system, prepare the “Cost of goods sold” section of the income statement for the year ended May 31. Inventory, June 1 Inventory, May 31 Purchases Purchases returns and allowances Purchases discounts Sales Freight in

$ 393,250 380,100 1,579,600 81,200 16,500 2,060,000 59,250

192. Using the following data taken from Payton Company, which uses a periodic inventory system, determine the gross profit to be reported on the income statement for the year ended May 31. Inventory, June 1 Inventory, May 31 Powered by Cognero

$

393,250 380,100 Page 26

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Chapter 05: Accounting for Retail Businesses Purchases Purchases returns and allowances Purchases discounts Sales Freight in

1,579,600 81,200 16,500 2,060,000 59,250

193. Prepare a single-step income statement from the following data for Burt Co., taken from the ledger after adjustments on December 31, the end of the fiscal year. Accounts Payable Accounts Receivable Accumulated Depreciation—Office Equipment Accumulated Depreciation—Store Equipment Administrative Expenses Cash Cost of Goods Sold Interest Expense Inventory Note Payable (due in 2 years) Office Equipment Owner’s Capital Owner’s Drawing Prepaid Insurance Rent Revenue Salaries Payable Sales Selling Expenses Store Equipment Supplies

$ 97,200 64,300 72,750 162,100 56,500 53,000 121,700 12,000 93,250 154,000 149,750 81,750 52,000 6,500 17,500 28,700 365,500 41,500 325,000 4,000

194. The following data were extracted from the accounting records of Dana Designs on March 31, the end of Dana’s fiscal year: Inventory, April 1 Inventory, March 31 Purchases Purchase returns and allowances Purchases discounts Sales Freight in

$530,000 375,000 270,000 25,000 10,000 770,000 3,000

Prepare a partial income statement through gross profit for the year ended March 31, using the periodic method. 195. Prepare a multiple-step income statement for Armstrong Co. from the following data for the year ended December 31. Sales, $755,000; cost of goods sold, $330,000; administrative expenses, $35,000; interest expense, $30,000; rent revenue, $25,000; selling expenses, $50,000. 196. Selected data from the ledger of Beck Co., after adjustments, on September 30, the end of the fiscal year, are listed as Powered by Cognero

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Chapter 05: Accounting for Retail Businesses follows: Accounts Receivable Accumulated Depreciation Administrative Expenses Cost of Goods Sold Interest Revenue Note Payable Office Equipment

$ 39,120 60,540 90,000 550,000 10,000 77,750 82,700

Owner’s Capital Owner’s Drawing Prepaid Insurance Salaries Payable Sales Selling Expenses Supplies

$ 65,000 25,000 4,680 3,060 950,000 102,000 3,125

Prepare a single-step income statement and a statement of owner’s equity. The owner did not make any additional investments during the year. 197. The following data for the current year ended June 30 are from the accounting records of Zanadu Co.: Administrative expenses Cost of goods sold Interest expense Rent revenue Sales Selling expenses

$ 28,750 181,440 3,600 1,500 534,440 65,000

Prepare a multiple-step income statement for the year ended June 30. 198. Madison Company’s perpetual inventory records indicate that $875,300 of merchandise should be on hand on October 31. The physical inventory count indicates that $781,900 is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Madison Company for the year ended October 31. 199. The records of Penny Co. indicated that $415,000 of merchandise should be on hand on December 31. The physical inventory count indicates that $370,000 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for the year ended December 31. 200. Based upon the following data for a business with a periodic inventory system, determine the cost of goods sold for August. Inventory, August 1 Inventory, August 31 Purchases Purchases returns and allowances Purchases discounts Freight in

$ 75,560 96,330 373,880 14,760 10,900 4,135

Indicate the answer choice that best completes the statement or answers the question. 201. Based on the following information, what are the amounts of gross profit and net income for Batavia Co.? Batavia, Co. Sales Cost of goods sold Powered by Cognero

$865,000 320,000 Page 28

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Chapter 05: Accounting for Retail Businesses Gross profit Operating expenses Operating income

? 125,000 ?

a. Net income: $545,000; Gross profit: $740,000 b. Net income: $545,000; Gross profit: $545,000 c. Net income: $420,000; Gross profit: $740,000 d. Net income: $420,000; Gross profit: $545,000 202. Based on the following information, what are the amounts of operating expenses and cost of goods sold for Zebtec Company? Zebtec Company Operating loss Sales Gross profit Operating expenses Cost of goods sold

$(70,000) 890,000 465,000 ? ?

a. Operating expenses: $425,000; Cost of goods sold: $495,000 b. Operating expenses: $355,000; Cost of goods sold: $355,000 c. Operating expenses: $535,000; Cost of goods sold: $425,000 d. Operating expenses: $215,000; Cost of goods sold: $565,000 203. During the current year, merchandise is sold for $237,500 cash and $625,000 on account. The cost of the goods sold is $422,300. What is the amount of the gross profit? a. $440,200 b. $1,284,800 c. $442,000 d. $34,800 204. During the current year, merchandise is sold for $147,500 cash and $381,750 on account. The cost of the goods sold is $242,000. What is the amount of the gross profit? a. $771,250 b. $476,250 c. $287,250 d. $7,750 205. What amount will be paid in full settlement of Invoice 22384, assuming that credit for returns and allowances was received prior to payment and that the invoice was paid within the discount period. Inv. No. Merchandise Freight Paid by Seller Freight Terms Returns and Allowances FOB shipping point, 22384 $4,500 $140 $1,200 2/10, net 30 a. $3,374 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses b. $3,234 c. $3,440 d. $4,640 206. What amount will be paid in full settlement of Invoice 22392, assuming that credit for returns and allowances was received prior to payment and that the invoice was paid within the discount period. Inv. No. Merchandise Freight Paid by Seller 22392

$7,650

$120

Freight Terms Returns and Allowances FOB shipping point, $450 1/10, net 45

a. $7,694 b. $7,574 c. $7,530 d. $7,128 207. Details of invoices for purchases of merchandise are as follows: Invoice

Merchandise

Freight

Invoice A Invoice B Invoice C Invoice D

$2,800 7,600 1,400 500

$45 60 55 50

Freight Terms FOB shipping point, 1/10, n/30 FOB destination, n/30 FOB shipping point, 2/10, n/30 FOB destination, 1/10, n/30

Returns and Allowances $200 800 600 0

What will be the total amount collected on all four invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period. a. $10,653 b. $10,753 c. $10,803 d. $10,863 208. Assume that the total inventory on hand at the end of the year as determined by taking a physical inventory is $62,000. Of the $62,000, $8,000 has been sold FOB destination and is awaiting pickup by the carrier. What is the cost of inventory reported on the balance sheet? a. $70,000 b. $62,000 c. $58,000 d. $54,000 209. Assume that the total inventory on hand at the end of the year as determined by taking a physical inventory is $63,000. Excluded from the count were purchases of $6,000 in transit under FOB shipping point terms. What is the cost of inventory reported on the balance sheet? a. $69,000 b. $63,000 c. $57,000 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses d. $55,000 210. Assume that the total inventory counted at the end of the year was $75,000. Excluded from the count were purchases of $5,000 in transit under FOB destination terms. What is the cost of inventory reported on the balance sheet? a. $60,000 b. $70,000 c. $75,000 d. $80,000 211. Which of the following groupings of accounts includes only accounts that carry a normal debit balance? a. Sales Tax Payable, Inventory, Delivery Expense, and Customer Refunds Payable b. Inventory, Delivery Expense, Cost of Goods Sold, and Estimated Returns Inventory c. Inventory, Cost of Goods Sold, Customer Refunds Payable, and Sales d. Delivery Expense, Customer Refunds Payable, Estimated Return Inventory, and Sales 212. Which of the following groupings of accounts includes only accounts that carry a normal credit balance? a. Sales Tax Payable, Cost of Goods Sold, and Sales b. Inventory, Delivery Expense, and Sales c. Customer Refunds Payable, Estimated Returns Inventory, and Sales d. Sales Tax Payable, Customer Refunds Payable, and Sale 213. The following entry was journalized in the books of Bright Company: Apr. 8 Accounts Payable—Marigold, Co. 3,000 Inventory 3,000 Debit Memo No. 25. What is the impact of this entry on the accounting equation? a. an increase in Assets and an increase in Owner’s Equity b. an increase in Assets and an increase in Liabilities c. a decrease in Assets and a decrease in Liabilities d. a decrease in Assets and a decrease in Liabilities 214. The following entry was journalized in the books of Bright Company: Jan. 12 Inventory 8,000 Accounts Payable—HST Co. 8,000 Purchased inventory on account. What is the impact of this entry on the accounting equation? a. an increase in Assets and an increase in Owner’s Equity b. an increase in Assets and an increase in Liabilities c. a decrease in Assets and a decrease in Liabilities d. a decrease in Assets and a decrease in Liabilities 215. The following entry was journalized in the books of Brighty Company: Mar. 31 Cost of Goods Sold 18,000 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Inventory Recorded cost of goods sold.

18,000

What is the impact of this entry on the accounting equation? a. an increase in Assets and an increase in Owner’s Equity b. an increase in Assets and an increase in Liabilities c. a decrease in Assets and a decrease in Liabilities d. a decrease in Assets and a decrease in Owner’s Equity 216. The following entry was journalized in the books of Bright Company: Oct. 31 Accounts Receivable—Digitec 12,000 Sales 12,000 Invoice No. 7112. What is the impact of this entry on the accounting equation? a. an increase in Assets and an increase in Owner’s Equity b. an increase in Assets and an increase in Liabilities c. a decrease in Assets and a decrease in Liabilities d. a decrease in Assets and a decrease in Equity 217. The following entry was journalized in the books of Bright Company: Nov. 3 Customer Refunds Payable 120 Accounts Receivable—Tillet Co. 120 Granted customer an allowance. What is the impact of this entry on the accounting equation? a. an increase in Assets and an increase in Owner’s Equity b. an increase in Assets and an increase in Liabilities c. a decrease in Assets and a decrease in Liabilities d. a decrease in Assets and a decrease in Owner’s Equity

218. On April 3, Villa Company accepted a return of merchandise. What is the effect on the accounting equation of the following entries for this return? Apr. 3 Customer Refunds Payable 1,200 Cash 1,200 3

Inventory Estimated Returns Inventory

720 720

219. Colma Company purchased merchandise on account from Bellville Co., $2,400, terms FOB destination. Analyze the transaction and determine its effect on the accounting equation. May 18 Inventory 2,400 Accounts Payable—Bellville Co. 2,400 Powered by Cognero

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Chapter 05: Accounting for Retail Businesses

220. Stergell Company had sales of $1,500,000 and related cost of goods sold of $920,000 for the year. Stergell estimates that customers will request refunds and allowances for 1.5% of sales and estimates that merchandise costing $12,000 will be returned. Journalize the adjusting entries on December 31 for the expected customer returns. 221. Broxton Gallery, an art retailer, uses a periodic inventory system. A physical inventory count taken at year-end indicated that there was $125,000 of merchandise on hand. The cost of estimated returns of the current year's sales is $8,200. On December 31, the close of the fiscal year, the balances of selected accounts appearing in the ledger are as follows: Accumulated Depr.—Building Administrative Expenses Building Cash Depreciation Expense Interest Expense Inventory Notes Payable

$365,000 440,000 810,000 78,000 24,500 6,000 115,000 100,000

Owner’s Capital Owner’s Drawing Purchases Purchases Returns and Allowances Sales Sales Tax Payable Selling Expenses Store Supplies

$

75,000 15,000 810,000 2,500 1,700,000 4,500 160,000 16,000

Journalize the December 31 closing entries for Broxton Gallery.

222. The following expenses were incurred by a retail business during the year. Which of these expenses would be classified on the income statement as a selling expense? (a) Advertising expense (b) Depreciation expense on office equipment (c) Rent expense on office building (d) Salary expense of sales manager (e) Commissions expense paid to sales staff (f) Interest expense on notes payable (g) Salary expense of office staff (h) Office supplies expense

Indicate the answer choice that best completes the statement or answers the question. 223. The following selected accounts and their adjusted balances appear in the ledger of Fernandez Co. at the end of its fiscal year: Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Powered by Cognero

$250,000 1,197,000 1,790,000 23,500 14,000 8,500 870,000

Owner’s Drawing Sales Cost of Goods Sold Sales Salaries Expense Advertising Expense Depr. Exp.—Store Equip. Miscellaneous Selling Expense

$

50,000 9,350,000 5,840,000 820,000 350,000 120,000 58,000 Page 33

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Chapter 05: Accounting for Retail Businesses Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Customer Refunds Payable Salaries Payable Notes Payable (long-term) Owner’s Capital

580,000 2,600,000 820,000 336,000 39,000 43,000 200,000 600,000

Office Salaries Expense Rent Expense Depr. Exp.—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Admin. Exp. Interest Expense

550,000 104,000 60,000 50,000 26,000 12,000 50,000

What is the amount of gross profit for Fernandez Co.? a. $7,175,000 b. $1,335,000 c. $3,510,000 d. $2,162,000 224. The following selected accounts and their adjusted balances appear in the ledger of Fernandez Co. at the end of its fiscal year: Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Customer Refunds Payable Salaries Payable Notes Payable (long-term) Owner’s Capital

$250,000 1,197,000 1,790,000 23,500 14,000 8,500 870,000 580,000 2,600,000 820,000 336,000 39,000 43,000 200,000 600,000

Owner’s Drawing Sales Cost of Goods Sold Sales Salaries Expense Advertising Expense Depr. Exp.—Store Equip. Miscellaneous Selling Expense Office Salaries Expense Rent Expense Depr. Exp.—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Admin. Exp. Interest Expense

$

50,000 9,350,000 5,840,000 820,000 350,000 120,000 58,000 550,000 104,000 60,000 50,000 26,000 12,000 50,000

What are total operating expenses for Fernandez Co.? a. $2,175,000 b. $2,150,000 c. $3,510,000 d. $1,348,000 225. The following selected accounts and their adjusted balances appear in the ledger of Fernandez Co. at the end of its fiscal year: Cash Accounts Receivable Powered by Cognero

$250,000 Owner’s Drawing 1,197,000 Sales

$

50,000 9,350,000 Page 34

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Chapter 05: Accounting for Retail Businesses Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Customer Refunds Payable Salaries Payable Notes Payable (long-term) Owner’s Capital

1,790,000 23,500 14,000 8,500 870,000 580,000 2,600,000 820,000 336,000 39,000 43,000 200,000 600,000

Cost of Goods Sold Sales Salaries Expense Advertising Expense Depr. Exp.—Store Equip. Miscellaneous Selling Expense Office Salaries Expense Rent Expense Depr. Exp.—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Admin. Exp. Interest Expense

5,840,000 820,000 350,000 120,000 58,000 550,000 104,000 60,000 50,000 26,000 12,000 50,000

What is Fernandez Co.’s operating income for the year? a. $1,335,000 b. $2,162,000 c. $3,510,000 d. $1,360,000 226. The following selected accounts and their adjusted balances appear in the ledger of Fernandez Co. at the end of its fiscal year: Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Customer Refunds Payable Salaries Payable Notes Payable (long-term) Owner’s Capital

$250,000 1,197,000 1,790,000 23,500 14,000 8,500 870,000 580,000 2,600,000 820,000 336,000 39,000 43,000 200,000 600,000

Owner’s Drawing Sales Cost of Goods Sold Sales Salaries Expense Advertising Expense Depr. Exp.—Store Equip. Miscellaneous Selling Expense Office Salaries Expense Rent Expense Depr. Exp.—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Admin. Exp. Interest Expense

$

50,000 9,350,000 5,840,000 820,000 350,000 120,000 58,000 550,000 104,000 60,000 50,000 26,000 12,000 50,000

What is Fernandez Co.’s ending owner’s capital account balance for the year? a. $1,885,000 b. $600,000 c. $3,510,000 d. $1,910,000

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Chapter 05: Accounting for Retail Businesses 227. The following selected accounts and their adjusted balances appear in the ledger of Fernandez Co. at the end of its fiscal year: Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Customer Refunds Payable Salaries Payable Notes Payable (long-term) Owner’s Capital

$250,000 1,197,000 1,790,000 23,500 14,000 8,500 870,000 580,000 2,600,000 820,000 336,000 39,000 43,000 200,000 600,000

Owner’s Drawing Sales Cost of Goods Sold Sales Salaries Expense Advertising Expense Depr. Exp.—Store Equip. Miscellaneous Selling Expense Office Salaries Expense Rent Expense Depr. Exp.—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Admin. Exp. Interest Expense

$

50,000 9,350,000 5,840,000 820,000 350,000 120,000 58,000 550,000 104,000 60,000 50,000 26,000 12,000 50,000

Prepare a multiple-step income statement for Fernandez Co. for the year ended December 31. 228. The following selected accounts and their adjusted balances appear in the ledger of Fernandez Co. at the end of its fiscal year: Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Customer Refunds Payable Salaries Payable Notes Payable (long-term) Owner’s Capital

$250,000 1,197,000 1,790,000 23,500 14,000 8,500 870,000 580,000 2,600,000 820,000 336,000 39,000 43,000 200,000 600,000

Owner’s Drawing Sales Cost of Goods Sold Sales Salaries Expense Advertising Expense Depr. Exp.—Store Equip. Miscellaneous Selling Expense Office Salaries Expense Rent Expense Depr. Exp.—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Admin. Exp. Interest Expense

$

50,000 9,350,000 5,840,000 820,000 350,000 120,000 58,000 550,000 104,000 60,000 50,000 26,000 12,000 50,000

Prepare a statement of owner’s equity for Fernandez Co., assuming no additional investment was made by the owner during the year. 229. Alt Tile Company uses a perpetual inventory system. Journalize the December 31 adjusting entries based on the following information: a. The inventory account has a balance of $133,150, while the physical inventory count indicates that $130,900 of Powered by Cognero

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Chapter 05: Accounting for Retail Businesses merchandise is on hand. Assume any shrinkage is a normal amount. b. Sales refunds and allowances of $11,000 and merchandise returns of $8,000 are estimated for the current year’s sales.

Indicate the answer choice that best completes the statement or answers the question. 230. The adjusting entry to account for normal inventory shrinkage involves a a. debit to Inventory and a credit to Cost of Goods Sold b. debit to Cost of Goods Sold and a credit to Inventory c. debit to Inventory Shrinkage and a credit to Inventory d. debit to Inventory and a credit to Inventory Shrinkage 231. The adjusting entry to account for estimated customer returns and allowances involves a a. debit to Customer Refunds Payable b. credit to Customer Refunds Payable c. debit to Estimated Returns Inventory d. credit to Estimated Returns Inventory 232. Which of the following lists shows accounts that would be closed at the end of the fiscal period? a. Sales, Accounts Payable, Owner’s Drawing, and Inventory b. Cost of Goods Sold, Supplies, Wages Payable, and Owner’s Drawing c. Owner’s Capital, Depreciation Expense, Notes Payable, Store Supplies d. Sales, Cost of Goods Sold, Supplies Expense, and Wages Expense

233. Which of the following accounts will be closed at the end of the fiscal period? (a) Advertising Expense (b) Cash (c) Accounts Receivable (d) Salaries Expense (e) Cost of Goods Sold (f) Owner’s Drawing (g) Accumulated Depreciation—Building (h) Interest Expense (i) Sales Tax Payable

Indicate the answer choice that best completes the statement or answers the question. 234. The asset turnover ratio is the relationship between a. sales and average total assets b. average sales and average total assets c. average sales and total assets d. sales and total assets

235. The following information is available for Coulibaly Company: Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Year 2 Year 1 Total sales $16,700 $12,800 Total assets: Beginning of year 3,600 2,700 End of year 12,500 3,600 Compute the asset turnover ratio for Coulibaly Company for Year 1 and Year 2. Round to two decimal places.

Indicate the answer choice that best completes the statement or answers the question. 236. Argyle Company uses the gross method of recording sales discounts. Assume that a sale on account of $12,000 was made to Fitzgerald Co. with terms 2/10, n/30. When Fitzgerald pays within the discount period, what is the correct journal entry? a. Cash 11,760 Accounts Receivable—Fitzgerald Co. 11,760 b. Cash 11,760 Sales Discounts 240 Accounts Receivable—Fitzgerald Co. 12,000 c. Accounts Receivable—Fitzgerald Co. 11,760 Cash 11,760 d. Accounts Receivable—Fitzgerald Co. 12,000 Cash 11,760 Sales 240

237. Why does the gross method of recording sales discounts require an adjusting entry at the end of the fiscal period?

Indicate the answer choice that best completes the statement or answers the question. 238. The following accounts and their current balances appear in the ledger of Cerelat Co. at the end of its fiscal year, June 30. Cerelat uses a periodic inventory system. Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Salaries Payable Customer Refunds Payable Notes Payable (long-term) Owner’s Capital Owner’s Drawing Powered by Cognero

$450,000 650,000 850,000 15,000 8,000 8,500 900,000 600,000 600,000 280,000 86,000 45,000 4,000 100,000 600,000 25,000

Sales Purchases Purchases Returns and Allowances Purchases Discounts Freight In Sales Salaries Expense Advertising Expense Depreciation Expense—Store Equip. Delivery Expense Office Salaries Expense Rent Expense Depreciation Expense—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Administrative Exp. Interest Expense

$1,600,000 850,000 7,000 3,500 16,000 210,000 100,000 48,000 22,000 130,000 60,000 40,000 11,000 9,000 12,000 15,000 Page 38

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Chapter 05: Accounting for Retail Businesses

A physical inventory count at the end of June indicates that $882,000 of merchandise is on hand. Estimated Returns Inventory is expected to increase to $16,500. What is the amount of cost of goods sold for Cerelat Co. for the year? a. $886,000 b. $832,500 c. $822,000 d. $825,000 239. The following accounts and their current balances appear in the ledger of Cerelat Co. at the end of its fiscal year, June 30. Cerelat uses a periodic inventory system. Cash Accounts Receivable Inventory Estimated Returns Inventory Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Salaries Payable Customer Refunds Payable Notes Payable (long-term) Owner’s Capital Owner’s Drawing

$450,000 650,000 850,000 15,000 8,000 8,500 900,000 600,000 600,000 280,000 86,000 45,000 4,000 100,000 600,000 25,000

Sales Purchases Purchases Returns and Allowances Purchases Discounts Freight In Sales Salaries Expense Advertising Expense Depreciation Expense—Store Equip. Delivery Expense Office Salaries Expense Rent Expense Depreciation Expense—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Administrative Exp. Interest Expense

$1,600,000 850,000 7,000 3,500 16,000 210,000 100,000 48,000 22,000 130,000 60,000 40,000 11,000 9,000 12,000 15,000

A physical inventory count at the end of June indicates that $882,000 of merchandise is on hand. Estimated Returns Inventory is expected to increase to $16,500. What is Cerelat Co.’s operating income for the year? a. $136,000 b. $121,500 c. $105,000 d. $180,000

240. The following accounts and their current balances appear in the ledger of Cerelat Co. at the end of its fiscal year, June 30. Cerelat uses a periodic inventory system. Cash Accounts Receivable Inventory Estimated Returns Inventory Powered by Cognero

$450,000 650,000 850,000 15,000

Sales Purchases Purchases Returns and Allowances Purchases Discounts

$1,600,000 850,000 7,000 3,500 Page 39

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Chapter 05: Accounting for Retail Businesses Office Supplies Prepaid Insurance Office Equipment Accum. Depr.—Office Equip. Store Equipment Accum. Depr.—Store Equip. Accounts Payable Salaries Payable Customer Refunds Payable Notes Payable (long-term) Owner’s Capital Owner’s Drawing

8,000 8,500 900,000 600,000 600,000 280,000 86,000 45,000 4,000 100,000 600,000 25,000

Freight In Sales Salaries Expense Advertising Expense Depreciation Expense—Store Equip. Delivery Expense Office Salaries Expense Rent Expense Depreciation Expense—Office Equip. Insurance Expense Office Supplies Expense Miscellaneous Administrative Exp. Interest Expense

16,000 210,000 100,000 48,000 22,000 130,000 60,000 40,000 11,000 9,000 12,000 15,000

A physical inventory at the end of June indicates that $882,000 of merchandise is on hand. Estimated Returns Inventory is expected to increase to $16,500. Prepare a multiple-step income statement for Cerelat Co. showing how cost of goods sold was determined for the year ended June 30. 241. Journalize the following purchases and sales transactions for Manioc Co. Assume Manioc uses a periodic inventory system. Omit entry explanations. Date Apr. 1. 4. 6. 8. 8. 9. 12. 13.

Transaction Purchased merchandise on account, list price $22,000, trade discount 30%, terms FOB destination, 2/10, n/30. Sold merchandise on account, $8,500, terms n/15. Purchased merchandise on account, $18,000, terms FOB shipping point, 2/10, n/30, with prepaid freight of $140 added to the invoice. Sold merchandise on VISA, $14,500. Returned damaged merchandise, $800, purchased on April 6. Paid for the merchandise purchased on April 1, less discount. Received cash on account from the April 4 sale. Paid for merchandise purchased on April 6, less return and discount.

242. Journalize the following transactions for Oyster Co. Assume Oyster Co. uses the gross method of recording sales discounts. Omit entry explanations. Date Apr. 1. 7. 9. 24.

Transaction Sold merchandise on account, $8,000, terms 1/10, n/30. The cost of merchandise sold was $4,200. Sold merchandise on account, $5,000, terms 2/10, n/30. The cost of merchandise sold was $2,750. Received payment on account for the sale on April 1, less discount. Received payment on account for the sale of April 7.

243. Surplus Galore uses the gross method of accounting for sales discounts. Austin Maxwell pays his $400 receivable on January 3, taking the 2% discount to which he is entitled. Journalize the entry for the transaction on the books of Surplus Galore. Powered by Cognero

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Chapter 05: Accounting for Retail Businesses

Indicate the answer choice that best completes the statement or answers the question. 244. A statement that includes subtotals for sales, gross profit, and operating income in determining net income is the a. multiple-step income statement b. revenue statement c. operating income statement d. single-step income statement 245. A discount taken by the buyer for the early payment of an invoice is called a a. purchases discount b. sales discount c. trade discount d. payment discount 246. The account used to record inventory on hand under a periodic inventory system is a. Sales b. Purchases c. Inventory d. Cost of Goods Sold 247. The account used by the seller for recording shipping costs paid by the seller (FOB destination) is a. Freight In b. Sales c. Inventory d. Delivery Expense 248. A discount given to government agencies and customers who purchase large quantities of merchandise is called a a. purchases discount b. sales discount c. trade discount d. payment discount 249. Which of the following informs the seller of the reasons for the return of merchandise or the request for a price allowance? a. sales invoice b. purchase invoice c. credit memo d. debit memo

Indicate whether the statement is true or false. 250. If Estimated Coupons Payable has a credit balance at the end of the period and all unredeemed coupons have expired, the balance is added back to Sales. a. True Powered by Cognero

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Chapter 05: Accounting for Retail Businesses b. False 251. If a retail business distributes a coupon through a newspaper, no liability (journal entry) is recorded at the time of issue. a. True b. False

252. Welborn Stores offers a coupon on its website for $5 off the customer’s next purchase of $30 or more. Welborn also printed coupons at the bottom of its sales receipts for 10% off the customer’s next purchase of any amount. All sales are subject to a 5% sales tax (assessed on the amount charged to the sales account). Journalize the following transactions: (a) A customer purchases $45 of merchandise, submits the $5 coupon, and pays cash. The cost of the merchandise sold is $20. (b) A customer purchases $100 of merchandise, submits the 10% coupon, and pays with a VISA credit card. The cost of the merchandise sold is $45.

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Chapter 05: Accounting for Retail Businesses Answer Key 1. True 2. False 3. False 4. True 5. True 6. True 7. True 8. False 9. False 10. True 11. False 12. True 13. False 14. False 15. False 16. True 17. True 18. False 19. False 20. True 21. True 22. True 23. True 24. False 25. True Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 26. False 27. False 28. True 29. True 30. False 31. False 32. False 33. False 34. False 35. True 36. True 37. False 38. True 39. True 40. True 41. False 42. False 43. True 44. False 45. False 46. False 47. True 48. False 49. True 50. True 51. True Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 52. True 53. False 54. True 55. False 56. True 57. False 58. False 59. False 60. False 61. True 62. True 63. False 64. True 65. True 66. False 67. False 68. b 69. c 70. d 71. a 72. d 73. d 74. c 75. d 76. b Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 77. d 78. a 79. c 80. b 81. b 82. c 83. a 84. d 85. c 86. b 87. b 88. c 89. b 90. c 91. b 92. c 93. b 94. b 95. c 96. b 97. c 98. b 99. a 100. d 101. c 102. a Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 103. b 104. b 105. d 106. b 107. d 108. b 109. d 110. b 111. b 112. d 113. b 114. a 115. d 116. c 117. c 118. d 119. d 120. b 121. a 122. a 123. b 124. a 125. a 126. b 127. b Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 128. c 129. d 130. a 131. c 132. c 133. a 134. a 135. d 136. b 137. b 138. b 139. d 140. c 141. d 142. d 143. d 144. d 145. a 146. b 147. b 148. b 149. c 150. d 151. a 152. a 153. c Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 154. c 155. This is not true. While the operations of retail businesses generally all involve the purchase of merchandise (purchasing), the sale of products to customers (sales), and the receipt of cash from customers (collection), operating cycles may vary in length between retailers. This is due to the nature of the products they sell. For example, a grocery store depends on selling a large volume of perishable products in a short time span. In contrast, jewelry stores often carry expensive items that are displayed for months before being sold to customers. 156. The service business income statement will include revenues less operating expenses to equal operating income. The service business balance sheet will not have an inventory account. The retail business income statement will include sales less cost of goods sold to equal gross profit, then less operating expenses to equal operating income. The retail business balance sheet will include an inventory account in the “Current assets” section. 157. $137,500 + $425,600 – $322,325 = $240,775 158. $117,500 + $241,750 – $157,400 = $201,850 159. $86,000 + $93,950 – $76,240 = $103,710 160. Inventory Accounts Payable

5,700 5,700

Accounts Payable Cash Inventory (2% × $5,700)

5,700 5,586 114

161. Journal Date Description Mar. 25 Accounts Receivable Sales Sales Tax Payable 162. (a) Accounts Receivable Sales

Post. Ref.

Debit Credit 10,750 10,000 750

17,300 17,300

Cost of Goods Sold Inventory

12,600

(b) Cash Accounts Receivable

17,300

12,600

17,300

163. (a) ($4,500 – $1,200) – [($4,500 – $1,200) × 2%] + $140 = $3,374 (b) ($7,650 – $450) – [($7,650 – $450) × 1%] = $7,128 164. Sampson Co. Journal Entries: Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Accounts Receivable—Batson Co. Sales

45,080

Cost of Goods Sold Inventory

38,500

Cash

45,080

45,080

38,500

Accounts Receivable—Batson Co. Batson Co. Journal Entries: Inventory Accounts Payable—Sampson Co. Accounts Payable—Sampson Co. Cash Inventory

45,080 46,000 46,000 46,000 45,080 920

165. The costs to include in inventory are the purchase price, insurance in transit FOB shipping point, and freight for delivery FOB shipping point. 166. Periodic Inventory System Oct. 7 Accounts Receivable Sales 8 Purchases Freight In Accounts Payable

1,200 1,200 10,000 525 10,525

Perpetual Inventory System Oct. 7 Accounts Receivable Sales Cost of Goods Sold Inventory 8 Inventory Accounts Payable

1,200 1,200 720 720 10,525 10,525

167. (a) $62,000 (b) $69,000 (c) $75,000 168. (a) Accounts Receivable Sales

12,000

Cost of Goods Sold

6,500

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12,000

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Chapter 05: Accounting for Retail Businesses Inventory

6,500

(b) Cash Sales

9,500 9,500

Cost of Goods Sold Inventory

5,300 5,300

(c) Cash Sales

2,900 2,900

Cost of Goods Sold Inventory

1,700

(d) Credit Card Expense Cash

460

1,700

460

169. (a) Accounts Receivable Sales

4,200 4,200

Cost of Goods Sold Inventory

2,300 2,300

(b) Delivery Expense Cash

85

(c) Customer Refunds Payable Accounts Receivable

750

85

750

Inventory Estimated Returns Inventory (d) Cash Accounts Receivable

425 425 3,450 3,450

170. (a) Seller Accounts Receivable Sales

Buyer 4,750

Inventory 4,825

4,750 Accounts Payable

Cost of Goods Sold Inventory

2,850 2,850

Accounts Receivable Cash

75

(b) Customer Refunds Payable Accounts Powered by Cognero

4,825

75

700

Accounts Payable 700

700 700 Page 51

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Chapter 05: Accounting for Retail Businesses Receivable Inventory Estimated Returns Inventory (c)

Inventory 420

Cash

420 4,125

Accounts Receivable

Accounts Payable 4,125 Cash

4,125 4,125

171. (a) $50 [($6,500 – $1,500) × 1%] (b) $5,100 [($5,000 – $50) + $150] (c) $5,150 ($5,000 +$150) 172. (a) Inventory Accounts Payable (b) Accounts Payable Cash Inventory

1,500 1,500 1,500 1,470 30

173. (a) Inventory Accounts Payable

4,800 4,800

(b) Accounts Payable Inventory

1,600

(c) Accounts Payable Cash Inventory

3,200

1,600

3,169 31

174. (a) $2,800 – $200 – $26 + $45 = $2,619 (b) $7,600 – $800 = $6,800 (c) $1,400 – $600 – $16 + $55 = $839 (d) $500 – $5 = $495 175. (a) Accounts Receivable Sales Sales Tax Payable

963 900 63

Cost of Goods Sold Inventory

510

(b) Sales Tax Payable Cash

436

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510

436 Page 52

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Chapter 05: Accounting for Retail Businesses 176. Date July 5

6

8

15

General Journal Description Inventory A/P—Turbo Tools

Debit Credit 11,400.00 11,400.00

Inventory Cash

75.00

A/P—Turbo Tools Inventory

215.00

A/P—Turbo Tools Cash Inventory*

11,185.00

75.00

215.00

10,961.30 223.70

*($11,400 – $215) × 2% 177. Journal Date Description Debit Credit July 4 Inventory 8,500.00 A/P—Tidy Wholesalers 8,500.00 5 Inventory Cash

45.00 45.00

7 Inventory A/P—Tidy Wholesalers

11,985.00

13 A/P—Tidy Wholesalers Cash Inventory

20,485.00

178. Date

11,985.00

20,280.15 204.85 Journal

Description

Debit

May 4 A/R—Pet World Supplies Sales

8,167.50

Cost of Goods Sold Inventory

5,755.00

7 A/R—Pet World Supplies Sales Cost of Goods Sold Inventory Powered by Cognero

Credit

8,167.50

5,755.00 10,875.15 10,875.15 6,925.00 6,925.00 Page 53

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Chapter 05: Accounting for Retail Businesses 13 Cash A/R—Pet World Supplies

19,042.65

179. (a) Accounts Receivable—Garrison Brewer Sales

19,042.65

9,334.50 9,334.50

Cost of Goods Sold 6,905.00 Inventory 6,905.00 (b) Customer Refunds Payable 122.50 Accounts Receivable—Garrison Brewer 122.50 Inventory Estimated Returns Inventory (c) Cash Accounts Receivable—Garrison Brewer 180. Date Description May 5 Inventory Accounts Payable—Archie Co.

65.00 65.00 9,212.00 9,212.00

Debit Credit 6,100 6,100

12 Accounts Payable—Archie Co. Inventory

2,500

14 Accounts Payable—Archie Co. Cash Inventory*

3,600

2,500

3,530 70

*($6,000 – $2,500) × 2% 181. Date Description Aug. 1 Inventory Accounts Payable

Debit Credit 6,000 6,000

3 Accounts Payable Inventory

1,500

7 Cash Sales

9,750

7 Cost of Goods Sold Inventory

4,000

Powered by Cognero

1,500

9,750

4,000

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Chapter 05: Accounting for Retail Businesses 10 Accounts Receivable Sales

500

10 Cost of Goods Sold Inventory

200

500

200

11 Accounts Payable Cash Inventory* *($6,000 – $1,500) × 2%

4,500

20 Cash Accounts Receivable

500

4,410 90

500

182. Abbott Co. Dalton Co. Date Description Debit Credit Description Debit Credit July 3 Accounts Receivable 7,500 Inventory 7,500 Sales 7,500 Accounts Payable 7,500 3 Cost of Goods. Sold Inventory

4,400 4,400

5

9

Inventory Cash Customer Refunds Payable Accounts Rec.

2,250 2,250

9 Inventory Est. Returns Inventory

1,325

31 Cash Accounts Rec.

5,250

183. Acct No. 110* 112 115

275 275

Accounts Payable Inventory

2,250

Accounts Payable Cash

5,250

2,250

1,325

5,250

Description Cash Accounts Receivable Inventory Estimated Returns Inventory

Acct. No. Description 410 Sales 510 Cost of Goods Sold 521 Advertising Expense

117

Supplies

523

120 123

Land Equipment Accumulated Depr.—

524 525

116

Powered by Cognero

522

5,250

Delivery Expense Depreciation Expense— Equipment Salaries Expense Supplies Expense Page 55

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Chapter 05: Accounting for Retail Businesses 124 210 211 212 213 215 310 311

Equipment Accounts Payable Salaries Payable Unearned Rent Customer Refunds Payable Notes Payable Owner’s Capital Owner’s Drawing

526 610 710

Utilities Expense Rent Revenue Interest Expense

*Second and third digits may vary, so long as all asset accounts begin with 1, etc. 184. Journal Date Description (a) Cash Sales

(b)

Debit 645

645

Cost of Goods Sold Inventory

375

Cash

432

375

Sales

(c)

(d)

Credit

432

Cost of Goods Sold Inventory

195

Accounts Receivable Sales

670

Cost of Goods Sold Inventory

438

Credit Card Expense Cash

85

195

670

438

85

185. Gross Profit = Sales – Cost of Goods Sold = ($70,000 – $7,200) – ($49,000 – $3,400) = $62,800 – $45,600 = $17,200 186. Gross Profit = Sales – Cost of Goods Sold = $764,000 – $538,000 = $226,000 187. The periodic inventory system would include Purchases, Purchases Discounts, and Freight In. The perpetual inventory system would include Cost of Goods Sold. Both systems would use Inventory, Sales, and Delivery Expense. 188. Journal Date Description July 3 Accounts Receivable Sales Powered by Cognero

Debit Credit 3,750 3,750 Page 56

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Chapter 05: Accounting for Retail Businesses 3 Cost of Goods Sold Inventory

2,000

5 Customer Refunds Payable Accounts Receivable

1,050

5 Inventory Estimated Returns Inventory

2,000

1,050 610 610

12 Cash Accounts Receivable

2,700

17 Cash Sales Sales Tax Payable

7,420

17 Cost of Goods Sold Inventory

3,830

2,700

7,000 420

3,830

189. Gross Profit = Sales – Cost of Goods Sold = $1,860,000 – $1,042,300* = $817,000 *Cost of goods sold: Inventory, April 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Inventory available for sale Inventory, March 31 Cost of goods sold 190. Cost of goods sold: Inventory, April 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Inventory available for sale Inventory, March 31 Cost of goods sold

$ 193,250 $1,079,600 (51,200) (18,500) $1,009,900 19,250 1,029,150 $1,222,400 (180,100) $1,042,300

$193,250 $1,079,600 (51,200) (18,500) $1,009,900 19,250 1,029,150 $1,222,400 (180,100) $1,042,300

191. Cost of goods sold: Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Inventory, June 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Inventory available for sale Inventory, May 31 Cost of goods sold

$393,250 $1,579,600 (81,200) (16,500) $1,481,900 59,250 1,541,150 $1,934,400 (380,100) $1,554,300

192. Gross Profit = Sales – Cost of Goods Sold = $2,060,000 – $1,554,300* = $505,700 *Cost of goods sold: Inventory, June 1

$393,250

Cost of merchandise purchased: Purchases $1,579,600 Purchases returns and (81,200) allowances (16,500) Purchases discounts Net purchases $1,481,900 Freight in 59,250 Total cost 1,541,150 of merchandise purchased Inventory available for $1,934,400 sale Inventory, May 31 (380,100) Cost of goods sold $1,554,300 193. Burt Co. Income Statement For the Year Ended December 31 Revenues: Sales Rent revenue Total revenues Expenses: Cost of goods sold Selling expenses Administrative expenses Interest expense Total expenses Net income

$365,500 17,500 $383,000 $121,700 41,500 56,500 12,000 (231,700) $151,300

194. Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Dana Designs Income Statement For the Year Ended March 31 Sales Cost of goods sold: Inventory, April 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Total cost of merchandise purchased Inventory available for sale Inventory, March 31 Cost of goods sold Gross profit

$770,000 $530,000 $270,000 (25,000) (10,000) $235,000 3,000 238,000 $768,000 (375,000) (393,000) $377,000

195. Armstrong Co. Income Statement For the Year Ended December 31 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Operating income Other revenue and expense: Rent revenue Interest expense Net income

$755,000 330,000 $425,000 $50,000 35,000 (85,000) $340,000 $25,000 (30,000)

(5,000) $335,000

196. Beck Co. Income Statement For the Year Ended September 30 Revenues: Sales Interest revenue Total revenues Expenses: Cost of goods sold Selling expenses Administrative expenses Total expenses Powered by Cognero

$950,000 10,000 $960,000 $550,000 102,000 90,000 (742,000) Page 59

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Chapter 05: Accounting for Retail Businesses Net income

$218,000

Beck Co. Statement of Owner’s Equity For the Year Ended September 30 Owner’s capital, October 1, prior year Net income for the year Withdrawals Owner’s capital, September 30, current year

$ 65,000 218,000 (25,000) $258,000

197. Zanadu Co. Income Statement For the Year Ended June 30 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses Administrative expenses Total operating expenses Operating income Other revenue and expense: Rent revenue Interest expense Net revenue and expense Net income

198. Oct. 31

$534,440 (181,440) $353,000 65,000 28,750 (93,750) $259,250 $1,500 (3,600) (2,100) $257,150

Cost of Goods Sold Inventory

93,400 93,400

199. Journal Date Description Dec. 31 Cost of Goods Sold Inventory 200. Cost of goods sold: Inventory, August 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in Powered by Cognero

Post. Ref.

Debit Credit 45,000 45,000

$ 75,560 $373,880 (14,760) (10,900) $348,220 4,135 Page 60

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Chapter 05: Accounting for Retail Businesses Total cost of merchandise purchased Inventory available for sale Inventory, August 31 Cost of goods sold

352,355 $427,915 (96,330) $331,585

201. d 202. c 203. a 204. c 205. a 206. d 207. b 208. b 209. a 210. c 211. b 212. d 213. c 214. b 215. d 216. a 217. c 218. The first entry reduces assets and liabilities by the amount of the refund. The second entry increases an asset (Inventory) and decreases an asset (Estimated Returns Inventory). 219. The entry increases assets (Inventory) and increases liabilities (Accounts Payable). 220. Dec. 31

31

Sales Customer Refunds Payable

22,500

Estimated Returns Inventory Cost of Goods Sold

12,000

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22,500

12,000 Page 61

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Chapter 05: Accounting for Retail Businesses

221. Dec. 31

31

Inventory Estimated Returns Inventory Sales Purchases Returns and Allowances Inventory Purchases Selling Expenses Administrative Expenses Depreciation Expense Interest Expense Owner’s Capital

125,000 8,200 1,700,000 2,500 115,000 810,000 160,000 440,000 24,500 6,000 280,200

Owner’s Capital Owner’s Drawing

15,000 15,000

222. The selling expenses would be advertising expense, salary expense of the sales manager, and the commissions expense paid to the sales staff. 223. c 224. b 225. d 226. a 227. Fernandez Co. Income Statement For the Year Ended December 31 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses: Sales salaries expense Advertising expense Depreciation expense—store equip. Office supplies expense Miscellaneous selling expense Total selling expenses Administrative expenses: Office salaries expense Powered by Cognero

$9,350,000 (5,840,000) $3,510,000

$820,000 350,000 120,000 26.000 58,000 $1,374,000 $550,000 Page 62

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Chapter 05: Accounting for Retail Businesses Rent expense Depreciation expense—office equip. Insurance expense Miscellaneous administrative expense Total administrative expenses Total operating expenses Operating income Other revenue and expense: Interest expense Net income

104,000 60,000 50,000 12,000 776,000 (2,150,000) $1,360,000 (25,000) $1,335,000

228. Fernandez Co. Statement of Owner’s Equity For the Year Ended December 31 Common Stock Owner’s capital, January 1 $600,000 Net income for the year* 1,335,000 Withdrawals (50,000) Owner’s capital, December 31 $1,885,000 *Gross Profit = Sales – Cost of Goods Sold = $9,350,000 − $5,840,000 = $3,510,000 Operating Expenses = $820,000 + $350,000 + $120,000 + $58,000 + $550,000 + $104,000 + $60,000 + $50,000 + $26,000 + $12,000 = $2,150,000 Operating Income = Gross Profit – Operating Expenses = $3,510,000 – $2,150,000 = $1,360,000 Net Income = Operating Income – Other Expense (Interest) = $1,360,000 – $25,000 = $1,335,000 229. Dec. 31

31

31

Adjusting Entries Cost of Goods Sold Inventory

2,250 2,250

Sales Customer Refunds Payable

11,000

Estimated Returns Inventory Cost of Goods Sold

8,000

11,000

8,000

230. b 231. b 232. d 233. The accounts that will be closed include Advertising Expense, Salaries Expense, Cost of Goods Sold, Owner’s Drawing, and Interest Expense. Powered by Cognero

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Chapter 05: Accounting for Retail Businesses 234. a 235. Asset Turnover Ratio = Sales ÷ Average Total Assets Year 1: $12,800 ÷ [($2,700 + $3,600) ÷ 2] = $12,800 ÷ $3,150 = 4.06 Year 2: $16,700 ÷ [($3,600 + $12,500) ÷ 2] = $16,700 ÷ $8,050 = 2.07 236. b 237. Under GAAP, sales must be reported at the amount mostly likely to be received. In this case, sales must be reduced by the amount of sales discounts that are likely to be taken. 238. c 239. a 240. Cerelat Co. Income Statement For Period Ended June 30 Sales Cost of goods sold: Inventory, July 1 Cost of merchandise purchased: Purchases Purchases returns and allowances Purchases discounts Net purchases Freight in

$1,600,000 $850,000 $850,000 (7,000) (3,500) $839,500 16,000

Total cost of merchandise purchased Inventory available for sale

855,500 $1,705,500

Inventory, June 30 Cost of goods sold before estimated returns

(882,000) $823,500

Increase in estimated returns inventory Cost of goods sold Gross profit Operating expenses: Selling expenses: Sales salaries expense Advertising expense Depreciation expense—store equipment Delivery expense Total selling expenses Administrative expenses: Powered by Cognero

(1,500) 822,000 $ 778,000

$210,000 100,000 48,000 22,000 $380,000

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Chapter 05: Accounting for Retail Businesses Office salaries expense Rent expense Depreciation expense—office equipment Insurance expense Office supplies expense

$130,000 60,000 40,000 11,000 9,000

Miscellaneous administrative expense

12,000

Total administrative expenses

262,000

Total operating expenses Operating income Other revenue and expense: Interest expense

(642,000) $ 136,000

Net income

$121,000

241. Date Description Apr. 1 Purchases Accounts Payable

(15,000)

Debit Credit 15,400 15,400

4 Accounts Receivable Sales

8,500

6 Purchases Freight In Accounts Payable

18,000 140

8 Cash Sales

14,500

8 Accounts Payable Purchases Returns and Allowances

8,500

18,140

14,500 800 800

9 Accounts Payable Cash Purchases Discounts

15,400

12 Cash Accounts Receivable

8,500

13 Accounts Payable Cash Purchases Discounts

17,340

15,092 308

8,500

16,996 344

242. Powered by Cognero

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Chapter 05: Accounting for Retail Businesses Date Description Apr. 1 Accounts Receivable Sales

Debit Credit 8,000 8,000

1 Cost of Goods Sold Inventory

4,200

7 Accounts Receivable Sales

5,000

7 Cost of Goods Sold Inventory

2,750

9 Cash Sales Discounts Accounts Receivable

7,920 80

24 Cash Accounts Receivable

5,000

243. Jan. 3

4,200

5,000

2,750

8,000

5,000

Cash Sales Discounts Accounts Receivable—Austin Maxwell

392 8 400

244. a 245. a 246. c 247. b 248. c 249. d 250. True 251. True 252. (a) Cash Sales Sales Tax Payable Cost of Goods Sold Inventory Powered by Cognero

42 40 2 20 20 Page 66

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Chapter 05: Accounting for Retail Businesses (b) Cash Estimated Coupons Payable Sales Sales Tax Payable

95 10

Cost of Goods Sold Inventory

45

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100 5 45

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Chapter 06: Inventories

Indicate whether the statement is true or false. 1. One of the primary objectives of inventory control is to properly report inventory on the financial statements. a. True b. False 2. A purchase order establishes an initial record of the receipt of the inventory. a. True b. False 3. A perpetual inventory system is an effective means of control over inventory. a. True b. False 4. A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels. a. True b. False 5. Safeguarding inventory and the proper reporting of inventory in the financial statements are the primary objectives of inventory control. a. True b. False 6. Inventory controls start when the merchandise is shelved in the store area. a. True b. False 7. A physical inventory should be taken at the end of every month. a. True b. False 8. The specific identification inventory cost flow method should be used when the inventory consists of identical, low-cost units that are purchased and sold frequently. a. True b. False 9. The choice of an inventory costing method has no significant impact on the financial statements. a. True b. False 10. Under the LIFO inventory cost flow method, costs are charged to units sold based on the most recent purchases first. a. True b. False 11. When using the FIFO inventory cost flow method, the most recent costs are assigned to the cost of goods sold. a. True Powered by Cognero

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Chapter 06: Inventories b. False 12. FIFO is the inventory cost flow method that follows the normal physical flow of the goods. a. True b. False 13. Under the LIFO inventory cost flow method, the most recent costs are assigned to ending inventory. a. True b. False 14. If the perpetual inventory system is used, the inventory account is debited for purchases of merchandise. a. True b. False 15. Under the periodic inventory system, the inventory account continuously discloses the amount of inventory on hand. a. True b. False 16. Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of goods sold. a. True b. False 17. The three inventory costing methods will normally each yield different amounts of net income. a. True b. False 18. The weighted average cost method will always yield results between FIFO and LIFO. a. True b. False 19. During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO costing method. a. True b. False 20. During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce. a. True b. False 21. During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits. a. True b. False 22. During periods of decreasing costs, the use of the LIFO method of costing inventory will result in a lower amount of Powered by Cognero

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Chapter 06: Inventories net income than would result from the use of the FIFO method. a. True b. False 23. During periods of increasing costs, an advantage of the LIFO inventory costing method is that it matches more recent costs against current revenues. a. True b. False 24. In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal. a. True b. False 25. Unsold consigned merchandise should be included in the consignee's inventory. a. True b. False 26. If ending inventory for the year is understated, net income for the year is overstated. a. True b. False 27. If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated. a. True b. False 28. The lower of cost or market is a method of inventory valuation. a. True b. False 29. "Market" as used in the phrase "lower of cost or market" for valuing inventory refers to the price at which the inventory is being offered for sale by the company. a. True b. False 30. A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor. a. True b. False 31. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. a. True b. False 32. The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item-by-item Powered by Cognero

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Chapter 06: Inventories basis, by major classification of inventory, or by the total inventory. a. True b. False 33. When inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown. a. True b. False 34. It's not unusual for large companies to use different inventory costing methods for different segments of their inventory. a. True b. False 35. Direct disposal costs do not include special advertising or sales commissions. a. True b. False 36. Inventory errors, if not discovered, will self-correct within 2 years. a. True b. False 37. Generally, the lower the days' sales in inventory, the better. a. True b. False 38. One negative effect of carrying too much inventory is the increased risk of loss if customer tastes change. a. True b. False 39. Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by 2. a. True b. False 40. Inventory turnover measures the length of time it takes to acquire, sell, and replace inventory. a. True b. False 41. In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail price of the goods sold. a. True b. False 42. Use of the retail inventory method requires taking a physical count of inventory. a. True Powered by Cognero

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Chapter 06: Inventories b. False 43. If a fire destroys the inventory, the gross profit method can be used to estimate the cost of merchandise destroyed. a. True b. False 44. If a company uses a periodic inventory system, the gross profit method can be used to estimate inventory for monthly or quarterly statements. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 45. Under a perpetual inventory system, the amount of each type of merchandise on hand is available in the a. customer's ledger b. creditor's ledger c. inventory ledger d. purchase ledger 46. Which document authorizes the purchase of inventory from an approved vendor? a. purchase order b. petty cash voucher c. receiving report d. vendor's invoice 47. The primary objectives of control over inventory are a. safeguarding the inventory from damage or theft and maintaining constant observation of the inventory b. reporting inventory in the financial statements and keeping an accurate count of inventory c. maintaining constant observation of the inventory and reporting inventory in the financial statements d. safeguarding inventory from damage or theft and reporting inventory in the financial statements 48. Taking a physical count of inventory a. is not necessary when a periodic inventory system is used b. should be done near year-end c. has no internal control relevance d. is not necessary when a perpetual inventory system is used 49. Control of inventory should begin as soon as the inventory is received. Which of the following internal control steps is not done to meet this goal? a. Prepare a receiving report. b. Compare the receiving report to the purchase order. c. Check the invoice with the person who specifically purchased the item. d. Compare the receiving report and purchase order to the vendor’s invoice. 50. All of the following are documents used for inventory control except a Powered by Cognero

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Chapter 06: Inventories a. petty cash voucher b. vendor's invoice c. receiving report d. purchase order 51. Which document establishes an initial record of the receipt of the inventory? a. receiving report b. vendor's invoice c. purchase order d. petty cash voucher 52. Which of the following is not an example of safeguarding inventory? a. storing inventory in restricted areas b. using physical devices such as two-way mirrors, cameras, and alarms c. matching receiving documents, purchase orders, and vendor’s invoice d. returning inventory that is defective or broken 53. Which of the following inventory cost flow methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items? a. FIFO b. LIFO c. weighted average cost d. specific identification 54. Ending inventory is made up of the oldest purchases when a company uses the a. first-in, first-out method b. last-in, first-out method c. weighted average cost method d. retail method 55. When merchandise is assumed to be sold in the order in which the purchases were made, the company is using the a. first-in, last-out method b. last-in, first-out method c. first-in, first-out method d. weighted average cost method 56. Cost flow is most likely to be in the order in which costs were incurred when using the a. weighted average cost method b. last-in, first-out method c. first-in, first-out method d. first-in, last-out method 57. Cost flow is most likely in the reverse order in which costs were incurred when using the a. weighted average cost method Powered by Cognero

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Chapter 06: Inventories b. last-in, first-out method c. first-in, first-out method d. first-in, last-out method 58. The inventory cost flow method that assigns the most recent costs to cost of goods sold is a. FIFO b. LIFO c. weighted average cost d. specific identification 59. The inventory cost flow method that reports the most current prices in ending inventory is a. FIFO b. specific identification c. LIFO d. weighted average cost 60. The inventory cost flow method that reports the earliest costs in ending inventory is a. FIFO b. LIFO c. weighted average cost d. specific identification 61. Which of the following companies would be more likely to use the specific identification inventory cost flow method? a. Gordon’s Jewelers b. Lowe’s c. Best Buy d. Walmart 62. Use this information to answer the questions that follow. Addison, Inc. uses a perpetual inventory system. Information about one inventory item for the month of September follows. Sep. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

If Addison uses FIFO, the September 30 inventory is a. $800 b. $650 c. $750 d. $700 63. Use this information to answer the questions that follow. Powered by Cognero

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Chapter 06: Inventories Addison, Inc. uses a perpetual inventory system. Information about one inventory item for the month of September follows. Sep. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

If Addison uses LIFO, the September 30 inventory balance is a. $800 b. $650 c. $750 d. $700 64. When using a perpetual inventory system, the entry to journalize the cost of goods sold is a. debit Cost of Goods Sold and credit Sales b. debit Cost of Goods Sold and credit Inventory c. debit Inventory and credit Cost of Goods Sold d. No entry is made to journalize the cost of goods sold. 65. Accounting records maintain a continuously updated inventory value with a a. retail inventory system b. periodic inventory system c. physical inventory system d. perpetual inventory system 66. The inventory data for an item for November are: Nov. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $19 10 units 30 units at $20 20 units 10 units at $21

Using a perpetual system, what is the cost of goods sold for November if the company uses LIFO? a. $610 b. $600 c. $590 d. $580 67. The inventory data for an item for November are: Nov. 1 4 10 17

Inventory Sold Purchased Sold

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20 units at $19 10 units 30 units at $20 20 units Page 8

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Chapter 06: Inventories 30

Purchased

10 units at $21

Using a perpetual system, what is the cost of goods sold for November if the company uses FIFO? a. $610 b. $600 c. $590 d. $580 68. Use this information to answer the questions that follow. Boxwood Company sells blankets for $60 each. The following information was taken from the inventory records during May. The company had no beginning inventory on May 1. Boxwood uses a perpetual inventory system. Date Blankets Units Cost May 3 Purchase 5 $20 10 Sale 3 17 Purchase 10 $24 20 Sale 6 23 Sale 3 30 Purchase 10 $30 Determine the cost of goods sold for the sale of May 20 using the LIFO inventory costing method. a. $136 b. $144 c. $180 d. $120 69. Use this information to answer the questions that follow. Boxwood Company sells blankets for $60 each. The following information was taken from the inventory records during May. The company had no beginning inventory on May 1. Boxwood uses a perpetual inventory system. Date Blankets Units Cost May 3 Purchase 5 $20 10 Sale 3 17 Purchase 10 $24 20 Sale 6 23 Sale 3 30 Purchase 10 $30 Determine the cost of goods sold for the sale of May 20 using the FIFO inventory costing method. a. $120 b. $180 c. $136 d. $144 70. Use this information to answer the questions that follow. Boxwood Company sells blankets for $60 each. The following information was taken from the inventory records during May. The company had no beginning inventory on May 1. Boxwood uses a perpetual inventory system. Powered by Cognero

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Chapter 06: Inventories Date May 3 10 17 20 23 30

Blankets Purchase Sale Purchase Sale Sale Purchase

Units 5 3 10 6 3 10

Cost $20 $24

$30

Determine the May 31 inventory balance using the FIFO inventory costing method. a. $364 b. $372 c. $324 d. $320 71. Use this information to answer the questions that follow. Boxwood Company sells blankets for $60 each. The following information was taken from the inventory records during May. The company had no beginning inventory on May 1. Boxwood uses a perpetual inventory system. Date Blankets Units Cost May 3 Purchase 5 $20 10 Sale 3 17 Purchase 10 $24 20 Sale 6 23 Sale 3 30 Purchase 10 $30 Determine the gross profit for the sale of May 23 using the FIFO inventory costing method. a. $108 b. $120 c. $72 d. $180 72. Use this information to answer the questions that follow. Boxwood Company sells blankets for $60 each. The following information was taken from the inventory records during May. The company had no beginning inventory on May 1. Boxwood uses a perpetual inventory system. Date Blankets Units Cost May 3 Purchase 5 $20 10 Sale 3 17 Purchase 10 $24 20 Sale 6 23 Sale 3 30 Purchase 10 $30 Determine the May 31 inventory balance using the LIFO inventory costing method. Powered by Cognero

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Chapter 06: Inventories a. $324 b. $372 c. $320 d. $364 73. Use this information to answer the questions that follow. Boxwood Company sells blankets for $60 each. The following information was taken from the inventory records during May. The company had no beginning inventory on May 1. Boxwood uses a perpetual inventory system. Date Blankets Units Cost May 3 Purchase 5 $20 10 Sale 3 17 Purchase 10 $24 20 Sale 6 23 Sale 3 30 Purchase 10 $30 Determine the gross profit for the month of May using the LIFO costing method. a. $348 b. $452 c. $444 d. $356 74. Use this information to answer the questions that follow. The following units of an inventory item were available for sale during the year. Beginning inventory 10 units at $55 First purchase 25 units at $60 Second purchase 30 units at $65 Third purchase 15 units at $70 The firm uses the periodic inventory system. During the year, 60 units of the item were sold. The ending inventory cost using FIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 75. Use this information to answer the questions that follow. The following units of an inventory item were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase Powered by Cognero

10 units at $55 25 units at $60 30 units at $65 15 units at $70 Page 11

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Chapter 06: Inventories The firm uses the periodic inventory system. During the year, 60 units of the item were sold. The ending inventory cost using LIFO is a. $1,250 b. $1,350 c. $1,375 d. $1,150 76. Use this information to answer the questions that follow. The following units of an inventory item were available for sale during the year. Beginning inventory 10 units at $55 First purchase 25 units at $60 Second purchase 30 units at $65 Third purchase 15 units at $70 The firm uses the periodic inventory system. During the year, 60 units of the item were sold. The ending inventory cost rounded to the nearest dollar using weighted average cost is a. $1,353 b. $1,263 c. $1,375 d. $1,150 77. Use this information to answer the questions that follow. The following lots of Commodity Z were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

10 units at $30 25 units at $32 30 units at $34 10 units at $35

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the ending inventory balance of Commodity Z using LIFO? a. $655 b. $620 c. $690 d. $659 78. Use this information to answer the questions that follow. The following lots of Commodity Z were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase Powered by Cognero

10 units at $30 25 units at $32 30 units at $34 10 units at $35 Page 12

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Chapter 06: Inventories The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the ending inventory balance of Commodity Z using FIFO? a. $655 b. $620 c. $690 d. $659 79. Use this information to answer the questions that follow. The following lots of Commodity Z were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

10 units at $30 25 units at $32 30 units at $34 10 units at $35

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the ending inventory balance of Commodity Z using the weighted average cost method? a. $655 b. $620 c. $690 d. $659 80. Use this information to answer the questions that follow. The following lots of Commodity P were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the cost of goods sold for the year using the weighted average cost method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 81. Use this information to answer the questions that follow. The following lots of Commodity P were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase Powered by Cognero

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Chapter 06: Inventories The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the cost of goods sold for the year using FIFO? a. $1,380 b. $1,375 c. $1,510 d. $1,250 82. Use this information to answer the questions that follow. The following lots of Commodity P were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the cost of goods sold for the year using LIFO? a. $1,380 b. $1,375 c. $1,510 d. $1,250 83. Under a periodic inventory system, a. accounting records continuously disclose the amount of inventory b. a separate account for each type of merchandise is maintained in a subsidiary ledger c. a physical inventory is taken at the end of the period d. Inventory is debited when goods are returned to vendors 84. Use this information to answer the questions that follow. The following lots of Commodity D were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

10 units at $60 25 units at $65 30 units at $68 15 units at $75

The firm uses the periodic inventory system, and there are 25 units of the commodity on hand at the end of the year. What is the ending inventory balance of Commodity D using FIFO? a. $1,685 b. $1,575 c. $1,805 Powered by Cognero

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Chapter 06: Inventories d. $3,585 85. Use this information to answer the questions that follow. The following lots of Commodity D were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

10 units at $60 25 units at $65 30 units at $68 15 units at $75

The firm uses the periodic inventory system, and there are 25 units of the commodity on hand at the end of the year. What is the ending inventory balance of Commodity D using LIFO? a. $1,685 b. $1,575 c. $1,805 d. $3,815 86. Use this information to answer the questions that follow. The following lots of Commodity D were available for sale during the year. Beginning inventory First purchase Second purchase Third purchase

10 units at $60 25 units at $65 30 units at $68 15 units at $75

The firm uses the periodic inventory system, and there are 25 units of the commodity on hand at the end of the year. What is the ending inventory balance of Commodity D using the weighted average cost method? a. $1,684 b. $1,575 c. $1,805 d. $3,705 87. If beginning inventory (BI) plus purchases (P) minus ending inventory (EI) equals cost of goods sold (COGS), an equivalent equation can be written as a. BI + P = COGS – EI b. BI – P = COGS + EI c. BI + P = COGS + EI d. EI + P = COGS – BI 88. During a period of consistently rising prices, the method of inventory that will result in reporting the greatest cost of goods sold is a. FIFO b. LIFO Powered by Cognero

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Chapter 06: Inventories c. FILO d. weighted average cost 89. During times of rising prices, which of the following is not an accurate statement? a. Weighted average costing will yield results that are between those of FIFO and LIFO. b. LIFO will result in a higher cost of goods sold than FIFO. c. FIFO will result in a higher net income than LIFO. d. LIFO will result in higher income taxes than FIFO. 90. If revenues are correctly reported and the gross profit of a company is understated, what is the effect on owner's equity? a. understated b. overstated c. no effect d. cannot determine without more information 91. If inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is a. periodic b. LIFO c. FIFO d. weighted average cost 92. If inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income? a. FILO b. LIFO c. FIFO d. weighted average cost 93. Which of the following will be the same amount regardless of the cost flow assumption adopted? a. number of items ordered b. gross profit c. cost of goods sold d. ending inventory 94. FIFO reports higher gross profit and net income than the LIFO method when a. prices are increasing b. prices are decreasing c. prices remain stable d. prices are reduced by 50% 95. During a period of falling prices, which of the following inventory methods generally results in the lowest balance sheet amount for inventory? a. weighted average cost method Powered by Cognero

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Chapter 06: Inventories b. LIFO method c. FIFO method d. cannot determine without more information 96. Damaged merchandise that can be sold only at prices below cost should be valued at a. net realizable value b. LIFO c. FIFO d. weighted average cost 97. If a manufacturer ships merchandise to a retailer on consignment, the unsold merchandise should be included in the inventory of the a. consignee b. retailer c. manufacturer d. shipper 98. Inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity? a. Net income is overstated, assets are overstated, and owner's equity is understated. b. Net income is overstated, assets are overstated, and owner's' equity is overstated. c. Net income is understated, assets are understated, and owner's equity is understated. d. Net income is understated, assets are understated, and owner's equity is overstated. 99. Inventory at the end of the year was understated. Which of the following statements correctly states the effect of the error? a. Net income is understated. b. Net income is overstated. c. Cost of goods sold is understated. d. Inventory reported on the balance sheet is overstated. 100. Inventory at the end of the year is overstated. Which of the following statements correctly states the effect of the error? a. Owner's equity is overstated. b. Cost of goods sold is overstated. c. Gross profit is understated. d. Net income is understated. 101. If the cost of an item of inventory is $60 and the current replacement cost is $75, the amount included in inventory according to the lower of cost or market is a. $15 b. $60 c. $75 d. $135 Powered by Cognero

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Chapter 06: Inventories 102. Kristin’s Boutiques has identified the following items for possible inclusion in its December 31 inventory. Which of the following would not be included in the year-end inventory? a. Merchandise purchased FOB shipping point was picked up by the freight company but had still not arrived at Kristin’s Boutique as of December 31. b. Kristin has in its warehouse merchandise on consignment from Abby Co. c. Kristin has sent merchandise to various retailers on a consignment basis. d. Kristin has inventory on hand that has been returned by customers because of wrong size. 103. During the taking of its physical inventory on December 31, 20Y4, Barry’s Bike Shop incorrectly counted its inventory as $350,000 instead of the correct amount of $280,000. The effect on the balance sheet and income statement would be a. assets overstated by $70,000; owner's capital understated by $70,000; and net income understated by $70,000 b. assets overstated by $70,000; owner's capital understated by $70,000; and no effect on net income c. assets, owner's capital, and net income all overstated by $70,000 d. assets and owner's capital overstated by $70,000, and net income understated by $70,000 104. If a company mistakenly counts more items during a physical inventory than actually exist, how will the error affect its bottom line? a. There will be no change to net income. b. Net income will be overstated. c. Net income will be understated. d. Only gross profit will be affected. 105. If a company mistakenly counts fewer items during a physical inventory than actually exist, how will the error affect the cost of goods sold? a. understated b. overstated c. no effect d. cannot determine without more information 106. Too much inventory on hand a. ties up funds that could be used to improve operations b. increases the cost to safeguard the assets c. increases the losses due to price declines d. all of these choices 107. Which of the following is used to analyze the efficiency and effectiveness of inventory management? a. inventory turnover only b. days’ sales in inventory only c. both inventory turnover and days’ sales in inventory d. neither inventory turnover nor days’ sales in inventory 108. Which of the following measures the relationship between cost of goods sold and the amount of inventory carried during the period? a. inventory turnover Powered by Cognero

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Chapter 06: Inventories b. fixed asset turnover c. retail method of inventory costing d. gross profit method of inventory costing 109. Which of the following measures the length of time it takes to acquire, sell, and replace inventory? a. inventory turnover b. days’ sales in inventory c. retail method of inventory costing d. gross profit method of inventory costing 110. Excess inventory results in all of the following except a. tied-up funds that could be used to improve operations b. lost sales c. increased storage expense d. increased risk of loss due to damage 111. Days' sales in inventory measures the a. length of time it takes to acquire, sell, and replace inventory b. length of time it takes to acquire and receive payment for inventory c. number of days inventory is on hand prior to sale d. number of days inventory takes to arrive after ordering 112. For the year ended December 31, Depot Max’s cost of goods sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. What is Depot Max’s inventory turnover for the year? a. 8.7 b. 7.8 c. 8.3 d. 44.0 113. For the year ended December 31, Depot Max’s cost of goods sold was $56,900. Inventory at the beginning of the year was $6,540. Ending inventory was $7,250. Depot Max’s days' sales in inventory is closest to a. 42 b. 46 c. 8 d. 44 114. The method of estimating inventory that uses records of the selling prices of the merchandise is called the a. retail method b. gross profit method c. inventory turnover method d. weighted average cost method 115. On the basis of the following data, what is the estimated cost of the inventory on May 31 using the retail method? Cost Powered by Cognero

Retail Page 19

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Chapter 06: Inventories May 1 May 1–31 May 1–31

Inventory Purchases Sales

$125,000 235,000

$166,667 313,333 230,000

a. $250,000 b. $360,000 c. $172,500 d. $187,500 116. If the estimated rate of gross profit is 30%, what is the estimated cost of the inventory on September 30, based on the following data? Sept. 1 Sept. 1–30 Sept. 1–30

Inventory (at cost) Purchases, net (at cost) Sales

$125,000 300,000 150,000

a. $320,000 b. $192,500 c. $275,000 d. $105,000 117. Which of the following is not a reason to use an estimated method of costing inventory? a. Perpetual inventory records are not maintained. b. Purchase records are not maintained. c. A disaster has destroyed the inventory records and the inventory. d. Interim financial statements are required but physical inventory is only taken once a year. 118. Garrison Company uses the retail method of inventory costing. It started the year with an inventory that had a retail sales value of $45,000. During the year, Garrison purchased inventory with a retail sales value of $300,000. After performing a physical inventory, Garrison computed the inventory at retail to be $80,000. The markup is 100% of cost. What is the ending inventory at its estimated cost? a. $160,000 b. $80,000 c. $40,000 d. $45,000 119. A company will most likely use an estimated method of determining inventory when a. the company decides not to do a physical inventory b. a natural disaster has destroyed most of the inventory c. the company has not kept up with its inventory records d. the company is preparing annual financial statements 120. Stevens Company started the year with an inventory cost of $145,000. During the month of January, Stevens purchased inventory that cost $53,000. January sales totaled $140,000. Estimated gross profit is 35%. The estimated ending inventory as of January 31 is Powered by Cognero

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Chapter 06: Inventories a. $58,000 b. $91,000 c. $107,000 d. $69,300 121. Determine the total value of the following merchandise using net realizable value. Item Doll Horse a. $35 b. $80 c. $115 d. $90

Quantity 10 5

Original Cost $8 11

Selling Price $7 9

Commission $2 3

122. If a company values inventory at the lower of cost or market, which of the following is the value of inventory on the balance sheet? Apply the lower-of-cost-or-market method to inventory as a whole. Item Product C Product D a. $6,960 b. $7,700 c. $6,540 d. $7,280

Inventory Quantity 420 370

Unit Cost Price $ 6 12

Unit Market Price $ 5 14

123. In which inventory cost flow method is the cost of the units sold and in ending inventory a weighted average of the purchase costs? a. FIFO b. LIFO c. weighted average cost d. specific identification 124. Which inventory cost flow method matches the unit sold to the unit purchased? a. FIFO b. LIFO c. weighted average cost d. specific identification

125. For each of the following statements, indicate the inventory system (perpetual or periodic) to which it relates. (a) This system can be costly and time consuming if not computerized. (b) With this system, the weighted average cost method uses a “moving average.” (c) Under this system, only revenue is recorded when sales are made. Powered by Cognero

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Chapter 06: Inventories (d) When using this system, a physical inventory is necessary to determine cost of goods sold.

Indicate the answer choice that best completes the statement or answers the question. 126. Which of the following inventory cost flow methods is widely used for tax purposes? a. FIFO b. LIFO c. weighted average cost d. specific identification 127. Which of the following inventory cost flow methods is prohibited under International Financial Reporting Standards (IFRS)? a. FIFO b. LIFO c. weighted average cost d. specific identification 128. Under which of the following situations would net income for the current year be understated? a. Purchased merchandise was shipped FOB shipping point on the last day of the year. The cost of the merchandise was not included in ending inventory. b. Merchandise was purchased FOB destination on the last day of the year. The cost of the merchandise purchased was not included in ending inventory. c. Merchandise held on consignment was included in the count of ending inventory. d. A consignor included merchandise in the hands of the consignee in ending inventory. 129. Under which of the following situations would net income for the current year not be affected? a. Beginning inventory was understated. b. Merchandise that was sold and shipped FOB destination on the last day of the year was not included in the seller’s ending inventory. c. Merchandise that was sold and shipped FOB shipping point on the last day of the year was not included in the seller’s ending inventory. d. The beginning inventory was recorded as $10,000, when actual inventory on hand was $12,000.

130. Safeguarding inventory from damage or theft is a primary objective for the control of inventory. If you were running a clothing store, name three specific controls you would implement to guard inventory from theft. 131. List three different security measures taken to safeguard inventory. 132. Three identical units of merchandise were purchased during March, as follows:

Mar. 3 10 Powered by Cognero

Steele Plate Purchase Purchase

Units 1 1

Cost $ 830 840 Page 22

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Chapter 06: Inventories 19

Purchase

1 3

Total

880 $2,550

Assume that one unit is sold on March 23 for $1,125. Determine the gross profit for March and ending inventory on March 31 using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 133. Three identical units of merchandise were purchased during May, as follows:

May

Magnesium XP Purchase Purchase Purchase

3 10 19

Total

Units 1 1 1 3

Cost $130 136 142 $408

Assume that two units are sold on May 23 for $313 total. Determine the gross profit for May and ending inventory on May 31 using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 134. Assume that three identical units of merchandise were purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of goods sold, gross profit, and ending inventory using the LIFO method. 135. Assume that three identical units of merchandise were purchased during October, as follows:

Oct.

5 12 28

Purchase Purchase Purchase

Total

Units 1 1 1 3

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of goods sold, gross profit, and ending inventory using the weighted average cost method. 136. Assume that three identical units of merchandise are purchased during October, as follows:

Oct.

Total

5 12 28

Purchase Purchase Purchase

Units 1 1 1 3

Cost $5 13 15 $33

Assume one unit is sold on October 31 for $28. Determine cost of goods sold, gross profit, and ending inventory using the FIFO method. Powered by Cognero

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Chapter 06: Inventories 137. Three identical units of merchandise were purchased during July, as follows: Date July 3 10 24

Product Basic H Purchase Purchase Purchase Total

Units 1 1 1 3

Cost $ 35 36 37 $108

Average cost per unit

$36

Assume one unit sells on July 28 for $45. Determine the gross profit, cost of goods sold, and ending inventory on July 31 using the (a) first-in, first-out, (b) lastin, first-out, and (c) weighted average cost flow methods. 138. Beginning inventory, purchases, and sales for an inventory item are as follows: Sep. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale

24 units 17 units 10 units 8 units

@

$15

@

$20

Assuming a perpetual inventory system and the first-in, first-out method, determine (a) the cost of goods sold for the September 30 sale and (b) the inventory on September 30. 139. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale

150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units

The firm uses the perpetual inventory system, and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory using FIFO? 140. Beginning inventory, purchases, and sales for an inventory item are as follows: Beginning inventory Sale First purchase Sale Second purchase Sale

150 units @ $755 120 units 400 units @ $785 200 units 300 units @ $805 290 units

The firm uses the perpetual inventory system, and there are 240 units of the item on hand at the end of the year. What is the total cost of ending inventory using LIFO?

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Chapter 06: Inventories 141. Beginning inventory, purchases, and sales for an inventory item are as follows: Sep. 1 Beginning inventory 5 Sale 17 Purchase 30 Sale

24 units 17 units 10 units 8 units

@

$10

@

$15

Assuming a perpetual inventory system and the last-in, first-out method, determine (a) the cost of goods sold for the September 30 sale and (b) the inventory on September 30. 142. Beginning inventory, purchases, and sales for an inventory item are as follows: Nov. 1 4 11 12 22 23

Purchased Sold Purchased Sold Purchased Sold

600 units $80 each 200 units 350 units $82 each 275 units 175 units $84 each 155 units

Assuming no beginning inventory, a perpetual inventory system, and the last-in, first-out method, determine (a) the inventory on November 30 and (b) the cost of goods sold for November. 143. Complete the following table assuming a perpetual inventory system and the FIFO method of inventory cost flow: Purchases Date July 2

Qty. 600

Unit Cost 12.00

200

13.00

5 7

10

Total Cost

Qty

325

Qty.

Unit Cost

Total Cost

300 150

250

13.00 50 205

25

120 180

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Total Cost

14.00

22

28

Unit Cost

Inventory

300

12

18

Cost of Goods Sold

330

15.00

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Chapter 06: Inventories 70 5

31 31

Balances

144. Beginning inventory, purchases, and sales data for tennis rackets are as follows: April

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

12 units 13 units 18 units 9 units 10 units

@ @

$45 $47

@

$60

Complete the inventory record assuming the business maintains a perpetual inventory system and determine the cost of goods sold and ending inventory using FIFO. Cost of Goods Sold

Purchases

Date

Qty.

Unit Cost

Total Cost

Qty.

Inventory

Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

Balances 145. Beginning inventory, purchases, and sales data for tennis rackets are as follows: Apr. 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

12 units @ 13 units @ 18 units 9 units @ 10 units

$45 $47 $60

Complete the inventory record assuming the business maintains a perpetual inventory system and determine the cost of goods sold and ending inventory using LIFO. Cost of Goods Sold

Purchases Date

Qty.

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Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

Inventory Qty.

Unit Cost

Total Cost

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Chapter 06: Inventories

Balances 146. Beginning inventory, purchases, and sales data for widgets are as follows: April 3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

15 units 12 units 18 units 7 units 10 units

@ @

$30 $27

@

$25

Complete the inventory record assuming the business maintains a perpetual inventory system, and determine the cost of goods sold and ending inventory using FIFO. Cost of Goods Sold

Purchases Unit Qty. Cost

Date

Total Cost

Qty.

Unit Cost

Total Cost

Inventory Qty.

Unit Cost

Total Cost

Balances 147. Beginning inventory, purchases, and sales data for widgets are as follows: Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

15 units 12 units 18 units 7 units 10 units

@ @

$30 $27

@

$25

Complete the inventory record assuming the business maintains a perpetual inventory system, and determine the cost of goods sold and ending inventory using LIFO. Cost of Goods Sold

Purchases Date

Qty.

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Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

Inventory Qty.

Unit Cost

Total Cost

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Chapter 06: Inventories Balances 148. The units of an item available for sale during the year were as follows: Jan. 10 Feb. 27 July 11 Nov. 13

Inventory Purchase Purchase Purchase

27 units @ $90 54 units @ $98 63 units @ $106 36 units @ $115

There are 50 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the weighted average cost method. Show your work. 149. The units of an item available for sale during the year were as follows: Jan. 11 Feb. 27 Nov. 21

Inventory Purchase Purchase

60 units @ $145 90 units @ $150 75 units @ $154

There are 48 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost using (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the weighted average cost method. Show your work. 150. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28

Inventory Purchase Purchase

16 units 30 units 45 units 91 units

@ $30 @ $35 @ $39

$ 480 1,050 1,755 $3,285

There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is used. Determine the inventory cost using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 151. Complete the chart, indicating whether LIFO or FIFO would give the highest and lowest amounts for each item, assuming a period of increasing costs. Highest Amount

Lowest Amount

Cost of goods sold Gross profit Net income Ending inventory 152. The units of Manganese Plus available for sale during the year were as follows: Mar. 1 June 16 Nov. 28

Inventory Purchase Purchase

16 units 30 units 45 units 91 units

@ $30 @ $35 @ $39

$ 480 1,050 1,755 $3,285

There are 15 units of the product in the physical inventory at November 30. The periodic inventory system is Powered by Cognero

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Chapter 06: Inventories used. Determine the difference in gross profit between the LIFO and FIFO inventory costing methods. 153. Applying the lower-of-cost-or-market method to each item of inventory, what should the total inventory value be for the following items?

Item

Inventory Quantity

Cost per Unit

A B C

300 200 100

$15.00 14.00 17.00

Market value per Unit $14.50 15.00 17.50

Total Cost

Total Market

$4,500 2,800 1,700

$4,350 3,000 1,750

154. Determine the total value of the following merchandise using net realizable value. Item Doll Horse

Quantity 20 10

Original Cost $8 11

Selling Price $6 8

Commission $2 3

155. While taking a physical inventory, a company counts its inventory as less than the actual amount on hand. How will this error affect the income statement? 156. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Product C Product D

Inventory Quantity 300 420

Unit Cost Price $6 12

Unit Market Price $ 5 14

157. On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item. Show your work. Item Gear X Gear Y

Inventory Quantity 175 225

Unit Cost Price $33 27

Unit Market Price $29 28

158. The following data were taken from the annual reports of Big Bang Inc., a manufacturer of fireworks, and Orange Inc., a manufacturer of computers.

Cost of goods sold Inventory, end of year Inventory, beginning of year

Big Bang, Inc. $830,000 190,000 240,000

Orange, Inc. $11,540,000 320,000 290,000

(a) Determine the (1) inventory turnover and (2) days' sales in inventory for Big Bang and Orange. Round answers to two decimal places. (b) How would you expect these measures to compare between the companies? Why? Powered by Cognero

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Chapter 06: Inventories 159. Based on the following data, estimate the cost of the inventory on March 31 using the retail method. Cost $225,000 454,245

Mar. 1 Inventory Mar. 1–31 Purchases (net) Mar. 1–31 Sales

Retail $357,600 612,750 835,000

160. A business using the retail method of inventory costing determines that inventory at retail is $2,300,000. If the ratio of cost to retail price is 55%, what is the amount of inventory to be reported on the balance sheet? 161. Based upon the following data, estimate the cost of ending inventory using the gross profit method. Sales Estimated gross profit rate

$250,000 25%

Beginning inventory Purchases (net) Merchandise available for sale

$ 9,000 211,000 $220,000

162. Fill in the missing amounts from the following chart regarding the estimation of Bean Corporation’s inventory using the retail method.

Inventory, October 1 Purchases for October (net) Merchandise available for sale

Cost $13,687 ? $82,528

Ratio of cost to retail price: ? Sales for October

Retail $19,553 98,344 $ ?

Merchandise at retail, October 31

? $25,340

Merchandise at cost, October 31

$

?

163. List the internal control objectives illustrated by the following: (a) (b) (c)

Keeping the inventory storeroom locked Counting the inventory at the end of the accounting period and comparing it to the inventory ledger Using subsidiary ledgers and a perpetual inventory system

164. Describe three inventory cost flow assumptions and how they impact the financial statements. 165. The following data regarding purchases and sales of a commodity were taken from the related perpetual inventory account: June 1 6 8

Balance Sale Purchase

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25 units at $60 20 units 20 units at $61 Page 30

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Chapter 06: Inventories 16 20 23 30

Sale Purchase Sale Purchase

10 units 20 units at $62 25 units 15 units at $63

Determine the cost of the ending inventory at June 30, using (a) the first-in, first-out (FIFO) method and (b) the last-in, first-out (LIFO) method. Identify the quantity, unit price, and total cost of each lot in the inventory. 166. Beginning inventory, purchases, and sales data for hammers are as follows: Mar. 3 11 14 21 25

Inventory Purchase Sale Purchase Sale

12 units 13 units 18 units 9 units 10 units

@ @

$15 $17

@

$20

Assuming the business maintains a perpetual inventory system, complete the inventory records and compute the cost of goods sold and ending inventory under the following assumptions: (a) First-in, first-out Purchases Date

Qty.

Unit Cost

Cost of Goods Sold Total Cost

Qty.

Unit Cost

Total Cost

Inventory Unit Cost

Qty.

Total Cost

Mar. 3 11 14 21 25 Balances (b) Last-in, first-out Purchases Date

Qty.

Unit Cost

Cost of Goods Sold Total Cost

Qty.

Unit Cost

Total Cost

Inventory Qty.

Unit Cost

Total Cost

Mar. 3 11 14 21 Powered by Cognero

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Chapter 06: Inventories 25 Balances 167. The units of an item available for sale during the year were as follows: Jan. 1 Inventory Mar. 4 Purchase June 7 Purchase Nov. 15 Purchase

25 units at $45 15 units at $50 35 units at $58 20 units at $65

There are 30 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using FIFO. 168. The units of an item available for sale during the year were as follows: Jan. 1 Apr. 4 May 20 Oct. 30

Inventory Purchase Purchase Purchase

10 units at $25 15 units at $24 20 units at $28 18 units at $30

There are 19 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost using LIFO. 169. The beginning inventory and purchases of an item for the period were as follows: Beginning inventory First purchase Second purchase Third purchase

6 units at $70 each 10 units at $75 each 18 units at $80 each 10 units at $90 each

The company uses the periodic system, and there were 15 units in inventory at the end of the period. Determine the cost of the inventory using the (a) first-in, first-out; (b) last-in, first-out; and (c) weighted average cost methods. For weighted average cost, do not round intermediate computation, and round final answer to two decimal places. 170. Beginning inventory, purchases, and sales data for T-shirts are as follows: Apr.

3 Inventory 11 Purchase 14 Sale 21 Purchase 25 Sale

24 units 26 units 36 units 18 units 20 units

@ @

$10 $12

@

$15

Assuming the business maintains a periodic inventory system, determine the cost of goods sold and ending inventory using the following methods: a. FIFO b. LIFO c. Weighted average cost (round cost of goods sold and ending inventory to the nearest dollar) 171. The units of Product Green-2 available for sale during the year were as follows: Apr.

1

Inventory

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15 units

@

$30 Page 32

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Chapter 06: Inventories June 16 Sep. 28

Purchase Purchase

29 units 45 units

@ @

$33 $35

There are 17 units of the product in the physical inventory at September 30. The periodic inventory system is used. Determine the cost of goods sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods. 172. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1. Purchased 500 units @ $25.00 each 4. Purchased 300 units @ $24.00 each 6. Sold 400 units @ $38.00 each 8. Purchased 700 units @ $23.00 each 13. Sold 450 units @ $37.50 each 20. Purchased 250 units @ $25.25 each 22. Sold 275 units @ $36.00 each 27. Sold 300 units @ $37.00 each 28. Purchased 550 units @ $26.00 each 30. Sold 100 units @ $39.00 each Determine the total sales, cost of goods sold, gross profit, and ending inventory using each of the following inventory costing methods: (a) FIFO perpetual (b) FIFO periodic (c) LIFO perpetual (d) LIFO periodic (e) Weighted average cost periodic (round average to nearest cent) 173. Basic inventory data for April 30 are presented as follows for a business that employs the lower-of-cost-or-market basis of inventory valuation to each category. Inventory Commodity Quantity A 35 B 20 C 25 D 40 (a) (b)

Cost per Unit $ 52 155 82 58

Market Value per Unit $ 55 150 85 55

Cost _______ _______ _______ _______

Total Market _______ _______ _______ _______

LCM _______ _______ _______ _______

Complete the table. Determine the amount of reduction in the inventory at April 30 attributable to market decline.

174. Hampton Co. took a physical count of its inventory on December 31. In addition, it had to decide whether or not the following items should be added to this count. (a) (b) (c)

Inventory on hand had been sold earlier in the year but had been returned by customers for various warranty repairs. Hampton Co. sent merchandise on a consignment basis on December 31 just prior to the physical count. On December 22, Hampton Co. ordered merchandise on FOB destination terms. The merchandise was shipped by the supplier on December 30 but had not been received by December 31.

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Chapter 06: Inventories (d) (e) (f)

On December 27, Hampton Co. ordered merchandise on FOB shipping point terms. The merchandise was shipped on December 29 but had not been received by December 31. Merchandise sold FOB shipping point on December 31 was picked up by the freight company just before closing on December 31. Merchandise shipped to a customer FOB destination was picked up by the freight company on December 28 but had not arrived at its destination as of December 31.

Answer "yes" or "no" to indicate which items should and should not be added to the December 31 inventory count. 175. (a) Explain the effect of the following on the financial statements: Goods held on consignment were included in the ending inventory count. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory. (b) What happens if inventory errors are not found and corrected? 176. On the basis of the following data for Sanford Industries as of December 31, determine the value of the inventory at the lower of cost or market. Also, show how the inventory would appear on the balance sheet (assume that the cost was determined by the FIFO method). Apply lower of cost or market to each inventory item. Commodity Size 4 Size 5 Size 6 Size 7

Inventory Quantity 9 10 14 12

Cost per Unit $17 17 20 13

Market Value per Unit $19 14 22 15

177. Based on the following information: compute (a) inventory turnover; (b) average daily cost of goods sold; and (c) days' sales in inventory for the current year. Use a 365-day year. (d) If an inventory turnover of 12 is average for the industry, how is this company doing? Item Cost of goods sold Inventory

Prior Year $172,900 18,000

Current Year $215,000 12,000

178. The following data were taken from Castle, Inc. Cost of goods sold Inventory, end of year Inventory, beginning of the year

$894,000 78,000 92,000

Determine the inventory turnover and the days’ sales in inventory for Castle, Inc. Round to two decimal places. 179. Based on the following information, compute (a) inventory turnover, (b) average daily cost of goods sold using a 365-day year, and (c) days’ sales in inventory. Powered by Cognero

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Chapter 06: Inventories Cost of goods sold Inventory: Beginning of year End of year

$195,640 20,500 18,628

180. During August, the first month of the fiscal year, sales totaled $875,000 and the cost of merchandise available for sale totaled $850,000. Estimate the cost of the inventory as of August 31, based on an estimated gross profit rate of 45%. 181. On the basis of the following data, estimate the cost of the inventory at March 31 by the retail method. Mar. 1 Mar. 1–31 Mar. 1–31

Inventory Purchases (net) Sales

Cost $250,000 850,000

Retail $ 350,000 1,650,000 845,000

182. On the basis of the following data, determine the estimated cost of the inventory as of March 31 using the retail method. Mar.

Cost $310,000 307,250

1 Inventory 1–31 Purchases (net) 1–31 Sales

Retail $550,000 515,000 400,000

Indicate the answer choice that best completes the statement or answers the question. 183. Three identical units of merchandise were purchased during March, as follows: Steele Plate Mar. 3 Purchase 10 Purchase 19 Purchase Total

Units Cost 1 $ 830 1 840 1 880 3 $2,550

Assume that one unit is sold on March 23 for $1,125. What is the gross profit for March using FIFO? a. $245 b. $295 c. $1,670 d. $1,720 184. Three identical units of merchandise were purchased during March, as follows: Steele Plate Mar. 3 Purchase 10 Purchase 19 Purchase Total Powered by Cognero

Units 1 1 1 3

Cost $ 830 840 880 $2,550 Page 35

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Chapter 06: Inventories Assume that one unit is sold on March 23 for $1,125. What is the ending inventory on March 31 using the weighted average cost method? a. $245 b. $295 c. $1,670 d. $1,700 185. Three identical units of merchandise were purchased during March, as follows: Steele Plate Units Cost Mar. 3 Purchase 1 $ 830 10 Purchase 1 840 19 Purchase 1 880 Total 3 $2,550 Assume that one unit is sold on March 23 for $1,125. What is the ending inventory on March 31 using LIFO? a. $245 b. $295 c. $1,670 d. $1,720 186. Assume that three identical units of merchandise were purchased during October, as follows: Units Cost Oct. 5 Purchase 1 $ 5 12 Purchase 1 13 28 Purchase 1 15 Total 3 $33 One unit is sold on October 31 for $28. Using the table provided, what is the cost of goods sold using the LIFO method? a. $28 b. $18 c. $15 d. $13 187. Assume that three identical units of merchandise were purchased during October, as follows: Units Cost Oct. 5 Purchase 1 $ 5 12 Purchase 1 13 28 Purchase 1 15 Total 3 $33 One unit is sold on October 31 for $28. Using the table provided, determine the cost of goods sold using the weighted average cost method. a. $22 b. $17 Powered by Cognero

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Chapter 06: Inventories c. $13 d. $11 188. Assume that three identical units of merchandise were purchased during October, as follows: Units Cost Oct. 5 Purchase 1 $ 5 12 Purchase 1 13 28 Purchase 1 15 Total 3 $33 One unit is sold on October 31 for $28. Using the table provided, determine the gross profit using the FIFO method. a. $28 b. $23 c. $15 d. $13 189. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1. Purchased 500 units @ $25.00 each. 4. Purchased 300 units @ $24.00 each. 6. Sold 400 units @ $38.00 each. 8. Purchased 700 units @ $23.00 each. 13. Sold 450 units @ $37.50 each. 20. Purchased 250 units @ $25.25 each. 22. Sold 275 units @ $36.00 each. 27. Sold 300 units @ $37.00 each. 28. Purchased 550 units @ $26.00 each. 30. Sold 100 units @ $39.00 each. Using the table provided and assuming a perpetual inventory system, determine total sales, cost of goods sold, gross profit, and ending inventory using FIFO. a. Total sales: $56,975.00 Cost of goods sold: $36,431.25 Gross profit: $20,543.75 Ending inventory: $19,981.25 b. Total sales: $56,975.00 Cost of goods sold: $36,587.50 Gross profit: $20,387.50 Ending inventory: $19,825.00 c. Total sales: $56,975.00 Cost of goods sold: $37,312.50 Gross profit: $19,662.50 Ending inventory: $19,573.25 d. Total sales: $56,975.00 Cost of goods sold: $37,401.75 Gross profit: $19,573.25 Ending inventory: $19,010.75 Powered by Cognero

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Chapter 06: Inventories 190. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1. Purchased 500 units @ $25.00 each. 4. Purchased 300 units @ $24.00 each. 6. Sold 400 units @ $38.00 each. 8. Purchased 700 units @ $23.00 each. 13. Sold 450 units @ $37.50 each. 20. Purchased 250 units @ $25.25 each. 22. Sold 275 units @ $36.00 each. 27. Sold 300 units @ $37.00 each. 28. Purchased 550 units @ $26.00 each. 30. Sold 100 units @ $39.00 each. Using the table provided and assuming a periodic inventory system, determine total sales, cost of goods sold, gross profit, and ending inventory using the weighted average cost method. Round the average unit cost to the nearest cent. a. Total sales: $56,975.00 Cost of goods sold: $36,431.25 Gross profit: $20,543.75 Ending inventory: $19,981.2 b. Total sales: $56,975.00 Cost of goods sold: $36,587.50 Gross profit: $20,387.50 Ending inventory: $19,825.00 c. Total sales: $56,975.00 Cost of goods sold: $37,312.50 Gross profit: $19,662.50 Ending inventory: $19,573.25 d. Total sales: $56,975.00 Cost of goods sold: $37,401.75 Gross profit: $19,573.25 Ending inventory: $19,010.75 191. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1. Purchased 500 units @ $25.00 each. 4. Purchased 300 units @ $24.00 each. 6. Sold 400 units @ $38.00 each. 8. Purchased 700 units @ $23.00 each. 13. Sold 450 units @ $37.50 each. 20. Purchased 250 units @ $25.25 each. 22. Sold 275 units @ $36.00 each. 27. Sold 300 units @ $37.00 each. 28. Purchased 550 units @ $26.00 each. 30. Sold 100 units @ $39.00 each. Using the table provided and assuming a perpetual inventory system, determine total sales, cost of goods sold, gross profit, and ending inventory using LIFO. a. Total sales: $56,975.00 Cost of goods sold: $36,431.25 Powered by Cognero

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Chapter 06: Inventories Gross profit: $20,543.75 Ending inventory: $19,981.25 b. Total sales: $56,975.00 Cost of goods sold: $36,587.50 Gross profit: $20,387.50 Ending inventory: $19,825.00 c. Total sales: $56,975.00 Cost of goods sold: $37,312.50 Gross profit: $19,662.50 Ending inventory: $19,573.25 d. Total sales: $56,975.00 Cost of goods sold: $37,401.75 Gross profit: $19,573.25 Ending inventory: $19,010.75 192. Brutus Corporation, a newly formed corporation, has the following transactions during May, its first month of operations. May 1. Purchased 500 units @ $25.00 each. 4. Purchased 300 units @ $24.00 each. 6. Sold 400 units @ $38.00 each. 8. Purchased 700 units @ $23.00 each. 13. Sold 450 units @ $37.50 each. 20. Purchased 250 units @ $25.25 each. 22. Sold 275 units @ $36.00 each. 27. Sold 300 units @ $37.00 each. 28. Purchased 550 units @ $26.00 each. 30. Sold 100 units @ $39.00 each. Using the table provided and assuming a periodic inventory system, determine total sales, cost of goods sold, gross profit, and ending inventory using LIFO. a. Total sales: $56,975.00 Cost of goods sold: $36,431.25 Gross profit: $20,543.75 Ending inventory: $19,981.25 b. Total sales: $56,975.00 Cost of goods sold: $36,587.50 Gross profit: $20,387.50 Ending inventory: $19,825.00 c. Total sales: $56,975.00 Cost of goods sold: $37,312.50 Gross profit: $19,662.50 Ending inventory: $19,573.25 d. Total sales: $56,975.00 Cost of goods sold: $37,401.75 Gross profit: $19,573.25 Ending inventory: $19,010.75 193. Applying the lower of cost or market to each item of inventory, what should the total inventory value be for the following items? Powered by Cognero

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Chapter 06: Inventories

Item A B C

Inventory Quantity 300 200 100

Cost per Unit $15.00 14.00 17.00

Market Value per Unit $14.50 15.00 17.50

Total Cost $4,500 2,800 1,700

Total Market $4,350 3,000 1,750

a. $8,850 b. $9,000 c. $9,100 d. $9,250 194. On the basis of the following data, what is the value of the total inventory at the lower of cost or market? Apply lower of cost or market to each inventory item. Item Inventory Quantity Unit Cost Price Unit Market Price Product C 300 $ 6 $ 5 Product D 420 12 14 a. $7,380 b. $6,840 c. $6,540 d. $6,300 195. Basic inventory data for April 30 are presented for a business that employs the lower-of-cost-or-market basis of inventory valuation to each category. Inventory Market Value Commodity Cost per Unit Quantity per Unit A 35 $ 52 $ 55 B 20 155 150 C 25 82 85 D 40 58 55 What is the amount of reduction in the inventory at April 30 attributable to market decline? a. $14 b. $40 c. $180 d. $220 196. On the basis of the following data for Sanford Industries as of December 31, what is the value of the inventory at the lower of cost or market? Apply lower of cost or market to each inventory item. Inventory Market Value Commodity Quantity Cost per Unit per Unit Size 4 9 $17 $19 Size 5 10 17 14 Size 6 14 20 22 Size 7 12 13 15 a. $679 Powered by Cognero

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Chapter 06: Inventories b. $729 c. $759 d. $799

197. During the taking of its physical inventory on December 31, 20Y5, Beyrl’s Bike Shop incorrectly counted its inventory as $380,000 instead of the correct amount of $320,000. What is the effect on the balance sheet and income statement? 198. During the taking of its physical inventory on December 31, Almond Supplies Company incorrectly counted its inventory as $545,000 instead of the correct amount of $554,000. Indicate the balance sheet effects of the error on inventory, current assets, total assets, and owner's equity. Also indicate the income statement effects of the error on cost of goods sold, gross profit, and net income.

Indicate the answer choice that best completes the statement or answers the question. 199. The following data were taken from the annual reports of Big Bang Inc., a manufacturer of fireworks, and Orange Inc., a manufacturer of computers. Big Bang Inc. Orange Inc. Cost of goods sold $830,000 $11,540,000 Inventory, end of year 190,000 320,000 Inventory, beginning of year 240,000 290,000 What is the inventory turnover for Big Bang and Orange? a. Big Bang Inc.: 94.55 Orange Inc.: 9.65 b. Big Bang Inc.: 3.86 Orange Inc.: 9.65 c. Big Bang Inc.: 3.86 Orange Inc.: 37.84 d. Big Bang Inc.: 94.55 Orange Inc.: 37.84 200. Based on the following information, what are the company’s (1) inventory turnover, (2) average daily cost of goods sold, and (3) days' sales in inventory for the current year? Use a 365-day year. Item Prior Year Current Year Cost of goods sold $172,900 $215,000 Inventory 18,000 12,000 a. (1) 14.33 times (2) $589.04 (3) 25.5 days b. (1) 23.88 times (2) $589.04 (3) 15.3 days c. (1) 13.43 times (2) $597.22 (3) 26.8 days Powered by Cognero

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Chapter 06: Inventories d. (1) 14.33 times (2) $597.22 (3) 25.1 days 201. The following data were taken from the records of Castle, Inc.: $894,000 Cost of goods sold Inventory, end of year 78,000 Inventory, beginning of year 92,000 What are (1) the inventory turnover and (2) the days’ sales in inventory? a. (1) 11.46 times (2) 31.85 days b. (1) 10.52 times (2) 34.70 days c. (1) 9.72 times (2) 37.56 days d. (1) 10.53 times (2) 34.56 days 202. Based on the following information, what is the (1) inventory turnover, (2) average daily cost of goods sold using a 365-day year, and (3) days’ sales in inventory? Cost of goods sold $195,640 Inventory: Beginning of year 20,500 End of year 18,628 a. (1) 9.9 times (2) $543.44 (3) 36.3 days b. (1) 10.5 times (2) $536 (3) 34.8 day c. (1) 9.5 times (2) $543.44 (3) 37.7 days d. (1) 10.0 times (2) $536 (3) 36.5 days 203. Use this information to answer the questions that follow. Addison, Inc. uses a perpetual inventory system. Information regarding one inventory item for the month of September follows: Sep.

1 Inventory 4 Sold 10 Purchased 17 Sold

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20 units at $20 10 units 30 units at $25 20 units Page 42

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Chapter 06: Inventories 30 Purchased 10 units at $30 If Addison uses FIFO, the September 17 entry for the cost of goods sold would be a. Inventory Cost of Goods Sold b. Cost of Goods Sold Inventory c. Cost of Goods Sold Sales d. Sales Cost of Goods Sold

450 450 450 450 450 450 450 450

204. Use this information to answer the questions that follow. Addison, Inc. uses a perpetual inventory system. Information regarding one inventory item for the month of September follows: Sep.

1 Inventory 4 Sold 10 Purchased 17 Sold 30 Purchased

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

If Addison uses LIFO, the September 17 cost of goods sold would be a. $400 b. $450 c. $500 d. $600 205. Use this information to answer the questions that follow. Addison, Inc. uses a perpetual inventory system. Information regarding one inventory item for the month of September follows: Sep.

1 Inventory 4 Sold 10 Purchased 17 Sold 30 Purchased

20 units at $20 10 units 30 units at $25 20 units 10 units at $30

If Addison uses the weighted average cost method, what is the inventory balance at the end of September? a. $750.00 b. $800.00 c. $775.00 d. $387.50 206. The inventory data for an item for November are: Powered by Cognero

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Chapter 06: Inventories Nov. 1 4 10 17 30

Inventory Sold Purchased Sold Purchased

20 units at $19 10 units 30 units at $20 20 units 10 units at $22

Using a perpetual system, what is the cost of goods sold for November if the company uses the weighted average cost method? a. $610 b. $585 c. $590 d. $575 207. The inventory data for an item for November are: Nov. 1 Inventory 20 units at $19 4 Sold 10 units 10 Purchased 30 units at $20 17 Sold 20 units 30 Purchased 10 units at $22 Using a perpetual system, what is the cost of goods sold for November if the company uses LIFO? a. $610 b. $600 c. $590 d. $580 208. The following lots of Commodity P were available for sale during the year. Use this information to answer the questions that follow. Beginning inventory First purchase Second purchase Third purchase

5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the year-end inventory balance of Commodity P using the weighted average cost method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 209. The following lots of Commodity P were available for sale during the year. Use this information to answer the questions that follow. Beginning inventory First purchase Powered by Cognero

5 units at $61 15 units at $63 Page 44

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Chapter 06: Inventories Second purchase Third purchase

10 units at $74 10 units at $77

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the year-end inventory balance of Commodity P using the FIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250 210. The following lots of Commodity P were available for sale during the year. Use this information to answer the questions that follow. Beginning inventory First purchase Second purchase Third purchase

5 units at $61 15 units at $63 10 units at $74 10 units at $77

The firm uses the periodic inventory system, and there are 20 units of the commodity on hand at the end of the year. What is the year-end inventory balance of Commodity P using the LIFO method? a. $1,380 b. $1,375 c. $1,510 d. $1,250

211. Complete the following table assuming a perpetual inventory system and the LIFO method of inventory cost flow: Purchases Cost of Goods Sold Inventory Date

Qty.

Unit Cost

July 2

600

12.00

5

200

13.00

325

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Unit Cost

Total Cost

Qty.

Unit Cost

Total Cost

14.00 325 125

12 18

Qty.

200 100

7 10

Total Cost

250

13.00 Page 45

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Chapter 06: Inventories

22

250 5

25

300

28

330

31 31 Balances

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15.00 75

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Chapter 06: Inventories Answer Key 1. True 2. False 3. True 4. True 5. True 6. False 7. False 8. False 9. False 10. True 11. False 12. True 13. False 14. True 15. False 16. True 17. True 18. True 19. True 20. True 21. False 22. False 23. True 24. True 25. False Powered by Cognero

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Chapter 06: Inventories 26. False 27. False 28. True 29. False 30. True 31. False 32. True 33. True 34. True 35. False 36. True 37. True 38. True 39. True 40. False 41. False 42. False 43. True 44. True 45. c 46. a 47. d 48. b 49. c 50. a 51. a Powered by Cognero

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Chapter 06: Inventories 52. d 53. d 54. b 55. c 56. c 57. b 58. b 59. a 60. b 61. a 62. a 63. c 64. b 65. d 66. c 67. d 68. b 69. c 70. b 71. a 72. d 73. c 74. c 75. d 76. b Powered by Cognero

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Chapter 06: Inventories 77. b 78. c 79. d 80. a 81. d 82. c 83. c 84. c 85. b 86. a 87. c 88. b 89. d 90. a 91. c 92. b 93. a 94. a 95. c 96. a 97. c 98. b 99. a 100. a 101. b 102. b Powered by Cognero

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Chapter 06: Inventories 103. c 104. b 105. b 106. d 107. c 108. a 109. b 110. b 111. a 112. c 113. d 114. a 115. d 116. a 117. b 118. c 119. b 120. c 121. b 122. a 123. c 124. d 125. (a) perpetual (b) perpetual (c) periodic (d) periodic 126. b Powered by Cognero

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Chapter 06: Inventories 127. b 128. a 129. c 130. Answers will vary but may include ink tags, alarm tags, bells that signal a customer is entering the area to try on clothing, chains that hook through the sleeves of garments and are locked onto clothing racks, scanners to screen customers as they leave the store for unpaid merchandise, and greeters at the store's entrance to keep customers from bringing in bags that can be used to shoplift merchandise. 131. Answers will vary and may include the following: Storing inventory in areas that are restricted to only authorized employees Using physical devices such as two-way mirrors, cameras, and security guards Locking high-priced inventory in cabinets Placing sensors at each of the exits that are set off by alarm tags 132. Gross Profit

Ending Inventory

(a)

First-in, first-out (FIFO)

$295 ($1,125 – $830)

$1,720 ($840 + $880)

(b)

Last-in, first-out (LIFO)

$245 ($1,125 – $880)

$1,670 ($830 + $840)

Weighted average cost

$2,550 ÷ 3 = $850 average cost $275 ($1,125 – $850)

$1,700 ($850 × 2)

(c)

133. (a)

First-in, first-out (FIFO)

Gross Profit $47 [$313 – ($130 + $136)]

Ending Inventory $142

(b)

Last-in, first-out (LIFO)

$35 [$313 – ($142 + $136)]

$130

Weighted average cost

$408 ÷ 3 = $136 average cost $41 [$313 – ($136 × 2 units)]

$136

(c)

134. Sales Cost of goods sold Gross profit Ending inventory ($5 + $13)

October 31 $28 (15) $13 $18

135. Sales Cost of goods sold ($33 ÷ 3) Powered by Cognero

October 31 $28 (11) Page 52

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Chapter 06: Inventories Gross profit

$17

Ending inventory ($11 × 2)

$22

136. October 31 $28 (5) $23

Sales Cost of goods sold Gross profit Ending inventory ($13 + $15)

$28

137. (a) First-in, first-out

Gross Profit $45 – $35 = $10

Cost of Goods Sold $35

Ending Inventory $108 – $35 = $73

(b) Last-in, first-out

$45 – $37 = $8

$37

$108 – $37 = $71

(c) Weighted average

$45 – $36 = $9

$36

$108 – $36 = $72

138. (a) Cost of goods sold: 7 units @ $15 = $105 1 unit @ $20 = 20 8 units $125 (b) Inventory, September 30: 9 units @ $20 = $180 139. $805 × 240 units = $193,200 140. ($755 × 30 units) + ($785 × 200 units) + ($805 × 10 units) = $22,650 + $157,000 + $8,050 = $187,700 141. (a) Cost of goods sold: 8 units @ $15 = $120 (b) Inventory on September 30: 7 units @ $10 = $ 70 2 units @ $15 = 30 9 units $100

142. (a) Inventory on November 30: 400 @ $80 = $32,000 75 @ $82 = 6,150 20 @ $84 = 1,680 $39,830 (b) Cost of goods sold: Powered by Cognero

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Chapter 06: Inventories 200 @ $80 = $16,000 275 @ $82 = 22,550 155 @ $84 = 13,020 $51,570 143. Purchases

Date

Qty.

Inventory

Cost of Goods Sold

Unit Cost

Total Cost

Unit Cost

Qty.

Total Cost

Unit Cost

Qty.

Total Cost

July 2

600

12.00

7,200

600

12.00

7,200

5

200

13.00

2,600

600 200

12.00 13.00

7,200 2,600

300 200

12.00 13.00

3,600 2,600

300 200 325

12.00 13.00 14.00

3,600 2,600 4,550

50 325

13.00 14.00

650 4,550

50 325 250

13.00 14.00 13.00

650 4,550 3,250

7

300

10

325

14.00

300 150

250

13.00

3,600

4,550

12

18

12.00

12.00 13.00

3,600 1,950

3,250

22

50 205

13.00 14.00

650 2,870

120 250

14.00 13.00

1,680 3,250

25

120 180

14.00 13.00

1,680 2,340

70

13.00

910

70 330

13.00 15.00

910 4,950

325

15.00

4,875

28

330

15.00

4,950 70 5

31 31

Balances

13.00 15.00

910 75 17,675

4,875

144.

Date Apr. 3 11

Purchases Unit Total Qty. Cost Cost 13

47

611

14 21

9

25 Powered by Cognero

60

Cost of Goods Sold Unit Total Qty. Cost Cost

12 6

45 47

7 3

47 60

540

Inventory Unit Total Qty. Cost Cost 12 45 540 12 45 540 13 47 611 540 7 47 329 282 7 47 329 9 60 540 329 6 60 360 180 Page 54

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Chapter 06: Inventories 1,331

Balances

360

145. Cost of Inventory Goods Sold Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Apr. 3 12 45 540 13 47 611 12 45 540 11 13 47 611 13 47 611 7 45 315 14 5 45 225 9 60 540 7 45 315 21 9 60 540 9 60 540 6 45 270 25 1 45 45 1,421 270 Balances Purchases

146. Cost of Inventory Goods Sold Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Apr. 3 15 30 450 12 27 324 15 30 450 11 12 27 324 15 30 450 9 27 243 14 3 27 81 7 25 175 9 27 243 21 7 25 175 9 27 243 6 25 150 25 1 25 25 799 150 Balances Purchases

147.

Date Apr. 3 11 14

Cost of Purchases Inventory Goods Sold Unit Total Unit Total Unit Total Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost 15 30 450 12 $27 324 15 30 450 12 27 324 12 27 324 9 30 270

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Chapter 06: Inventories 6 7

21

$25

30

180

175 7 3

25 Balances

25 30

175 90 769

9 7 6

30 25 30

270 175 180 180

148. (a) $5,624 (36 units at $115 + 14 units at $106 = $4,140 + $1,484) (b) $4,684 (27 units at $90 + 23 units at $98 = $2,430 + $2,254) (c) $5,150 ($18,540* ÷ 180 units = $103; 50 units × $103) *Cost of goods available for sale: 27 units at $90 54 units at $98 63 units at $106 36 units at $115 180 units

$ 2,430 5,292 6,678 4,140 $18,540

149. (a) $7,392 (48 units × $154) (b) $6,960 (48 units × $145) (c) $7,200 ($33,750* ÷ 225 units = $150; 48 units × $150) *Cost of goods available for sale: 60 units at $145 90 units at $150 75 units at $154 225 units

$ 8,700 13,500 11,550 $33,750

150. (a) 15 units × $39 = $585 (b) 15 units × $30 = $450 (c) $3,285 ÷ 91 = $36.10 per unit;

15 units × $36.10 = $541.50

151. Cost of goods sold Gross profit Net income Ending inventory

Highest Amount LIFO FIFO FIFO FIFO

Lowest Amount FIFO LIFO LIFO LIFO

152. Powered by Cognero

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Chapter 06: Inventories FIFO cost of goods sold [(16 × $30) + (30 × $35) + (30 × $39)] LIFO cost of goods sold [(45 × $39) + (30 × $35) + (1 × $30)] Difference

$2,700 (2,835) $ 135

153. Total Item A B C

Inventory Cost Market Value Quantity per Unit per Unit 300 $15.00 $14.50 200 14.00 15.00 100 17.00 17.50

Total

Cost Market LCM $4,500 $4,350 $4,350 2,800 3,000 2,800 1,700 1,750 1,700 $8,850

154. Net Realizable Value = Estimated Selling Price – Direct Costs of Disposal = [(20 units × $6) + (10 units × $8)] – [(20 units × $2) + (10 units × $3)] = [($120 + $80) – ($40 + $30)] = $130 155. Net income will be understated. 156. Total Market Inventory Cost per Value Item Quantity Unit per Unit Product C 300 $6 $5 Product D 420 12 14 Total

Cost Market $1,800 $1,500 5,040 5,880

LCM $1,500 5,040

$6,840

$6,540

$7,380

157. Total

Item Gear X Gear Y

Market Inventory Cost per Value per Quantity Unit Unit 175 $33 $29 225 27 28

Total

Cost Market LCM $ 5,775 $ 5,075 $ 5,075 6,075 6,300 6,075 $11,850 $11,375 $11,150

158. (a) 1. Inventory Turnover: Big Bang Inc.: 3.86 {$830,000 ÷ [($190,000 + $240,000) ÷ 2]} Orange Inc.: 37.84 {$11,540,000 ÷ [($320,000 + $290,000) ÷ 2]} Powered by Cognero

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Chapter 06: Inventories (a) 2. Days' Sales in Inventory: Big Bang, Inc. Ave. Inv.: ($190,000 + $240,000) ÷ 2 = $215,000 Ave. Daily COGS: $830,000 ÷ 365 = $2,274 $215,000 ÷ 2,274 = 94.55 days Orange, Inc. Ave. Inv.: ($320,000 + $290,000) ÷ 2 = $305,000 Ave. Daily COGS: $11,540,000 ÷ 365 = $31,616 $305,000 ÷ $31,616 = 9.65 days (b)

You would expect Big Bang’s inventory turnover to be lower. Big Bang’s business is seasonal in nature, with most of its revenue generated during the major holidays. Much of its nonholiday inventory will most likely turn over very slowly. Orange, on the other hand, turns its inventory over very quickly. A computer manufacturer maintains a low inventory, which allows it to respond quickly to customer needs. Additionally, computer products can quickly become obsolete, so Orange cannot risk building large inventories. For these same reasons, Big Bang’s days' sales in inventory is expected to be higher than Orange’s.

159. Mar. 1 Mar. 1–31

Cost $225,000 454,245 $679,245

Inventory Purchases (net) Merchandise available for sale

Retail $357,600 612,750 $970,350

Ratio of cost to retail: $679,245 ÷ $970,350 = 70% Mar. 1–31 Mar. 1–31

(835,000) $135,350

Sales Inventory (at retail) Estimated inventory at estimated cost ($135,350 × 70%)

$ 94,745

160. $2,300,000 × 55% = $1,265,000 161. Merchandise available for sale Sales Estimated gross profit ($250,000 × 25%) Estimated cost of goods sold Estimated ending inventory

$220,000 $250,000 (62,500) (187,500) $ 32,500

162. Cost Powered by Cognero

Retail Page 58

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Chapter 06: Inventories Inventory, October 1 Purchases for October (net)

$13,687 $ 19,553 68,841 98,344 $82,528 $117,897

Merchandise available for sale Ratio of cost to retail price: 70% ($82,528 ÷ $117,897) Sales for October Merchandise at retail, October 31

(92,557) $ 25,340

Merchandise at cost, October 31 ($25,340 × 70%)

$17,738

163. (a) Safeguarding the inventory from damage or theft (b) Reporting inventory in the financial statements (c) Keeping inventory at proper levels and reporting inventory in the financial statements 164. 1. Cost flow is assumed to be in the order in which costs were incurred, or first-in, first-out (FIFO). The first units purchased are assumed sold, so the oldest costs flow to the income statement and the costs of the newest purchases are on the balance sheet. 2. Cost flow is assumed to be in the reverse order in which costs were incurred, or last-in, first-out (LIFO). The last units purchased are assumed sold, so the newest costs flow to the income statement and the costs of the oldest purchases are on the balance sheet. 3. Cost flow is a weighted average of the costs. Under the weighted average cost method, all units are assigned the same average cost for the period. 165. (a)

(b)

June 20 30

10 units at $62 15 units at $63

June 1 8 30

Total

$ 620 945 $1,565

5 units at $60 5 units at $61 15 units at $63 Total

$ 300 305 945 $1,550

166. a. First-in, first-out Purchases

Date

Qty.

Mar. 3 11

13

Cost of Goods Sold

Unit Total Cost Cost Qty.

Powered by Cognero

17

221

Inventory

Unit Total Unit Total Cost Cost Qty. Cost Cost 12 15 180 12 13

15 17

180 221 Page 59

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Chapter 06: Inventories 14

12 6

21

9

20

15 17

180

25

7 3

17 20

Balances b. Last-in, first-out Purchases Date Mar. 3 11

Qty.

17

13 5 9

20

17

119

7 9 6

17 20 20

119 180 120 120

17 15

221 75

180

25

9 1

Inventory

Unit Total Cost Cost Qty.

221

14 21

119 60 461

7

Cost of Goods Sold

Unit Total Cost Cost Qty.

13

180 102

20 15

Balances

180 15

Unit Total Cost Cost

12

15

180

12 13

15 17

180 221

7

15

105

7 9

15 20

105 180

6

15

90

491

90

167. $1,880 [(20 units × $65) + (10 units × $58)] 168. $466 [(10 units × $25) + (9 units × $24)] 169. (a) 10 units @ $90 5 units @ $80 Total

$ 900 400 $1,300

(b) 6 units @ $70 9 units @ $75 Total

$ 420 675 $1,095

(c) Average unit cost = $3,510 ÷ 44 = 15 units @ $79.7727 =

$ 79.7727 $1,196.59

170. a. FIFO Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ $10 26 units @ $12 18 units @ $15 68

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$240 312 270 $822 Page 60

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Chapter 06: Inventories

14 Sale

Cost of goods sold

24 units @ $10 12 units @ $12 14 units @ $12 6 units @ $15 56

$240 144 168 90 $642

Ending inventory

12 units @ $15

$180

b. LIFO Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale

24 units @ $10 26 units @ $12 18 units @ $15 68

$240 312 270 $822

Cost of goods sold

18 units @ $15 18 units @ $12 8 units @ $12 12 units @ $10 56

$270 216 96 120 $702

Ending inventory

12 units @ 10

$120

24 units @ 10 26 units @ 12 18 units @ 15 68

$240 312 270 $822

Apr. 14 and 25 Cost of goods sold

56 × $12.09

677

Ending inventory

12 × $12.09

$145

25 Sale

14 Sale 25 Sale

c. Weighted average cost Apr. 3 Inventory 11 Purchase 21 Purchase Available for sale Average cost $822 ÷ 68 = $12.09

171. (a) FIFO

15 units @ $30 = 29 units @ $33 = 28 units @ $35 = Total

(b) LIFO Powered by Cognero

45 units @ $35 = 27 units @ $33 =

$ 450 957 980 $2,387 $1,575 891 Page 61

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Chapter 06: Inventories $2,466

Total (c) Weighted average $2,982 ÷ 89 = $33.51 cost

$2,412.72

72 units @ $33.51 = 172. Total sales (not dependent on inventory method): May 6 400 @ $38.00 = $15,200.00 13 450 @ $37.50 = 16,875.00 22 275 @ $36.00 = 9,900.00 27 300 @ $37.00 = 11,100.00 30 100 @ $39.00 = 3,900.00 Total sales 1,525 units $56,975.00 Total merchandise available for sale: May 1 500 @ $25.00 = $12,500.00 4 300 @ $24.00 = 7,200.00 8 700 @ $23.00 = 16,100.00 20 250 @ $25.25 = 6,312.50 28 550 @ $26.00 = 14,300.00 Total 2,300 units $56,412.50

(a) and (b) FIFO perpetual, FIFO periodic: There is no difference between these methods since FIFO is always first-in, first-out. Ending inventory: Total Units – Units Sold = Ending Inventory Units 2,300 – 1,525 = 775 units 225 @ $25.25 = $ 5,681.25 550 @ $26.00 = 14,300.00 Ending inventory $19,981.25 Cost of goods sold: Total goods available Less ending inventory Cost of goods sold

$56,412.50 (19,981.25) $36,431.25

Gross profit: Total sales Less cost of goods sold Gross profit

$56,975.00 (36,431,25) $20,543.75

(c) LIFO perpetual: Purchases

Date

Unit Cost

Qty

May 1 Powered by Cognero

500

25.00

Inventory

Cost of Goods Sold

Total Cost 12,500.00

Qty

Unit Cost

Total Cost

Unit Cost

Qty 500

25.00

Total Cost 12,500.00 Page 62

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Chapter 06: Inventories

4

300

24.00

500 300

7,200.00 300 100

6

8

700

23.00

24.00 25.00

16,100.00

13

450

20

250

25.25

7,200.00 2,500.00

23.00

10,350.00

6,312.50

25.00 24.00

12,500.00 7,200.00

400

25.00

10,000.00

400 700

25.00 23.00

10,000.00 16,100.00

400 250

25.00 23.00

10,000.00 5,750.00

400 250 250

25.00 23.00 25.25

10,000.00 5,750.00 6,312.50

22

250 25

25.25 23.00

6,312.50 575.00

400 225

25.00 23.00

10,000.00 5,175.00

27

225 75

23.00 25.00

5,175.00 1,875.00

325

25.00

8,125.00

325 550

25.00 26.00

8,125.00 14,300.00

325 450

25.00 26.00

8,125.00 11,700.00

28

550

26.00

14,300.00

30 31

100 Balance

Cost of goods sold: Total goods available Less ending inventory

26.00

2,600.00 36,587.50

Cost of goods sold

$56,412.50 (19,825.00) $36,587.50

Gross profit: Total sales Less cost of goods sold Gross profit

$56,975.00 (36,587.50) $20,387.50

19,825.00

(d) LIFO periodic: Ending inventory: 500 @ $25.00 = 275 @ $24.00 = Ending inventory

$12,500.00 6,600.00 $19,100.00

Cost of goods sold: Total goods available Less ending inventory Cost of goods sold

$56,412.50 (19,100.00) $37,312.50

Gross profit: Powered by Cognero

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Chapter 06: Inventories Total sales Less cost of goods sold Gross profit

$56,975.00 (37,312,50) $19,662.50

(e) Weighted average cost periodic: Average cost: $56,412.50 ÷ 2,300 units = $24.53 Ending inventory: 775 units × $24.53 = $19,010.75 Cost of goods sold: $56,412.50 – $19,010.75 = $37,401.75 Gross profit: $56,975.00 – $37,401.75 = $19,573.25 173. (a) Total Inventory Commodity Quantity A 35 B 20 C 25 D 40 Total

Cost Market per Value Unit per Unit $ 52 $ 55 155 150 82 85 58 55

Cost Market $1,820 $1,925 3,100 3,000 2,050 2,125 2,320 2,200 $9,290 $9,250

LCM $1,820 3,000 2,050 2,200 $9,070

(b) $220 ($9,290 – $9,070) 174. (a) no (b) yes (c) no (d) yes (e) no (f) yes 175. (a) Goods held on consignment were included in the ending inventory count: Goods held on consignment should not be included in the consignee’s ending inventory. By including these goods, ending inventory, gross profit, and net income are overstated and cost of goods sold is understated. On the balance sheet, inventory, current assets, total assets, and owner's' equity are all overstated. Goods purchased FOB shipping point were in transit on the last day of the year. These goods were not counted as part of ending inventory: Goods purchased FOB shipping point become part of inventory when they are shipped to the purchaser. Thus, these goods should have been included in ending inventory even though they were not yet received. By excluding these goods, ending inventory, gross profit, and net income are understated and cost of goods sold is overstated. On the balance sheet, inventory, current assets, total assets, and owner's equity are all understated. Goods sold FOB shipping point were in transit on the last day of the year. These goods were not counted as part Powered by Cognero

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Chapter 06: Inventories of ending inventory: When goods are sold FOB shipping point, title transfers when they are shipped to the purchaser. As such, they should not have been included in ending inventory so this transaction has no error effect on the financial statements. (b) The income statement and balance sheet will have errors in the current year. Inventory errors reverse themselves within 2 years. If the errors are not discovered, the income statement and balance sheet will be correct at the end of the next year. 176. Inventory valuation = $729 Total Commodity

Market Inventory Cost Value per Quantity per Unit Unit

Size 4 Size 5 Size 6 Size 7

9 10 14 12

$17 17 20 13

$19 14 22 15

Totals

Cost

Market

$153 170 280 156 $759

$171 140 308 180 $799

LCM $153 140 280 156 $729

Sanford Industries Balance Sheet December 31 Assets Current assets: Inventory at lower of cost (first-in, first-out) or market

$729

177. (a) Inventory Turnover = Cost of Goods Sold ÷ Average Inventory = $215,000 ÷ [($18,000 + $12,000) ÷ 2] = $215,000 ÷ $15,000 = 14.33 times (b)

Average Daily Cost of Goods Sold = $215,000 ÷ 365 = $589.04

(c)

Days’ Sales in Inventory = Average Inventory ÷ Average Daily Cost of Goods Sold = $15,000 ÷ $589.04 = 25.5 days

(d)

This company is doing worse than the overall industry.

178. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory = $894,000 ÷ [($78,000 + $92,000) ÷ 2] = 10.52 Days’ Sales in Inventory = Average Inventory ÷ Average Daily Cost of Goods Sold = $85,000 ÷ ($894,000 ÷ 365) = 34.70 days 179. (a) Inventory Turnover = Cost of Goods Sold ÷ Average Inventory = $195,640 ÷ [($20,500 + $18,628) ÷ 2] = $195,640 ÷ $19,564 = 10 (b) Average Daily Cost of Goods Sold = $195,640 ÷ 365 = $536 Powered by Cognero

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Chapter 06: Inventories (c) Days’ Sales in Inventory = Average Inventory ÷ Average Daily Cost of Goods Sold = $19,564 ÷ $536 = 36.5 days 180. Merchandise available for sale in August August sales Less estimated gross profit ($875,000 × 45%) Estimated cost of goods sold Estimated ending inventory

$850,000 $875,000 (393,750) (481,250) $368,750

181. Cost Retail Mar. 1 Inventory $ 250,000 $ 350,000 Mar. 1-31 Purchases (net) 850,000 1,650,000 Merchandise available for sale $1,100,000 $2,000,000 Ratio of cost to retail price: 55% ($1,100,000 ÷ $2,000,000) Sales for March (845,000) Inventory, March 31 at retail price $1,155,000 Inventory, March 31 at estimated cost ($1,155,000 × 55%) $ 635,250 182. Inventory, March 1 Purchases in March (net) Merchandise available for sale Ratio of cost to retail price: 58% ($617,250 ÷ $1,065,000) Sales in March Inventory, March 31, at retail price Inventory, March 31, at estimated cost ($665,000 × 58%)

Cost $310,000 307,250 $617,250

Retail $ 550,000 515,000 $1,065,000

(400,000) $ 665,000 $ 385,700

183. b 184. d 185. c 186. c 187. d Powered by Cognero

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Chapter 06: Inventories 188. b 189. a 190. d 191. b 192. c 193. a 194. c 195. d 196. b 197. Assets, owner's capital, and net income would be overstated by $60,000. 198. Amount of Misstatement Overstatement (Understatement) Balance Sheet: Inventory understated Current assets understated Total assets understated Owner's equity understated

$(9,000) (9,000) (9,000) (9,000)

Income Statement: Cost of goods sold overstated Gross profit understated Net income understated

$ 9,000 (9,000) (9,000)

199. c 200. a 201. b 202. d 203. b 204. c Powered by Cognero

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Chapter 06: Inventories 205. c 206. b 207. c 208. a 209. c 210. d 211. Purchases Date

Qty.

July 2 5

600 200

Unit Cost 12.00 13.00

Cost of Goods Sold Total Cost

14.00

7,200

2,600

600 200

12.00 13.00

7,200 2,600

500

12.00

6,000

500 325

12.00 14.00

6,000 4,550

375

12.00

4,500

13.00

375 250

12.00 13.00

4,500 3,250

13.00 12.00

2,600 1,200

4,550 325 125

250

Total Cost

12.00

12 18

Unit Cost

Qty. 600

200 100 325

Total Cost

7,200

7 10

Unit Cost

Qty.

Inventory

14.00 12.00

4,550 1,500

3,250

22

250 5

13.00 12.00

3,250 60

370

12.00

4,440

25

300

12.00

3,600

70

12.00

840

70 330

12.00 15.00

840 4,950

70 255

12.00 15.00

840 3,825 4,665

28

330

31 31 Balances

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15.00

4,950 75

15.00

1,125 17,885

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Chapter 07: Internal Control and Cash

Indicate whether the statement is true or false. 1. The Sarbanes-Oxley Act applies only to companies whose stock is traded on public exchanges. a. True b. False 2. Sarbanes-Oxley’s purpose is to maintain public confidence and trust in the financial reporting of companies. a. True b. False 3. There are three internal control objectives and they are to safeguard the company's reputation, to ensure accurate financial reports, and to ensure compliance with applicable laws. a. True b. False 4. The Sarbanes-Oxley Act requires that financial statements of all public companies report on management's conclusions about the effectiveness of the company's internal control procedures. a. True b. False 5. Sarbanes-Oxley requires companies to maintain effective internal controls and thus deter fraud and prevent misleading financial statements. a. True b. False 6. The control environment in an internal control structure is the overall attitude of management and employees about the importance of internal control. a. True b. False 7. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control procedure: separating operations, custody of assets, and accounting. a. True b. False 8. Internal control is enhanced by separating the control of a transaction from the record-keeping function. a. True b. False 9. A backlog in recording transactions is an example of a warning sign from the accounting system. a. True b. False 10. Money orders are considered cash. a. True b. False Powered by Cognero

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Chapter 07: Internal Control and Cash 11. A customer's check received in settlement of an account receivable is considered cash. a. True b. False 12. Businesses that have several bank accounts, such as one for general cash payments and another for payroll, normally maintain a separate ledger account for each. a. True b. False 13. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash payments divided among different employees. a. True b. False 14. If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash shortages have exceeded cash overages for the period. a. True b. False 15. If the balance in Cash Short and Over at the end of a period is a credit, it should be reported in the "Other revenue" section on the income statement. a. True b. False 16. An example of good internal controls over cash payments is the taking of all purchases discounts offered. a. True b. False 17. A voucher is a form on which is recorded pertinent data about a liability and the details of its payment. a. True b. False 18. When a voucher system is used, the amount due on each voucher represents the credit balance of an account payable if the voucher is in full payment to a creditor. a. True b. False 19. A voucher system is an example of an internal control procedure over cash payments. a. True b. False 20. A voucher is a written authorization to make a cash payment. a. True b. False 21. The bank often informs the company of bank service charges by including a credit memo with the monthly bank statement. Powered by Cognero

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Chapter 07: Internal Control and Cash a. True b. False 22. Bank customers are considered creditors of the bank so the bank shows their accounts with credit balances on the bank's records. a. True b. False 23. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control procedure over cash. a. True b. False 24. For efficiency of operations and better control over cash, a company should maintain only one bank account. a. True b. False 25. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement. a. True b. False 26. In preparing a bank reconciliation, the amount of outstanding checks is added to the balance per bank statement. a. True b. False 27. In preparing a bank reconciliation, the amount indicated by a debit memo for bank service charges is added to the balance per company's records. a. True b. False 28. In preparing a bank reconciliation, the amount of a canceled check omitted from the journal is added to the balance per company's records. a. True b. False 29. A check for $342 was erroneously charged by the bank as $432. In order for the bank reconciliation to balance, you must add $90 to the bank statement balance. a. True b. False 30. If an adjustment for an NSF check is made in a company’s bank reconciliation, then the company must have written a bad check during the month. a. True b. False 31. The amount of the "adjusted balance" appearing on the bank reconciliation as of a given date is the amount that is shown on the balance sheet for that date. Powered by Cognero

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Chapter 07: Internal Control and Cash a. True b. False 32. All bank memos reported on the bank reconciliation require entries in the company's accounts. a. True b. False 33. The bank reconciliation is an important part of the system of internal controls. a. True b. False 34. The main reason that the bank statement cash balance and the company's cash balance do not initially balance is due to timing differences. a. True b. False 35. The bank reconciles its statement to the company's records. a. True b. False 36. In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per company's records. a. True b. False 37. In preparing a bank reconciliation, the amount of an error indicating the recording of a check in the journal for an amount larger than the amount of the check is added to the balance per the company's records. a. True b. False 38. A check outstanding for 2 consecutive months will appear only on the first month's bank reconciliation. a. True b. False 39. After a bank reconciliation is completed, journal entries are prepared for items in the balance per company's records as well as items in the balance per bank statement. a. True b. False 40. A business that requires all cash payments to be made by check cannot use a petty cash system. a. True b. False 41. In establishing a petty cash fund, a check is written for the amount of the fund and is journalized as a debit to Accounts Payable and a credit to Petty Cash. a. True Powered by Cognero

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Chapter 07: Internal Control and Cash b. False 42. Expenditures from a petty cash fund are documented by a petty cash receipt. a. True b. False 43. The sum of the money on hand and petty cash receipts in a petty cash fund will always be equal to the balance in the petty cash account. a. True b. False 44. When the petty cash fund is replenished, the petty cash account is credited for the total of all expenditures made since the fund was last replenished. a. True b. False 45. Most companies that have several bank accounts, petty cash, and cash on hand would list each separately on the balance sheet. a. True b. False 46. A petty cash fund is used to pay relatively large amounts. a. True b. False 47. The petty cash fund eliminates the need for a bank checking account. a. True b. False 48. A compensating balance occurs when a bank may require a company to maintain a maximum cash balance. a. True b. False 49. Cash equivalents include short-term investments that will be converted to cash within 120 days. a. True b. False 50. Money market accounts, commercial paper, and U.S. Treasury bills are examples of cash equivalents. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 51. Sarbanes-Oxley applies to a. publicly held companies b. not-for-profit organizations Powered by Cognero

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Chapter 07: Internal Control and Cash c. privately held businesses d. all of these choices 52. "To maintain public confidence and trust in the financial reporting of companies" is the purpose of a. the FASB b. the IRS c. Sarbanes-Oxley d. GAAP 53. Which of the following is not an element of internal control? a. risk assessment b. monitoring c. information and communication d. cost-benefit considerations 54. Which of the following is not a factor that influences a business's control environment? a. management's philosophy and operating style b. organizational structure c. proofs and security measures d. personnel policies 55. When a firm uses internal auditors, it is adhering to which of the following internal control elements? a. risk assessment b. monitoring c. proofs and security measures d. information and communication 56. The objectives of internal control include which of the following? a. control the internal organization of the Accounting Department personnel and equipment b. provide reasonable assurance that assets are safeguarded and used for business purposes, business information is accurate, and laws and regulations are complied with c. prevent fraud and promote the social interest of the company d. provide control over "internal-use only" reports and employee internal conduct 57. Which of the following reflects a weak internal control system? a. All employees are well supervised. b. A single employee is responsible for comparing a receiving report to an invoice. c. All employees must take their vacations. d. A single employee is responsible for collecting and recording of cash. 58. Internal control does not consist of policies and procedures that a. protect assets from misuse b. ensure employees and managers comply with laws and regulations c. guarantee the company will earn a profit Powered by Cognero

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Chapter 07: Internal Control and Cash d. ensure that business information is accurate 59. A firm's internal control environment is not influenced by a. management's operating style b. organizational structure c. personnel policies d. monitoring policies 60. An element of internal control is a. risk assessment b. journals c. subsidiary ledgers d. controlling accounts 61. A necessary element of internal control is a. database b. systems design c. systems analysis d. information and communication 62. Which of the following should not be considered cash by an accountant? a. money orders b. bank checking accounts c. postage stamps d. check from a customer 63. The cash account in the company's ledger is a(n) a. asset with a normal debit balance b. asset with a normal credit balance c. liability with a normal debit balance d. liability with a normal credit balance 64. The portion of an invoice that is returned with payment is a a. remittance advice b. voucher c. debit memo d. credit memo 65. The debit balance in Cash Short and Over at the end of an accounting period is reported as a. miscellaneous expense on the income statement b. revenue on the income statement c. an asset on the balance sheet d. a liability on the balance sheet

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Chapter 07: Internal Control and Cash 66. Procedures designed to protect cash from theft and misuse from the time it is received until it can be deposited in a bank are called a. accounting controls b. cash controls c. FASB controls d. GAAP controls 67. A special form on which is recorded pertinent data about a liability and the particulars of its payment is called a(n) a. invoice b. voucher c. debit memo d. remittance advice 68. Which of the following best describes EFT? a. EFT means efficient funds transfer b. EFT can process certain cash transactions at less cost than by using the mail c. EFT makes it easier to document purchases and sales transactions d. EFT means effective funds transfer 69. A voucher is usually supported by a. a supplier's invoice b. a purchase order c. a receiving report d. all of these choices 70. Credit memos from the bank a. decrease a bank customer's account b. are used to show a bank service charge c. show that a company has deposited a customer's NSF check d. show the bank has collected a note receivable for the customer 71. Consider the following information taken from the cash account. Assume cash payments were 80% of collections. Cash ?? $115,375 ?? $80,275

Beginning balance Collections Disbursements Ending balance

How much was the beginning balance of the cash account? a. $57,200 b. $92,300 c. $103,350 d. $35,100 72. A bank statement Powered by Cognero

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Chapter 07: Internal Control and Cash a. is a credit reference letter written by the company's bank b. shows a company the financial position of the bank as of a certain date c. is a bill from the bank for services rendered d. shows the activity that increased or decreased the company's account balance 73. A debit or credit memo describing an entry in the company's bank account may be enclosed with the bank statement. An example of a credit memo is a. deposited checks returned for insufficient funds b. a promissory note collected by the bank on the company’s behalf c. a service charge d. notification that a customer's check for $375 was recorded by the company as $735 on the deposit ticket 74. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. This item would be included on the bank reconciliation as a(n) a. addition to the balance per the company's records b. addition to the balance per the bank statement c. deduction from the balance per the bank statement d. deduction from the balance per the company's records 75. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. What entry is required in the company's accounts? a. debit Accounts Payable and credit Cash b. debit Cash and credit Accounts Receivable c. debit Cash and credit Accounts Payable d. debit Accounts Receivable and credit Cash 76. A bank reconciliation should be prepared periodically because a. the company's records and the bank's records are in agreement b. the bank has not recorded all of its transactions c. any differences between the company's records and the bank's records should be determined, and any errors made by either party should be discovered and corrected d. the bank must make sure that its records are correct 77. The bank reconciliation a. should be prepared by an employee who records cash transactions b. is part of the internal control system c. is for information purposes only d. is sent to the bank for verification 78. Journal entries based on the bank reconciliation are required in the company's accounts for a. outstanding checks b. deposits in transit c. bank errors d. book errors Powered by Cognero

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Chapter 07: Internal Control and Cash 79. Accompanying the bank statement was a debit memo for bank service charges. On the bank reconciliation, the item is a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 80. Accompanying the bank statement was a debit memo for bank service charges. What entry is required in the company's accounts? a. debit Miscellaneous Expense and credit Cash b. debit Cash and credit Other Revenue c. debit Cash and credit Accounts Payable d. debit Accounts Payable and credit Cash 81. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. This item would be included in the bank reconciliation as a(n) a. deduction from the balance per the company's records b. addition to the balance per the bank statement c. deduction from the balance per the bank statement d. addition to the balance per the company's records 82. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. What entry is required in the company's accounts? a. debit Accounts Payable and credit Cash b. debit Cash and credit Accounts Receivable c. debit Cash and credit Accounts Payable d. debit Accounts Receivable and credit Cash 83. Receipts from cash sales of $3,200 were incorrectly journalized as $2,300. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 84. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the company. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 85. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the company. What entry is required in the company's accounts? a. debit Notes Receivable and credit Cash Powered by Cognero

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Chapter 07: Internal Control and Cash b. debit Cash and credit Miscellaneous Income c. debit Cash and credit Notes Receivable and Interest Revenue d. debit Accounts Receivable and credit Cash 86. The amount of deposits in transit is included on the bank reconciliation as a(n) a. deduction from the balance per company's books b. deduction from the balance per bank statement c. addition to the balance per bank statement d. addition to the balance per company’s books 87. The amount of the outstanding checks is included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 88. Which of the following items that might appear on a bank reconciliation would not require a journal entry? a. bank service charges b. deposits in transit c. NSF checks d. a check for $630 recorded in the check register for $360 89. What entry is required in the company's accounts to record outstanding checks? a. debit Accounts Receivable and credit Cash b. debit Cash and credit Accounts Receivable c. debit Cash and credit Accounts Payable d. no entry required 90. Accompanying the bank statement was a debit memo for an NSF check received from a customer. This item would be included on the bank reconciliation as a(n) a. deduction from the balance per company's records b. addition to the balance per bank statement c. deduction from the balance per bank statement d. addition to the balance per company's records 91. Accompanying the bank statement was a debit memo for an NSF check received from a customer. What entry is required in the company's accounts? a. debit Other Revenue and credit Cash b. debit Cash and credit Other Revenue c. debit Cash and credit Accounts Receivable d. debit Accounts Receivable and credit Cash 92. The amount of cash to be reported on the balance sheet at June 30 is a. the balance in the cash account before reconciliation b. the adjusted balance appearing on the bank reconciliation for June 30 Powered by Cognero

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Chapter 07: Internal Control and Cash c. none of these choices d. the balance as of June 30 on the bank statement 93. Which of the following would be deducted from the balance per company’s records on a bank reconciliation? a. service charges b. outstanding checks c. deposits in transit d. notes collected by the bank 94. Which of the following would be added to the balance per company’s records on a bank reconciliation? a. service charges b. outstanding checks c. deposits in transit d. notes collected by the bank 95. Which of the following would be subtracted from the balance per company’s records on a bank reconciliation? a. outstanding checks b. deposits in transit c. notes collected by the bank d. error by the company in recording a check for $732 as $723 96. Which of the following would be subtracted from the balance per bank on a bank reconciliation? a. outstanding checks b. deposits in transit c. notes collected by the bank d. service charges 97. A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money b. to explain any difference between the balance per company's records with the balance per bank c. by the company's bank d. by the person who is authorized to sign checks 98. Minor Company had checks outstanding totaling $19,200 on its April bank reconciliation. In May, Minor Company issued checks totaling $64,900. The May bank statement shows that $47,600 in checks cleared the bank in May. A check from one of Minor Company's customers of $300 was also returned marked "NSF." The amount of outstanding checks on Minor Company's May bank reconciliation should be a. $28,400 b. $36,800 c. $17,300 d. $36,500 99. Rodgers Company gathered the following reconciling information in preparing its May bank reconciliation: Cash balance per company’s records, May 31 Powered by Cognero

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Chapter 07: Internal Control and Cash Deposits in transit Note receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check

375 650 40 2,400 140

Determine the adjusted balance that would appear in the company section of the bank reconciliation on May 31. a. $5,870 b. $6,245 c. $4,930 d. $3,845 100. Gunnar Company gathered the following reconciling information in preparing its September bank reconciliation: Cash balance per company’s records, September 30 Deposits in transit Note receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check

$2,750 200 630 50 1,250 290

Determine the adjusted balance that would appear in the company section of the bank reconciliation on September 30. a. $5,130 b. $3,690 c. $3,040 d. $1,590 101. Jamison Company gathered the following reconciling information in preparing its June bank reconciliation: Cash balance per bank, June 30 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check

$13,000 4,000 7,000 2,500 35 1,900

Determine the cash balance per the company’s records (before adjustments). a. $8,065 b. $10,565 c. $15,065 d. $6,435 102. Thompson Corporation gathered the following reconciling information in preparing its October bank reconciliation: Cash balance per bank, October 31 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge Powered by Cognero

$17,000 4,800 6,500 3,000 50 Page 13

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Chapter 07: Internal Control and Cash NSF check

2,300

Determine the cash balance per the company’s records (before adjustments). a. $11,050 b. $19,450 c. $15,950 d. $11,150 103. During the bank reconciliation process, a. outstanding checks and deposits in transit are added to the bank statement balance b. outstanding checks are subtracted and deposits in transit are added to the bank statement balance c. outstanding checks and deposits in transit are subtracted from the bank statement balance d. outstanding checks are added and deposits in transit are subtracted from the bank statement balance 104. The following data were gathered to use in reconciling the bank account of Savannah Company: Balance per bank Balance per company records Bank service charges Deposit in transit NSF check Outstanding checks

$16,750 16,125 80 2,195 950 3,850

What is the adjusted balance on the bank reconciliation? a. $14,470 b. $10,705 c. $15,095 d. $15,720 105. In the normal operation of business, a $775 check received from a customer is deposited into the company’s checking account. With the bank statement, this check is returned as “NSF.” Also, due to the amount of activity on the business account, the monthly service charge is $75. When preparing the bank reconciliation, you will a. subtract both values from the balance according to bank statement b. add both values to the balance according to company records c. add both values to the balance according to bank statement d. subtract both values from the balance according to company records 106. A $150 petty cash fund has petty cash on hand of $54 and receipts of $83. The journal entry to replenish the fund would include a a. credit to Petty Cash for $29 b. debit to Cash for $83 c. debit to Cash Short and Over for $13 d. credit to Cash for $54 107. A $135 petty cash fund has petty cash on hand of $18 and receipts of $120. The journal entry to replenish the fund would include a a. credit to Petty Cash for $120 Powered by Cognero

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Chapter 07: Internal Control and Cash b. debit to Cash for $120 c. credit to Cash Short and Over for $3 d. credit to Cash for $102 108. Entries are made to the petty cash account when a. making payments out of the fund b. recording shortages in the fund c. replenishing the petty cash fund d. establishing the fund 109. The type of account and normal balance of Petty Cash is a(n) a. revenue, credit b. asset, debit c. liability, credit d. expense, debit 110. The debit recorded in the journal to reimburse the petty cash fund is to a. Petty Cash b. Accounts Receivable c. Cash d. various accounts for which the petty cash was disbursed 111. A $200 petty cash fund has petty cash on hand of $20 and receipts of $177. The journal entry to replenish the fund would include a credit to a. Cash for $20 b. Cash Short and Over for $3 c. Petty Cash for $190 d. Cash for $180 112. Cash equivalents include a. checks b. coins and currency c. money market accounts and commercial paper d. stocks and short-term bonds 113. Cash equivalents a. are illegal in some states b. will be converted to cash within 2 years c. will be converted to cash within 3 months d. will be converted to cash within 4 months 114. A minimum cash balance required by a bank is called a. cash in bank b. a cash equivalent Powered by Cognero

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Chapter 07: Internal Control and Cash c. a compensating balance d. an EFT 115. Which of the following would not be included with cash and cash equivalents on the balance sheet? a. commercial paper b. short-term receivables c. U.S. Treasury bills d. money market mutual funds 116. A company's days' cash on hand is computed by dividing a. cash and short-term investments by daily cash operating expenses b. cash by total cash operating expenses c. cash, short-term investments, and accounts receivable by daily cash operating expenses d. average cash over the period by daily cash operating expenses 117. Which is the better choice for evaluating across companies: days' cash on hand or the amount in the company's cash account? a. The amount in the cash account, because the company with the largest amount of cash is the most liquid. b. Days' cash on hand, because it is computed as a ratio, which expresses cash relative to the cash requirements of the business. c. Days' cash on hand, because a daily cash amount is more accurate. d. The amount in the cash account, because companies with a lower cash balance are considered a greater credit risk. 118. Which of the following statements about the days' cash on hand ratio is true? a. It is not useful in comparing different businesses to one another. b. It uses all current assets in the numerator of the ratio. c. The only operating expense used in the denominator of the ratio is depreciation expense. d. It may be useful in determining whether a business is able to meet its cash commitments. 119. The control environment a. provides reasonable assurance that business goals will be achieved b. is used by management for guiding operations and ensuring compliance with requirements c. is the overall attitude of management and employees d. identifies, analyzes, and assesses the likeliness of vulnerabilities 120. Risk assessment a. provides reasonable assurance that business goals will be achieved b. is used by management for guiding operations and ensuring compliance with requirements c. is the overall attitude of management and employees d. identifies, analyzes, and assesses the likeliness of vulnerabilities 121. Control procedures a. provide reasonable assurance that business goals will be achieved b. are used by management for guiding operations and ensuring compliance with requirements Powered by Cognero

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Chapter 07: Internal Control and Cash c. are the overall attitude of management and employees d. identify, analyze, and assess the likeliness of vulnerabilities 122. Monitoring a. provides reasonable assurance that business goals will be achieved b. is used by management for guiding operations and ensuring compliance with requirements c. is the overall attitude of management and employees d. is used to locate weaknesses and improve controls 123. Information and communication a. provide reasonable assurance that business goals will be achieved b. are used by management for guiding operations and ensuring compliance with requirements c. are the overall attitude of management and employees d. identify, analyze, and assess the likeliness of vulnerabilities 124. On the bank reconciliation, outstanding checks are a. a bank statement adjustment b. a company books adjustment c. a bank statement adjustment or a company books adjustment d. none of these choices 125. On the bank reconciliation, a returned NSF check is a. a bank statement adjustment b. a company books adjustment c. a bank statement adjustment or a company books adjustment d. none of these choices 126. On the bank reconciliation, an error in recording a check is a. a bank statement adjustment b. a company books adjustment c. a bank statement adjustment or a company books adjustment d. none of these choices 127. On the bank reconciliation, bank service charges are a. a bank statement adjustment b. a company books adjustment c. a bank statement adjustment or a company books adjustment d. none of these choices 128. On the bank reconciliation, a note collected by the bank is a. a bank statement adjustment b. a company books adjustment c. a bank statement adjustment or a company books adjustment d. none of these choices Powered by Cognero

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Chapter 07: Internal Control and Cash 129. On the bank reconciliation, a deposit in transit is a. a bank statement adjustment b. a company books adjustment c. a bank statement adjustment or a company books adjustment d. none of these choices

130. Identify each of the following as relating to (a) the control environment, (b) risk assessment, or (c) control procedures. 1. Mandatory vacations 2. Personnel policies 3. Report of outside consultants on future market changes 131. List the objectives of internal control and give an example of how each is implemented. 132. You began your new job as the accountant at Bolivar Industries during the month of December. During your first month, you found several interesting issues. (1) While looking through the invoices, you found Invoice Nos. 213–242, 245–271, and 275–290. Invoice Nos. 243, 244, 272, 273, and 274 appear to be missing. (2) During the month, Clerk No. 3 issued $500 in refunds as compared to Clerks Nos. 1, 2, and 4 who issued less than $50 each. (3) The daily cash receipts and bank deposits reconcile, except on Tuesdays during the month. (4) Business is generally brisk during the holiday season, but 2 weeks before Christmas there was a sudden increase in slow payments. (a) What kind of warning signs could be associated with these issues? (b) What controls could you put in place regarding cash refunds mentioned in issue (2)? 133. Two features of internal control are presented in the following sections. Each is followed by a list of four irregularities that occurred in processing data. Identify the one irregularity from each list that would be discovered or prevented by the feature of internal control described. (a) The sum of the balances of the customer accounts in the accounts receivable subsidiary ledger is compared at the end of each month with the balance of the accounts receivable account in the general ledger by a person who has no responsibility for maintaining either the general ledger or the accounts receivable subsidiary ledger. (1) (2) (3) (4) (b)

Five hours of services were rendered but the customer was only billed for 4 hours. A cash receipt of $750 was recorded correctly in the accounts receivable controlling account but was posted to the customer's ledger as $75. A bill for services rendered to Cole Co. was erroneously posted to the account of Coleman Co. No entry was made in the accounting records for services rendered to a customer.

Both cash and credit charges for services rendered are recorded on prenumbered invoices. At the end of the day, all invoices are accounted for before the duplicate copies of the invoices are routed to the Accounting Department for entry into the accounts and the cash is sent to the Cashier's Department for deposit.

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Chapter 07: Internal Control and Cash (1) (2) (3) (4)

Some charge customers complained that the monthly statements of account did not add all amounts correctly. Some clerks used incorrect hourly rates in preparing invoices. Some clerks destroyed duplicate copies of cash invoices and misappropriated the cash. Some charge customers complained that their monthly statements of account did not indicate credits for payments made.

134. List and define each of the five elements of internal control. 135. The following procedures were recently implemented at Health Station, Inc. For each procedure, indicate whether the internal control over cash represents (1) a strength or (2) a weakness. If it is a weakness, explain why. (a) All mail is opened by the mail clerk, who forwards all cash remittances to the cashier. The cashier prepares a listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for recording in the accounts. (b) The accounts payable clerk prepares a voucher for each disbursement. The voucher along with the supporting documentation is forwarded to the treasurer’s office for approval. (c) At the end of each day, all cash receipts are placed in the bank’s night depository. (d) The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer. 136. The following procedures were recently implemented at Pampered Pets, Inc. For each procedure, indicate whether the internal control over cash represents (1) a strength or (2) a weakness. If it is a weakness, please explain why. (a) At the end of the day, cash register clerks are required to use their own funds to make up any cash shortages in their registers. (b) At the end of the day, an accounting clerk compares the duplicate copy of the daily cash deposit slip with the deposit receipt obtained from the bank. (c) After necessary approvals have been obtained for the payment of a voucher, the treasurer signs and mails the check. The treasurer then stamps the voucher and supporting documentation as paid and returns the voucher and supporting documentation to the accounts payable clerk for filing. (d) Along with the petty cash receipts for postage, office supplies, etc., several postdated employee checks are in the petty cash fund. 137. The following selected transactions relate to 2 days’ cash collections for a firm that maintains a $100 change fund at all times: (a) (b)

Actual cash in cash register, $5,512.36; cash receipts per cash register tally, $5,413.07. Actual cash in cash register, $3,812.95; cash receipts per cash register tally, $3,712.16.

Journalize the sales and cash receipts for each of the 2 days. 138. The actual cash received during the week ended June 16 for cash sales was $8,276, and the amount indicated by the cash register total was $8,262. Journalize the entry for cash receipts and cash sales for the week. 139. The actual cash received during the week ended October 31 for cash sales was $23,447, and the amount indicated by the cash register total was $23,457. Journalize the entry for cash receipts and cash sales for the week. Powered by Cognero

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Chapter 07: Internal Control and Cash 140. Consider the following information from the cash account. Assume cash payments were 84% of collections. Cash ?? $245,000 ?? $80,275

Beginning balance Collections Disbursements Ending balance

How much was the beginning balance of the cash account? 141. Describe the features of a voucher system and list typical supporting documents for a voucher. 142. The actual cash received during the week ended June 7 for cash sales was $18,632, and the amount indicated by the cash register total was $18,628. Journalize the entry for cash receipts and cash sales for the week. 143. Consider the following journal entry made by Jones Company for one day's sales of a single cashier. Upon investigation, what might you find happened to create this amount of cash short and over account difference? Give three possible reasons for this difference.

Cash Cash Short and Over Sales

2,235.00 100.00 2,135.00

144. List the principal advantages of electronic funds transfers. 145. You are trying to explain debit and credit memos that appear on bank statements and whether they will increase or decrease your company’s bank account balance. Complete the following table to help your new staff understand.

Item

Debit or Credit Memo

Increases or Decreases the Company’s Bank Account Balance

EFT payment Bank correction of an error due to posting another customer’s check to your account Service charge Note and interest collected for our company NSF check Bank correction of an error recording a $250 deposit as $520 EFT deposit 146. The following items may appear on a bank statement: (a) (b) (c) (d)

NSF check EFT deposit Service charge Bank correction of an error from recording a $300 deposit as $30

For each item, indicate whether it would appear as a debit memo or a credit memo on the bank statement and whether the item would increase or decrease the balance of the account. Use the following format: Appears on the Powered by Cognero

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Chapter 07: Internal Control and Cash Bank Statement as a a Debit or Credit Memo

Item No.

Increases (Decreases) the Balance of the Company’s Bank Account

147. The following information is from Madison Corporation’s accounting records for May. Check No. 3269 was returned as a double payment and voided. Checks that have not cleared the bank include Check Nos. 3252, 3260, and series 3275– 3278. Check No. 3247 3248 3249 3250 3251 3252 3253 3254 3255 3256 3257 3258 3259 3260 3261 3262

Amount $ 32.64 400.00 309.22 256.00 3,212.17 56.89 98.02 47.55 1,124.77 250.00 68.00 215.56 38.55 92.65 44.61 72.96

Check No. 3263 3264 3265 3266 3267 3268 3269 3270 3271 3272 3273 3274 3275 3276 3277 3278

Amount $ 24.87 45.00 33.78 756.77 84.34 789.00 48.90 34.41 872.00 22.00 562.38 512.00 603.50 67.00 301.61 47.88

In addition, Madison has Check No. 2264 for $32.98 and Check No. 2655 for $45.99 outstanding previously that have not cleared. (a) Create an outstanding checks list for Madison at the end of May. (b) What is the total amount of checks that cleared the bank (written in May)? 148. Scharf Company is a retailer located in a state without sales tax. The following data relate to the day’s sales at each cash register. All cash drawers start with $100 in change.

Cash in drawer Cash register reading for cash sales

Reg. #1 $974.50

Reg. #2 $1,383.66

Reg. #3 $939.46

Reg. #4 $1,137.91

879.50

1,298.16

839.46

1,030.33

Journalize a separate entry for each cash register for cash receipts and cash sales.

149. Jackson Industries has collected the following information but needs assistance completing the table. The cash payments were 90% of collections. Cash ?? $511,770

Beginning balance Collections

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Chapter 07: Internal Control and Cash ?? $102,275

Disbursements Ending balance

How much was the beginning balance of the cash account? 150. Identify each of the following reconciling items as (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the company’s records, or (d) a deduction from the cash balance according to the company’s records. Assume that none of the transactions reported by bank debit and credit memos have been recorded by the company. Also, write "entry" by those items that will require a journal entry in the company’s accounts. 1. 2. 3. 4. 5. 6.

Deposits in transit Bank service charges NSF check Outstanding checks Check for $690 incorrectly recorded by the company as $960 Check for $420 incorrectly recorded by the company as $240

151. Using the following information, prepare a bank reconciliation for Miller Co. for August 31: (a) (b) (c) (d) (e) (f)

The bank statement balance is $4,690. The cash account balance is $5,080. Outstanding checks amount to $715. Deposits in transit are $1,020. The bank service charge is $40. A check for $72 for supplies was recorded as $27 in the ledger.

152. Using the following information, prepare a bank reconciliation for Candace Co. for May 31: (a) (b) (c) (d) (e) (f)

The bank statement balance is $2,936. The cash account balance is $3,194. Outstanding checks amount to $465. Deposits in transit are $655. The bank service charge is $50. A check for $97 for supplies was recorded as $79 in the ledger.

153. Bank reconciliation information for Kaden Co. for May 31 is as follows: (a) (b) (c) (d) (e) (f)

The bank statement balance is $2,936. The cash account balance is $3,194. Outstanding checks amount to $465. Deposits in transit are $655. The bank service charge is $50. A check for $97 for supplies was recorded as $79 in the ledger.

Journalize the appropriate entry(ies) for Kaden Co. 154. The bank statement for Farmer Co. indicates a balance of $7,735 on June 30. After the journal entries for June had been posted, the cash account had a balance of $4,098. Prepare a bank reconciliation on the basis of the following reconciling items: (a)

Cash sales of $742 had been erroneously recorded in the journal as $724.

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Chapter 07: Internal Control and Cash (b) (c) (d) (e) (f)

Deposits in transit not recorded by bank, $425. Bank debit memo for service charges, $35. Bank credit memo for note collected by bank, $2,475 including $75 interest. Bank debit memo for $256 NSF (not sufficient funds) check from Janice Smith, a customer. Checks outstanding, $1,860.

155. Accompanying a bank statement for Marsh Land Properties is a credit memo for collection of a $15,000 note receivable and $900 of interest. Marsh Land Properties had been notified by the bank at the time of collection but had made no entries. Journalize the entry that should be made by Marsh Land to bring the accounting records up to date. 156. For each of the following, explain whether the issue would require you to prepare a journal entry for your company, assuming any original entry is correct. If an entry is required, please include it as part of your answer. (a) The bank recorded your deposit as $91 rather than the actual amount of $191. (b) Two outstanding checks amounted to $450. (c) Company Check No. 538 for postage was recorded incorrectly by the company bookkeeper as $50 instead of $59. (d) The bank paid a check for $500 after the company had issued a stop payment and voided the check. (e) An EFT deposit was made by one of the company’s customers, Atlas Design, for merchandise received. The sale had previously been recorded when shipped and was equal to the payment amount of $125. 157. The following data were gathered to use in reconciling the bank account of Savannah Company: Balance per bank Balance per company records Bank service charges Deposit in transit NSF check Outstanding checks

$16,750 16,125 80 2,195 950 3,850

What is the adjusted balance on the bank reconciliation? 158. The following data were gathered to use in reconciling the bank statement of Build-A-Lot: Balance per bank Balance per company records Bank service charges Deposits in transit NSF checks Outstanding checks

$14,355 14,010 80 4,100 775 5,300

(a) What is the adjusted balance on the bank reconciliation? (b) Journalize any necessary entries for Build-A-Lot based on the bank reconciliation. 159. Roper Electronics received its bank statement for the month of August with an ending balance of $11,740. Roper determined that Check No. 613 for $155 and Check No. 601 for $420 were both outstanding. Also, a $6,900 deposit for August 30 was in transit as of the end of the month. Northern Regional Bank also collected a $5,000 note receivable on August 1 that was issued March 1. Accrued interest was $250. Northern Regional Bank charged a $35 fee for the collection service. The bank statement reveals a bank service charge of $20. A customer check for $68 was returned with the bank statement marked “NSF.” The ending balance of the Roper cash account is $12,938. (a) Prepare a bank reconciliation. Powered by Cognero

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Chapter 07: Internal Control and Cash (b) Journalize any necessary entries based on the bank reconciliation. (c) If a balance sheet were prepared for Roper Electronics on August 31, what amount should be reported for cash? 160. Green Valley Bank sent Comstock Industries its end-of-month bank statement for July. The end of month balance by the bank is $11,237. The statement shows that a deposit for $4,250 is in transit at the end of the statement period. The statement also revealed that checks for $87, $105, and $95 are outstanding. Green Valley collected a $4,000 note receivable plus $120 of interest revenue. The bank charges $20 for the collection service. The bank charges a monthly account fee of $35. The end-of-month balance per company books is $11,135. (a) Prepare a bank reconciliation. (b) Journalize any necessary entries based on the bank reconciliation. (c) If the balance sheet were prepared for Comstock Industries on July 31, what amount should be reported for cash? 161. The cash account for Santiago Co. on May 31 indicated a balance of $20,915. The May bank statement indicated an ending balance of $25,645. Comparing the bank statement, the canceled checks, and the accompanying memos with the records revealed the following reconciling items: • • • • • •

Checks outstanding totaled $5,975. A deposit of $3,796 had been made too late to appear on the bank statement. A check for $1,482 returned with the statement had been incorrectly recorded by the company as $482. The check was originally issued to pay on account. The bank collected $4,515 on a note left for collection of which $515 was interest revenue. Bank service charges for May amounted to $70. A check for $894 was returned by the bank because of insufficient funds.

(a) Prepare a bank reconciliation as of May 31. (b) Journalize any necessary entries based on the bank reconciliation. (c) If a balance sheet were prepared for Santiago Co. on May 31, what amount should be reported for cash? 162. The bank statement for Jeffrey Co. indicates a balance of $8,785 on October 31. After the journal entries for October were posted, the cash account had a balance of $8,998. The reconciliation process revealed the following: (a) (b) (c) (d) (e) (f)

Cash sales of $945 were erroneously recorded in the journal as $495. Deposits in transit not recorded by the bank were $778. The bank enclosed a debit memo for service charges of $40. The bank enclosed a credit memo for a note collected on Jeffrey Co.’s behalf of $23,985 plus $885 interest. The bank returned a $756 check from Calin Sams, a customer, marked “NSF.” Checks outstanding totaled $1,860.

Journalize any necessary entries based on the bank reconciliation. 163. The bank statement for Gatlin Co. indicates a balance of $7,735 on June 30. After the journal entries for June were posted, the cash account had a balance of $4,098. The reconciliation process revealed the following: (a) (b) (c) (d)

Cash sales of $742 were erroneously recorded in the journal as $724. Deposits in transit not recorded by the bank were $425. The bank enclosed a debit memo for service charges of $35. The bank enclosed a credit memo for a note collected on Gatlin Co.’s behalf of $2,475 including $75 interest.

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Chapter 07: Internal Control and Cash (e) (f)

The bank returned a $256 check from Janice Smith, a customer, marked “NSF.” Checks outstanding totaled $1,860.

Journalize any necessary entries based on the bank reconciliation. 164. Journalize the entries for the following: Mar. 1 Established a petty cash fund of $300. Mar. 31 Replenished the petty cash fund based on the following summary of receipts: office supplies, $137, and selling expenses, $112. Petty cash on hand was $64. Record any discrepancy in the cash short and over account. 165. On April 2, Granger Sales decides to establish a $125.00 petty cash fund to relieve the burden on Accounting. (a) Journalize the establishment of the fund. (b) On April 10, the petty cash fund has receipts for mail and postage of $43.50, contributions and donations of $29.50, and meals and entertainment of $38.25. Petty cash on hand is $13.55. Journalize the replenishment of the fund. Record any missing funds in the cash short and over account. (c) On April 11, Granger Sales decides to increase petty cash to $200.00. Journalize this event. 166. The last custodian of the petty cash fund was hospitalized and you have been asked to take stock of the fund and replenish it. When you receive the fund, it has $299 in cash and receipts as follows: Office supplies Advertising Transportation by taxi

$295 120 75

The petty cash fund was established to have $800 in it. Based on what you have found, what journal entry should be recorded to replenish the fund? Record any missing funds in the cash short and over account. 167. Journalize the entries for the following: June 1. Established a petty cash fund of $200. 30. Replenished the petty cash fund based on the following receipts: postage, $25; entertainment, $100; and miscellaneous, $20. Petty cash on hand was $57. Record any missing funds in the cash short and over account. 168. On April 3, Snappy Sales decides to establish a $135.00 petty cash fund to relieve the burden on Accounting. (a)

Journalize the establishment of the fund.

(b)

On April 11, the petty cash fund has receipts for mail and postage of $32.75, contributions and donations of $25.25, and meals and entertainment of $68.00. Petty cash on hand is $9.75. Journalize the replenishment of the fund. Record any missing funds in the cash short and over account. On April 12, Snappy Sales decides to increase petty cash to $175.00. Journalize this transaction.

(c)

169. Journalize the following transactions: Powered by Cognero

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Chapter 07: Internal Control and Cash (a) (b)

(c)

Established a petty cash fund of $235.00. Replenished the petty cash fund, based on the following summary of receipts: office supplies, $74.50; miscellaneous administrative expense, $92.75; and miscellaneous selling expense, $18.60. Petty cash on hand was $42.80. Record any missing funds in the cash short and over account. Increased the petty cash fund to $300.00.

170. On August 3, Sonar Sales decides to establish a $275.00 petty cash fund to relieve the burden on Accounting. (a) Journalize the establishment of this fund. (b) On August 11, the petty cash fund has receipts for mail and postage of $124.75, contributions and donations of $53.25, and meals and entertainment of $63.85. Petty cash on hand is $32.75. Journalize the replenishment of the fund. Record any missing funds in the cash short and over account. (c) On August 12, Sonar Sales decides to increase petty cash to $400.00. Journalize this transaction. 171. Stephanie Jo Company established a petty cash fund of $300 on May 1. At the end of the month, the petty cash fund has $42 of petty cash on hand and receipts for postage, $39; entertainment, $146; and office supplies, $70. Journalize the establishment of the fund on May 1 and the replenishment of the fund on May 31. 172. Journalize the entries for the following: Sept. 1. Established a petty cash fund of $350. 30. Replenished the petty cash fund based on the following summary of receipts: office supplies, $116, and postage, $100. Petty cash on hand was $130. Record any missing funds in the cash short and over account.

173. (a) Where are cash equivalents disclosed in the financial statements? (b) List three examples of cash equivalents. 174. You began your new job as the accountant for Morton Company. You were surprised to find that the company had a $2,000 petty cash fund, which sits in the break room. The president of the company told you, “Our petty cash system here works quite smoothly. Since everyone is honest here, everyone has access to the fund for incidentals that might pop up in the course of the business day. Most of these situations don’t have any receipts tied to them, so I just put the money back in the fund when my secretary tells me that we have run out of petty cash, and we debit the amount to Miscellaneous Expense.” (a) Should you implement some controls on petty cash? Why? (b) If so, what controls could be used for petty cash? 175. Under what circumstances would a bank require a company to maintain a compensating balance? 176. Gamma Company and Delta Company have compiled the following data as of the end of the current fiscal year:

Cash Temporary investments Accounts receivable Inventory Powered by Cognero

Gamma $ 65,700 27,700 2,500 52,400

Delta $302,300 125,000 87,000 127,500 Page 26

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Chapter 07: Internal Control and Cash Accounts payable Operating expenses

4,500 153,000

265,000 625,000

Depreciation (one of the operating expenses) for Gamma was $35,000, and for Delta was $65,000. (a) Compute the days' cash on hand for Gamma Company and for Delta Company. Round to one decimal place. (b) Which company has the better liquidity position based on your results in part (a)?

Indicate the answer choice that best completes the statement or answers the question. 177. What are the processes and procedures a company uses to safeguard its assets, process information correctly, and ensure its compliance with laws and regulations called? a. Sarbanes-Oxley Act b. fraud prevention control c. internal control d. external control 178. The Internal Control—Integrated Framework is used by companies as a(n) a. standard for designing, analyzing, and evaluating internal controls b. standard for making statements about a company’s finances to the public c. extension of internal controls d. extension of GAAP 179. Which of the following relate to a company’s control procedures? (1) Separating responsibilities for related operations (2) Safeguarding inventory in a locked storeroom (3) Identifying a sudden increase in slow payments (4) Operating style of management (5) Requiring employees to take vacations a. 1, 2, and 3 b. 1, 3, and 5 c. 1, 2, and 4 d. 1, 2, and 5 180. Which of the following could signal internal control problems within the accounting system? (1) Safeguarding inventory in a locked warehouse (2) Abuse of alcohol or drugs (3) Gaps in transactions numbers (4) Operating style of management (5) Sudden increase in slow payments a. 1 and 2 b. 3 and 5 c. 2 and 4 d. 1 and 3

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Chapter 07: Internal Control and Cash 181. Hanna Co. sells art supplies and also has a Custom Framing Department. Only two employees are trained to complete custom framing orders. They place the orders for the supplies they need. Also, they are the only ones who take customer orders, as the ordering process is fairly technical. For the past several years, custom framing has been a very profitable part of Hanna Co.’s business. However, the financial reports for the most recent period show a substantial drop in profitability for custom framing. Upon investigation, it was determined that the supplies being used in custom framing had increased measurably. However, the sales generated did not support the amount of supplies being used. Further investigation discovered that one of the custom framing specialists had arranged for a co-conspirator to bring in orders and have them filled. The co-conspirator paid for the orders in cash, but the sales were not recorded in the accounting system. The two then sold the framed art through another business. What general internal control weaknesses contributed to the fraud? 182. Nebraska Fields Co. records all cash receipts from data on the cash register tapes. Nebraska discovered during June that one of its salesclerks had stolen some cash. However, the amount is not known. The salesclerk was responsible for taking cash deposits to the bank. To determine the amount stolen, the following data have been obtained for June: Cash in bank according to the general ledger Cash according to the June 30 bank statement Outstanding checks at June 30 Bank service charge for June Notes receivable collected by bank Interest collected on note receivable

$21,530 25,620 4,800 30 2,000 80

No deposits were in transit on June 30. (a) Determine the amount of cash receipts stolen by the salesclerk. (b) Suggest accounting controls that would have prevented or detected the theft. 183. Journalize the entries for the following: Apr. 1. Established a petty cash fund of $350. 10. Cash sales for the day, according to the cash register records, totaled $3,120. The actual cash received from cash sales was $3,122. 30. Replenished the petty cash fund based on the following summary of receipts: office supplies, $98; postage, $106; and miscellaneous, $12. Petty cash on hand was $130. Record any missing funds in the cash short and over account. 30. Cash sales for the day, according to the cash register records, totaled $6,350. The actual amount of cash received for the day was $6,336. 30. Decreased the petty cash fund by $100.

Indicate the answer choice that best completes the statement or answers the question. 184. Which of the following is a reason that businesses use bank accounts as part of their internal control measures? a. The bank records incoming checks as liabilities. b. Customers’ returned checks can be charged an NSF fee. c. Bank accounts are an independent record of cash transactions. d. Differences between the company balance and the bank balance will automatically indicate fraud. Powered by Cognero

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Chapter 07: Internal Control and Cash 185. The effect of a debit memo on the company’s books is a decrease in an asset. On the bank’s records, the debit memo a. decreases an asset b. decreases a liability c. increases an asset d. increases a liability 186. The effect of a credit memo on the company’s books and the bank’s records is to a. increase an asset on the company’s books and increase a liability on the bank’s records b. increase an asset on the company’s books and increase an asset on the bank’s records c. decrease an asset on the company’s books and decrease a liability on the bank’s records d. decrease an asset on the company’s books and increase a liability on the bank’s records

187. An accounting clerk prepared the following bank reconciliation for Inges Corp. Inges Corp. Bank Reconciliation August 31 Cash balance according to company records Adjustments: Outstanding checks $1,020 Error by company in recording Ck. No. 2490 as $1,540 instead of $1,450 90 Note collected by bank, including $200 interest 3,200 Deposit in transit on August 31 Bank service charge Total adjustments Cash balance according to bank statement

$14,690

(2,750) (40) 1,520 $16,210

(a)

Use the data in the bank reconciliation to prepare a new bank reconciliation for Inges Corp. that adjusts both the company’s books and the bank statement balance in a two-section format. (b) If a balance sheet were prepared for Inges Corp. on August 31, what amount should be reported for cash?

188. The following bank reconciliation was prepared as of July 31 for Maestro Corp.: Maestro Corp. Bank Reconciliation July 31 Cash balance according to bank statement Add: Deposits in transit not recorded by bank Outstanding checks Total additions Adjusted balance Cash balance according to company's records Add: Bank service charge Powered by Cognero

$4,690 $1,020 715 1,735 $6,425 $5,080 $45 Page 29

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Chapter 07: Internal Control and Cash Error in recording July 3 deposit as $540 instead of $500 Total additions Adjusted balance

40 85 $5,165

(a) Identify the errors in the bank reconciliation. Assume that both cash balances before adjustment are correct. (b) Prepare a corrected bank reconciliation.

Indicate the answer choice that best completes the statement or answers the question. 189. Selected financial statement data for 2 years ended December 31 for Carey Co. follow. Assets are reported at their year-end values. Cash Short-term investments Operating expenses Depreciation expense

Year 2 Year 1 $32,500 $30,100 9,400 10,200 72,800 70,400 12,000 11,200

What is the days’ cash on hand for each year? Round all calculations to one decimal place. a. Year 2: 251.5 days; Year 1: 248.5 days b. Year 2: 210.1 days; Year 1: 208.9 days c. Year 2: 258.1 days; Year 1: 265.1 days d. Year 2: 215.6 days; Year 1: 222.9 days

190. Selected financial statement data for 2 years ended December 31 for Mariah Co. follow. Assets are reported at their year-end values. Cash Short-term investments Operating expenses Depreciation expense

Year 2 $22,500 19,400 62,800 10,000

Year 1 $20,100 10,200 52,400 11,200

Determine the days’ cash on hand for each year. Round all calculations to one decimal place.

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Chapter 07: Internal Control and Cash Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. False 8. True 9. True 10. True 11. True 12. True 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. True 21. False 22. True 23. True 24. False 25. False Powered by Cognero

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Chapter 07: Internal Control and Cash 26. False 27. False 28. False 29. True 30. False 31. True 32. True 33. True 34. True 35. False 36. True 37. True 38. False 39. False 40. True 41. False 42. True 43. False 44. False 45. False 46. False 47. False 48. False 49. False 50. True 51. a Powered by Cognero

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Chapter 07: Internal Control and Cash 52. c 53. d 54. c 55. b 56. b 57. d 58. c 59. d 60. a 61. d 62. c 63. a 64. a 65. a 66. b 67. b 68. b 69. d 70. d 71. a 72. d 73. b 74. a 75. c 76. c Powered by Cognero

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Chapter 07: Internal Control and Cash 77. b 78. d 79. a 80. a 81. a 82. a 83. d 84. d 85. c 86. c 87. c 88. b 89. d 90. a 91. d 92. b 93. a 94. d 95. d 96. a 97. b 98. d 99. a 100. c 101. d 102. a Powered by Cognero

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Chapter 07: Internal Control and Cash 103. b 104. c 105. d 106. c 107. c 108. d 109. b 110. d 111. d 112. c 113. c 114. c 115. b 116. a 117. b 118. d 119. c 120. d 121. a 122. d 123. b 124. a 125. b 126. b 127. b Powered by Cognero

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Chapter 07: Internal Control and Cash 128. b 129. a 130. 1. (c) control procedures 2. (a) the control environment 3. (b) risk assessment 131. Internal control provides reasonable assurance that (1) assets are safeguarded and used for business purposes (2) business information is accurate (3) employees and managers comply with laws and regulations Examples: (1) duties are separated (2) duties are rotated (3) reports are submitted to management Many other examples would be correct. 132. (a) (1) Missing invoices or gaps in transaction numbers could mean that the invoices are being used for fraudulent transactions. (2) An unusually high number of refunds for Clerk No. 3 could mean that the individual is creating fictitious refunds and pocketing the cash. (3) The difference could mean that receipts are being pocketed before being deposited. Maybe a person responsible for making the deposits on Tuesdays is the culprit. (4) A sudden increase in slow payments could mean that an employee is pocketing the payments. (b) Place surveillance cameras at customer service area. Require a supervisor to be a second authorizer on refund transactions. Prohibit cash refunds and require exchanges of merchandise instead. Provide employee training. Incorporate special alerts for critical dollar thresholds through company software. Require information about the original transaction to be part of the refund process. 133. (a) (2) (b) (3) 134. (1) Control Environment. The control environment is the overall attitude of management and employees about the importance of internal controls. (2) Risk Assessment. Risk assessment is the identification of risks faced by an organization so that management can take necessary actions to control them. (3) Control Procedures. The control procedures are the policies and Powered by Cognero

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Chapter 07: Internal Control and Cash procedures designed to provide reasonable assurance that the business goals are met and fraud is prevented. (4) Monitoring. Monitoring involves observing employee behavior and the accounting system for indicators of control problems. (5) Information and Communication. Information and communication is the gathering and reporting of information about the control environment, risk assessment, control procedures, and monitoring elements of internal control needed by management to guide operations and ensure compliance with reporting, legal, and regulatory requirements. 135. (a) This is a weakness. The mail clerk should prepare an initial listing of cash remittances before forwarding the cash receipts to the cashier. This establishes initial accountability for the cash receipts. The mail clerk should forward a copy of the listing of remittances to the accounts receivable clerk for recording in the accounts. (b) This is a strength. (c) This is a strength. (d) This is a weakness. The bank reconciliation should be prepared by someone not involved with the handling or recording of cash. 136. (a) This is a weakness. Requiring cash register clerks to make up any cash shortages from their own funds gives the clerks an incentive to shortchange customers. That is, the clerks will want to make sure that they don’t have a shortage at the end of the day. In addition, one might also assume that the clerks can keep any overages. This would again encourage clerks to shortchange customers. The shortchanging of customers will create customer complaints, etc. The best policy is to report any cash shortages or overages at the end of each day. If there is consistently a cash shortage or overage, then corrective action (training, removal, etc.) could be taken. (b) This is a strength. (c) This is a strength. (d) This is a weakness. Employees should not be allowed to use the petty cash fund to cash personal checks. In any case, postdated checks should not be accepted. In effect, postdated checks represent a receivable from the employees. 137. (a) Cash Cash Short and Over Sales (b) Cash Cash Short and Over Sales Powered by Cognero

5,412.36 0.71 5,413.07 3,712.95 0.79 3,712.16 Page 37

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Chapter 07: Internal Control and Cash 138. Journal Date Description June 16 Cash Sales Cash Short and Over

Post. Ref.

Debit Credit 8,276 8,262 14

139. Date Description Oct. 31 Cash Cash Short and Over Sales

Journal Post. Ref. Debit 23,447 10

Credit

23,457

140. Disbursements = 84% of Collections = 84% × $245,000 = $205,800 Beginning Balance = Ending Balance + Disbursements – Collections = $80,275 + $205,800 – $245,000 = $41,075 141. A voucher system is used to control cash payments. It should provide reasonable assurance that only authorized payments are made and that all purchases discounts are taken. Specifically, a voucher system is a set of procedures for authorizing and recording liabilities and cash payments. Typical supporting documents for a voucher are a supplier's invoice, a purchase order, and a receiving report. After a voucher is prepared, it is submitted for approval. Once approved, the voucher is recorded in the accounts and filed by due date. Upon payment, the voucher is recorded in the same manner as the payment of an account payable. 142. Journal Date Description June 7 Cash Sales Cash Short and Over

Post. Ref.

Debit 18,632

Credit 18,628 4

143. There are many possibilities, but the most likely reasons are as follows: 1. The beginning change fund in the drawer was not considered. 2. A collection of an account receivable could have not been recorded, making the cash “heavy” to sales. 3. A customer may have used a debit card and requested $100 cash back that was not given to the customer (expect a call from the customer). 4. A sale for the exact amount of $100 was not recorded into the sales of the cash register. However, this is a very improbable occurrence. 5. A void could have taken place and the cash not refunded or possibly not removed. In this case, you would certainly investigate the voided items and the actions of the cashier as well as the history of cash reconciliations for this cashier. 144. • •

EFTs cost less than receiving cash payments through the mail. EFTs enhance internal controls over cash, since the cash is received directly by the bank without any employees

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Chapter 07: Internal Control and Cash •

handling cash. EFTs reduce late payments from customers and speed up the processing of cash receipts.

145. Debit or Credit Memo

Item EFT payment Debit Bank correction of an error due to posting another Credit customer’s check to your account Service charge Debit Note and interest collected for our company Credit NSF check Debit Bank correction of an error recording a $250 deposit as $520 Debit EFT deposit Credit

Increases or Decreases the Company’s Bank Account Balance Decreases Increases Decreases Increases Decreases Decreases Increases

146.

Item No. (a) (b) (c) (d)

Appears on the Bank Statement as a a Debit or Credit Memo Debit memo Credit memo Debit memo Credit memo

Increases (Decreases) the Balance of the Company’s Bank Account Decreases Increases Decreases Increases

147. (a) Madison Corporation Outstanding Checks List May 31 Check No. 2264 2655 3252 3260 3275 3276 3277 3278 Total

Amount $ 32.98 45.99 56.89 92.65 603.50 67.00 301.61 47.88 $1,248.50

(b) Students must remember to not include the voided Check No. 3269. Check No. Amount 3247 $ 32.64 3248 400.00 3249 309.22 Powered by Cognero

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Chapter 07: Internal Control and Cash 3250 3251 3253 3254 3255 3256 3257 3258 3259 3261 3262 3263 3264 3265 3266 3267 3268 3270 3271 3272 3273 3274 Total

256.00 3,212.17 98.02 47.55 1,124.77 250.00 68.00 215.56 38.55 44.61 72.96 24.87 45.00 33.78 756.77 84.34 789.00 34.41 872.00 22.00 562.38 512.00 $9,906.60

148. Each cash drawer starts with $100, which must be subtracted from the cash in drawer to determine the cash short or over amount. Reg. No. 1 Cash Cash Short and Over Sales 2

3

4

Cash Cash Short and Over Sales Cash Sales Cash Cash Short and Over Sales

Debit

Credit

874.50 5.00 879.50 1,283.66 14.50 1,298.16 839.46 839.46 1,037.91 7.58 1,030.33

149. Disbursements = 90% of Collections = 90% × $511,770 = $460,593 Ending Balance = Beginning Balance + Collections – Disbursements $102,275 = X + $511,770 – $460,593 X = $51,098 Powered by Cognero

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Chapter 07: Internal Control and Cash 150. 1. (a) an addition to the cash balance according to the bank statement 2. (d) a deduction from the cash balance according to the company’s records (entry) 3. (d) a deduction from the cash balance according to the company’s records (entry) 4. (b) a deduction from the cash balance according to the bank statement 5. (c) an addition to the cash balance according to the company’s records (entry) 6. (d) a deduction from the cash balance according to the company’s records (entry) 151. Miller Co. Bank Reconciliation August 31 Cash balance according to bank statement Add: Deposits in transit Deduct: Outstanding checks Adjusted balance Cash balance according to company's records Deduct: Bank service charge Error in recording check Total deductions Adjusted balance

$4,690 $1,020 (715) $4,995 $5,080 $40 45 (85) $4,995

152. Candace Co. Bank Reconciliation May 31 Cash balance according to bank statement Add: Deposits in transit Deduct: Outstanding checks Adjusted balance Cash balance according to company's records Deduct: Bank service charge Error in recording check Total deductions Adjusted balance 153. Miscellaneous Expense Supplies Cash

$2,936 655 (465) $3,126 $3,194 $50 18 (68) $3,126

50 18 68

154. Farmer Co. Powered by Cognero

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Chapter 07: Internal Control and Cash Bank Reconciliation June 30 Cash balance according to bank statement Add: Deposits in transit Deduct: Outstanding checks Adjusted balance

$7,735 425 (1,860) $6,300

Cash balance according to company's records Add: Note collected by bank, including $75 interest Error in recording cash sales of $742 as $724 Total additions Deduct: NSF check from Janice Smith Bank service charges Total deductions Adjusted balance 155. Cash Notes Receivable Interest Revenue

$4,098 $2,475 18 2,493 $256 35 (291) $6,300

15,900 15,000 900

156. (a) If you recorded the deposit correctly in your company’s books, then no additional journal entry is required. (b) Since your company has already recorded these checks correctly, no additional journal entry is required by your company. (c) A journal entry is required by the company to correct the books. In this case, the entry would be: Postage Expense 9 Cash 9 (d) The bank is at fault here and no additional journal entry is required by the company. (e) Since the company has to be notified by the bank when direct deposits occur, the company will need to make a journal entry. This entry would be: Cash 125 Accounts Receivable—Atlas Design 125 157. $15,095 ($16,750 + $2,195 – $3,850) or ($16,125 – $80 – $950) 158. (a) $13,155 Bank section reconciliation: $14,355 + $4,100 – $5,300 = $13,155 Company section of reconciliation: $14,010 – $80 – $775 = $13,155 (b) Accounts Receivable Miscellaneous Expense Cash

775 80 855

159. (a) Roper Electronics Bank Reconciliation August 31 Cash balance according to bank statement Powered by Cognero

$11,740 Page 42

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Chapter 07: Internal Control and Cash Add: Deposits in transit Deduct: Outstanding Check No. 601 Outstanding Check No. 613

6,900 $420 155 (575)

Total deductions Adjusted balance

$18,065

Cash balance according to company's records Add: Note and interest collected by bank Deduct: Check returned because of insufficient funds Collection fee Bank service charge Total deductions

$12,938 5,250 $68 35 20 (123)

Adjusted balance (b) Aug. 31

31

31

$18,065

Cash Miscellaneous Expense Notes Receivable Interest Revenue

5,215 35

Miscellaneous Expense Cash

20

Accounts Receivable Cash

68

5,000 250

20

68

(c) Cash should be reported for the adjusted balance of $18,065. 160. (a) Comstock Industries Bank Reconciliation July 31 Cash balance according to bank statement Add: Deposits in transit Deduct: Outstanding checks Adjusted balance Cash balance according to company's records Add: Note and interest collected by bank Deduct: Collection fee Bank service charge Total deductions Adjusted balance (b) July 31 Cash Miscellaneous Expense Notes Receivable Interest Revenue Powered by Cognero

$11,237 4,250 (287) $15,200 $11,135 4,120 $20 35 (55) $15,200 4,100 20 4,000 120 Page 43

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Chapter 07: Internal Control and Cash 31 Miscellaneous Expense Cash

35 35

(c) Cash should be reported for the adjusted balance of $15,200 161. (a) Santiago Co. Bank Reconciliation May 31 Cash balance according to bank statement Add: Deposit in transit Deduct: Outstanding checks Adjusted balance

$25,645 3,796 (5,975) $23,466

Cash balance according to company’s records Add: Proceeds of note and interest collected by bank Deduct: Error in recording check Bank service charges Nonsufficient funds check Total deductions Adjusted balance

$20,915 4,515 $1,000 70 894 (1,964) $23,466

(b) Journal Date Description May 31 Cash Note Receivable Interest Revenue

Post. Ref.

31 Accounts Payable Miscellaneous Expense Accounts Receivable Cash

Debit Credit 4,515 4,000 515 1,000 70 894 1,964

(c) Cash should be reported for the adjusted balance of $23,466. 162. Cash Notes Receivable Interest Revenue Sales

25,320 23,985 885 450

Accounts Receivable—Calin Sams Miscellaneous Expense Cash 163. Cash Powered by Cognero

756 40 796

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Chapter 07: Internal Control and Cash Notes Receivable Interest Revenue Sales

2,400 75 18

Accounts Receivable—Janice Smith Miscellaneous Expense Cash

256 35 291

164. Journal Post. Ref.

Date Description Mar. 1 Petty Cash Cash 31 Office Supplies Selling Expenses Cash Short and Over Cash

137 112 13 236

165. (a) Apr. 2 Petty Cash Cash (b)

(c)

Debit Credit 300 300

125.00 125.00

10 Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash

43.50 29.50 38.25 0.20

11 Petty Cash Cash

75.00

111.45

75.00

166. Office Supplies Advertising Expense Transportation Expense Cash Short and Over Cash

295 120 75 11 501

167. Journal Date Description June 1 Petty Cash Cash 30 Postage Expense Entertainment Expense Miscellaneous Expense Cash Short and Over Powered by Cognero

Post. Ref.

Debit Credit 200 200 25 100 20 2 Page 45

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Chapter 07: Internal Control and Cash Cash

143

168. (a) Apr. 3 Petty Cash Cash

135.00

(b)

32.75

135.00

11 Mail and Postage Expense Contributions and Donations Expense

25.25 68.00

Meals and Entertainment Expense Cash Short and Over Cash (c)

12 Petty Cash Cash

169. (a) Petty Cash Cash (b) Office Supplies Miscellaneous Administrative Expense Miscellaneous Selling Expense Cash Short and Over Cash (c) Petty Cash Cash

40.00 40.00

235.00 235.00 74.50 92.75 18.60 6.35 192.20 65.00 65.00

170. (a) Aug. 3 Petty Cash Cash (b)

(c)

0.75 125.25

275.00 275.00

11 Mail and Postage Expense Contributions and Donations Expense Meals and Entertainment Expense Cash Short and Over Cash

124.75 53.25

12 Petty Cash Cash

125.00

63.85 0.40 242.25

125.00

171. Date

Journal Description

May 1 Petty Cash Cash Powered by Cognero

Post. Ref.

Debit Credit 300 300 Page 46

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Chapter 07: Internal Control and Cash 31 Postage Expense Entertainment Expense Office Supplies Cash Short and Over Cash

39 146 70 3 258

172. Journal Date

Description Sept. 1 Petty Cash Cash 30 Office Supplies Postage Expense Cash Short and Over Cash

Post. Ref.

Debit Credit 350 350 116 100 4 220

173. (a) Cash account on the balance sheet (b) Money market funds, notes of major corporations (commercial paper), and U.S. Treasury bills 174. (a) Even though the president thinks the petty cash system works well, $2,000 is a tempting sum for theft. Even with only $2,000, if the fund is replenished frequently, a significant amount of cash could be stolen. For example, if the fund is replenished weekly, then $104,000 ($2,000 × 52 weeks) could be subject to theft. The issue of debiting the amount used to Miscellaneous Expense is a questionable practice that would typically be flagged by an independent auditor. (b) Controls for petty cash include (1) designating one person who is responsible for the fund, (2) maintaining a written record of all payments, (3) requiring support (receipts) for payments from the fund, and (4) periodic review of the funds on hand and the payments by an independent person. 175. Usually, a compensating balance is part of a loan agreement or line of credit. 176. (a) Days' Cash on Hand = Cash and Short-Term Investments ÷ Daily Cash Operating Expenses = (Cash + Temporary Investments) ÷ [(Operating Expenses – Depreciation Expense) ÷ 365 days] Gamma Company: ($65,700 + $27,700) ÷ [($153,000 – $35,000) ÷ 365 days] = 288.9 days Delta Company: ($302,300 + $125,000) ÷ [($625,000 – $65,000) ÷ 365 days] = 278.5 days (b) Gamma Company has the better liquidity position, because it has a larger number of days' cash on hand, enabling it to survive longer if its sources of revenue were to decline significantly. 177. c 178. a Powered by Cognero

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Chapter 07: Internal Control and Cash 179. d 180. b 181. Allowing the custom frame specialists to take orders, fulfill them, and collect the cash is an internal control weakness. Also, allowing them to be solely responsible for ordering their own supplies is another weakness. 182. (a) The adjusted bank balance is $20,820 ($25,620 − $4,800). The adjusted balance on Nebraska’s books is $23,580 ($21,530 − $30 + $2,000 + $80). The difference of $2,760 represents the amount the salesclerk stole. (b) The control that should be in place is that anyone receiving cash, such as the salesclerk, should not be the person responsible for depositing or for accounting for it.

183. Date

Description Apr. 1 Petty Cash Cash

Post. Ref.

Debit Credit 350 350

10 Cash Sales Cash Short and Over

3,122

30 Office Supplies Postage Expense Miscellaneous Expense Cash Short and Over Cash

98 106 12 4

30 Cash Cash Short and Over Sales

6,336 14

30 Cash Petty Cash

3,120 2

220

6,350 100 100

184. c 185. b 186. a 187. (a) Powered by Cognero

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Chapter 07: Internal Control and Cash Inges Corp. Bank Reconciliation August 31 Cash balance according to bank statement Add: Deposit in transit Deduct: Outstanding checks Adjusted balance

$16,210 2,750 (1,020) $17,940

Cash balance according to company's records

$14,690

Add: Error in recording Ck. No. 2490 as $1,540 instead of $1,450 Note and interest collected by bank Total additions Deduct: Bank service charge

$

90 3,200 3,290 (40)

Adjusted balance

$17,940

(b) Cash should be reported for the adjusted balance of $17,940.

188. (a) Outstanding checks should be deducted from the bank statement balance. The adjusted bank statement balance is $4,995 ($4,690 + $1,020 – $715). The service charge and the error in recording should be subtracted from the balance according to the company’s records. The adjusted balance per company’s records is also $4,995 ($5,080 – $45 – $40). (b) Maestro Corp. Bank Reconciliation July 31 Cash balance according to bank statement Add: Deposits in transit not recorded by bank Deduct: Outstanding checks Adjusted balance Cash balance according to company's records Deduct: Bank service charge Error in recording July 3 deposit as $540 instead of $500 Total deductions Adjusted balance

$4,690 1,020 (715) $4,995 $5,080 $40 45 (85) $4,995

189. a 190. Days' Cash on Hand = Cash and Short-Term Investments ÷ Daily Cash Operating Expenses = (Cash + Short-Term Investments) ÷ [(Operating Expenses – Depreciation Expense) ÷ 365 days] Year 2: ($22,500 + $19,400) ÷ [($62,800 – $10,000) ÷ 365 days] = $41,900 ÷ ($52,800 ÷ 365) = $41,900 ÷ $144.7 = 289.6 days Year 1: ($20,100 + $10,200) ÷ [($52,400 – $11,200) ÷ 365 days] = $30,300 ÷ ($41,200 ÷ 365) = $30,300 ÷ $112.9 = 268.4 days Powered by Cognero

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Chapter 08: Receivables

Indicate whether the statement is true or false. 1. Receivables not currently collectible are reported in the “Investments” section of the balance sheet. a. True b. False 2. Trade receivables occur when two companies trade or exchange notes receivable. a. True b. False 3. Other receivables include nontrade receivables such as loans to company officers. a. True b. False 4. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash. a. True b. False 5. When companies sell their receivables to other companies, the transaction is called factoring. a. True b. False 6. Of the two methods of accounting for uncollectible receivables, the allowance method provides in advance for uncollectible receivables. a. True b. False 7. An advantage of factoring is that the company selling its receivables immediately receives cash. a. True b. False 8. Small companies can use either the direct write-off method or the allowance method. a. True b. False 9. GAAP requires companies with a large amount of receivables to use the allowance method. a. True b. False 10. The direct write-off method records bad debt expense when an account is determined to be uncollectible. a. True b. False 11. Generally accepted accounting principles do not normally allow the use of the direct write-off method of accounting for uncollectible accounts. a. True Powered by Cognero

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Chapter 08: Receivables b. False 12. The direct write-off method records bad debt expense in the year the specific account receivable is determined to be uncollectible. a. True b. False 13. No allowance account is used with the direct write-off method. a. True b. False 14. When using the direct write-off method of accounting for uncollectible receivables, Allowance for Doubtful Accounts is debited when a specific account is determined to be uncollectible. a. True b. False 15. When an account receivable that has been written off is subsequently collected, the account receivable must first be reinstated before recording the receipt of payment. a. True b. False 16. Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a debit or a credit balance before adjusting entries are recorded at the end of the accounting period. a. True b. False 17. Allowance for Doubtful Accounts is a liability account. a. True b. False 18. When using the percent of sales method of estimating uncollectible accounts, the entry to journalize bad debt expense includes a credit to Accounts Receivable. a. True b. False 19. The difference between the balance in Accounts Receivable and the balance in Allowance for Doubtful Accounts is called the net realizable value of the receivables. a. True b. False 20. When the allowance method for accounting for uncollectible receivables is used, net income is reduced when a specific receivable is written off. a. True b. False 21. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The credit sales for the period total $500,000. If the company estimates uncollectible accounts at 1% of credit sales, the amount of Powered by Cognero

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Chapter 08: Receivables bad debt expense to be journalized in an adjusting entry is $4,750. a. True b. False 22. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $500. Credit sales for the period total $800,000. If bad debt expense is estimated at 1% of credit sales, the amount of bad debt expense to be journalized in the adjusting entry is $8,500. a. True b. False 23. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $2,000. The Accounts Receivable balance is analyzed by aging the receivables, and the amount estimated to be uncollectible is $15,000. The amount to be journalized in the adjusting entry for the bad debt expense is $15,000. a. True b. False 24. At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $5,000. The Accounts Receivable balance is analyzed by aging the receivables and the amount estimated to be uncollectible is $50,000. The amount to be journalized in the adjusting entry for the bad debt expense is $45,000. a. True b. False 25. When using the analysis of receivables method for estimating uncollectible accounts, the amount computed in the analysis is usually the amount that would be journalized in the end-of-period adjusting entry. a. True b. False 26. The balance in Allowance for Doubtful Accounts at the end of the year is the total of all accounts written off since the beginning of the year. a. True b. False 27. When accounting for uncollectible receivables and using the percentage of sales method, the matching principle is violated. a. True b. False 28. A primary difference between the direct write-off and allowance methods is whether or not bad debts are based on a percentage of sales. a. True b. False 29. The due date of a 60-day note dated July 10 is September 10. a. True b. False 30. The maturity value of a $5,000, 12%, 60-day note is $5,600. Powered by Cognero

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Chapter 08: Receivables a. True b. False 31. The maturity value of a note receivable is always the same as its face value. a. True b. False 32. The interest on a $5,000, 6%, 60-day note is $300. a. True b. False 33. The party promising to pay a note at maturity is the maker. a. True b. False 34. In computing the maturity date of a note, the date the note is issued is included but the due date is omitted. a. True b. False 35. If a promissory note is dishonored, the payee should still record interest revenue. a. True b. False 36. The equation for computing interest on an interest-bearing note is as follows: Interest = Maturity Value × Interest Rate × Time. a. True b. False 37. If the maker of a note fails to pay the debt on the due date, the note is said to be dishonored. a. True b. False 38. When a note is received from a customer on account, it is journalized by debiting Notes Receivable and crediting Accounts Receivable. a. True b. False 39. When a note is written to settle an open account, no entry is necessary. a. True b. False 40. The balance of Allowance for Doubtful Accounts is added to Accounts Receivable on the balance sheet. a. True b. False 41. Receivables that are expected to be collected in cash in 18 months or less are reported in the “Current assets” section Powered by Cognero

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Chapter 08: Receivables of the balance sheet. a. True b. False 42. The accounts receivable turnover is computed by dividing sales by the average accounts receivable during the year. a. True b. False 43. The accounts receivable turnover measures the length of time in days it takes to collect a receivable. a. True b. False 44. The days’ sales in receivables is an estimate of the length of time the accounts receivable have been outstanding. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 45. A note receivable due in 18 months is listed on the balance sheet under the caption a. Long-term liabilities b. Fixed assets c. Current assets d. Investments 46. The receivable that is usually evidenced by a formal, written instrument of credit is a(n) a. trade receivable b. note receivable c. accounts receivable d. income tax receivable 47. Which of the following receivables would not be classified as an “other receivable”? a. advance to an employee b. interest receivable c. refundable income tax d. notes receivable 48. Notes or accounts receivable that result from sales transactions are often called a. nontrade receivables b. trade receivables c. merchandise receivables d. sales receivables 49. Which of the following statements is not true? a. Current assets are normally reported in order of their liquidity. b. Disclosures related to receivables are reported in the financial statement notes. Powered by Cognero

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Chapter 08: Receivables c. Cash and cash equivalents are the first items reported under “Current assets.” d. All receivables that are expected to be realized in cash beyond 265 days are reported in the “Noncurrent assets” section. 50. The term "receivables" includes all a. money claims against other entities b. merchandise to be collected from individuals or companies c. cash to be paid to creditors d. cash to be paid to debtors 51. If collection of an other receivable is expected beyond 1 year, it is classified as a a. noncurrent asset and reported under “Other receivables” b. current asset and reported under “Other receivables” c. current asset and reported under “Investments” d. noncurrent asset and reported under “Investments” 52. When does an account become uncollectible? a. when accounts receivable is converted into notes receivable b. when a discount is available on notes receivable c. There is no general rule for when an account becomes uncollectible d. at the end of the fiscal year 53. The direct write-off method of accounting for uncollectible accounts a. emphasizes balance sheet relationships b. is often used by small companies and companies with few receivables c. emphasizes cash realizable value d. emphasizes the matching of expenses with revenues 54. Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited a. at the end of each accounting period b. when a credit sale is past due c. whenever a predetermined amount of credit sales have been made d. when an account is determined to be worthless 55. An alternative name for Bad Debt Expense is a. collection expense b. doubtful accounts expense c. uncollectible accounts expense d. both doubtful accounts expense and uncollectible accounts expense 56. Two methods of accounting for uncollectible accounts are the a. direct write-off method and the allowance method b. allowance method and the accrual method c. allowance method and the net realizable method Powered by Cognero

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Chapter 08: Receivables d. direct write-off method and the accrual method 57. The operating expense recorded from uncollectible receivables can be called all of the following except a. bad receivables expense b. bad debt expense c. doubtful accounts expense d. uncollectible accounts expense 58. Indications that an account may be uncollectible include all of the following except a. the customer closes its business b. the customer is making small but regular payments c. the customer files for bankruptcy d. the customer cannot be located 59. Selling receivables is called a. factoring b. sales revenue c. a factor d. sold receivables 60. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Bad Debt Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense 61. Lowery Co. uses the direct write-off method of accounting for uncollectible accounts receivable. Lowery has a customer whose accounts receivable balance has been determined to be uncollectible. The entry to write off this account would be which of the following? a. debit Allowance for Doubtful Accounts and credit Accounts Receivable b. debit Sales and credit Accounts Receivable c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts d. debit Bad Debt Expense and credit Accounts Receivable 62. If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? a. Uncollectible Accounts Receivable b. Accounts Receivable c. Allowance for Doubtful Accounts d. Bad Debt Expense 63. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible? Powered by Cognero

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Chapter 08: Receivables a. Uncollectible Accounts Expense b. Allowance for Doubtful Accounts c. Accounts Receivable d. Interest Expense 64. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $340,000 and Allowance for Doubtful Accounts has a balance of $51,000. What is the net realizable value of the accounts receivable? a. $51,000 b. $289,000 c. $340,000 d. $391,000 65. If the allowance method of accounting for uncollectible receivables is used, what general ledger account is credited to write off a customer's account as uncollectible? a. Uncollectible Accounts Expense b. Accounts Receivable c. Allowance for Doubtful Accounts d. Interest Expense 66. On the balance sheet after adjusting entries are made, the amount shown for Allowance for Doubtful Accounts is equal to the a. uncollectible accounts expense for the year b. total of the accounts receivable written off during the year c. total estimated uncollectible accounts as of the end of the year d. sum of all accounts that are past due 67. What is the type of account and normal balance of Allowance for Doubtful Accounts? a. contra asset, credit b. asset, debit c. asset, credit d. contra asset, debit 68. When the allowance method is used to account for uncollectible accounts receivable, Bad Debt Expense is debited a. when a customer's account becomes past due b. when an account becomes bad and is written off c. when a sale is made d. at the end of the period with adjusting entries 69. A debit balance in Allowance for Doubtful Accounts a. is the normal balance for that account b. indicates that actual bad debt write-offs have been less than what was estimated c. cannot occur if the percentage of receivables method of estimating bad debts is used d. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts Powered by Cognero

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Chapter 08: Receivables 70. To journalize estimated uncollectible receivables using the allowance method, the adjusting entry would be a a. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts b. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable d. debit to Loss on Credit Sales and a credit to Accounts Receivable 71. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. liabilities decrease b. net income is unchanged c. total assets are unchanged d. total assets decrease 72. Tanning Company analyzes its receivables to estimate uncollectible accounts. The accounts receivable balance is $390,000, and credit sales are $1,300,000. An aging of accounts receivable estimates that $19,500 of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 17,000 Allowance for Doubtful Accounts b. Bad Debt Expense 19,500 Allowance for Doubtful Accounts c. Bad Debt Expense 22,000 Allowance for Doubtful Accounts d. Bad Debt Expense 65,000 Allowance for Doubtful Accounts

17,000 19,500 22,000 65,000

73. You have just received notice that a customer with an account receivable balance of $500 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Bad Debt Expense and credit Allowance for Doubtful Accounts b. debit Bad Debt Expense and credit Accounts Receivable c. debit Allowance for Doubtful Accounts and credit Accounts Receivable d. debit Allowance for Doubtful Accounts and credit Bad Debt Expense 74. An aging of a company's accounts receivable indicates an estimate of uncollectible accounts of $7,900. If Allowance for Doubtful Accounts has a $700 credit balance, the adjustment to journalize the bad debt expense for the period will require a a. debit to Bad Debt Expense for $8,600 b. debit to Bad Debt Expense for $7,900 c. debit to Bad Debt Expense for $7,200 d. credit to Allowance for Doubtful Accounts for $700 75. An aging of a company's accounts receivable indicates an estimate of uncollectible accounts of $6,400. If Allowance for Doubtful Accounts has a $1,300 debit balance, the adjustment to journalize the bad debt expense for the period will require a a. debit to Bad Debt Expense for $7,700 Powered by Cognero

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Chapter 08: Receivables b. debit to Bad Debt Expense for $6,400 c. debit to Bad Debt expense for $5,100 d. credit to Allowance for Doubtful Accounts for $1,300 76. An aging of a company's accounts receivable indicates an estimate of uncollectible accounts of $4,000. If Allowance for Doubtful Accounts has an $800 credit balance, the adjustment to journalize the bad debt expense for the period will require a a. debit to Allowance for Doubtful Accounts for $3,200 b. debit to Bad Debt Expense for $3,200 c. debit to Allowance for Doubtful Accounts for $4,000 d. credit to Allowance for Doubtful Accounts for $4,000 77. The collection of an account that was previously written off under the allowance method of accounting for uncollectible receivables a. will increase net income in the period it is collected b. will decrease net income in the period it is collected c. does not affect net income in the period it is collected d. requires a correcting entry for the period in which the account was written off 78. Allowance for Doubtful Accounts has a credit balance of $2,100 at the end of the year (before adjustment), and an analysis of the receivables indicates uncollectible accounts of $19,700. Which of the following entries journalizes the proper adjustment for bad debt expense? a. debit Allowance for Doubtful Accounts for $17,600; credit Bad Debt Expense for $17,600 b. debit Allowance for Doubtful Accounts for $21,800; credit Bad Debt Expense for $21,800 c. debit Bad Debt Expense for $21,800; credit Allowance for Doubtful Accounts for $21,800 d. debit Bad Debt Expense for $17,600; credit Allowance for Doubtful Accounts for $17,600 79. Allowance for Doubtful Accounts has a debit balance of $1,100 at the end of the year (before adjustment), and an analysis of the receivables indicates uncollectible accounts of $12,900. Which of the following entries journalizes the proper adjustment for bad debt expense? a. debit Bad Debt Expense for $14,000; credit Allowance for Doubtful Accounts for $14,000 b. debit Allowance for Doubtful Accounts for $14,000; credit Bad Debt Expense for $14,000 c. debit Allowance for Doubtful Accounts for $11,800; credit Bad Debt Expense for $11,800 d. debit Bad Debt Expense for $11,800; credit Allowance for Doubtful Accounts for $11,800 80. Allowance for Doubtful Accounts has a debit balance of $600 at the end of the year (before adjustment), and an analysis of the receivables indicates uncollectible accounts of $13,000. Which of the following entries journalizes the proper adjustment for bad debt expense? a. debit Bad Debt Expense for $600; credit Allowance for Doubtful Accounts for $600 b. debit Bad Debt Expense for $12,400; credit Allowance for Doubtful Accounts for $12,400 c. debit Allowance for Doubtful Accounts for $600; credit Bad Debt Expense for $600 d. debit Bad Debt Expense for $13,600; credit Allowance for Doubtful Accounts for $13,600 Powered by Cognero

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Chapter 08: Receivables 81. At the beginning of the year, the balance in Allowance for Doubtful Accounts is a credit of $760. During the year, $120 of previously written off accounts is reinstated and accounts totaling $740 are written off as uncollectible. The endof-year balance (before adjustment) in Allowance for Doubtful Accounts should be a. $760 b. $120 c. $140 d. $740 82. Jefferson uses the percent of sales method of estimating uncollectible receivables. Based on past history, 2% of credit sales are expected to be uncollectible. Credit sales for the current year are $5,550,000. Which of the following statements is correct? a. Uncollectible accounts are estimated to be $55,500. b. Uncollectible accounts are estimated to be $111,000. c. Bad debt expense is estimated to be $5,550. d. Bad debt expense is estimated to be $11,100. 83. Jefferson uses the percent of sales method of estimating uncollectible receivables. Based on past history, 2% of credit sales are expected to be uncollectible. Credit sales for the current year are $5,550,000. Which of the following statements regarding the entry to journalize estimated uncollectible receivables is correct? a. Cash will be debited. b. Bad Debt Expense will be credited. c. Allowance for Doubtful Accounts will be credited. d. Accounts Receivable will be debited. 84. Miles uses the allowance method and wrote off the account of James. Miles then received $559 as partial payment on the account of James. The entry to journalize the initial write-off includes a a. debit to Allowance for Doubtful Accounts b. credit to Cash c. debit to Accounts Receivable d. credit to Bad Debt Expense 85. Using the allowance method of accounting for uncollectible receivables, the entry to reinstate a specific receivable previously written off would include a a. credit to Bad Debt Expense b. credit to Accounts Receivable c. debit to Allowance for Doubtful Accounts d. debit to Accounts Receivable 86. Dalton Company uses the allowance method to account for uncollectible receivables. Dalton has determined that the Irish Company account is uncollectible. To write off this account, Dalton should debit a. Bad Debt Expense and credit Accounts Receivable b. Bad Debt Expense and credit Allowance for Doubtful Accounts c. Allowance for Doubtful Accounts and credit Accounts Receivable d. Accounts Receivable and credit Allowance for Doubtful Accounts Powered by Cognero

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Chapter 08: Receivables 87. In accounting for uncollectible receivables, the balance in Allowance for Doubtful Accounts will directly impact the amount of the adjustment when applying which method? a. direct write-off method b. percentage of sales method c. analysis of receivables method d. both percentage of sales and analysis of receivables methods 88. Abbott Company uses the allowance method of accounting for uncollectible receivables. Abbott estimates that 3% of credit sales will be uncollectible. On January 1, Allowance for Doubtful Accounts had a credit balance of $2,400. During the year, Abbott wrote off accounts receivable totaling $1,800 and made credit sales of $100,000. After the adjusting entry, the December 31 balance in Bad Debt Expense will be a. $1,200 b. $3,000 c. $3,600 d. $7,200 89. A company uses the allowance method to account for uncollectible accounts receivable. When the firm writes off a specific customer's account receivable a. total current assets are reduced b. total expenses for the period are increased c. the net realizable value of accounts receivable increases d. there is no effect on total current assets or total expenses 90. Allowance for Doubtful Accounts has a credit balance of $1,300 at the end of the year (before adjustment). The company prepares an analysis of the receivables and estimates the amount of uncollectible accounts to be $41,900. Which of the following adjusting entries would be made to journalize the bad debt expense for the year? a. debit Allowance for Doubtful Accounts for $40,600; credit Bad Debt Expense for $40,600 b. debit Allowance for Doubtful Accounts for $43,200; credit Bad Debt Expense for $43,200 c. debit Bad Debt Expense for $43,200; credit Allowance for Doubtful Accounts for $43,200 d. debit Bad Debt Expense for $40,600; credit Allowance for Doubtful Accounts for $40,600 91. Allowance for Doubtful Accounts has a debit balance of $2,300 at the end of the year (before adjustment). The company prepares an analysis of receivables and estimates the amount of uncollectible accounts to be $31,900. Which of the following adjusting entries is needed to journalize the bad debt expense for the year? a. debit Bad Debt Expense for $34,200; credit Allowance for Doubtful Accounts for $34,200 b. debit Allowance for Doubtful Accounts for $34,200; credit Bad Debt Expense for $34,200 c. debit Allowance for Doubtful Accounts for $29,600; credit Bad Debt Expense for $29,600 d. debit Bad Debt Expense for $29,600; credit Allowance for Doubtful Accounts for $29,600 92. Allowance for Doubtful Accounts has a debit balance of $2,500 at the end of the year (before adjustment), and bad debt expense is estimated at 4% of credit sales. If credit sales are $800,000, the amount of the adjusting entry for uncollectible accounts is a. $29,500 b. $34,500 c. $32,000 d. cannot determine without more information Powered by Cognero

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Chapter 08: Receivables 93. Allowance for Doubtful Accounts has a credit balance of $800 at the end of the year (before adjustment), and an analysis of receivables estimates the amount of uncollectible accounts to be $16,000. Based on this estimate, which of the following adjusting entries should be made? a. debit Bad Debt Expense for $800; credit Allowance for Doubtful Accounts for $800 b. debit Bad Debt Expense for $15,200; credit Allowance for Doubtful Accounts for $15,200 c. debit Allowance for Doubtful Accounts for $800; credit Bad Debt Expense for $800 d. debit Bad Debt Expense for $16,800; credit Allowance for Doubtful Accounts for $16,800 94. The allowance method of estimating uncollectible accounts receivable based on an analysis of receivables shows that $640 of accounts receivable are uncollectible. Allowance for Doubtful Accounts has a debit balance of $110. The adjusting entry at the end of the year will include a credit to Allowance for Doubtful Accounts in the amount of a. $110 b. $640 c. $530 d. $750 95. Allowance for Doubtful Accounts has a credit balance of $500 at the end of the year (before adjustment), and bad debt expense is estimated at 3% of credit sales. If credit sales are $300,000, the amount of the adjusting entry to journalize the estimated uncollectible accounts receivable is a. $8,500 b. $9,500 c. $9,000 d. cannot determine without more information 96. Allowance for Doubtful Accounts is classified as a(n) ______ account and has a normal ______ balance. a. owner's equity, credit b. contra asset, debit c. owner's equity, debit d. contra asset, credit 97. Under the allowance method of accounting for uncollectible receivables, writing off an uncollectible account a. affects only income statement accounts b. is not an acceptable practice c. affects only balance sheet accounts d. affects both balance sheet and income statement accounts 98. When comparing the direct write-off method and the allowance method of accounting for uncollectible receivables, a major difference is that the direct write-off method a. uses a percentage of sales method to estimate uncollectible accounts b. is used primarily by large companies with many receivables c. is used primarily by small companies with few receivables d. uses an allowance account 99. When a company uses the allowance method of accounting for uncollectible receivables, which entry would not be found in the journal? Powered by Cognero

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Chapter 08: Receivables a. Bad Debt Expense Allowance for Doubtful Accounts b. Bad Debt Expense Accounts Receivable—Bob Smith c. Cash Allowance for Doubtful Accounts Accounts Receivable—Bob Smith d. Cash Accounts Receivable—Bob Smith

500 500 500 500 300 200 500 500 500

100. When a company uses the allowance method of accounting for uncollectible receivables, the entry to reinstate a previously written off account would include a a. credit to Bad Debt Expense b. debit to Bad Debt Expense c. debit to Allowance for Doubtful Accounts d. credit to Allowance for Doubtful Accounts 101. The amount for which a promissory note is written is called the a. realizable value b. maturity value c. face value d. proceeds 102. The amount of the promissory note plus the interest earned on the due date is called the a. interest value b. maturity value c. face value d. issuance value 103. A $7,000, 60-day, 12% note, dated April 15, is received from a customer on account. The face value of the note is a. $6,860 b. $7,140 c. $7,840 d. $7,000 104. A $10,000, 60-day, 9% note, dated May 1, is received from a customer on account. The maturity value of the note is a. $10,000 b. $10,150 c. $10,900 d. $9,100 105. Interest on a note can be determined without knowledge of the a. fair value of the note b. rate of interest c. term of note Powered by Cognero

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Chapter 08: Receivables d. face amount 106. On October 1, Black Company receives a 9% interest-bearing note from Reese Company to settle a $20,000 account receivable. The note is due in 6 months. On December 31, Black should record interest revenue of a. $0 b. $450 c. $900 d. $1,800 107. If the maker of a promissory note fails to pay the note on the due date, the note is said to be a. displaced b. disallowed c. dishonored d. discounted 108. The entry to journalize a note received from a customer to replace an account is a. debit Notes Receivable and credit Accounts Receivable b. debit Accounts Receivable and credit Notes Receivable c. debit Cash and credit Notes Receivable d. debit Notes Receivable and credit Notes Payable 109. A $6,000, 60-day, 12% note recorded on November 21 is not paid by the maker at maturity. The journal entry to recognize this event is a. debit Cash for $6,120; credit Notes Receivable for $6,120 b. debit Notes Receivable for $6,120; credit Accounts Receivable for $6,000; credit Interest Receivable for $120 c. debit Notes Receivable for $6,060; credit Accounts Receivable for $6,060 d. debit Accounts Receivable for $6,120; credit Notes Receivable for $6,000; credit Interest Revenue for $120 110. When referring to a note receivable or promissory note a. the maker is the party to whom the money is due b. the note is not considered a formal credit instrument c. the note cannot be factored to another party d. the note may be used to settle an account receivable 111. When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note b. debit Notes Receivable for the face value of the note c. credit Notes Receivable for the maturity value of the note d. credit Notes Receivable for the face value of the note 112. Paper Company receives a $6,000, 3-month, 6% promissory note from Dame Company in settlement of an open account receivable. What entry will Paper Company make upon receiving the note? a. Notes Receivable—Dame Company 6,000 Accounts Receivable—Dame Company 6,000 b. Notes Receivable—Dame Company 6,090 Powered by Cognero

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Chapter 08: Receivables Accounts Receivable—Dame Company c. Notes Receivable—Dame Company Accounts Receivable—Dame Company Interest Revenue d. Notes Receivable—Dame Company Interest Revenue Accounts Receivable—Dame Company Interest Receivable

6,090 6,090 6,000 90 6,000 90 6,000 90

113. The maturity value of a $40,000, 9%, 40-day note receivable dated July 3 is a. $40,000 b. $40,400 c. $43,600 d. $44,000 114. Harper Company lends Hewell Company $40,000 on March 1, accepting a 4-month, 6% interest note. Harper Company prepares financial statements on March 31. What related adjusting entry should be made before the financial statements can be prepared? a. Cash 200 Interest Revenue 200 b. Interest Receivable 800 Interest Revenue 800 c. Interest Receivable 200 Interest Revenue 200 d. Note Receivable 40,000 Cash 40,000 115. On August 1, Kim Company accepted a $20,000, 90-day, 6% note receivable as payment for services provided to Hsu Company. On October 30, the entry to journalize the collection of the note should include a a. credit to Notes Receivable for $20,300 b. debit to Interest Receivable for $300 c. credit to Interest Revenue for $300 d. debit to Notes Receivable for $20,000 116. Current assets are usually listed in order a. of the due date b. of the size c. alphabetically d. of liquidity 117. The accounts receivable turnover measures a. how frequently during the year the accounts receivable are converted to cash b. the number of days of accounts receivable outstanding c. the fair market value of accounts receivable d. the efficiency of the accounts payable function Powered by Cognero

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Chapter 08: Receivables 118. Days' sales in receivables a. is an estimate of the length of time the receivables have been outstanding b. measures the number of times the receivables turn over each year c. is computed as credit sales divided by average receivables d. is not meaningful and therefore is not used 119. Given the following information, compute the accounts receivable turnover: Sales $135,000 Accounts receivable, beginning of year 18,000 Accounts receivable, end of year 22,000 a. 6.75 b. 7.50 c. 6.13 d. 6.82 120. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts (unadjusted) has a credit balance of $5,500; and credit sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables of $25,000. Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance for Doubtful Accounts, respectively. a. $19,500 and $25,000 b. $30,500 and $525,000 c. $19,500 and $525,000 d. $30,500 and $25,000 121. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts (unadjusted) has a credit balance of $5,500; and credit sales for the year total $2,500,000. An analysis of receivables estimates uncollectible receivables of $25,000. Determine the net realizable value of accounts receivable after adjustment. (Hint: Determine the amount of the adjusting entry for bad debt expense and the adjusted balance of Allowance for Doubtful Accounts.) a. $550,000 b. $544,500 c. $525,000 d. $575,000 122. The direct write-off method a. may be used only by businesses with five or fewer accounts receivable b. is used by businesses whose receivables are a small part of their current assets c. may not be used by companies that accept MasterCard or VISA d. does not allow for reinstatement if the amount owed is received after being written off 123. When an account receivable is written off under the direct write-off method, the accounting equation is kept in Powered by Cognero

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Chapter 08: Receivables balance because a. assets and equity both decrease by the same amount b. assets both increase and decrease by the same amount c. assets and equity both increase by the same amount d. equity both increases and decreases by the same amount 124. Which of the following phrases best describes accounts receivable? a. created from selling merchandise or services on account b. a list of customer accounts sorted by age classes c. a contra asset that represents the amount of estimated uncollectible receivables d. all money claims against other entities 125. Which of the following phrases best describes an aging schedule? a. a list of all sales transactions in chronological order b. a list of customer accounts sorted by age classes c. measures how frequently during the year accounts receivable are being turned into cash d. shows the net realizable value of accounts receivable 126. The difference between accounts receivable and allowance for doubtful accounts is a. the net realizable value of accounts receivable b. the bad debt expense c. the accounts receivable turnover d. none of these choices 127. Under which of the following methods of accounting for uncollectible receivables are estimated bad debts added to the existing allowance balance? a. direct write-off method b. aging of receivables method c. percent of sales method d. allowance method 128. Which method of estimating uncollectible receivables is based on the theory that older accounts are less likely to be collected? a. direct write-off method b. aging of receivables method c. percent of sales method d. allowance method 129. Which method of estimating uncollectible receivables focuses on the balance sheet? a. direct write-off method b. aging of receivables method c. percent of sales method d. allowance method 130. Which method of accounting for uncollectible receivables offers two methods of estimating uncollectible accounts? Powered by Cognero

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Chapter 08: Receivables a. direct write-off method b. aging of receivables method c. percent of sales method d. allowance method 131. Under which method of accounting for uncollectible receivables is there no allowance account? a. direct write-off method b. aging of receivables method c. percent of sales method d. allowance method 132. Which method of estimating uncollectible receivables focuses on the income statement? a. direct write-off method b. aging of receivables method c. percent of sales method d. allowance method 133. The amount due that must be paid at the due date of a note receivable is the a. face value b. interest c. maturity value d. none of these choices 134. The amount charged for using the money of another party is the a. face value b. interest c. maturity value d. term 135. The stated rate charged for using the money of another party is the a. face value b. interest c. maturity value d. inflation rate 136. The dollar amount stated on a promissory note is the a. face amount b. interest c. maturity value d. term 137. The party promising to pay a promissory note is the a. payee b. banker Powered by Cognero

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Chapter 08: Receivables c. consigner d. maker 138. The time between the date a note is issued and the due date of the note is the a. discount period b. term c. days’ sales in receivables d. note turnover

139. Other than Accounts Receivable and Notes Receivable, name other receivables that might be included in the general ledger. 140. Discuss the similarities and differences between accounts receivable, notes receivable, and other receivables. 141. List at least three indicators that a receivable may be uncollectible. 142. Discuss the two methods for recording bad debt expense. What type of company uses each method? 143. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables. Apr. 1. Sold merchandise on account to Jim Dobbs, $7,200. The cost of goods sold is $5,400. June 10. Received payment for one-third of the receivable from Jim Dobbs and wrote off the remainder. Oct. 11. Reinstated the account of Jim Dobbs and received cash in full payment. 144. Roe's Renovations utilizes the direct write-off method of accounting for uncollectible receivables. On September 15, the company is notified by the attorneys for Jacob Marley that Jacob Marley is bankrupt and no cash is expected in the liquidation. Journalize the entry to write off Jacob Marley’s $675 account receivable. 145. Journalize the following transactions using the direct write-off method of accounting for uncollectible receivables: Feb. 20. Received $1,000 from Andrew Warren and wrote off the remaining $4,000 owed as uncollectible. May 10. Reinstated the account of Andrew Warren and received $4,000 cash in full payment. 146. Each of the following journal entries writing off an uncollectible account would be used in one of the two methods of accounting for uncollectible receivables. Identify the method used by each entry. (a) Bad Debt Expense Accounts Receivable—Billings (b) Allowance for Doubtful Accounts Accounts Receivable—Grover

900 900 900 900

147. Determine the amount to be added to Allowance for Doubtful Accounts in each of the following cases and indicate the ending balance in each case. (a)

Credit balance of $300 in Allowance for Doubtful Accounts just prior to adjustment. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $8,500.

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Chapter 08: Receivables (b)

Credit balance of $500 in Allowance for Doubtful Accounts just prior to adjustment. Bad debt expense is estimated at 2% of credit sales, which totaled $1,000,000 for the year.

148. Journalize the following transactions using the allowance method of accounting for uncollectible receivables. Apr. 1. Sold merchandise on account to Jim Dobbs, $7,200. The cost of the merchandise sold is $5,400. June 10. Received payment for one-third of the receivable from Jim Dobbs and wrote off the remainder as uncollectible. Oct. 11. Reinstated the account of Jim Dobbs and received cash in full payment. 149. At the end of the current year, Accounts Receivable has a balance of $700,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and credit sales for the year total $3,500,000. Bad debt expense is estimated at 1/2 of 1% of credit sales. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 150. At the end of the current year, Accounts Receivable has a balance of $750,000; Allowance for Doubtful Accounts has a debit balance of $6,200; and credit sales for the year total $3,500,000. Bad debt expense is estimated at 1/2 of 1% of credit sales. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 151. At the end of the current year, Accounts Receivable has a balance of $90,000; Allowance for Doubtful Accounts has a credit balance of $850; and credit sales for the year total $300,000. Bad debt expense is estimated at 2.5% of credit sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 152. At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and credit sales for the year total $2,500,000. An analysis of the receivables indicates that uncollectible receivables are estimated to be $25,000. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 153. At the end of the current year, Accounts Receivable has a balance of $675,000; Allowance for Doubtful Accounts has a debit balance of $5,400; and credit sales for the year total $3,000,000. An analysis of the receivables indicates that uncollectible receivables are estimated to be $45,000. Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. 154. Discount Mart utilizes the allowance method of accounting for uncollectible receivables. On December 12, the company receives a $550 check in settlement of Chad Thomas’s $1,100 outstanding accounts receivable. Due to Thomas’s failing health, he is closing his company and is expecting to make no further payments to Discount Mart. Journalize this declaration. 155. On June 30 (the end of the period), Brown Company has a credit balance of $2,275 in Allowance for Doubtful Powered by Cognero

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Chapter 08: Receivables Accounts. An evaluation of accounts receivable indicates that the proper balance should be $30,025. Journalize the appropriate adjusting entry. 156. A partially completed aging of receivables schedule for Torme Designs follows:

Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total

Balance $850,000 47,500 21,750 11,250 5,060 2,500 1,140 $939,200

Estimate of Uncollectible Accounts Percentage Amount 3.50% 5.00% 10.00% 20.00% 30.00% 50.00% 95.00%

(a) Determine the amount estimated to be uncollectible by completing the aging of receivables schedule. Round computations to the nearest dollar. (b) If Allowance for Doubtful Accounts has a credit balance of $1,135, journalize the adjusting entry for the bad debt expense for the year.

157. For each of the following scenarios, indicate the amount of the adjusting journal entry for bad debt expense, the balance in Allowance for Doubtful Accounts after adjustment at December 31, and the net realizable value of accounts receivable at December 31. (a) Based on an analysis of Simmons Company’s $380,000 balance in Accounts Receivable at December 31, it was estimated that $15,500 will be uncollectible. There is a credit balance of $1,200 in Allowance for Doubtful Accounts before adjustment. (b) Blake Company had credit sales of $900,000 at year-end and has an Accounts Receivable balance of $425,000 at December 31 and an Allowance for Doubtful Accounts credit balance of $11,000 before adjustment. Blake estimates bad debt expense as 3/4 of 1% of credit sales. (c) Hidgon Inc. has a balance of $812,000 in Accounts Receivable at December 31. An analysis of those receivables shows $24,000 will probably not be collected. Before adjusting entries are prepared, Allowance for Doubtful Accounts has a debit balance of $750. 158. A partially completed aging of receivables schedule for Lindy Designs follows:

Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Powered by Cognero

Estimate of Uncollectible Accounts Balance Percentage Amount $550,000 2.50% 96,500 4.00% 43,750 9.50% 22,250 16.00% 5,600 31.00% 3,100 60.00% 1,250 95.00% Page 22

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Chapter 08: Receivables $722,450

Total

(a) Determine the amount estimated to be uncollectible by completing the aging of receivables schedule. Round computations to the nearest dollar. (b) If Allowance for Doubtful Accounts has a credit balance of $9,700, journalize the adjusting entry for the bad debt expense for the year. (c) If Allowance for Doubtful Accounts has a debit balance of $9,700, journalize the adjusting entry for the bad debt expense for the year. 159. Discuss the (a) focus and (b) financial statement emphasis of the percent of sales and analysis of receivables methods of estimating bad debts. 160. Morry Company wrote off the following accounts receivable as uncollectible for the first year of its operations ending December 31: Customer J. Jackson L. Stanton C. Barton S. Fenton Total

Amount $10,000 9,500 13,100 7,400 $40,000

(a)

Journalize the write-offs for the current year under the direct write-off method.

(b)

Journalize the write-offs for the current year under the allowance method. Also, journalize the adjusting entry for uncollectible receivables, assuming the company made $2,400,000 of credit sales during the year and estimates uncollectible receivables to be 1.5% of credit sales.

(c)

How much higher or lower would Morry Company’s net income have been under the direct write-off method than under the allowance method?

161. Fellows Corporation has determined that the $2,700 accounts receivable due from Andrew Stevens is uncollectible. Compare the journal entry that is required under the direct write-off method to the journal entry that is required using the allowance method. 162. For a business that uses the allowance method of accounting for uncollectible receivables: (a) Journalize the entries for the following transactions: (1)

(2) (3) (4)

On December 31, the accounts receivable account has a balance of $800,000, and the contra asset account before adjustment has a debit balance of $600. Analysis of the receivables indicates uncollectible accounts of $18,000. In March of the next year, the $350 owed by Fronk Co. on account is written off as uncollectible. In November of the next year, $200 of the Fronk Co. account is reinstated and payment of that amount is received. In December of the next year, $400 is received on the $600 owed by Dodger Co. and the remainder is written off as uncollectible.

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Chapter 08: Receivables (b) Redo the entries for transactions (2), (3), and (4) assuming the company uses the direct write-off method.

163. Sunshine Service Center received a $40,000, 120-day, 6% note, dated April 12, from a customer on account. (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entry for the receipt of the payment of the note at maturity.

Indicate the answer choice that best completes the statement or answers the question. 164. The party promising to pay a promissory note is called the a. payor b. maker c. promissor d. payee 165. The date a promissory note is to be paid is called the a. issuance date b. discount date c. maturity date d. demand date

166. Determine the due date and amount of interest due at maturity on the following notes:

(a) (b)

Origination Date Mar. 15 May 1

Face Amount $8,000 $12,000

Term of Note 60 days 90 days

Interest Rate 9% 8%

Maturity Date _______ _______

Interest Amount _______ _______

167. Blackwell Industries received a $180,000, 120-day, 9% note for $180,000, dated August 10, from a customer on account. Required: (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entry for the receipt of the payment of the note at maturity. 168. Determine the due date and the amount of interest due at maturity on the following notes: (a) (b) (c) (d) (e)

Date of Note October 1 August 30 May 30 March 6 May 23

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Face Amount $21,000 9,000 12,000 15,000 9,000

Interest Rate 8% 10% 12% 9% 10%

Term of Note 60 days 120 days 90 days 60 days 60 days Page 24

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Chapter 08: Receivables 169. Journalize the following transactions for Lucite Company. Nov. 14. Received a $4,800, 90-day, 9% note from Alan Albertson in payment of his account. Dec. 31. Accrued interest on the Albertson note. Feb. 12. Received the amount due from Albertson on his note. 170. For each of the following notes receivable held by Winter Company, determine the interest revenue to be reported on the income statements. Round answers to nearest whole dollar.

Date

Face

Aug. 8, Year 1 Oct. 7, Year 1 Jan. 6, Year 2 Nov. 12,Year 1

$15,000 $22,000 $30,000 $28,000

Rate

Time

Year 1 Interest Revenue

Year 2 Interest Revenue

7% 180 days 8% 60 days 8% 90 days 9% 60 days

171. Valley Co. received a $200,000, 90-day, 7% note, dated February 3, from Mr. Potts in payment of his account receivable. (a) Determine the due date of the note. (b) Determine the interest. (c) Determine the maturity value of the note. (d) Journalize the entry for the receipt of the note from Potts on February 3. (e) Journalize the entry for the receipt of payment of the note at maturity by Valley Co. 172. Lone Star Company received an $80,000, 6%, 90-day note, dated March 12, from a customer in payment of the customer’s account receivable. (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entry for the receipt of the payment of the note at maturity. 173. On April 5, Laker Company received an $18,000, 8%, 60-day note from Watson Co. in payment of Watson’s account receivable. (a) Determine the due date of the note. (b) Determine the maturity value of the note. (c) Journalize the entries for the following: (1) Receipt of the note by the payee (2) Receipt by the payee of the amount due on the note at maturity. Round answers to the nearest dollar. 174. Journalize the following transactions: Mar. 1. May 30.

Received a $24,000, 90-day, 10% note dated March 1 from Batson Co. on account. The note of March 1 was dishonored.

175. Journalize the following transactions of Upton Drugs: July 8.

Received a $180,000, 90-day, 8% note dated July 8 from Miracle Chemical on account.

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Chapter 08: Receivables Oct. 6.

The note is dishonored by Miracle Chemical.

Nov. 5.

Received the amount due on the dishonored note plus interest for 30 days at 10% on the total amount charged to Miracle Chemical on October 6.

176. Journalize the following transactions of Scott Company: Nov. 4. Received a $6,500, 90-day, 6% note from Tim's Co. on account. Dec. 31. Accrued interest on the Tim's Co. note. Feb. 2. Received the amount due from Tim's Co. on the note. 177. For each of the following notes receivable held by Christensen Company determine the interest revenue to be reported on the income statements for the year ended December 31. Round answers to nearest whole dollar. Date Aug. 8 Oct. 7 Jan. 6 Nov. 12

Face Amount $45,000 62,000 28,000 43,000

Rate 7% 5% 4% 6%

Term

Interest Revenue

45 days 60 days 120 days 49 days

178. Journalize the following transactions of Simmons Company: Mar. 1. Received a $60,000, 60-day, 6% note dated March 1 from Bynum Company on account. 18. Received a $25,000, 60-day, 9% note dated March 18 from Solo Co. on account. Apr. 30. The note dated March 1 from Bynum Company is dishonored. May 17. The note dated March 18 from Solo Co. is dishonored. July 29. Received the amount due on the dishonored note dated March 1 plus interest for 90 days at 8% on the total amount charged to Bynum Company on April 30. Aug. 23. Wrote off the amount charged to Solo Co. on May 17. Simmons uses the allowance method of accounting for uncollectible receivables. 179. On the basis of the following data related to current assets for Simons Co., prepare a partial balance sheet through total current assets as of December 31. Cash Accounts receivable Allowance for doubtful accounts Interest receivable Supplies Inventory Other current assets

$ 56,000 325,000 25,000 3,000 4,000 45,000 10,000

180. On the basis of the following data related to current assets for Webb Co., prepare a partial balance sheet through total current assets as of December 31. Cash Powered by Cognero

$ 96,000 Page 26

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Chapter 08: Receivables Notes receivable Accounts receivable Allowance for doubtful accounts Interest receivable

50,000 275,000 40,000 1,000

181. The following current assets are for Barnes Co. as of December 31: Accounts Receivable Allowance for Doubtful Accounts Cash Interest Receivable Inventory Notes Receivable

$ 38,000 5,000 45,000 5,500 88,000 100,000

Prepare the “Current assets” section of the balance sheet. 182. Data for Smith Corporation are as follows:

Sales Accounts receivable: Beginning of year End of year

Year 2 $1,200,000

Year 1 $1,050,000

100,000 70,000

90,000 100,000

(a) Compute the accounts receivable turnover for Year 2. Round to one decimal place. (b) Compute the days' sales in receivables for Year 2. Assume a 365-day year and round to one decimal place. (c) Assuming the industry average for the accounts receivable turnover is 20.0, and for the days' sales in receivables is 25.0, comment on this situation. 183. For fiscal Years 1 and 2, Grange Co. reported the following:

Sales Accounts receivable

Year Ended December 31, Year 2 Year 1 $34,124,961 $44,123,486 719,365 749,321

(a) Compute the accounts receivable turnover for Year 2. Round to one decimal place. (b) Compute the days’ sales in receivables for Year 2. Round to one decimal place. 184. Financial statement data for the years ended December 31 for Parker Corporation are as follows: Sales Accounts receivable: Beginning of year End of year

Current Year $2,595,600

Prior Year $2,409,500

390,000 434,000

400,000 390,000

(a) Determine the accounts receivable turnover for each year. Round to one decimal place. (b) Determine the days’ sales in receivables for each year. Round to whole days. (c) Do the changes in accounts receivable turnover and days’ sales in receivables from the first year to the second year indicate a favorable or unfavorable change? Powered by Cognero

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Chapter 08: Receivables 185. Theta Company determines that a $6,300 account receivable due from CorpCo is uncollectible and writes off the account using the direct write-off method on June 16. Journalize the entry to write off the account. 186. Theta Company determines that a $6,300 account receivable due from CorpCo is uncollectible and writes off the account using the direct write-off method on June 16. On August 21, CorpCo pays $6,300 to Theta Company. Journalize the entry for the reinstatement of the account receivable and receipt of cash on August 21.

Indicate the answer choice that best completes the statement or answers the question. 187. The following information was taken from the financial records of Sodigaz, Inc.: Year 2

Year 1

Sales $285,000 $278,500 Accounts receivable: Beginning of year 29,600 18,900 End of year

41,000

29,600

The days’ sales in receivables for Year 1 is a. 45.2 b. 31.8 c. 24.8 d. 38.8 188. The following information was taken from the financial records of Sodigaz, Inc.: Year 2 Year 1 Sales $285,000 $278,500 Accounts receivable: Beginning of year 29,600 18,900 End of year

41,000

29,600

The days’ sales in receivables for Year 2 is a. 45.2 b. 31.8 c. 24.8 d. 38.8 189. The following information was taken from the financial records of Sodigaz, Inc.: Year 2 Year 1 Sales $285,000 $278,500 Accounts receivable: Beginning of year 29,600 18,900 End of year Powered by Cognero

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Chapter 08: Receivables The accounts receivable turnover for each year is a. Year 2: 9.4; Year 1: 7.0 b. Year 2: 14.7; Year 1: 9.6 c. Year 2: 8.1; Year 1: 11.5 d. Year 2: 11.5; Year 1: 8.1

190. The following information was taken from the books of Olmeck, Inc.: Year 2 Year 1 Sales $992,000 $956,000 Accounts receivable Beginning of year 136,400 120,500 End of year 120,500 110,000 (a) Determine the accounts receivable turnover for Year 1 and Year 2. Round to one decimal place. (b) Determine the days’ sales in receivables for Year 1 and Year 2. Round to one decimal place (c) The industry average for the accounts receivable turnover is 8.0. How does Olmeck, Inc. compare?

Indicate the answer choice that best completes the statement or answers the question. 191. Under the direct write-off method of accounting for uncollectible accounts, the effect on the accounting equation of writing off a customer’s account is a(n) a. increase in assets and an increase in liabilities b. increase in liabilities and a decrease in owner's equity c. decrease in assets and a decrease in liabilities d. decrease in assets and a decrease in owner's equity 192. Under the direct write-off method of accounting for uncollectible accounts, if a written off account is later collected, the overall effect of the two required entries on the accounting equation is a(n) a. increase in assets and an increase in liabilities b. increase in liabilities and a decrease in owner's equity c. increase in assets and an increase in owner's equity d. decrease in assets and a decrease in owner's equity 193. Under the allowance method of accounting for uncollectible accounts, the adjusting entry to estimate the amount that will become uncollectible affects the accounting equation by a. increasing assets and increasing liabilities b. increasing liabilities and decreasing owner's equity c. decreasing assets and decreasing owner's equity d. decreasing assets and increasing owner's equity 194. Under the allowance method of accounting for uncollectible accounts, the entry to write off a customer’s account Powered by Cognero

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Chapter 08: Receivables affects the accounting equation by a. increasing an asset and decreasing an asset b. increasing a liability and decreasing a liability c. decreasing an asset and decreasing owner's equity d. decreasing a liability and increasing owner's equity 195. Under the allowance method of accounting for uncollectible accounts, the entry to reinstate a customer’s account that had been written off affects the accounting equation by a. increasing an asset and decreasing an asset b. increasing a liability and decreasing a liability c. decreasing an asset and decreasing owner's equity d. decreasing a liability and increasing owner's equity 196. When a company accepts a note in settlement of a past due account, the effect on the accounting equation is a(n) a. increase in a liability and a decrease in an asset b. increase in an asset and a decrease in an asset c. decrease in an asset and a decrease in owner's equity d. decrease in a liability and an increase in owner's equity

197. What is the effect on the accounting equation when a company receives payment on a note receivable, including interest? 198. If a note receivable is dishonored, what is the effect on the accounting equation? 199. Suppose that at the end of the year there is an outstanding note receivable. The adjusting entry to recognize the interest to be paid has what effect on the accounting equation? 200. Under the direct write-off method of accounting for uncollectible receivables, what is the effect on the accounting equation of writing off a customer’s account? 201. Under the allowance method of accounting for uncollectible receivables, how does the adjusting entry to estimate the amount that will become uncollectible affect the accounting equation?

Indicate the answer choice that best completes the statement or answers the question. 202. When a company accepts a note in settlement of a past due account, what is the effect on the accounting equation? a. an increase in a liability and a decrease in an asset b. an increase in an asset and a decrease in an asset c. a decrease in an asset and a decrease in owner's equity d. a decrease in a liability and an increase in owner's equity

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Chapter 08: Receivables Answer Key 1. True 2. False 3. True 4. True 5. True 6. True 7. True 8. True 9. True 10. True 11. True 12. True 13. True 14. False 15. True 16. True 17. False 18. False 19. True 20. False 21. False 22. False 23. False 24. True 25. False Powered by Cognero

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Chapter 08: Receivables 26. False 27. False 28. False 29. False 30. False 31. False 32. False 33. True 34. False 35. True 36. False 37. True 38. True 39. False 40. False 41. False 42. True 43. False 44. True 45. d 46. b 47. d 48. b 49. d 50. a 51. d Powered by Cognero

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Chapter 08: Receivables 52. c 53. b 54. d 55. d 56. a 57. a 58. b 59. a 60. b 61. d 62. d 63. b 64. b 65. b 66. c 67. a 68. d 69. d 70. a 71. d 72. a 73. c 74. c 75. a 76. b Powered by Cognero

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Chapter 08: Receivables 77. c 78. d 79. a 80. d 81. c 82. b 83. c 84. a 85. d 86. c 87. c 88. b 89. d 90. d 91. a 92. c 93. b 94. d 95. c 96. d 97. c 98. c 99. b 100. d 101. c 102. b Powered by Cognero

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Chapter 08: Receivables 103. d 104. b 105. a 106. b 107. c 108. a 109. d 110. d 111. b 112. a 113. b 114. c 115. c 116. d 117. a 118. a 119. a 120. a 121. c 122. b 123. a 124. a 125. b 126. a 127. c Powered by Cognero

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Chapter 08: Receivables 128. b 129. b 130. d 131. a 132. c 133. c 134. b 135. b 136. a 137. d 138. b 139. Interest Receivable, Receivables from Officers or Employees, Taxes Receivable 140. Accounts receivable result from the sale of goods and services on credit. They are normally collected within a short period of time (30–60 days) and are classified as current assets on the balance sheet. Notes receivable can also result from the sale of goods, generally when the amount owed is due in more than 60 days. Notes can also be used to settle accounts receivable. Notes are formal written instruments of credit. When collection is expected to be in less than 1 year, they are classified as current assets on the balance sheet. Other receivables result from nontrade transactions (interest, taxes, amounts due from employees). They are generally reported separately on the balance sheet. If collection is expected in less than 1 year, they are classified as current assets. If not, they are classified as noncurrent assets and reported under the caption “Investments.” 141. Answers may vary and should include three of the following: 1. The receivable is past due. 2. The customer does not respond to the company’s attempts to collect. 3. The customer files for bankruptcy. 4. The customer closes its business. 5. The company cannot locate the customer. 142. The first method is the direct write-off method. Under this method, bad debt expense is recorded only when an account is deemed uncollectible. This method is most often used by small companies and those with few receivables. The second method is the allowance method. Under this method, bad debt expense is recorded by estimating bad debts at the end of the accounting period. Companies that have a large amount of receivables are required to use this method under generally accepted accounting principles (GAAP). 143. Apr.

1 Accounts Receivable—Jim Dobbs Sales

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7,200 7,200 Page 36

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Chapter 08: Receivables 1 Cost of Goods Sold Inventory

5,400 5,400

June 10 Cash Bad Debt Expense Accounts Receivable—Jim Dobbs

2,400 4,800

Oct. 11 Accounts Receivable—Jim Dobbs Bad Debt Expense

4,800

11 Cash Accounts Receivable—Jim Dobbs

144. Sept. 15 Bad Debt Expense Accounts Receivable—Jacob Marley 145. Feb.

May

7,200

4,800 4,800 4,800

675 675

20 Cash Bad Debt Expense Accounts Receivable—Andrew Warren

1,000 4,000

10 Accounts Receivable—Andrew Warren Bad Debt Expense

4,000

10 Cash Accounts Receivable—Andrew Warren

4,000

5,000

4,000

4,000

146. (a) Direct write-off method (b) Allowance method 147. (a) Amount added: $8,200 Ending balance: $8,500 (b) Amount added: $20,000 Ending balance: $20,500

148. Apr. 1 Accounts Receivable Sales

7,200

1 Cost of Goods Sold Inventory

5,400

June 10 Cash Allowance for Doubtful Accounts Accounts Receivable—Jim Dobbs Powered by Cognero

7,200

5,400 2,400 4,800 7,200 Page 37

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Chapter 08: Receivables Oct. 11 Accounts Receivable—Jim Dobbs Allowance for Doubtful Accounts

4,800

11 Cash Accounts Receivable—Jim Dobbs

4,800

149. (a)

4,800

4,800

$17,500 ($3,500,000 × 0.005)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($5,500 + $17,500) Bad Debt Expense

(c)

Net realizable value ($700,000 – $23,000)

150. (a)

$17,500 ($3,500,000 × 0.005)

(b)

Accounts Receivable Allowance for Doubtful Accounts ($17,500 – $6,200) Bad Debt Expense

(c)

Net realizable value ($750,000 – $11,300)

151. (a)

$7,500 ($300,000 × 0.025)

Adjusted Balance $700,000 23,000 17,500 $677,000

Adjusted Balances $750,000 11,300 17,500 $738,700

Adjusted Balance (b) Accounts Receivable Allowance for Doubtful Accounts ($850 + $7,500) Bad Debt Expense

$90,000 8,350 7,500

(c)

Net realizable value ($90,000 – $8,350)

$81,650

152. (a)

$19,500 ($25,000 – $5,500) Adjusted Balance

(b) Accounts Receivable Allowance for Doubtful Accounts ($5,500 + $19,500) Bad Debt Expense

$550,000 25,000 19,500

(c)

Net realizable value ($550,000 – $25,000)

$525,000

153. (a)

$50,400 ($45,000 + $5,400) Adjusted Balance

(b) Accounts Receivable Powered by Cognero

$675,000 Page 38

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Chapter 08: Receivables Allowance for Doubtful Accounts ($50,400 – $5,400) Bad Debt Expense (c) 154. Dec. 12

45,000 50,400

Net realizable value ($675,000 – $45,000)

$630,000

Cash Allowance for Doubtful Accounts Accounts Receivable, Chad Thomas

155. June 30 Bad Debt Expense Allowance for Doubtful Accounts

550 550 1,100 27,750* 27,750

*$30,025 – $2,275 156. (a) Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total

Estimate of Uncollectible Accounts Balance Percentage Amount $850,000 3.50% $29,750 47,500 5.00% 2,375 21,750 10.00% 2,175 11,250 20.00% 2,250 5,060 30.00% 1,518 2,500 50.00% 1,250 1,140

95.00%

$939,200

1,083 $40,401

(b) Dec. 31 Bad Debt Expense 39,266* Allowance for Doubtful Accounts 39,266 *$40,401 – $1,135 157. (a) Bad debt expense Allowance for doubtful Accounts at Dec. 31 Net realizable value of A/R at Dec. 31

$ 14,300 15,500 364,500

(b) Bad debt expense Allowance for doubtful Accounts at Dec. 31 Net realizable value of A/R at Dec. 31

$ 6,750 17,750 $407,250

(c) Bad debt expense Allowance for doubtful Accounts at Dec. 31 Net realizable value of A/R at Dec. 31

$ 24,750 24,000 $788,000

158. (a) Estimate of Powered by Cognero

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Chapter 08: Receivables

Age Interval Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Total (b) Dec. 31

Balance $550,000 96,500 43,750 22,250 5,600 3,100 1,250 $722,450

Uncollectible Accounts Percentage Amount 2.50% $13,750 4.00% 3,860 9.50% 4,156 16.00% 3,560 31.00% 1,736 60.00% 1,860 95.00% 1,188 $30,110

Bad Debt Expense 20,410* Allowance for Doubtful Accounts

20,410

*$30,110 – $9,700 (c) Dec. 31

Bad Debt Expense 39,810* Allowance for Doubtful Accounts

39,810

*$30,110 + $9,700 159. (a) Bad debt expense is the focus of the percent of sales method. It places more emphasis on matching revenues and expenses and thus emphasizes the income statement. (b) The allowance for doubtful accounts is the focus of the analysis of receivables method. It places more emphasis on the net realizable value of receivables and thus emphasizes the balance sheet. 160. (a) Bad Debt Expense Accounts Receivable—J. Jackson Accounts Receivable—L. Stanton Accounts Receivable—C. Barton Accounts Receivable—S. Fenton (b) Allowance for Doubtful Accounts Accounts Receivable—J. Jackson Accounts Receivable—L. Stanton Accounts Receivable—C. Barton Accounts Receivable—S. Fenton Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate ($2,400,000 × 1.5%).

40,000 10,000 9,500 13,100 7,400 40,000 10,000 9,500 13,100 7,400 36,000 36,000

(c) Net income would have been $4,000 lower under the direct write-off method, because bad debt expense is $4,000 higher under the direct write-off method ($36,000 expense under the allowance method vs. $40,000 expense under the direct writeoff method). Powered by Cognero

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Chapter 08: Receivables 161. Under the direct write-off method, Bad Debt Expense will be debited for $2,700. Under the allowance method, the debit will be to Allowance for Doubtful Accounts. Under both methods, Accounts Receivable—Andrew Stevens will be credited for $2,700. 162. (a) (1) Bad Debt Expense Allowance for Doubtful Accounts

18,600

(2) Allowance for Doubtful Accounts Accounts Receivable—Fronk Co.

350

(3) Accounts Receivable—Fronk Co. Allowance for Doubtful Accounts

200

Cash Accounts Receivable—Fronk Co.

200

(4) Cash Allowance for Doubtful Accounts Accounts Receivable—Dodger Co.

400 200

(2) Bad Debt Expense Accounts Receivable—Fronk Co.

350

(3) Accounts Receivable—Fronk Co. Bad Debt Expense

200

18,600

350

200

200

600

(b) 350

200

Cash Accounts Receivable—Fronk Co.

200

(4) Cash Bad Debt Expense Accounts Receivable—Dodger Co.

400 200

200

600

163. (a) August 10 determined as follows: April (30 − 12) May June July August Term of note

18 days 31 30 31 10 120 days

(b) $40,800 {$40,000 + [$40,000 × 6% × (120 ÷ 360)]} (c) Aug. 10

Cash Notes

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40,800 40,000 Page 41

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Chapter 08: Receivables Receivable Interest Revenue

800

164. b 165. c 166. (a) May 14 (16 + 30 + 14); $120 [$8,000 × 9% × (60 ÷ 360)] (b) July 30 (30 + 30 + 30); $240 [$12,000 × 8% × (90 ÷ 360)] 167. (a) The due date for the note is December 8, determined as follows: August days (31 – 10) 21 September 30 October 31 November 30 December 8 Term of days note 120 (b)

$185,400 {$180,000 + [$180,000 × 9% × (120 ÷ 360)]}

(c) Dec. 8

Cash Notes Receivable Interest Revenue

185,400 180,000 5,400

168. (a) (b) (c) (d) (e)

Due Date Interest Nov. 30 (30 + $280 30) Dec. 28 (1 + 30 + 300 31 + 30 + 28) Aug. 28 (1 + 30 360 + 31 + 28) May 5 (25 + 30 + 225 5) July 22 (8 + 30 + 150 22)

169. Nov. 14

Dec. 31

Feb. 12

[$21,000 × 8% × (60 ÷ 360)] [$9,000 × 10% × (120 ÷ 360)] [$12,000 × 12% × (90 ÷ 360)] [$15,000 × 9% × (60 ÷ 360)] [$9,000 × 10% × (60 ÷ 360)]

Notes Receivable—Alan Albertson 4,800.00 Accounts Receivable—Alan Albertson Interest Receivable Interest Revenue

56.40

Cash Interest Receivable

4,908.00

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4,800.00

56.40

56.40 Page 42

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Chapter 08: Receivables Interest Revenue Notes Receivable—Alan Albertson

51.60 4,800.00

170.

Date

Face

Aug. 8, Year 1 Oct. 7, Year 1 Jan. 6, Year 2 Nov. 12, Year 1

$15,000 $22,000 $30,000 $28,000

Rate 7% 8% 8% 9%

Year 1 Year 2 Interest Interest Time Revenue Revenue 180 days $423* $102** 60 days 293 0 90 days 0 600 60 days 343 77

*$15,000 × 7% × (145 ÷ 360) **[$15,000 × 7% × (35 ÷ 360)] 171. (a) May 4 February (28 – 3) March April May Term of note

25 days 31 30 4 90 days

(b) Interest = Face Amount × Rate × Time = $200,000 × 7% × (90 ÷ 360) = $3,500 (c) Maturity Value = Face Amount + Interest = $200,000 + $3,500 = $203,500 (d) Notes Receivable—Mr. Potts Accounts Receivable—Mr. Potts

200,000

(e) Cash Notes Receivable—Mr. Potts Interest Revenue

203,500

200,000 200,000 3,500

172. (a) June 10 March (31 – 19 days 12) April 30 May 31 June 10 Term of note 90 days (b) $81,200 {$80,000 + [$80,000 × 6% × (90 ÷ 360)]} (c) June 10 Cash Notes Receivable Interest Revenue Powered by Cognero

81,200 80,000 1,200 Page 43

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Chapter 08: Receivables 173. (a) June 4 (25 + 31 + 4) (b) $18,240 {$18,000 + [$18,000 × 8% × (60 ÷ 360)]} (c) (1) Notes Receivable—Watson Co. Accounts Receivable—Watson Co.

18,000

(2) Cash Notes Receivable—Watson Co. Interest Revenue

18,240

174. Mar. 1

May 30

175. July 8

Oct. 6

Nov. 5

18,000 18,000 240

Notes Receivable—Batson Co. Accounts Receivable—Batson Co.

24,000

Accounts Receivable—Batson Co. Notes Receivable—Batson Co. Interest Revenue

24,600

24,000

24,000 600

Notes Receivable—Miracle Chemical Accounts Receivable—Miracle Chemical

180,000

Accounts Receivable—Miracle Chemical Notes Receivable—Miracle Chemical Interest Revenue

183,600

Cash Accounts Receivable—Miracle Chemical Interest Revenue

185,130

180,000

180,000 3,600

183,600 1,530*

*$183,600 × 10% × (30 ÷ 360) 176. Date

Description Nov. 4 Notes Receivable—Tim's Co. Accounts Receivable—Tim's Co. Dec. 31 Interest Receivable Interest Revenue* Feb. 2 Cash Interest Receivable Interest Revenue** Notes Receivable—Tim's Co.

Post. Ref.

Debit Credit 6,500.00 6,500.00 61.75 61.75 6,597.50 61.75 35.75 6,500.00

*$6,500 × 6% × (57 ÷ 360) **$6,500 × 6% × (33 ÷ 360) Powered by Cognero

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Chapter 08: Receivables 177. Date Aug. 8 Oct. 7 Jan. 6 Nov. 12

Face Amount $45,000 62,000 28,000 43,000

Rate 7% 5% 4% 6%

Interest Term Revenue 45 days $394 60 days 517 120 days 373 49 days 351

178. Mar. 1 Notes Receivable—Bynum Co. Accounts Receivable—Bynum Co.

60,000 60,000

18 Notes Receivable—Solo Co. Accounts Receivable—Solo Co.

25,000

Apr. 30 Accounts Receivable—Bynum Co. Notes Receivable—Bynum Co. Interest Revenue *$60,000 × 6% × (60 ÷ 360)

60,600

May 17 Accounts Receivable—Solo Co. Notes Receivable—Solo Co. Interest Revenue *$25,000 × 9% × (60 ÷ 360)

25,375

July 29 Cash Accounts Receivable—Bynum Co. Interest Revenue *$60,600 × 8% × (90 ÷ 360)

61,812

Aug.23 Allowance for Doubtful Accounts Accounts Receivable—Solo Co.

25,375

25,000

60,000 600*

25,000 375*

60,600 1,212*

25,375

179. Simons Co. Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Allowance for doubtful accounts Accounts receivable, net Inventory Supplies Interest receivable Other current assets Total current assets

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$ 56,000 $325,000 (25,000) 300,000 45,000 4,000 3,000 10,000 $418,000

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Chapter 08: Receivables 180. Webb Co. Balance Sheet December 31 Assets Current assets: Cash Notes receivable Accounts receivable Allowance for doubtful accounts Accounts receivable, net Interest receivable Total current assets

$ 96,000 50,000 $275,000 (40,000) 235,000 1,000 $382,000

*Note: Order may vary, depending on assumed due dates/liquidity. 181. Barnes Co. Balance Sheet December 31 Assets Current assets: Cash Notes receivable* Accounts receivable Allowance for doubtful accounts Accounts receivable, net Interest receivable Inventory Total current assets

$ 45,000 100,000 $38,000 (5,000) 33,000 5,500 88,000 $271,500

*Note: Order may vary, depending on assumed due dates/liquidity. 182. (a) Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $1,200,000 ÷ [($100,000 + $70,000) ÷ 2] = $1,200,000 ÷ $85,000 = 14.1 (b) Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = [($70,000 + $100,000) ÷ 2] ÷ ($1,200,000 ÷ 365 days) = $85,000 ÷ $3,287.7 = 25.9 days (c) Smith is less efficient in collecting accounts receivable than most companies in its industry. 183. (a) Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $34,124,961 ÷ [($749,321 + $719,365) ÷ 2] = $34,124,961 ÷ $734,343 = 46.5 (b) Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = [($749,321 + $719,365) ÷ 2] ÷ Powered by Cognero

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Chapter 08: Receivables ($34,124,961 ÷ 365 days) = $734,343 ÷ $93,493 = 7.9 days 184. (a) Accounts receivable turnover: Current Year Average accounts receivable: ($390,000 + $434,000) ÷ 2 ($400,000 + $390,000) ÷ 2 Accounts receivable turnover: $2,595,600 ÷ $412,000 $2,409,500 ÷ $395,000

Prior Year

$412,000 $395,000 6.3 6.1

(b) Days’ sales in receivables: Current Year Average daily sales: $2,595,600 ÷ 365 days $2,409,500 ÷ 365 days

$7,111

Days’ sales in receivables: $412,000 ÷ $7,111 $395,000 ÷$6,601

58 days

Prior Year

$6,601

60 days

(c) The increase in the accounts receivable turnover from 6.1 to 6.3 times and the decrease in the days’ sales in receivables from 60 days to 58 days indicate a favorable change in the efficiency in collecting accounts receivable. 185. Journal Date Description June 16 Bad Debt Expense Accounts Receivable—CorpCo

Post Ref. Debit Credit 6,300 6,300

186. Journal Date Description Aug. 21 Accounts Receivable—CorpCo Bad Debt Expense 21 Cash Accounts Receivable—CorpCo

Post. Ref. Debit Credit 6,300 6,300 6,300 6,300

187. b 188. a 189. c 190. (a) Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable Year 1: $956,000 ÷ [($120,500 + $110,000) ÷ 2] = $956,000 ÷ $115,250 = 8.3 Powered by Cognero

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Chapter 08: Receivables Year 2: $992,000 ÷ [($136,400 + $120,500) ÷ 2] = $992,000 ÷ $128,450 = 7.7 (b) Days’ Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales Year 1: [($120,500 + $110,000) ÷ 2] ÷ ($956,000 ÷ 365 days) = $115,250 ÷ $2,619.2 = 44.0 days Year 2: [($136,400 + $120,500) ÷ 2] ÷ ($992,000 ÷ 365 days) = $128,450 ÷ $2,717.8 = 47.3 days (c) Olmeck is very close to the industry average in both years. In Year 1, Olmeck was slightly more efficient than the industry average in collecting receivables; in Year 2, Olmeck was slightly less efficient than the industry average. 191. d 192. c 193. c 194. a 195. a 196. b 197. Assets both increase and decrease (Cash increases, Notes Receivable decreases) and owner's equity increases by the amount of the interest revenue. 198. Assets both increase and decrease (Accounts Receivable increases, Notes Receivable decreases) and owner's equity increases by the amount of the interest revenue. 199. Assets and owner's equity both increase. 200. Assets and owner's equity both decrease. 201. Assets and owner's equity both decrease. 202. b

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Chapter 09: Long-Term Assets: Fixed and Intangible

Indicate whether the statement is true or false. 1. Long-lived assets that are intangible in nature, used in the operations of the business, and not held for sale in the ordinary course of business are called fixed assets. a. True b. False 2. The acquisition costs of property, plant, and equipment should include all normal, reasonable and necessary costs to get the asset in place and ready for use. a. True b. False 3. When land is purchased to construct a new building, the cost of removing any structures on the land should be charged to the building account. a. True b. False 4. Land acquired as a speculation is reported under “Investments” on the balance sheet. a. True b. False 5. Standby equipment held for use in the event of a breakdown of regular equipment is reported as property, plant, and equipment on the balance sheet. a. True b. False 6. The cost of repairing damage to a machine during installation is debited to a fixed asset account. a. True b. False 7. During construction of a building, the cost of interest on a construction loan should be charged to an expense account. a. True b. False 8. The cost of computer equipment does not include the consultant's fee to supervise installation of the equipment. a. True b. False 9. Capital expenditures are costs that improve a fixed asset or extend its useful life. a. True b. False 10. The cost of new equipment is called a revenue expenditure because it will help generate revenues in the future. a. True b. False Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 11. Expenditures that increase operating efficiency or capacity for the remaining useful life of a fixed asset are called capital expenditures. a. True b. False 12. The cost of replacing an engine in a truck is an example of ordinary maintenance. a. True b. False 13. An intangible asset is one that has a physical existence. a. True b. False 14. Under both finance and operating leases, the lessee records an asset and liability similar to having purchased the asset. a. True b. False 15. Long-lived assets held for sale are classified as fixed assets. a. True b. False 16. Functional depreciation factors include obsolescence and changes in customer needs that cause the asset to no longer provide the services for which it was intended. a. True b. False 17. The normal balance of the accumulated depreciation account is a debit. a. True b. False 18. As a company records depreciation expense for a period of time, cash is accumulated to replace fixed assets as they wear out. a. True b. False 19. All property, plant, and equipment assets are depreciated over time. a. True b. False 20. The book value of a fixed asset reported on the balance sheet represents its market value on that date. a. True b. False 21. The depreciable cost of a building is the same as its acquisition cost. a. True b. False Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 22. It is necessary for a company to use the same depreciation method for all of its depreciable assets. a. True b. False 23. It is not necessary for a company to use the same depreciation method for financial statement purposes as it does for income tax purposes. a. True b. False 24. An estimate of the amount for which an asset can be sold at the end of its useful life is called residual value. a. True b. False 25. The units-of-activity depreciation method provides a good match of expenses against revenue. a. True b. False 26. Once the useful life of a depreciable asset has been estimated and the amount to be depreciated each year has been determined, the amounts cannot be changed. a. True b. False 27. Residual value is not incorporated in the initial computations for double-declining-balance depreciation. a. True b. False 28. The double-declining-balance method is an accelerated depreciation method. a. True b. False 29. The double-declining-balance depreciation method computes depreciation each year by taking twice the straight-line rate times the book value of the asset at the beginning of each year. a. True b. False 30. The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line method. a. True b. False 31. The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-activity method during a period when the asset was used for 4,500 hours. a. True b. False Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 32. The amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000, with an estimated residual value of $5,000 and a useful life of 4 years, is $25,000 by the double-declining-balance method. a. True b. False 33. When depreciation estimates are revised, all years of the asset’s life are affected. a. True b. False 34. For income tax purposes, most companies use an accelerated deprecation method called double-declining-balance. a. True b. False 35. Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same. a. True b. False 36. Revising depreciation estimates affects the amounts of depreciation expense recorded in past periods. a. True b. False 37. Capital expenditures are costs that are charged to owner's equity accounts. a. True b. False 38. Minerals removed from the earth are classified as intangible assets. a. True b. False 39. The method used to compute the depletion of a natural resource is the straight-line method. a. True b. False 40. Intangible assets differ from property, plant, and equipment assets in that they lack physical substance. a. True b. False 41. The cost of a patent with a remaining legal life of 10 years and an estimated useful life of 7 years is amortized over 10 years. a. True b. False 42. The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in usefulness is called amortization. a. True Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible b. False 43. Costs associated with normal research and development activities should be treated as intangible assets. a. True b. False 44. Patents are exclusive rights to produce and sell goods with one or more unique features. a. True b. False 45. When a company establishes an outstanding reputation and has a competitive advantage because of it, the company should record goodwill on its financial statements. a. True b. False 46. The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value. a. True b. False 47. Though a piece of equipment is still being used, the equipment should be removed from the accounts if it has been fully depreciated. a. True b. False 48. When selling a piece of equipment for cash, a loss will result when the proceeds of the sale are less than the book value of the asset. a. True b. False 49. When a property, plant, and equipment asset is sold for cash, any gain or loss on the asset sold should be recorded. a. True b. False 50. Losses on the discarding of fixed assets are reported in the “Other revenue and expense” section of the income statement. a. True b. False 51. A gain can be realized when a fixed asset is discarded. a. True b. False 52. When old equipment is traded in for new equipment, the difference between the list price and the trade-in allowance is called boot. a. True Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible b. False 53. When a plant asset is traded for another similar asset, losses on the asset traded are not recognized. a. True b. False 54. When exchanging equipment, if the trade-in allowance is greater than the book value a loss results. a. True b. False 55. If a fixed asset with a book value of $10,000 is traded for a similar fixed asset, a trade-in allowance of $15,000 is granted by the seller, and the transaction is deemed to have commercial substance, the buyer would report a gain on exchange of fixed assets of $5,000. a. True b. False 56. The entry to journalize the disposal of fixed assets will include a credit to Accumulated Depreciation. a. True b. False 57. Both the initial cost of an asset and the associated accumulated depreciation will be taken off the books with the disposal of the asset. a. True b. False 58. When a seller allows a buyer an amount for old equipment that is traded in for new equipment of similar use, this amount is known as boot. a. True b. False 59. An exchange is said to have commercial substance if future cash flows remain the same as a result of the exchange. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 60. A characteristic of a fixed asset is that it is a. intangible b. used in the operations of a business c. held for sale in the ordinary course of the business d. a short-term investment 61. Land acquired so it can be resold in the future is listed on the balance sheet as a(n) a. fixed asset b. current asset c. investment Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible d. intangible asset 62. Which of the following should be included in the acquisition cost of a piece of equipment? a. transportation costs b. installation costs c. testing costs prior to placing the equipment into production d. all of these choices 63. Which of the following is included in the cost of constructing a building? a. insurance costs during construction b. cost of paving the parking lot c. cost of repairing vandalism damage during construction d. cost of removing the demolished building existing on the land when it was purchased 64. Which of the following is included in the cost of land? a. cost of paving a parking lot b. broker’s commission c. outdoor parking lot lighting attached to the land d. fences on the land 65. Accumulated Depreciation a. is used to show the amount of cost expiration of intangibles b. is the same as Depreciation Expense c. is a contra asset account d. is used to show the amount of cost expiration of natural resources 66. A building with an appraisal value of $154,000 is made available at an offer price of $172,000. The purchaser acquires the property for $40,000 in cash, a 90-day note payable for $45,000, and a mortgage amounting to $75,000. The cost of the building to be reported on the balance sheet is a. $154,000 b. $172,000 c. $160,000 d. $120,000 67. The acquisition of a used machine with a purchase price of $77,000, requiring an overhaul costing $8,000, installation costs of $5,000, and special acquisition fees of $3,000, would be journalized with a debit to the asset account for a. $93,000 b. $90,000 c. $82,000 d. $85,000 68. The acquisition of a new machine with a purchase price of $109,000, transportation costs of $12,000, installation costs of $5,000, and special acquisition fees of $6,000 would be journalized with a debit to the asset account for a. $114,000 b. $126,000 Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible c. $121,000 d. $132,000 69. Expenditures that add to the utility of fixed assets for more than one accounting period are a. committed expenditures b. revenue expenditures c. utility expenditures d. capital expenditures 70. A capital expenditure results in a debit to a(n) a. expense account b. capital account c. liability account d. asset account 71. Which of the following is an example of a capital expenditure? a. cleaning the carpet in the front room b. tune-up for a company truck c. replacing an engine in a company car d. replacing all burned-out light bulbs in a factory 72. In a lease contract, the party who legally owns the asset is the a. lessee b. lessor c. operator d. banker 73. The entry for journalizing payment for the short-term lease of a fixed asset would a. be a memo entry only b. debit the fixed asset and credit Cash c. debit Rent Expense and credit Cash d. debit a liability and credit Cash 74. Which of the following are criteria for determining whether to record an asset as a fixed asset? a. must be an investment and long lived b. must be long lived and used by the company in its normal operations c. must be short lived and tangible d. must be tangible and an investment 75. Factors contributing to a decline in the usefulness of a fixed asset may be divided into which of the following two categories? a. salvage and functional b. physical and functional c. residual and salvage Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible d. functional and residual 76. A fixed asset's estimated value at the time it is to be retired from service is called a. book value b. residual value c. market value d. carrying value 77. All of the following are needed for the computation of straight-line depreciation except a. cost b. residual value c. estimated life d. units produced 78. The method of determining depreciation that yields successive reductions in the periodic depreciation charge over the estimated life of the asset is the a. units-of-activity method b. double-declining-balance method c. straight-line method d. time-valuation method 79. When the amount of use of a fixed asset varies from year to year, the method of determining depreciation expense that best matches allocation of cost with revenue is a. the double-declining-balance method b. the straight-line method c. the units-of-activity method d. MACRS 80. A machine with a cost of $120,000 has an estimated residual value of $15,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $5,000 b. $35,000 c. $21,000 d. $45,000 81. Equipment with a cost of $220,000 has an estimated residual value of $30,000 and an estimated life of 10 years or 19,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,100 hours? a. $19,000 b. $21,000 c. $22,000 d. $30,000 82. A machine with a cost of $75,000 has an estimated residual value of $5,000 and an estimated life of 4 years or 18,000 Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible hours. What is the amount of depreciation for the second full year, using the double-declining-balance method? a. $17,500 b. $37,500 c. $18,750 d. $16,667 83. Equipment with a cost of $160,000, an estimated residual value of $40,000, and an estimated life of 15 years was depreciated by the straight-line method for 4 years. Due to obsolescence, it was determined that the remaining useful life should be shortened by 3 years and the residual value changed to zero. The depreciation expense for the current and future years is a. $11,636 b. $16,000 c. $11,000 d. $8,000 84. The depreciation method that does not use residual value in computing the first year's depreciation expense is the a. straight-line method b. units-of-activity method c. double-declining-balance method d. sum-of-the-years’-digits method 85. If a fixed asset, such as a computer, were purchased on January 1 for $3,750 with an estimated life of 3 years and a salvage or residual value of $150, the journal entry for monthly expense under straight-line depreciation is a. Depreciation Expense 100 Accumulated Depreciation 100 b. Depreciation Expense 1,200 Accumulated Depreciation 1,200 c. Accumulated Depreciation 1,200 Depreciation Expense 1,200 d. Accumulated Depreciation 100 Depreciation Expense 100 86. The proper journal entry for the purchase of a computer costing $975 on account to be utilized within the business would be a. Office Supplies 975 Accounts Payable 975 b. Office Equipment 975 Accounts Payable 975 c. Office Supplies 975 Accounts Receivable 975 d. Office Equipment 975 Accounts Receivable 975 87. Residual value is also known as all of the following except a. scrap value b. trade-in value Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible c. salvage value d. net book value 88. The formula for depreciable cost is a. Initial Cost + Residual Value b. Initial Cost – Residual Value c. Initial Cost – Accumulated Depreciation d. Depreciable Cost = Initial Cost 89. Expected useful life is a. computed when the asset is sold b. estimated at the time the asset is placed in service c. determined each year the depreciation computation is made d. none of these choices 90. The formula for annual depreciation using the straight-line depreciation method is a. Initial Cost ÷ Estimated Useful Life b. Depreciable Cost ÷ Estimated Useful Life c. Depreciable Cost × Estimated Useful Life d. Initial Cost × Estimated Useful Life 91. The formula for annual depreciation using the units-of-activity method is a. (Initial Cost ÷ Total Estimated Units of Activity) × Units of Activity for Period b. (Depreciable Cost ÷ Yearly Activity) × Estimated Activity c. Depreciable Cost ÷ Units of Activity for Period d. (Depreciable Cost ÷ Total Estimated Units of Activity) × Units of Activity for Period 92. On June 1, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of 3 years or 30,000 hours. Aaron’s fiscal year ends on December 31. Using straight-line depreciation, compute the depreciation expense for the final (partial) year of service. a. $17,500 b. $30,000 c. $12,500 d. $40,000 93. On June 1, Michael Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of 3 years or 30,000 hours. Using straight-line depreciation, compute depreciation expense for the second year. a. $17,500 b. $30,000 c. $12,500 d. $40,000 94. On June 1, Scotter Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible estimated useful life of 3 years or 30,000 hours. Using straight-line depreciation, compute depreciation expense for the first year, which ends on December 31. a. $17,500 b. $30,000 c. $12,500 d. $40,000 95. Computer equipment was acquired at the beginning of the year at a cost of $57,000 that has an estimated residual value of $9,000 and an estimated useful life of 5 years. Determine the second-year depreciation using the straight-line method. a. $13,200 b. $19,200 c. $9,600 d. $9,000 96. Which of the following statements regarding depreciation is true? a. If using the double-declining-balance method, the total amount of depreciation expense during the life of the asset will be the highest. b. If using the units-of-activity method, it is possible to depreciate more than the depreciable cost. c. If using the straight-line method, the amount of depreciation expense during the first year is higher than that of the double-declining-balance method. d. Regardless of the depreciation method, the amount of total depreciation expense during the life of the asset will be the same. 97. An asset was purchased for $120,000 on January 1, Year 1, and originally estimated to have a useful life of 10 years with a residual value of $10,000. At the beginning of the third year, it was determined that the remaining useful life of the asset was only 4 years with a residual value of $2,000. Compute the third-year depreciation expense using the revised amounts and straight-line method. a. $25,000 b. $11,000 c. $24,000 d. $24,500 98. The accumulated depletion of a natural resource is reported on the a. balance sheet as an addition to the cost of the resource b. income statement as an increase in revenue c. balance sheet as a deduction from the cost of the resource d. income statement as a deduction from revenues 99. The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called a. depletion b. deferral c. amortization d. depreciation Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 100. Sands Company purchased mining rights for $500,000. It expects to harvest 1 million tons of ore over the next 5 years. During the current year, Sands mined 350,000 tons of ore. The entry to journalize the depletion would include a a. debit to Depletion Expense for $175,000 b. credit to Depletion Expense for $350,000 c. debit to Accumulated Depletion for $175,000 d. credit to Accumulated Depletion for $350,000 101. The natural resources of some companies include a. timber, metal ores, and minerals b. timber, equipment, and patents c. minerals, trademarks, and land d. metal ores, copyrights, and supplies 102. Weber Company purchased a mining site for $1,600,000 on July 1. The company expects to mine ore for the next 10 years and anticipates that a total of 400,000 tons will be recovered. During the first year, the company extracted 6,500 tons of ore. The depletion expense is a. $17,500 b. $16,000 c. $26,000 d. $15,000 103. Expenditures for research and development are generally recorded as a. current operating expenses b. assets and amortized over their estimated useful life c. assets and amortized over 40 years d. current assets 104. The term applied to the amount of cost to transfer to expense resulting from a decline in the utility of intangible assets is a. amortization b. depletion c. depreciation d. allocation 105. Xtra Company purchased a business from Argus for $96,000 above the fair value of its net assets. Argus had developed the goodwill over 12 years. How much would Xtra amortize the goodwill for its first year? a. $7,000 b. $8,000 c. Goodwill is not amortized. d. cannot determine without more information 106. Which intangible assets are amortized over their useful life? a. trademarks b. goodwill Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible c. patents d. all of these choices 107. The name, term, or symbol used to identify a business and its products is called a. goodwill b. a patent c. a trademark d. a copyright 108. The process of transferring the cost of an asset to an expense account is called all of the following except a. depletion b. allocation c. amortization d. depreciation 109. Fixed assets are ordinarily presented on the balance sheet a. at current market values b. at replacement costs c. at cost less accumulated depreciation d. in a separate section along with intangible assets 110. The ratio measuring the number of dollars of sales earned per dollar of fixed assets is the a. fixed asset turnover ratio b. days' in assets ratio c. current asset turnover ratio d. intangible asset ratio 111. The higher the fixed asset turnover ratio, the a. less efficiently a company is using its fixed assets in generating sales b. more efficiently a company is using its fixed assets in generating sales c. more efficiently a company is using its current assets in generating sales d. more efficiently a company is using its intangible assets in generating sales 112. Which of the following statements regarding the fixed asset turnover ratio is true? a. A larger fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. b. The fixed asset turnover ratio cannot be compared across time for an individual company. c. A smaller fixed asset turnover ratio is associated with firms that are more labor intensive and require smaller fixed asset investments. d. The fixed asset turnover ratio is not useful for comparing different companies. 113. Newport Company has sales of $2,025,000 for the current year. The book value of its fixed assets at the beginning of the year was $550,000 and at the end of the year was $800,000. The fixed asset turnover ratio for Newport is a. 3.0 b. 3.6 Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible c. 3.7 d. 2.5 114. A fixed asset with a cost of $52,000 and accumulated depreciation of $47,500 is traded for a similar asset priced at $60,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $5,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $59,500 c. $60,000 d. $60,500 115. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,000 is traded for a similar asset priced at $50,000 (fair market value) in a transaction with commercial substance. Assuming a trade-in allowance of $4,000, at what cost will the new equipment be recorded in the books? a. $54,000 b. $45,000 c. $51,000 d. $50,000 116. A fixed asset with a cost of $41,000 and accumulated depreciation of $36,500 is traded for a similar asset priced at $60,000. Assuming a trade-in allowance of $3,000, the recognized loss on the trade is a. $(3,000) b. $(4,500) c. $(500) d. $(1,500) 117. A fixed asset with a cost of $30,000 and accumulated depreciation of $28,500 is sold for $3,500. What is the amount of the gain or loss on disposal of the fixed asset? a. $2,000 loss b. $1,500 loss c. $3,500 gain d. $2,000 gain 118. Bacon Company acquired new machinery with a price of $15,200 by trading in similar old machinery and paying $12,700. The old machinery originally cost $9,000 and had accumulated depreciation of $5,000. In recording this transaction, Bacon Company should record a. the new machinery at $16,700 b. the new machinery at $12,700 c. a gain of $1,500 d. a loss of $1,500 119. When a company discards machinery that is fully depreciated, this transaction would be journalized with which entry? a. debit Accumulated Depreciation and credit Machinery b. debit Machinery and credit Accumulated Depreciation Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible c. debit Cash and credit Accumulated Depreciation d. debit Depreciation Expense and credit Accumulated Depreciation 120. When a company sells machinery at a price equal to its book value, this transaction would be journalized with which entry? a. debit Cash and Accumulated Depreciation and credit Machinery b. debit Machinery and credit Cash and Accumulated Depreciation c. debit Cash and Machinery and credit Accumulated Depreciation d. debit Cash and Depreciation Expense and credit Accumulated Depreciation 121. When a company exchanges machinery and receives a trade-in allowance greater than the book value, this transaction would be journalized with which of the following entries (assuming the exchange was considered to have commercial substance)? a. debit Machinery and Accumulated Depreciation and credit Machinery, Cash, and Gain on Exchange of Machinery b. debit Machinery and Accumulated Depreciation and credit Machinery and Cash c. debit Cash and Machinery and credit Accumulated Depreciation d. debit Cash and Machinery and credit Accumulated Depreciation and Machinery 122. When a company exchanges machinery and receives a trade-in allowance less than the book value, this transaction would be journalized with which of the following entries? a. debit Machinery and Accumulated Depreciation and credit Machinery and Cash b. debit Cash and Machinery and credit Accumulated Depreciation c. debit Cash and Machinery and credit Accumulated Depreciation and Machinery d. debit Machinery, Accumulated Depreciation, and Loss on Exchange of Machinery and credit Machinery and Cash 123. On December 31, Strike Company has decided to discard one of its batting cages. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. Which of the following will be included in the entry to journalize the disposal? a. debit Accumulated Depreciation for $310,000 b. debit Loss on Disposal of Asset for $260,000 c. credit Equipment for $310,000 d. credit Gain on Disposal of Asset for $50,000 124. On December 31, Strike Company sold one of its batting cages for $50,000. The equipment had an original cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. gain of $50,000 b. loss of $50,000 c. no gain or loss d. cannot determine without more information 125. On December 31, Strike Company sold one of its batting cages for $20,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible a. gain of $20,000 b. gain of $30,000 c. loss of $20,000 d. loss of $30,000 126. On December 31, Strike Company sold one of its batting cages for $55,000. The equipment had an initial cost of $310,000 and has accumulated depreciation of $260,000. Depreciation has been recorded up to the end of the year. What is the amount of the gain or loss on this transaction? a. loss of $55,000 b. loss of $5,000 c. gain of $5,000 d. gain of $55,000 127. On December 31, Strike Company traded in one of its batting cages for another one that has a cost of $500,000. Strike receives a trade-in allowance of $11,000. The old equipment had an initial cost of $215,000 and has accumulated depreciation of $185,000. Depreciation has been recorded up to the end of the year. The difference will be paid in cash. What is the amount of the gain or loss on this transaction? a. loss of $11,000 b. gain of $11,000 c. loss of $19,000 d. No loss or gain will be recorded 128. Machinery was purchased on January 1 for $51,000. The machinery has an estimated life of 7 years and an estimated salvage value of $9,000. Double-declining-balance depreciation for the second year would be a. $10,929 b. $6,000 c. $10,500 d. $10,408 129. Overhauling an engine in a large truck would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 130. Exterior and interior painting would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 131. Paving a new parking lot would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible d. none of these choices 132. New landscaping would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 133. Installing a new air conditioning system in an old building would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 134. Resurfacing a pool in an apartment building would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 135. Adding refrigerant to an air conditioning system would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 136. Fixing damage due to a car accident would be classified as a. ordinary maintenance and repairs b. asset improvements c. extraordinary repairs d. none of these choices 137. The amount of fees paid to an architect to design a new office building would be debited to which of the following accounts? a. Buildings b. Building Expense c. Land d. Land Improvements 138. The cost of insurance during the construction of a new office building would be debited to which of the following accounts? a. Buildings b. Building Expense c. Insurance Expense d. Land Improvements Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 139. Interest charged on funds borrowed to finance the construction of a new office building would be debited to which of the following accounts? a. Buildings b. Building Expense c. Insurance Expense d. Land Improvements 140. Sales taxes paid on new factory equipment would be debited to which of the following accounts? a. Factory Building b. Machinery and Equipment c. Sales Tax Expense d. Land Improvements 141. Freight costs paid on the purchase of new equipment would be debited to which of the following accounts? a. Factory Building b. Machinery and Equipment c. Freight In d. Land Improvements 142. Repairs made to recently purchased used office equipment would be debited to which of the following accounts? a. Office Building b. Office Equipment c. Repairs and Maintenance Expense d. Accumulated Depreciation 143. Costs to survey a new piece of land for a new business location would be debited to which of the following accounts? a. Buildings b. Survey Expense c. Land d. Land Improvements 144. Costs of government permits required to develop land for a new business location would be debited to which of the following accounts? a. Buildings b. Miscellaneous Expense c. Land d. Land Improvements 145. The purchase price of land acquired for a new business site would be debited to which of the following accounts? a. Buildings b. Miscellaneous Expense c. Land d. Land Improvements Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 146. The cost of landscaping a new business location would be debited to which of the following accounts? a. Buildings b. Miscellaneous Expense c. Land d. Land Improvements 147. The cost of a new fence around land at a new business location would be debited to which of the following accounts? a. Buildings b. Miscellaneous Expense c. Land d. Land Improvements 148. The cost of installing outdoor lighting at a new business location would be debited to which of the following accounts? a. Buildings b. Utilities Expense c. Land d. Land Improvements 149. The cost of installing walkways around a new business location would be debited to which of the following accounts? a. Buildings b. Walkway Expense c. Land d. Land Improvements 150. The cost of modifying a building purchased for a new business location would be debited to which of the following accounts? a. Buildings b. Repairs and Maintenance Expense c. Land d. Land Improvements 151. The cost of supplies (materials) used to test new equipment would be debited to which of the following accounts? a. Buildings b. Machinery and Equipment c. Supplies d. Land Improvements 152. The cost of installing new equipment would be debited to which of the following accounts? a. Buildings b. Machinery and Equipment c. Repairs and Maintenance Expense d. Land Improvements Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 153. The cost of grading and leveling land to be used for a new business site would be debited to which of the following accounts? a. Buildings b. Land c. Repairs and Maintenance Expense d. Land Improvements 154. The cost of removing an existing building to ready land for use as a new business site would be debited to which of the following accounts? a. Buildings b. Machinery and Equipment c. Repairs and Maintenance Expense d. Land Improvements 155. The exclusive right to publish and sell a book is secured through a. a patent b. a copyright c. a trademark d. goodwill 156. McDonald’s Golden Arches are an example of a. a patent b. a copyright c. a trademark d. goodwill 157. The exclusive right to produce and sell a new kitchen gadget is secured through a. a patent b. a copyright c. a trademark d. goodwill 158. The intangible asset created through a business’s good location or reputation is called a. a patent b. a copyright c. a trademark d. goodwill 159. The Nike swoosh is an example of a. a patent b. a copyright c. a trademark d. goodwill 160. Land Improvements would appear on the financial statements as a(n) Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible a. current asset on the balance sheet b. fixed asset on the balance sheet c. expense on the income statement d. an intangible asset on the balance sheet 161. Gain on Sale of Equipment would appear on the financial statements as a(n) a. current asset on the balance sheet b. fixed asset on the balance sheet c. other revenue on the income statement d. intangible asset on the balance sheet 162. Research and Development Costs would usually appear on the financial statements as a(n) a. current asset on the balance sheet b. fixed asset on the balance sheet c. expense on the income statement d. an intangible asset on the balance sheet

163. Based on the following data, determine the cost of the land to be reported on the balance sheet. Land purchase price Broker's commission Payment for the demolition and removal of existing building Cash received from sale of materials salvaged from demolished building

$138,000 10,000 4,000 1,500

164. Falcon Company acquired an adjacent lot to construct a new warehouse, paying $40,000 and giving a short-term note for $410,000. Legal fees paid were $13,275, delinquent taxes assessed were $14,500, and fees paid to remove an old building from the land were $15,800. Materials salvaged from the demolition of the building were sold for $6,800. A contractor was paid $890,000 to construct the new warehouse. Determine the cost of the land to be reported on the balance sheet and show your work. 165. Identify each of the following expenditures as chargeable to (a) Land, (b) Land Improvements, (c) Buildings, (d) Machinery and Equipment, or (e) other account. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)

Cost of paving parking area for employees and customers Insurance during construction of building Interest incurred on loan during construction of building Fee paid for installation of equipment Special foundation for new equipment acquired Insurance on new equipment while in transit Freight charges on new equipment Cost of repairing vandalism damage to equipment during installation Sales tax on new equipment Cost incurred in repairing damage resulting from installation of new equipment Cost of land fill for building site Cost of lubricating oil purchased for periodic oil changes for equipment

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Chapter 09: Long-Term Assets: Fixed and Intangible (13) (14) (15) (16) (17) (18) (19) (20)

Parking lot lighting Installing a fence around the parking lot Repainting the trim on a building Special assessment paid to city for extension of water main to property Cost of razing and removing the old building on property acquired for a building site Delinquent real estate taxes assumed by purchaser on property acquired for a building site Attorney's fee for title search Architect's fee for building plans and supervision of construction

166. A number of major structural repairs completed at the beginning of the current fiscal year at a cost of $1,000,000 are expected to extend the life of a building 10 years beyond the original estimate. The original cost of the building was $6,552,000, and it has been depreciated by the straight-line method for 25 years. Estimated residual value is negligible and has been ignored. The related accumulated depreciation account after the depreciation adjustment at the end of the preceding fiscal year is $4,550,000. (a) What has the amount of annual depreciation been in past years? (b) What was the original life estimate of the building? (c) To what account should the $1,000,000 be debited? (d) What is the book value of the building after the extraordinary repairs have been made? (e) What is the expected remaining life of the building after the extraordinary repairs have been made? (f) What is the amount of straight-line depreciation for the current year, assuming that the repairs were completed at the very beginning of the current year? Round to the nearest dollar. 167. Journalize each of the following transactions: (a) (b) (c)

A wing costing $2,345,000 was added to the building. A new mortgage was issued for the cost. Equipment was upgraded to increase its capacity to produce widgets. The upgrade cost of $11,500 was paid in cash. A major overhaul costing $8,000 on a machine increased the useful life by 4 years. The payment was made in cash.

168. On April 15, Compton Co. paid $2,800 to upgrade a delivery truck and $125 for an oil change. Journalize the entries for the upgrade to the delivery truck and the oil change expenditures. 169. XYZ Co. incurred the following costs related to the office building used in operating its sports supply company: (a) (b) (c) (d) (e) (f) (g)

Replaced a broken window. Replaced the roof that had been on the building for 23 years. Serviced all the air conditioners before summer started. Replaced the air conditioners in the customer service areas. Added a warehouse to the back of the building. Repainted the interior walls. Installed window shutters on all windows.

Classify each cost as a capital expenditure or a revenue expenditure. 170. Comment on the validity of the following statements. "As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal." 171. Computer equipment was acquired at the beginning of the year at a cost of $65,000 that has an estimated residual Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible value of $3,800 and an estimated useful life of 8 years. Determine the (a) depreciable cost, (b) straight-line rate, and (c) annual straight-line depreciation. 172. The double-declining-balance rate for computing depreciation expense is determined by doubling the straight-line rate. Assuming that an asset has a useful life of 25 years, determine the rate to be used if using the double-decliningbalance method. 173. Copy equipment was acquired at the beginning of the year at a cost of $72,000 that has an estimated residual value of $9,000 and an estimated useful life of 5 years. It is estimated that the machine will output an estimated 1,000,000 copies. This year, 315,000 copies were made. Determine the (a) depreciable cost, (b) depreciation rate, and (c) units-ofactivity depreciation for the year. 174. A machine costing $57,000 with a 6-year life and $54,000 depreciable cost was purchased on January 1. Compute the yearly depreciation expense using straight-line depreciation. 175. A machine costing $185,000 with a 5-year life and $20,000 residual value was purchased January 2. Compute depreciation for each of the 5 years, using the double-declining-balance method. 176. Computer equipment was acquired at the beginning of the year at a cost of $63,000 that has an estimated residual value of $3,000 and an estimated useful life of 5 years. Determine the (a) depreciable cost (b) double-declining-balance rate, and (c) double-declining-balance depreciation for the first year. 177. Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage. (a) 2 years (b) 8 years (c) 10 years (d) 20 years (e) 25 years (f) 40 years (g) 50 years 178. Prior to adjustment at the end of the year, the balance in Trucks is $300,900 and the balance in Accumulated Depreciation—Trucks is $88,200. Details of the subsidiary ledger are as follows: Accumulated Truck Estimated Estimated Useful Miles Operated Depreciation at Cost No. Residual Value Life (Miles) During Year Beginning of Year 1 $100,000 $13,000 300,000 — 30,000 2 72,900 9,900 300,000 $60,000 25,000 3 38,000 3,000 200,000 8,050 45,000 4 90,000 13,000 200,000 20,150 40,000 Required: (a) Based on the units-of-activity method, determine the depreciation rates per mile and the amount to be credited to the accumulated depreciation section of each of the subsidiary accounts for the miles operated during the current year. Round rates to three decimal places. (b) Journalize the entry for depreciation for the year. 179. An asset was purchased for $58,000 and originally estimated to have a useful life of 10 years with a residual value of $3,000. After 2 years of straight-line depreciation, it was determined that the remaining useful life of the asset was only 2 years with a residual value of $2,000. Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible (a) Determine the amount of the annual depreciation for the first 2 years. (b) Determine the book value at the end of Year 2. (c) Determine the depreciation expense for each of the remaining years after revision. 180. For each of the following fixed assets, determine the depreciation expense for Year 3. Disposal date is N/A if asset is still in use. Method: SL = straight-line; DDB = double-declining-balance Assume the estimated life is 5 years for each asset. Item

Cost

A B C D

$40,000 50,000 60,000 80,000

Residual Value

Purchase Date

Disposal Date

$ 4,000 July 1, Year 3 N/A 5,000 Jan. 1, Year 1 Aug. 31, Year 3 2,000 Oct. 1, Year 3 N/A 10,000 Jan. 1, Year 2 Apr. 1, Year 3

Depr. Method

Depr. Expense Year 3

SL SL DDB DDB

181. Equipment purchased at the beginning of the fiscal year for $360,000 is expected to have a useful life of 5 years, or 14,000 operating hours, and a residual value of $10,000. Compute the depreciation for the first and second years of use by each of the following methods: (a) Straight-line (b) Units-of-activity (1,200 hours first year; 2,250 hours second year) (c) Double-declining-balance

182. Machinery is purchased on July 1 of the current fiscal year for $240,000. It is expected to have a useful life of 4 years, or 25,000 operating hours, and a residual value of $15,000. Compute the depreciation for the last 6 months of the current fiscal year ending December 31 by each of the following methods: (a) Straight-line (b) Double-declining-balance (c) Units-of-activity (used for 1,600 hours during the current year) 183. Determine the depreciation, for the year of acquisition and for the following year of a fixed asset acquired on October 1 for $500,000, with an estimated life of 5 years, and residual value of $50,000, using (a) the double-decliningbalance method and (b) the straight-line method. Assume a fiscal year ending December 31. 184. Equipment costing $80,000 with a useful life of 10 years and a residual value of $8,000 has been depreciated for 6 years by the straight-line method. (a) (b)

What is the book value at the end of the sixth year of use? If early in the seventh year it is estimated that the remaining useful life is 5 years (instead of 4) and the residual value is $6,000, what is the amount of depreciation for the seventh year?

185. Golden Sales bought $135,000 in fixed assets on January 1 associated with sales equipment. The residual value of these assets is estimated at $10,000 at the end of their 4-year service life. Golden Sales managers want to evaluate the options of depreciation. (a) Compute the annual straight-line depreciation and journalize the adjusting entry that would be made at the end of each of the 4 years. (b) Journalize the adjusting entries that would be made for each year of the service life of these assets using the doublePowered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible declining-balance method. 186. On July 1, Harding Construction purchases a bulldozer for $228,000. The equipment has an 8-year life with a residual value of $16,000. Harding uses straight-line depreciation. (a) Compute and journalize the depreciation expense for the first year ending December 31. (b) Compute and journalize the depreciation expense for the third year ending December 31. (c) Compute and journalize the depreciation expense for the last year ending December 31. 187. On July 1, Hartford Construction purchases a bulldozer for $228,000. The equipment has a 9-year life with a residual value of $16,000. Hartford uses the units-of-activity method of depreciation, and the bulldozer is expected to yield 26,500 operating hours. (a) Compute the depreciation expense per hour of operation. (b) The bulldozer is operated 1,250 hours in the first year, 2,755 hours in the second year, and 1,225 hours in the third year of operations. Journalize the depreciation expense for each year ending December 31. 188. Eagle Country Club has acquired a lot on which to construct a clubhouse. Eagle had the following costs related to the construction: Architects’ fees Construction labor Engineers’ fees Fences around building Grading and leveling Insurance costs incurred during construction Interest on money borrowed for construction Land Building materials Sales taxes Trees and shrubs

$ 45,000 80,000 15,000 9,000 10,000 7,000 5,000 73,000 237,000 6,000 6,000

Determine the cost of the clubhouse to be reported on the balance sheet. 189. Equipment was purchased on January 5, Year 1, at a cost of $90,000. The equipment had an estimated useful life of 8 years and an estimated residual value of $8,000. After using the equipment for 3 years, the useful life was revised to a total of 10 years and the residual value was reduced to $2,004. Determine the straight-line depreciation expense for Year 4 and following years. 190. A copy machine acquired on May 1 with a cost of $2,545 has an estimated useful life of 3 years. Assuming that it will have a residual value of $445, determine the depreciation for the first and second years by the straight-line method. Round answers to the nearest whole dollar. 191. A copy machine acquired with a cost of $1,410 has an estimated useful life of 4 years. It is also expected to have a useful operating life of 13,350 copies. Assuming that it will have a residual value of $75, determine the depreciation for the first year by each of the following methods: (a) Straight-line (b) Double-declining-balance (c) Units-of-activity, assuming 4,500 copies were made in the first year Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 192. On July 1, Andrew Company purchased equipment at a cost of $150,000 that has a depreciable cost of $120,000 and an estimated useful life of 3 years or 60,000 hours. Andrew’s fiscal year ends December 31. Using straight-line depreciation, journalize the entry for depreciation expense for (a) the first year, (b) the second year, and (c) the last year. 193. A copy machine acquired on July 1 with a cost of $1,450 has an estimated useful life of 4 years and residual value of $250. Assuming that the fiscal year ends on December 31, determine the depreciation for the first year by the doubledeclining-balance method. 194. Champion Company purchased and installed carpet in its new general offices on March 31 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value. (a) (b)

Journalize the March 31 purchase of the new carpet. Journalize the December 31 adjusting entry for the partial-year depreciation of the carpet, assuming that Champion Company uses the straight-line method.

195. Solare Company acquired mineral rights for $60,000,000. The diamond deposit is estimated at 6,000,000 tons. During the current year, 2,300,000 tons were mined and sold. (a) Determine the depletion rate. (b) Determine the amount of depletion expense for the current year. (c) Journalize the adjusting entry to recognize the depletion expense. 196. Carter Co. acquired drilling rights for $18,550,000. The oil deposit is estimated at 74,200,000 gallons. During the current year, 6,000,000 gallons were drilled. Journalize the adjusting entry at December 31 to recognize the depletion expense. 197. Chasteen Company acquired mineral rights for $9,100,000. The mineral deposit is estimated at 65,000,000 tons. During the current year, 18,375,000 tons were mined and sold. (a) (b)

Determine the amount of depletion expense for the current year. Journalize the adjusting entry to recognize the depletion expense.

198. On December 31, Bowman Company estimated that goodwill of $80,000 was impaired. On June 1, a patent with an estimated useful economic life of 10 years was acquired for $252,000. (a) Journalize the adjusting entry on December 31 for the impaired goodwill. (b) Journalize the adjusting entry on December 31 for the amortization of the patent rights. 199. On December 31, it was estimated that goodwill of $65,000 was impaired. On July 1, a patent with an estimated useful economic life of 10 years was acquired for $60,000. (a) Journalize the adjusting entry on December 31 for the impaired goodwill. (b) Journalize the adjusting entry on December 31 for the amortization of the patent rights. 200. On July 1, Sterns Co. acquired patent rights for $36,000. The patent has a useful life of 6 years and a legal life of 15 years. Journalize the adjusting entry on December 31 to recognize the amortization. 201. Identify the following as a fixed asset (FA), intangible asset (IA), natural resource (NR), or none of these (N). (a) Computer (b) Patent (c) Oil reserve (d) Goodwill Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible (e) (f) (g)

U.S. Treasury note Land used for employee parking Gold mine

202. The following information was taken from a recent annual report of Harrison Company (in millions): Current Year Preceding Year Land and buildings $726 $361 Machinery, equipment, and internal-use software 595 470 Office furniture and equipment 94 81 Other fixed assets related to leases 760 569 Accumulated depreciation and amortization 894 644 (a) (b)

Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any. Would you normally expect the book value of fixed assets to increase or decrease during the year?

203. Fill in the missing numbers using the formula for the fixed asset turnover ratio: Sales Beginning fixed assets Ending fixed assets Fixed asset turnover ratio

Company A Company B Company C Company D $5,000,000 $720,000 $900,000 ? $450,000 $275,000 ? $380,000 $800,000 ? $310,000 $420,000 ? 2.4 3.0 2.6

204. Financial statement data for the years ended December 31 for Parker Corporation are as follows: Sales Fixed assets (net): Beginning of year End of year

Current Year $2,595,600

Prior Year $2,409,498

901,070 829,330

820,000 901,070

(a) Determine the fixed asset turnover ratio for the current and prior years. (b) Is the change in the fixed asset turnover ratio from the prior year to the current year favorable or unfavorable? 205. Computer equipment (office equipment) purchased 6 1/2 years ago for $170,000, with an estimated life of 8 years and a residual value of $10,000, is now sold for $60,000 cash. (Appropriate entries for depreciation have been made for the first 6 years of use.) Journalize the following: (a) Depreciation for the 1/2 year prior to the sale, using the straight-line method (b) Sale of the equipment for $60,000 cash (c) Sale of the equipment, assuming it sold for $25,000 cash 206. Equipment was acquired at the beginning of the year at a cost of $75,000. The equipment was depreciated using the straight-line method based upon an estimated useful life of 6 years and an estimated residual value of $7,500. (a) What was the depreciation expense for the first year? (b) Assuming the equipment was sold at the end of the second year for $59,000, determine the gain or loss on the sale of the equipment. (c) Journalize the entry for the sale. Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 207. On the first day of the fiscal year, a new walk-in cooler with a list price of $58,000 was acquired in exchange for an old cooler and $44,000 cash. The old cooler had a cost of $25,000 and accumulated depreciation of $16,000. Assume the transaction has commercial substance. (a) Determine the gain to be recorded on the exchange. (b) Journalize the entry for the exchange. 208. Equipment acquired on January 2, Year 1, at a cost of $525,000 has an estimated useful life of 8 years and an estimated residual value of $45,000. (a) (b) (c) (d)

What is the annual amount of depreciation for the first 3 years, assuming the straightline method of depreciation is used? What is the book value of the equipment on January 1, Year 4? Assuming that the equipment is sold on January 2, Year 4, for $326,000, journalize the entry for the sale. Assuming that the equipment is sold on January 2, Year 4, for $394,000, journalize the entry for the sale.

209. On October 1, Sebastian Company acquired new equipment with a fair market value of $458,000. Sebastian received a trade-in allowance of $92,000 on the old equipment of a similar type and paid cash of $366,000. The following information about the old equipment is obtained from the account in the equipment ledger: Cost, $336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $220,000; annual depreciation, $20,000. Assuming the exchange has commercial substance, journalize the entries for: (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1. 210. Machinery acquired at a cost of $80,000 and on which there is accumulated depreciation of $55,000 (including depreciation for the current year to date) is exchanged for similar machinery. Assume that the transaction has commercial substance. Journalize the entries for the exchange of the machinery under each of the following assumptions: (a) Price of new, $120,000; trade-in allowance on old, $4,000; balance paid in cash. (b) Price of new, $120,000; trade-in allowance on old, $34,000; balance paid in cash. 211. Equipment acquired at a cost of $126,000 has a book value of $42,000. Journalize the disposal of the equipment under the following independent assumptions. (a) The equipment had no market value and was discarded. (b) The equipment is sold for $54,000. (c) The equipment is sold for $24,000. (d) The equipment is traded in for a similar asset. The list price of the new equipment is $63,000. The buyer gave no cash in the exchange. The transaction lacks commercial substance.

Indicate the answer choice that best completes the statement or answers the question. 212. Based on the following data, determine the cost of the land to be reported on the balance sheet. Land purchase price $178,000 Broker's commission 15,000 Payment for demolition and removal of existing building 5,000 Cash received from sale of materials salvaged from demolished building 2,000 a. $178,000 b. $180,000 Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible c. $193,000 d. $196,000

213. A building with an appraisal value of $116,000 is made available at an offer price of $129,000. The purchaser acquires the property for $30,000 in cash, a 90-day note payable for $35,000, and a mortgage amounting to $57,000. What is the cost of the building to be reported on the balance sheet? 214. A used machine has a purchase price of $87,000 and requires an overhaul costing $10,000, installation costs of $4,000, and special acquisition fees of $2,000. At what cost would the machine be reported on the balance sheet? 215. A new machine has a purchase price of $109,000 and requires transportation costs of $12,000, installation costs of $5,000, and special acquisition fees of $6,000. At what cost would the machine be reported on the balance sheet?

Indicate the answer choice that best completes the statement or answers the question. 216. On July 1, Noshang Co. paid $3,800 to upgrade a delivery truck and $100 for an oil change. What account(s) would be debited for the upgrade to delivery truck and oil change? a. Delivery Truck b. Repairs and Maintenance Expense c. Delivery Truck and Repairs and Maintenance Expense d. Repairs and Maintenance Expense and Truck Repairs Expense 217. XYZ Co. incurred the following costs related to the office building used in operating its sports supply company: (1) (2) (3) (4) (5) (6) (7)

Replaced a broken window. Replaced the roof that had been on the building 23 years. Serviced all the air conditioners before summer started. Replaced the air conditioners in the customer service areas. Added a warehouse to the back of the building. Repainted the interior walls. Installed window shutters on all windows.

Which expenditures would be classified as capital expenditures? a. 1, 3, 6, and 7 b. 2, 4, 5, and 7 c. 1, 4, 5, and 6 d. 2, 3, 5, and 6 218. Computer equipment was acquired at the beginning of the year at a cost of $85,000 that has an estimated residual value of $5,000 and an estimated useful life of 8 years. What is the annual straight-line depreciation for the equipment? a. $10,000 b. $10,625 c. $11,250 d. $21,250 219. Copy equipment was acquired at the beginning of the year at a cost of $68,000 that has an estimated residual value of $8,000 and an estimated useful life of 5 years. It is estimated that the machine will output a total of 1,200,000 copies. This Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible year, 275,000 copies were made. What is the units-of-activity depreciation for the year? a. $12,000 b. $17,417 c. $15,583 d. $13,750 220. A machine costing $77,000 with a 6-year life and $72,000 depreciable cost was purchased on January 1. Compute the yearly depreciation expense using straight-line depreciation. a. $12,833 b. $12,000 c. $25,667 d. $5,000 221. What is the depreciation, for the year of acquisition and for the following year of a fixed asset acquired on October 1 for $250,000, with an estimated life of 5 years, and residual value of $25,000, using the straight-line method. Assume a fiscal year ending December 31. a. Year of acquisition, $25,000; following year, $45,000 b. Year of acquisition, $11,250; following year, $45,000 c. Year of acquisition, $45,000; following year, $45,000 d. Year of acquisition, $11,250; following year, $90,000 222. On July 1, Hartman Construction purchases a bulldozer for $205,200. The equipment has a 9-year life with a residual value of $14,400. Hartman uses the units-of-activity method of depreciation, and the bulldozer is expected to yield 26,500 operating hours. What is the depreciation expense per hour of operation? a. $7.74 b. $7.20 c. $8.29 d. $1.40 223. An asset was purchased for $58,000 and originally estimated to have a useful life of 10 years with a residual value of $3,000. After 3 years of straight-line depreciation, it was determined that the remaining useful life of the asset was only 2 years with a residual value of $1,000. What will be the new annual depreciation for the asset? a. $5,400 b. $20,250 c. $22,500 d. $23,500 224. A formula that can be used for annual depreciation using the double-declining-balance method is a. Initial Cost ÷ (Estimated Useful Life × 2) b. Depreciable Cost ÷ (Estimated Useful Life × 2) c. Depreciable Cost × (Estimated Useful Life ÷ 2) d. Book Value × (Straight-Line Percentage × 2) 225. Which of the following statements regarding the balance sheet presentation of fixed assets is not true? Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible a. Fixed assets may be shown on the face of the statement at their book value or net amount. b. If there are many classes of fixed assets, a single amount may be presented on the balance sheet, supported by a note with a separate listing. c. Intangible assets are usually reported as the first items listed under “Fixed assets.” d. Fixed assets may be reported under the more descriptive caption of “Property, plant, and equipment.” 226. Mathai Company has sales of $4,800,000 for the current year. The book value of its fixed assets at the beginning of the year was $1,450,000 and at the end of the year was $1,600,000. The fixed asset turnover ratio for Mathai is a. 3.0 b. 3.1 c. 3.2 d. 3.3 227. A company acquires a lathe priced at a fair market value of $124,000 in a transaction that has commercial substance by trading in a similar lathe and paying cash for the difference between the trade-in allowance of $45,000 and the price of the new lathe. Assuming that the book value of the lathe traded in is $36,000, what is the gain or loss on the exchange? a. gain of $9,000 b. gain of $12,000 c. loss of $9,000 d. loss of $12,000

228. A company acquires a machine priced at a fair market value of $155,000 in a transaction that has commercial substance by trading in a similar machine and paying cash for the difference between the trade-in allowance of $56,000 and the price of the new machine. (a) What is the amount of cash given? (b) Assuming that the book value of the machine traded in is $45,000, what is the gain or loss on the exchange? 229. A company acquires a lathe priced at a fair market value of $124,000 in a transaction that has commercial substance by trading in a similar lathe and paying cash for the difference between the trade-in allowance of $45,000 and the price of the new lathe. (a) What is the amount of cash given? (b) Assuming that the book value of the lathe traded in is $50,000, what is the gain or loss on the exchange?

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Chapter 09: Long-Term Assets: Fixed and Intangible Answer Key 1. False 2. True 3. False 4. True 5. True 6. False 7. False 8. False 9. True 10. False 11. True 12. False 13. False 14. True 15. False 16. True 17. False 18. False 19. False 20. False 21. False 22. False 23. True 24. True 25. True Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 26. False 27. True 28. True 29. True 30. False 31. False 32. True 33. False 34. False 35. True 36. False 37. False 38. False 39. False 40. True 41. False 42. True 43. False 44. True 45. False 46. True 47. False 48. True 49. True 50. True 51. False Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 52. True 53. False 54. False 55. True 56. False 57. True 58. False 59. False 60. b 61. c 62. d 63. a 64. b 65. c 66. c 67. a 68. d 69. d 70. d 71. c 72. b 73. c 74. b 75. b 76. b Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 77. d 78. b 79. c 80. b 81. a 82. c 83. b 84. c 85. a 86. b 87. d 88. b 89. b 90. b 91. d 92. c 93. b 94. a 95. c 96. d 97. c 98. c 99. a 100. a 101. a 102. c Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 103. a 104. a 105. c 106. c 107. c 108. b 109. c 110. a 111. b 112. a 113. a 114. c 115. d 116. d 117. d 118. d 119. a 120. a 121. a 122. d 123. c 124. c 125. d 126. c 127. c Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 128. d 129. c 130. a 131. b 132. b 133. b 134. c 135. a 136. a 137. a 138. a 139. a 140. b 141. b 142. b 143. c 144. c 145. c 146. d 147. d 148. d 149. d 150. a 151. b 152. b 153. b Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 154. b 155. b 156. c 157. a 158. d 159. c 160. b 161. c 162. b 163. Cost of Land = Land Purchase Price + Broker's Commission + Payment for Demolition and Removal of Existing Building – Cash Received from Sale of Materials Salvaged from Demolished Building = $138,000 + $10,000 + $4,000 – $1,500 = $150,500 164. Initial cost of land ($40,000 + $410,000) Legal fees $13,275 Delinquent taxes 14,500 Demolition of 15,800 building Salvaged materials Cost of land

$450,000

43,575 $493,575 (6,800) $486,775

165. (a) 11, 16, 17, 18, 19 (b) 1, 13, 14 (c) 2, 3, 20 (d) 4, 5, 6, 7, 9 (e) 8, 10, 12, 15 166. (a) $182,000 ($4,550,000 ÷ 25) (b) 36 years ($6,552,000 ÷ $182,000) (c) Accumulated Depreciation—Building (d) $3,002,000 ($6,552,000 + $1,000,000 – $4,550,000) (e) 21 years (36 – 25 + 10) (f) $142,952 ($3,002,000 ÷ 21) 167. (a) Building Powered by Cognero

2,345,000 Page 39

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Chapter 09: Long-Term Assets: Fixed and Intangible Mortgage Payable

2,345,000

(b) Equipment Cash

11,500

(c) Accumulated Depreciation—Machinery Cash

8,000

168. Apr. 15 Delivery Truck Cash 15 Repairs and Maintenance Expense Cash

11,500

8,000

2,800 2,800 125 125

169. (a) Revenue expenditure (b) Capital expenditure (c) Revenue expenditure (d) Capital expenditure (e) Capital expenditure (f) Revenue expenditure (g) Capital expenditure 170. Depreciation is the periodic transfer of the cost of an asset to expense. Depreciation is a noncash expense. Depreciation does not accumulate cash for replacements. 171. (a) (b) (c)

$61,200 (Initial cost – Estimated Residual Value = $65,000 – $3,800) 12.5% (100% ÷ 8) $7,650 ($61,200 × 0.125)

172. (100% ÷ 25) × 2 = 8% 173. (a) (b) (c)

Depreciable Cost = Initial Cost – Estimated Residual Value = $72,000 – $9,000 = $63,000 Depreciation Rate = Depreciable Cost ÷ Total Estimated Units of Activity = $63,000 ÷ 1,000,000 copies = $0.063 per copy Depreciation Expense = Depreciation Rate × Units of Activity for Period = 315,000 copies × $0.063 = $19,845

174. $54,000 ÷ 6 years = $9,000 per year 175. Depreciation rate: ($100% ÷ 5) × 2 = 40% Year 1: $185,000 × 40% = $74,000 Year 2: $185,000 – $74,000 = $111,000; $111,000 × 40% = $44,400 Year 3: $111,000 – $44,400 = $66,600; $66,600 × 40% = $26,640 Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible Year 4: $66,600 – $26,640 = $39,960; $39,960 × 40% = $15,984 Year 5: $39,960 – $15,984 = $23,976; $23,976 –$20,000* = $ 3,976 *Machine cannot be depreciated below residual value. 176. (a) Depreciable Cost = Initial Cost – Residual Value = $63,000 – $3,000 = $60,000 (b) Depreciation rate: ($100% ÷ 5) × 2 = 40% (c) Year 1 depreciation: $63,000 × 40% = $25,200 177. (a) 50% (100% ÷ 2) (b) 12.5% (100% ÷ 8) (c) 10% (100% ÷ 10) (d) 5% (100% ÷ 20) (e) 4% (100% ÷ 25) (f) 2.5% (100% ÷ 40) (g) 2% (100% ÷ 50) 178. (a) Truck No. 1 2 3 4

Rate per Mile

Miles Operated

$0.290 $0.210 $0.175 $0.385

Depreciation

30,000 25,000 45,000 40,000

$ 8,700 3,000* 7,875 15,400 $34,975

Total

*Mileage depreciation of $5,250 ($0.210 × 25,000) is limited to $3,000, which reduces the book value of the truck to $9,900, its residual value. (b) Depreciation Expense—Trucks Accumulated Depreciation—Trucks

34,975 34,975

179. (a) Depreciation Expense = (Cost – Residual Value) ÷ Useful Life = ($58,000 – $3,000) ÷ 10 = $5,500 (b) Book Value = Initial Cost – Accumulated Depreciation = $58,000 – ($5,500 × 2) = $47,000 (c) Deprecation Expense = (Book Value – Residual Value) ÷ Useful Life = ($47,000 – $2,000) ÷ 2 = $22,500 180. Item

A B C D

Residual Value

Purchase Date

Disposal Date

$40,000 $4,000 50,000 5,000 60,000 2,000 80,000 10,000

July 1, Year 3 Jan. 1, Year 1 Oct. 1, Year 3 Jan. 1, Year 2

N/A Aug. 31, Year 3 N/A Apr. 1, Year 3

Cost

Depr. Depr. Expense, Method Year 3

SL SL DDB DDB

$3,600 6,000 6,000 4,800

181. (a) (b)

1st Year $70,000 [($360,000 – $10,000) ÷ 5] $30,000 [($360,000 – $10,000) ÷ 14,000 hours × 1,200]

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Chapter 09: Long-Term Assets: Fixed and Intangible (c)

$144,000 ($360,000 × 40%)

(a) (b) (c)

2nd Year $70,000 [($360,000 – $10,000) ÷ 5] $56,250 {[($360,000 – $10,000) ÷ 14,000 hours] × 2,250} $86,400 [($360,000 – $144,000) × 40%]

182. (a) $28,125 [($240,000 – $15,000) ÷ 4 × 6/12] (b) $60,000 ($240,000 × 0.50 × 6/12) (c) $14,400 {[($240,000 – $15,000) ÷ 25,000 hours] × 1,600 hours}

183. (a) Year of acquisition: $50,000 ($500,000 × 40% × 3/12) Following year: $180,000 ($500,000 – $50,000 × 40%) (b) Year of acquisition: $22,500 {[($500,000 – $50,000) ÷ 5] × 3/12} Following year: $90,000 [($500,000 – $50,000) ÷ 5] 184. (a) $80,000– $8,000 = $72,000 $72,000 ÷ 10 = $7,200 $7,200× 6 = $43,200 $80,000– $43,200 = $36,800 (b) ($36,800– $6,000) ÷ 5 = $6,160 185. (a) Acquisition cost Residual value Depreciable value Divided by service life Annual depreciation Dec. 31

Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment

$135,000 (10,000) $125,000 ÷ 4 years $ 31,250 31,250 31,250

(b) $135,000 × 50% = $67,500 ($135,000 – $67,500) × 50% = $33,750 ($67,500 – $33,750) × 50% = $16,875 $16,875 – $10,000 = $6,875* *Depreciation cannot bring book value below $10,000 residual. Year 1 Dec. 31 Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment

67,500 67,500

Year 2 Dec. 31 Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment Year 3 Dec. 31 Depreciation Expense—Sales Equipment Powered by Cognero

33,750 33,750 16,875 Page 42

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Chapter 09: Long-Term Assets: Fixed and Intangible Accumulated Depreciation—Sales Equipment Year 4 Dec. 31 Depreciation Expense—Sales Equipment Accumulated Depreciation—Sales Equipment

16,875

6,875 6,875

186. Annual depreciation is: Acquisition cost Residual value Depreciable cost Divided by service life in years Annual depreciation

$228,000 (16,000) $212,000 ÷ 8 $ 26,500

(a) First-year depreciation (July through December): Dec. 31

Depreciation Expense Accumulated Depreciation

13,250* 13,250

*$26,500 × 6/12 (b) Third-year depreciation: Dec. 31

Depreciation Expense Accumulated Depreciation

26,500 26,500

(c) Last-year depreciation (January through June): Dec. 31

Depreciation Expense Accumulated Depreciation

13,250* 13,250

*$26,500 × 6/12 187. (a) Hourly depreciation: Acquisition cost Residual value Depreciable cost Service life in hours Hourly depreciation

$228,000 (16,000) $212,000 ÷ 26,500 $ 8

(b) First-year depreciation: 1,250 hours × $8 per hour = $10,000 Dec. 31 Depreciation Expense 10,000 Accumulated Depreciation 10,000 Second-year depreciation: 2,755 hours × $8 per hour = $22,040 Dec. 31 Depreciation Expense 22,040 Accumulated Depreciation 22,040 Third-year deprecation: 1,225 hours × $8 per hour = $ 9,800 Dec. 31 Depreciation Expense 9,800 Accumulated Depreciation 9,800 188. Architects’ fees Construction labor Engineers’ fees Insurance costs incurred during construction Powered by Cognero

$ 45,000 80,000 15,000 7,000 Page 43

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Chapter 09: Long-Term Assets: Fixed and Intangible Interest on money borrowed for construction Building materials Sales taxes Cost of clubhouse

5,000 237,000 6,000 $395,000

189. Book value at beginning of Year 4: Cost $90,000 Residual value (8,000) Depreciable cost $82,000 Depreciation expense for first 3 years: $82,000 ÷ 8 = $10,250 per year Accumulated depreciation: $10,250 × 3 = $30,750 Book value, Jan. 1, Year 4: $90,000 − $30,750 = $59,250 Revised depreciation expense: Book value at beginning of Year 4 Revised residual value Remaining depreciable amount Divided by remaining life Depreciation expense

$59,250 (2,004) $57,246 ÷ 7 $ 8,178

190. Straight-Line Depreciation = (Cost – Residual Value) ÷ Estimated Useful Life = ($2,545 – $445) ÷ 3 = $700 per year Year 1 depreciation: $700 × 8/12 = $467 Year 2 depreciation: $700 191. (a) Straight-Line Depreciation = (Cost – Residual Value) ÷ Estimated Useful Life ($1,410 – $75) ÷ 4 = $333.75 per year (b) Double-Declining-Balance Depreciation = Book Value × Depreciation Rate = $1,410 × 50%* = $705 *Rate = (100% ÷ 4) × 2 (c) Units-of-Activity Depreciation = Units of Activity for Period × Activity Rate = 4,500 × $0.10* = $450 *Rate = (Cost – Residual Value) ÷ Total Estimated Units of Activity = ($1,410 – $75) ÷ 13,350 = $0.10 per copy 192. $120,000 ÷ 3 years = $40,000 per full year $40,000 × 6/12 = $20,000 for first and final (partial) years (a) Depreciation Expense 20,000 Accumulated Depreciation 20,000 (b) Depreciation Expense 40,000 Accumulated Depreciation 40,000 (c) Depreciation Expense 20,000 Accumulated Depreciation 20,000 Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 193. Double-Declining-Balance Depreciation (full year) = Book Value × Depreciation Rate = $1,450 × 50%* = $725 *Rate = (100% ÷ 4) × 2 = 50% First (partial)-year depreciation: $725 × 6/12 = $362.50 194. (a) Mar. 31 Carpet Cash

18,000 18,000

(b) Dec. 31 Depreciation Expense 900 Accumulated Depreciation Carpet depreciation [($18,000 ÷ 15 years) × 9/12]. 195. (a) $10 per ton ($60,000,000 ÷ 6,000,000 tons) (b) $23,000,000 ($10 × 2,300,000 tons) (c) Dec. 31 Depletion Expense Accumulated Depletion Depletion of mineral deposit.

900

23,000,000 23,000,000

196. Journal Date Dec. 31

Post. Ref.

Description Depletion Expense Accumulated Depletion

Debit 1,500,000*

Credit 1,500,000

*($18,550,000 ÷ 74,200,000) × 6,000,000 197. (a) $9,100,000 ÷ 65,000,000 tons = $0.14 depletion per ton 18,375,000 × $0.14 = $2,572,500 depletion expense (b) Depletion Expense Accumulated Depletion Depletion of mineral deposit.

2,572,500

198. (a) Dec. 31 Loss from Impaired Goodwill Goodwill (b) Dec. 31 Amortization Expense—Patents Patents

2,572,500

80,000 80,000 14,700* 14,700

*($252,000 ÷ 10) × 7/12 199. (a) Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible Loss from Impaired Goodwill Goodwill (b) Amortization Expense—Patents Patents *($60,000 ÷ 10) × 6/12 200. Date Description Dec. 31 Amortization Expense Patents *($36,000 ÷ 6) × 6/12

65,000 65,000 3,000* 3,000

Journal Post. Ref.

Debit Credit 3,000* 3,000

201. FA (a) (f) IA (b) (d) NR (c) (g) N (e) 202. (a) Property, plant, and equipment (in millions): CurrentPreceding Year Year Land and buildings Machinery, equipment, and internal-use software Office furniture and equipment Other fixed assets related to leases Accumulated depreciation and amortization Book value

$ 726 $ 361 595 470 94 81 760 569 $2,175 $1,481 (894) (644) $1,281 $ 837

A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Harrison purchased $694 million ($2,175 – $1,481) of additional fixed assets, which was offset by the additional depreciation expense of $250 million ($894 – $644) taken during the current year. (b) The book value of fixed assets should normally increase during the year. Although additional depreciation expense will reduce the book value, most companies invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. 203. Company Company Company Company A B C D Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible Sales Beginning fixed assets Ending fixed assets Fixed asset turnover ratio

$5,000,000 $720,000 $900,000 $1,040,000 $450,000 $275,000 $290,000 $380,000 $800,000 $325,000 $310,000 $420,000 8.0 2.4 3.0 2.6

204. (a) Fixed Asset Turnover Ratio = Sales ÷ Average Book Value of Fixed Assets Current year: $2,595,600 ÷ [($901,070 + $829,330) ÷ 2] = $2,595,600 ÷ $865,200 = 3.0 Prior year: $2,409,498 ÷ [($820,000 + $901,070) ÷ 2] = $2,409,498 ÷ $860,535 = 2.8 (b) Favorable. The increase in fixed assets turnover indicates an increase in efficiency of using fixed assets to generate sales. 205. (a) Depreciation Expense—Office Equipment Accumulated Depreciation—Office Equipment

10,000* 10,000

*[($170,000 – $10,000) ÷ 8] × 6/12 (b) Cash Accumulated Depreciation—Office Equipment Office Equipment Gain on Sale of Equipment

60,000 130,000* 170,000 20,000**

*[($170,000 – $10,000) ÷ 8] × 6.5 **$60,000 – ($170,000 – $130,000) (c) Cash Accumulated Depreciation—Office Equipment Loss on Sale of Equipment Office Equipment

25,000 130,000 15,000* 170,000

*$25,000 – ($170,000 – $130,000)

206. (a) Depreciation Expense = (Cost – Residual Value) ÷ Useful Life = ($75,000 – $7,500) ÷ 6 = $11,250 (b) Gain on Sale = Selling Price – Book Value = $59,000 – $52,500* = $6,500 *$75,000 – ($11,250 × 2) (c) Cash Accumulated Depreciation Equipment Gain on Sale Equipment 207. (a) List price Book value of old cooler Cash paid Powered by Cognero

59,000 22,500 75,000 6,500

$58,000 $ 9,000 44,000 (53,000) Page 47

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Chapter 09: Long-Term Assets: Fixed and Intangible $ 5,000

Gain on exchange (b) Equipment (new) Accum. Depreciation Equipment (old) Gain on Exchange of Equipment Cash

58,000 16,000 25,000 5,000 44,000

208. (a) Annual depreciation expense: ($525,000 – $45,000) ÷ 8 = $60,000 (b) Book value: $525,000 – ($60,000 × 3) = $345,000 (c) Cash Accumulated Depreciation—Equipment Loss on Sale of Equipment Equipment

326,000 180,000 19,000

(d) Cash Accumulated Depreciation—Equipment Equipment Gain on Sale of Equipment

394,000 180,000

525,000

525,000 49,000

209. (a) Depreciation Expense—Equipment Accumulated Depreciation—Equipment Equipment depreciation ($20,000 × 9/12).

15,000 15,000

(b) Accumulated Depreciation—Equipment Equipment Loss on Exchange of Equipment Equipment Cash 210. (a) Accumulated Depreciation—Machinery Machinery Loss on Exchange of Machinery Machinery Cash (b) Accumulated Depreciation—Machinery Machinery Machinery Gain on Exchange of Machinery Cash

235,000 458,000 9,000 336,000 366,000

55,000 120,000 21,000 80,000 116,000 55,000 120,000 80,000 9,000 86,000

211. Journal Date Powered by Cognero

Description

Post. Ref.

Debit Credit Page 48

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Chapter 09: Long-Term Assets: Fixed and Intangible (a)

(b)

(c)

(d)

Loss on Disposal of Equipment Accumulated Depreciation—Equipment Equipment

42,000 84,000

Cash Accumulated Depreciation—Equipment Equipment Gain on Sale of Equipment

54,000 84,000

Cash Accumulated Depreciation—Equipment Loss on Sale of Equipment Equipment

24,000 84,000 18,000

Equipment (new equipment) Accumulated Depreciation—Equipment Equipment (old)

42,000 84,000

126,000

126,000 12,000

126,000

126,000

212. d 213. $30,000 + $35,000 + $57,000 = $122,000 214. Cost of Machine = Purchase Price + Overhaul Cost + Installation Cost + Special Acquisition Fees = $87,000 + $10,000 + $4,000 + $2,000 = $103,000 215. Cost of Machine = Purchase Price + Transportation Costs + Installation Costs + Special Acquisition Fees = $109,000 + $12,000 + $5,000 + $6,000 = $132,000 216. c 217. b 218. a 219. d 220. b 221. b 222. b 223. b 224. d 225. c 226. b 227. a Powered by Cognero

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Chapter 09: Long-Term Assets: Fixed and Intangible 228. (a) Cash Given = Cost of New Machine – Trade-In Allowance = $155,000 – $56,000 = $99,000 (b) Gain on Sale = Cost of New Machine – Cash Given – Book Value of the Old Machine = $155,000 – $99,000 – $45,000 = $11,000 229. (a) Cash Given = Cost of New Lathe – Trade-In Allowance = $124,000 − $45,000 = $79,000 (b) Loss on Sale = Cash Given + Book Value of the Old Lathe – Cost of New Lathe = $79,000 + $50,000 − $124,000 = $5,000

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies

Indicate whether the statement is true or false. 1. Receiving payment prior to delivering goods or services causes a current liability to be incurred. a. True b. False 2. All long-term liabilities eventually become current liabilities. a. True b. False 3. For a current liability to exist, the liability must be due usually within a year and must be paid out of current assets. a. True b. False 4. The borrower issues a note payable to a creditor. a. True b. False 5. Notes payable may be issued to creditors to satisfy previously created accounts payable. a. True b. False 6. Interest expense is reported in the “Operating expenses” section of the income statement. a. True b. False 7. An interest-bearing note is a loan in which the lender deducts interest from the amount loaned before the money is advanced to the borrower. a. True b. False 8. The amount borrowed is equal to the face amount of the note on an interest-bearing note payable. a. True b. False 9. The amount of money a borrower receives from the lender is called the discount rate. a. True b. False 10. The proceeds of a discounted note are equal to the face value of the note. a. True b. False 11. The discount on a note payable is charged to an account that has a normal credit balance. a. True b. False Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 12. The proceeds from discounting a $20,000, 60-day note payable at 6% are $20,200. a. True b. False 13. Amounts withheld from each employee for social security and Medicare vary by state. a. True b. False 14. An employee's take-home pay is equal to gross pay less all voluntary deductions. a. True b. False 15. Form W-4 is a form authorizing employers to withhold a portion of employee earnings for payment of an employee’s federal income taxes. a. True b. False 16. Taxes deducted from an employee's earnings to finance social security and Medicare benefits are called FICA taxes. a. True b. False 17. Generally, all deductions made from an employee's gross pay are required by law. a. True b. False 18. Payroll taxes are based on the employee's net pay. a. True b. False 19. Most employers are required to withhold federal unemployment taxes from employee earnings. a. True b. False 20. FICA tax is a payroll tax that is paid only by employers. a. True b. False 21. Medicare taxes are paid by both the employee and the employer. a. True b. False 22. Federal unemployment taxes are paid by the employer and the employee. a. True b. False Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 23. Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the unemployed but are allocated among the states for use in state programs. a. True b. False 24. Federal income taxes are subject to a maximum amount per employee per year. a. True b. False 25. Payroll taxes only include social security taxes and federal unemployment and state unemployment taxes. a. True b. False 26. Federal income taxes withheld increase the employer's payroll tax expense. a. True b. False 27. The use of a separate payroll bank account is not an advantageous control because it creates more complexity in reconciliation functions for a company and invites theft. a. True b. False 28. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense of the period during which the employee earns the benefits. a. True b. False 29. Depending on when an unfunded pension liability is to be paid, it will be classified on the balance sheet as either a long-term or current liability. a. True b. False 30. During the first year of operations, employees earned vacation pay of $35,000. The vacations will be taken during the second year. The vacation pay expense should be recorded in the second year as the vacations are taken by the employees. a. True b. False 31. One of the more popular defined contribution plans is the 401k plan. a. True b. False 32. A defined contribution plan promises employees a fixed annual pension benefit. a. True b. False 33. In a defined benefits plan, the employer bears the investment risks in funding a future retirement income benefit. Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies a. True b. False 34. The accounting for defined benefit plans is usually very easy and straightforward. a. True b. False 35. During the first year of operations, a company granted warranties on its products at an estimated cost of $8,500. The product warranty expense should be recorded in the years of the expenditures to repair the products covered by the warranty payments. a. True b. False 36. Obligations that may arise from past transactions only if certain events occur in the future are contingent liabilities. a. True b. False 37. In order to be recorded as a contingent liability, the liability must be possible and easily estimated. a. True b. False 38. The entry to journalize the cost of warranty repairs that were incurred during the current period, but related to sales made in prior years, includes a debit to Warranty Expense. a. True b. False 39. An installment note is a debt that requires the borrower to make equal periodic payments to the lender for the term of the note. a. True b. False 40. The interest portion of an installment note payment is computed by multiplying the interest rate by the carrying amount of the note at the end of the period. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 41. Notes may be issued a. when assets are purchased b. to creditors to temporarily satisfy an account payable created earlier c. when borrowing money d. all of these choices 42. Which of the following will be reported as a long-term liability on the balance sheet? a. accounts payable Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies b. accrued liabilities c. notes payable (due in 11 months) d. none of these choices 43. On June 8, Williams Company issued an $80,000, 5%, 120-day note payable to Brown Industries. Assuming a 360day year, what is the maturity value of the note? a. $82,600 b. $84,000 c. $81,333 d. $88,200 44. On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company. Assume that the fiscal year of Jones ends July 31. Using a 360-day year, what is the amount of interest expense recognized by Jones in the current fiscal year? a. $700 b. $4,200 c. $307 d. $1,400 45. On June 1, Davis Inc. issued an $84,000, 5%, 120-day note payable to Garcia Company. Assume that the fiscal year of Garcia ends June 30. Using a 360-day year, what is the amount of interest revenue recognized by Garcia in the following year? a. $700 b. $1,600 c. $1,062 d. $4,200 46. On May 18, Rodriguez Co. issued an $84,000, 6%, 120-day note payable on an overdue account payable to Wilson Company. Assume that the fiscal year of Rodriguez ends on June 30. Which of the following relationships is true? a. Rodriguez is the creditor and credits Accounts Receivable. b. Wilson is the creditor and debits Accounts Receivable. c. Wilson is the borrower and credits Accounts Payable. d. Rodriguez is the borrower and debits Accounts Payable. 47. Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry to journalize the payment should include a a. debit to Interest Payable for $750 b. debit to Interest Expense for $750 c. credit to Cash for $50,000 d. credit to Cash for $54,500 48. When a borrower receives the face amount of a discounted note less the discount, the amount received is known as the a. note proceeds b. note discount c. note deferred interest Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies d. note principal 49. Assuming a 360-day year, the interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable of $100,000 is a. $6,000 b. $1,500 c. $500 d. $3,000 50. Assuming a 360-day year, when a $50,000, 90-day, 9% interest-bearing note payable matures, total payment will be a. $51,125 b. $54,500 c. $1,125 d. $4,500 51. Assuming a 360-day year, proceeds of $48,750 were received from discounting a $50,000, 90-day note at a bank. The discount rate used by the bank in computing the proceeds was a. 6.25% b. 10.00% c. 10.26% d. 9.75% 52. Anderson Co. issued a $50,000, 60-day, discounted note to National Bank. The discount rate is 6%. At maturity, assuming a 360-day year, the borrower will pay a. $53,000 b. $50,500 c. $50,000 d. $49,500 53. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is 6%. Assuming a 360day year, the cash proceeds to Chang Co. are a. $49,750 b. $47,000 c. $49,000 d. $51,000 54. The entry to journalize the issuance of a note for the purpose of converting an existing account payable would be a. debit Cash and credit Accounts Payable b. debit Accounts Payable and credit Cash c. debit Cash and credit Notes Payable d. debit Accounts Payable and credit Notes Payable 55. The entry used to journalize the issuance of an interest-bearing note for the purpose of borrowing funds for the business is a. debit Accounts Payable and credit Notes Payable Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies b. debit Cash and credit Notes Payable c. debit Notes Payable and credit Cash d. debit Cash and Interest Expense and credit Notes Payable 56. The entry used to journalize the issuance of a discounted note for the purpose of borrowing funds for the business is a. debit Cash and Interest Expense and credit Notes Payable b. debit Cash and Interest Payable and credit Notes Payable c. debit Accounts Payable and credit Notes Payable d. debit Notes Payable and credit Cash 57. The entry used to journalize the payment of a discounted note is a. debit Notes Payable and Interest Expense and credit Cash b. debit Notes Payable and credit Cash c. debit Cash and credit Notes Payable d. debit Accounts Payable and credit Cash 58. The entry used to journalize the payment of an interest-bearing note is a. debit Cash and credit Notes Payable b. debit Accounts Payable and credit Cash c. debit Notes Payable and Interest Expense and credit Cash d. debit Notes Payable and Interest Receivable and credit Cash 59. A current liability is a debt that is reasonably expected to be paid a. between 6 months and 18 months b. out of currently recognized revenues c. within 1 year d. out of cash currently on hand 60. Taylor Bank lends Guarantee Company $150,000 on January 1. Guarantee Company signs a $150,000, 8%, 9-month, interest-bearing note. The entry made by Guarantee Company on January 1 to journalize the proceeds and issuance of the note is a. Interest Expense Cash Notes Payable

12,000 138,000

b. Cash Notes Payable

150,000

c. Cash Interest Expense Notes Payable

162,000

d. Notes Payable Interest Payable Cash Interest Expense

120,000 7,200

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150,000 150,000

12,000 150,000

120,000 7,200 Page 7

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 61. The entry to journalize the conversion of a $6,300 account payable to a note payable would be a. Cash 6,300 Notes Payable

6,300

b. Notes Receivable Notes Payable

6,300 6,300

c. Notes Payable Cash

6,300

d. Accounts Payable Notes Payable

6,300

6,300 6,300

62. Current liabilities are a. due and receivable within 1 year b. due and to be paid out of current assets within 1 year c. due, but not payable for more than 1 year d. payable if a possible subsequent event occurs 63. Which of the following would most likely be classified as a current liability? a. 2-year notes payable b. bonds payable c. mortgage payable d. unearned rent 64. Assuming a 360-day year, when a $20,000, 90-day, 5% interest-bearing note payable matures, the total payment will be a. $21,000 b. $1,000 c. $20,250 d. $250 65. The current portion of long-term debt should a. be classified as a long-term liability b. not be separated from the long-term portion of debt on the balance sheet c. be paid immediately d. be reclassified as a current liability 66. On January 5, Thomas Company, a calendar year company, issued $1,000,000 of notes payable, of which $250,000 is due on January 1 each of the next 4 years. The proper balance sheet presentation on December 31 is a. Current liabilities, $1,000,000 b. Current liabilities, $250,000; Long-term debt, $750,000 c. Long-term debt, $1,000,000 d. Current liabilities, $750,000; Long-term debt, $250,000 Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 67. Proper payroll accounting methods are important for a business for all but which of the following reasons? a. Good employee morale requires timely and accurate payroll payments. b. Payroll is subject to various federal and state regulations. c. A business can help cash flow problems by delaying payments of payroll taxes to federal and state agencies. d. Payroll and related payroll taxes have a significant effect on the net income of most businesses. 68. The amount of federal income taxes withheld from an employee's gross pay is recorded as a(n) a. payroll expense b. contra account c. asset d. liability 69. Which of the following is not a factor in determining federal income taxes withheld from an individual's pay? a. marital status b. types of earnings c. gross pay d. number of withholding allowances 70. Which of the following would be used to compute the federal income taxes to be withheld from an employee's earnings? a. FICA tax rate b. wage and tax statement c. FUTA tax rate d. withholding table 71. Which of the following taxes would be deducted in determining an employee's net pay? a. FUTA taxes b. SUTA taxes c. FICA taxes d. all of these choices 72. Employers are required to withhold which of the following taxes from employees? a. FICA tax b. FICA tax and state and federal unemployment taxes c. state unemployment tax d. federal unemployment tax 73. Thomas Martin receives an hourly wage rate of $40, with time and a half for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the gross pay for Martin? a. $449 b. $1,730 c. $2,080 d. $1,574 Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 74. Martin Jackson receives an hourly wage rate of $30, with time and a half for all hours worked in excess of 40 hours during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to Jackson? a. $1,470.00 b. $1,009.75 c. $1,097.95 d. $460.25 75. The total earnings of an employee for a payroll period is referred to as a. take-home pay b. pay net of taxes c. net pay d. gross pay 76. Most employers are levied a tax on payrolls for a. sales tax b. medical insurance premiums c. federal unemployment compensation tax d. union dues 77. Which of the following will have no effect on an employee’s take-home pay? a. social security tax b. unemployment tax c. marital status d. number of exemptions claimed 78. Sadie White receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $300; social security tax rate, 6.0%; and Medicare tax rate, 1.5%. What is the net amount to be paid to White? a. $1,443 b. $1,143 c. $1,260 d. $1,560 79. Davis and Thompson have earnings of $850 each. The social security tax rate is 6.0%, and the Medicare tax rate is 1.5%. Assuming that the payroll will be paid on December 29, what will be the employer's total FICA tax for this payroll period? a. $102.00 b. $127.50 c. $96.00 d. $25.50 80. The following totals for the month of June were taken from the payroll register of Arcon Company: Salaries expense Social security and Medicare taxes withheld Powered by Cognero

$14,000 1,050 Page 10

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies Income taxes withheld Retirement savings

2,600 1,000

The entry to journalize the payment of net pay would include a a. debit to Salaries Payable for $14,000 b. debit to Salaries Payable for $9,350 c. credit to Salaries Expense for $9,350 d. credit to Salaries Payable for $9,350 81. Which of the following are included in the employer's payroll taxes? a. SUTA taxes b. FUTA taxes c. social security taxes d. all of these choices 82. Which of the following is required to be withheld from an employee's gross pay? a. both federal and state unemployment compensation taxes b. only federal unemployment compensation tax c. only federal income tax d. only state unemployment compensation tax 83. Each year there is a ceiling for the amount that is subject to all of the following except a. social security tax b. federal income tax c. federal unemployment tax d. state unemployment tax 84. Lee Company has the following information for the pay period of December 15–31: Gross payroll Social security rate Medicare rate

$16,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$4,000 0.8% 5.4%

Assuming no employees are subject to ceilings for taxes on their earnings, Salaries Payable would be recorded for a. $16,000 b. $9,808 c. $10,800 d. $11,040 85. Payroll taxes levied against employees become liabilities a. on the first of the following month b. at the end of the payroll period c. when data are entered in a payroll register d. at the end of an accounting period 86. An employee receives an hourly wage rate of $15, with time and a half for all hours worked in excess of 40 during the first week of the calendar year. Payroll data for the first week of the calendar year are as follows: hours worked, 48; Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies federal income tax withheld, $120; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment tax, 5.4% on the first $7,000; and federal unemployment tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $568.74 b. $601.50 c. $660.00 d. $574.90 87. The following totals for the month of April were taken from the payroll register of Magnum Company. Use this information to answer the questions that follow. Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes

$12,000 900 2,500 450 32 216

The entry to journalize the monthly payroll on April 30 would include a a. credit to Salaries Payable for $8,150 b. debit to Salaries Expense for $7,902 c. debit to Salaries Payable for $8,150 d. debit to Salaries Payable for $7,902 88. The following totals for the month of April were taken from the payroll register of Magnum Company. Use this information to answer the questions that follow. Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Federal unemployment taxes State unemployment taxes

$12,000 900 2,500 450 32 216

The entry to journalize the accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,500 b. debit to FICA Taxes Payable for $1,800 c. credit to Payroll Tax Expense for $248 d. debit to Payroll Tax Expense for $1,148 89. The following totals for the month of April were taken from the payroll register of Magnum Company: Salaries FICA taxes withheld Income taxes withheld Medical insurance deductions Unemployment taxes Powered by Cognero

$10,000 750 2,000 450 420 Page 12

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies The entry to journalize the accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $1,170 b. debit to FICA Taxes Payable for $1,500 c. credit to Payroll Tax Expense for $420 d. debit to Payroll Tax Expense for $1,620 90. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the first week of the calendar year are as follows: hours worked, 46; federal income tax withheld, $110; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment tax, 5.4% on the first $7,000; and federal unemployment tax, 0.8% on the first $7,000. What is the net amount to be paid to the employee? a. $569.88 b. $539.00 c. $625.00 d. $544.88 91. The following totals for the month of June were taken from the payroll register of Young Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Retirement savings Salaries subject to federal and state unemployment taxes of 6.2%

$15,000 1,125 3,000 500 4,000

The entry to journalize the accrual of employer’s payroll taxes would include a debit to a. Payroll Tax Expense for $2,498 b. Social Security and Medicare Tax Payable for $2,250 c. Payroll Tax Expense for $1,373 d. Payroll Tax Expense for $3,000 92. Assuming no employees are subject to ceilings for their earnings, Harris Company has the following information for the pay period of January 15–31. Use this information to answer the questions that follow. Gross payroll Social security rate Medicare rate

$10,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$1,800 0.8% 5.4%

Salaries Payable would be recorded in the amount of a. $8,200 b. $6,830 c. $8,630 d. $7,450 93. Assuming no employees are subject to ceilings for their earnings, Harris Company has the following information for the pay period of January 15–31. Use this information to answer the questions that follow. Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies Gross payroll Social security rate Medicare rate

$10,000 6.0% 1.5%

Federal income tax withheld Federal unemployment tax rate State unemployment tax rate

$1,800 0.8% 5.4%

Assuming that all wages are subject to federal and state unemployment taxes, the employer's payroll tax expense would be a. $1,370 b. $750 c. $620 d. $2,870 94. Assume that social security taxes are payable at a 6.0% rate and Medicare taxes are payable at a 1.5% rate with no maximum earnings, and that federal and state unemployment compensation taxes total 6.2% on the first $7,000 of earnings. If an employee earns $2,500 for the current week and the employee's year-to-date earnings before this week were $6,800, what is the total employer payroll taxes related to the current week? a. $187.50 b. $199.90 c. $342.50 d. $12.40 95. According to a summary of the payroll of Scotland Company, all earnings were subject to the 6.0% social security tax and the 1.5% Medicare tax. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (5.4%) and federal (0.8%) unemployment taxes. The entry to journalize accrued payroll taxes would include a a. debit to SUTA Payable of $810 b. debit to SUTA Payable of $18,900 c. credit to SUTA Payable of $810 d. credit to SUTA Payable of $18,900 96. According to a summary of the payroll of Scotland Company, total salaries were $500,000. Assume that social security taxes are payable at a 6.0% rate and Medicare taxes are payable at a 1.5% rate with no maximum earnings. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (5.4%) and federal (0.8%) unemployment taxes. The entry to journalize accrued salaries would include a a. debit to Salaries Payable of $365,250 b. credit to Salaries Payable of $364,500 c. debit to Salaries Expense of $364,500 d. credit to Salaries Expense of $365,250 97. An aid in internal control over payroll that indicates employee attendance is a. a time card b. a voucher system c. a special payroll bank account d. fringe benefits 98. A pension plan that requires the employer to make annual pension contributions, with no promise to employees Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies regarding future pension payments, is termed a. funded b. unfunded c. defined benefit d. defined contribution 99. During its first year of operations, a company granted employees vacation privileges and pension rights estimated at a cost of $21,500 and $15,000. The vacations are expected to be taken in the next year, and the pension rights are expected to be paid in the future 5–30 years. What is the total cost of vacation pay and pension rights to be recognized in the first year? a. $15,000 b. $36,500 c. $6,500 d. $21,500 100. A pension plan that promises employees a fixed annual pension benefit, based on years of service and compensation, is called a(n) a. defined contribution plan b. defined benefit plan c. unfunded plan d. compensation plan 101. Vacation pay payable is reported on the balance sheet as a(n) a. current liability or long-term liability, depending on when the vacations will be taken by employees b. current liability c. expense d. long-term liability 102. An unfunded pension liability is reported on the balance sheet as a. a current liability b. owner's equity c. a long-term liability d. a current liability or long-term liability, depending on when the pension liability is to be paid 103. The entry a company uses to journalize accrued vacation privileges for its employees at the end of the year is a. debit Vacation Pay Expense and credit Vacation Pay Payable b. debit Vacation Pay Payable and credit Vacation Pay Expense c. debit Salaries Expense and credit Cash d. debit Salaries Expense and credit Salaries Payable 104. The entry a company uses to journalize fully funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense and credit Cash b. debit Pension Expense and credit Unfunded Pension Liability c. debit Pension Expense and credit Unfunded Pension Liability and Cash d. debit Pension Expense and credit Cash Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 105. The entry a company uses to journalize partially funded pension rights for its salaried employees at the end of the year is a. debit Salaries Expense and credit Cash b. debit Pension Expense and credit Unfunded Pension Liability c. debit Pension Expense and credit Unfunded Pension Liability and Cash d. debit Pension Expense and credit Cash 106. The entry a company uses to journalize pension rights that have not been funded for its salaried employees at the end of the year is a. debit Salaries Expense and credit Cash b. debit Pension Expense and credit Unfunded Pension Liability c. debit Pension Expense and credit Unfunded Pension Liability and Cash d. debit Pension Expense and credit Cash 107. Zennia Company provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation cost is $135,000. On December 31, the end of the current year, the current month’s accrued vacation pay is a. $135,000 b. $67,500 c. $0 d. $11,250 108. Hall Company sells merchandise with a 1-year warranty. In the current year, sales consisted of 4,500 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in the current year and 70% in the next year. On the current year's income statement, Hall should show warranty expense of a. $45,000 b. $13,500 c. $31,500 d. $0 109. Excom sells radios and each unit carries a 2-year replacement warranty. The cost of repair defects under the warranty is estimated at 5% of the sales price. During September, Excom sells 100 radios for $50 each. One radio is actually replaced during September. For what amount in September would Excom debit Product Warranty Expense? a. $50 b. $250 c. $30 d. $120 110. Wright Company sells merchandise with a 1-year warranty. This year, sales consisted of 2,000 units. It is estimated that warranty repairs will average $15 per unit sold, and 30% of the repairs will be made this year and 70% next year. On this year's income statement, Wright should show warranty expense of a. $9,000 b. $21,000 c. $30,000 d. $0 Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 111. Scott Company sells merchandise with a 1-year warranty. Sales consisted of 2,500 units in Year 1 and 2,000 units in Year 2. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in Year 1 and 70% in Year 2 for the Year 1 sales. Similarly, 30% of repairs will be made in Year 2 and 70% in Year 3 for the Year 2 sales. On the Year 3 income statement, how much of the warranty expense shown will be due to Year 1 sales? a. $6,000 b. $14,000 c. $20,000 d. $0 112. The cost of a product warranty should be included as an expense in the a. period the cash is collected for a product sold on account b. future period when the cost of repairing the product is paid c. period of the sale of the product d. future period when the product is repaired or replaced 113. McKay Company sells merchandise with a 1-year warranty. In Year 1, sales consisted of 1,200 units. It is estimated that warranty repairs will average $10 per unit sold, and 30% of the repairs will be made in Year 1 and 70% in Year 2. On the Year 1 income statement, McKay should show warranty expense of a. $3,600 b. $8,400 c. $12,000 d. $0 114. Blast Company sells portable CD players, and each unit carries a 1-year replacement warranty. The cost to repair defects under the warranty is estimated at 10% of the sales price. During May, Blast sells 650 portable CD players for $50 each. For what amount in May would Blast debit Product Warranty Expense? a. $3,250 b. $1,625 c. $650 d. $1,300 115. Estimating and recording product warranty expense in the period of the sale best follows the a. cost principle b. business entity assumption c. matching principle d. materiality concept 116. The entry a company uses to journalize the estimated product warranty expense is a. debit Product Warranty Expense and credit Product Warranty Payable b. debit Product Warranty Payable and credit Cash c. debit Product Warranty Expense and credit Cash d. debit Product Warranty Payable and credit Product Warranty Expense 117. Which of the following is the most desirable quick ratio? Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies a. 2.20 b. 1.80 c. 1.95 d. 1.50 118. Crafter Company has the following assets and liabilities: ASSETS Cash Accounts receivable Inventory Equipment

$28,000 15,000 20,000 50,000

LIABILITIES Current portion of long-term debt Accounts payable Long-term debt

10,000 2,000 25,000

Determine the quick ratio. a. 5.3 b. 3.6 c. 3.3 d. 2.3 119. Based on the following data, what is the quick ratio? Accounts payable Accounts receivable Accrued liabilities Cash Intangible assets Inventory Long-term investments Long-term liabilities Marketable securities Fixed assets Prepaid expenses

$ 30,000 60,000 5,000 30,000 50,000 69,000 80,000 100,000 30,000 670,000 1,000

a. 3.4 b. 3.0 c. 2.2 d. 1.8 120. Quick assets include a. cash, cash equivalents, receivables, prepaid expenses, and inventory b. cash, cash equivalents, receivables, and prepaid expenses c. cash, cash equivalents, receivables, and inventory d. cash, cash equivalents, and receivables Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 121. Young Company has the following assets and liabilities: ASSETS Cash Accounts receivable Inventory Equipment

$35,000 15,000 30,000 50,000

LIABILITIES Current portion of long-term debt Accounts payable Long-term debt

10,000 2,000 25,000

Determine the quick ratio. a. 6.7 b. 13.0 c. 4.2 d. 3.5 122. Which of the following is the least desirable quick ratio? a. 1.20 b. 1.00 c. 0.95 d. 0.50 123. If a company borrows money from a bank as an installment note, the interest portion of each annual payment will a. equal the interest rate on the note times the carrying amount of the note at the beginning of the period b. remain constant over the term of the note c. equal the interest rate on the note times the face amount d. increase over the term of the note 124. On the first day of the fiscal year, Hawthorne Company obtained an $88,000, 7-year, 5% installment note from Sea Side Bank. The note requires annual payments of $15,208, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $4,400 and principal repayment of $10,808. The entry Hawthorne would make to journalize the first annual payment due on the note would include a a. debit to Cash for $15,208 b. credit to Notes Payable for $10,808 c. debit to Interest Expense for $4,400 d. debit to Notes Payable for $15,208 125. On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The entry to journalize the payment of the first annual amount due on the note would include a a. debit to Cash for $11,942 b. credit to Interest Payable for $11,550 Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies c. debit to Notes Payable for $11,942 d. debit to Interest Expense for $23,492 126. On January 1, Gemstone Company obtained a $165,000, 10-year, 7% installment note from Guarantee Bank. The note requires annual payments of $23,492, with the first payment occurring on the last day of the fiscal year. The first payment consists of interest of $11,550 and principal repayment of $11,942. The entry to journalize the issuance of the installment note for cash on January 1 would include a a. debit to Interest Expense for $11,550 b. credit to Interest Payable for $11,550 c. credit to Notes Payable for $165,000 d. debit to Notes Payable for $165,000 127. On January 1, Year 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank. The note requires annual payments consisting of principal and interest of $15,179, beginning on December 31 of the current year. The December 31, Year 1, carrying amount in the allocation of periodic payments table for this installment note will be equal to a. $27,635 b. $40,201 c. $36,821 d. $39,000 128. On January 1, Year 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 2 carrying amount in the allocation of periodic payments table for this installment note will be equal to a. $26,000 b. $27,635 c. $21,642 d. $28,402 129. On January 1, Year 1, Zero Company obtained a $52,000, 4-year, 6.5% installment note from Regional Bank. The note requires annual payments of $15,179, beginning on December 31, Year 1. The December 31, Year 3 carrying amount in the allocation of periodic payments table for this installment note will be equal to a. $0 b. $13,000 c. $14,252 d. $6,463 130. Which of the following is applied to a specified maximum and is paid by the employer only? a. federal income tax b. FICA—social security c. FICA—Medicare d. federal unemployment compensation tax (FUTA) 131. An event is reasonably possible and the related liability is estimable. It will a. be recorded only Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies b. be recorded and disclosed c. be disclosed only d. not be recorded or disclosed 132. An event is reasonably possible but the related liability is not estimable. It will a. be recorded only b. be recorded and disclosed c. be disclosed only d. not be recorded or disclosed 133. An event is probable and the related liability is estimable. It will a. be recorded only b. be recorded and disclosed c. be disclosed only d. not be recorded or disclosed 134. An event is probable but the related liability is not estimable. It will a. be recorded only b. be recorded and disclosed c. be disclosed only d. not be recorded or disclosed 135. An event is remotely possible and the related liability is estimable. It will a. be recorded only b. be recorded and disclosed c. be disclosed only d. not be recorded or disclosed 136. An event is remotely possible and the related liability is not estimable. It will a. be recorded only b. be recorded and disclosed c. be disclosed only d. not be recorded or disclosed 137. Current Assets ÷ Current Liabilities = a. Current Ratio b. Working Capital c. Quick Assets d. Quick Ratio 138. Current Assets – Current Liabilities = a. Current Ratio b. Working Capital c. Quick Assets Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies d. Quick Ratio 139. Cash + Temporary Investments + Accounts Receivable = a. Current Ratio b. Working Capital c. Quick Assets d. Quick Ratio 140. (Cash + Temporary Investments + Accounts Receivable) ÷ Current Liabilities = a. Current Ratio b. Working Capital c. Quick Assets d. Quick Ratio

141. On January 1, Yeargan Company obtained a $125,000, 7-year, 5% installment note from Farmers Bank. The note requires annual payments of $21,602, with the first payment occurring on the last day of the fiscal year. The first payment consists of $6,250 interest and principal repayment of $15,352. Journalize the following entries: (a) Issued the installment note for cash on January 1. (b) Paid the first annual payment on the note.

142. A business issued a 120-day, 6% note for $10,000 to a creditor on account. The company uses a 360-day year for interest computations. Journalize the entries for (a) the issuance of the note and (b) the payment of the note at maturity, including interest. 143. On August 1, Batson Company issued a 60-day note with a face amount of $140,000 to Jergens Company for merchandise inventory. (Assume a 360-day year is used for interest computations.) (a) Determine the proceeds of the note assuming the note carries an interest rate of 6%. (b) Determine the proceeds of the note assuming the note is discounted at 6%. 144. Journalize the following, assuming a 360-day year is used for interest computations: Apr. 30. May 30.

Issued a $150,000, 30-day, 6% note dated April 30 to Misner Co. on account. Paid Misner Co. the amount owed on the note dated April 30.

145. Roseland Design borrowed $700,000 by issuing a 90-day note to CorpOne Funding Company. CorpOne discounts the note at 8%. (Assume a 360-day year is used for interest computations.) (a) Journalize Roseland’s entries for: (1) The issuance of the note. (2) The payment of the note at maturity. (b) Journalize CorpOne’s entries for: (1) The discounting of the note. Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies (2) The receipt of the payment of the note at maturity. 146. Journalize the following entries on the books of the borrower and creditor. Label accordingly. (Assume a 360-day year is used for interest computations.) June

1. 30. Aug. 29.

James Co. purchased merchandise on account from O’Leary Co., $90,000, terms n/30. James Co. issued a 60-day, 5% note for $90,000 on account. James Co. paid the amount due.

147. Journalize the following entries on the books of the borrower and creditor. Label accordingly. (Assume a 360-day year is used for interest computations.) June

1. 30. Aug. 29.

Regis Co. purchased merchandise on account from Winthrop Co., $60,000, terms n/30. Regis Co. issued a 60-day, 5% note for $60,000 on account. Regis Co. paid the amount due.

148. On October 1, Ramos Co. signed a $90,000, 60-day discounted note at the bank. The discount rate was 6%, and the note was paid on November 30. (Assume a 360-day year is used for interest computations.) (a) (b)

Journalize the entries for October 1 and November 30. Assume that Ramos Co. signed a 6% interest-bearing note. Journalize the entries for October 1 and November 30.

149. Journalize the following entries on the books of Winston Co. for August 1, September 1, and November 30. (Assume a 360-day year is used for interest computations.) Aug. 1. Sept. 1. Nov. 30.

Purchased merchandise for $75,000 on account from Bagley Co., terms n/30. Issued a 90-day, 6% note for $75,000 on account. Paid the amount due.

150. A borrower has two alternatives for a loan: (a) issue a $480,000, 60-day, 8% note or (2) issue a $480,000, 60-day note that the creditor discounts at 8%. (Assume a 360-day year is used for interest computations.) (a) (b)

Compute the amount of the interest expense for each option. Determine the proceeds received by the borrower in each situation.

151. Baker Green’s weekly gross earnings for the week ending December 7 were $2,500, and her federal income tax withholding was $525. Assuming the social security rate is 6.0%, the Medicare rate is 1.5%, and all earnings are subject to FICA taxes, what is Green’s net pay? 152. An employee earns $40 per hour and 1.5 times that rate for all hours in excess of 40 hours per week. Assume that the employee worked 60 hours during the week, and that the gross pay prior to the current week totaled $58,000. Assume further that the social security tax rate was 6.0%, the Medicare tax rate was 1.5%, and the federal income tax to be withheld was $614. (a) Determine the gross pay for the week. (b) Determine the net pay for the week. 153. The following information is for employee Ella Dodd for the week ended March 15. Total hours worked: 48 Rate: $15 per hour, with double time for all hours in excess of 40 Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies Federal income tax withheld: $200 United Fund deduction: $50 Cumulative earnings prior to current week: $6,400 Tax rates: Social security: 6.0% with no maximum earnings Medicare tax: 1.5% on all earnings State unemployment: 5.4% with no maximum earnings; on employer Federal unemployment: 0.8% with no maximum earnings; on employer (a) (b)

Determine (1) gross pay, (2) total employee deductions, and (3) net pay. Determine each of the employer's payroll taxes related to the earnings of Ella Dodd for the week ended March 15.

154. The summary of the payroll for the monthly pay period ending July 15 indicated the following: Sales salaries Office salaries Federal income tax withheld Medical insurance withheld Social security tax withheld Medicare tax withheld

$125,000 35,000 32,300 7,370 10,200 2,550

Journalize the entries for (a) the payroll and (b) the employer's payroll tax expense for the month. The state unemployment tax rate is 5.4%, and the federal unemployment tax rate is 0.8%. Only $25,000 of salaries is subject to unemployment taxes. 155. Excel Products Inc. pays its employees semimonthly. The summary of the payroll for December 31 indicated the following: Salaries expense Federal income tax withheld

$120,000 20,000

Payroll is subject to social security tax of 6.0% and Medicare tax of 1.5%, with no maximum earnings; $10,000 is subject to state unemployment tax of 5.4% and federal unemployment tax of 0.8%. Journalize the entry(ies) for the employer’s payroll tax expense if the employees are paid on December 31 of the current year. 156. An employee receives an hourly rate of $15, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $120; all earnings are subject to social security tax; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment tax, 5.4% on the first $7,000; federal unemployment tax, 0.8% on the first $7,000. Journalize the entries for the payroll and the employer’s payroll tax expense. If required, round answers to the nearest cent. 157. Townson Company had gross wages of $180,000 during the week ended December 10. All earnings are subject to social security tax, while the amount of wages subject to federal and state unemployment taxes was $24,000. Tax rates are as follows: Social security Medicare State unemployment Federal unemployment

6.0% 1.5% 5.4% 0.8%

The total amount withheld from employee wages for federal income taxes was $32,000. (a)

Journalize the entry for the payroll for the week of December 10.

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies (b)

Journalize the entry for the payroll tax expense incurred for the week of December 10.

158. According to a summary of the payroll of Scotland Company, salaries for the period were $500,000. Federal income tax withheld was $98,000. Also, $15,000 was subject to state (5.4%) and federal (0.8%) unemployment taxes. All earnings are subject to social security tax of 6.0% and Medicare tax of 1.5%. (a) (b)

Journalize the entry for the payroll. Journalize the entry for the employer’s payroll taxes.

159. The payroll register of Seaside Architecture Company indicates $970 of social security taxes and $257 of Medicare taxes withheld on total salaries of $16,500 for the period. Federal withholding for the period totaled $4,235. Journalize the entry for the payroll. 160. The payroll register of Seaside Architecture Company indicates $870 of social security taxes and $217 of Medicare taxes withheld on total salaries of $14,500 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250 at the federal rate of 0.8% and state rate of 5.4%. Journalize the entry for the employer’s payroll taxes. 161. List four internal controls that relate directly to payroll. 162. The payroll summary for December 31 for Waters Co. revealed total earnings of $80,000. All earnings are subject to social security tax of 6.0% and Medicare tax of 1.5%. Earnings subject to state and federal unemployment compensation taxes are $3,000 at the federal rate of 0.8% and state rate of 5.4%. Journalize the entry for the employer’s payroll taxes. 163. Perez Company has the following information for the pay period of January 15–31. Gross payroll Social security rate Medicare rate

$20,000 Federal income tax withheld 6.0% Federal unemployment tax rate 1.5% State unemployment tax rate

$2,500 0.8% 5.4%

Assuming no employees are subject to ceilings for their earnings, compute (a) salaries payable and (b) the employer’s payroll tax expense. 164. An employee receives an hourly rate of $45, with time and a half for all hours worked in excess of 40 during the week. Payroll data for the current week are as follows: hours worked, 48; federal income tax withheld, $950; social security tax rate, 6.0%; Medicare tax rate, 1.5%; state unemployment compensation tax, 5.4% on the first $7,000; federal unemployment compensation tax, 0.8% on the first $7,000. Determine the employer's payroll tax expense if: (a) This is the first payroll of the year and the employee has no cumulative earnings for the year to date. (b) The employee’s cumulative earnings for the year prior to this week equal $6,200.

165. According to a summary of the payroll of Sinclair Company, $545,000 was subject to the 6.0% social security tax and the 1.5% Medicare tax. Also, $10,000 was subject to state and federal unemployment taxes. (a) (b)

Compute the employer’s payroll taxes using the following rates: state unemployment tax, 5.4%; federal unemployment tax, 0.8%. Journalize the entry for the employer's payroll taxes.

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 166. Martin Services Company provides its employees vacation benefits and a defined contribution pension plan. Employees earned vacation pay of $39,500 for the period. The pension plan requires a contribution to the plan administrator equal to 9% of employee salaries. Salaries were $750,000 during the period. Journalize the entries for (a) the vacation pay and (b) the pension benefit. 167. The following two independent sets of transactions are for Welcott Company: (a) Welcott provides its employees with varying amounts of vacation per year, depending on the length of employment. The estimated amount of the current year’s vacation pay is $78,000. Journalize the adjusting entry required on January 31, the end of the first month of the year, for the accrued vacation pay. (b) Welcott maintains a defined contribution pension plan for its employees. The plan requires quarterly installments to be paid to the funding agent, Northern Trust, by the fifteenth of the month following the end of each quarter. Assuming that the pension cost is $119,600 for the quarter ended December 31, journalize the entries for (1) the accrued pension liability on December 31 and (2) the payment to the funding agent on January 15. 168. Journalize the following transactions for Riley Corporation: Dec. 31. Estimated the accrued product warranty expense for the year to be 2.5% of sales. Sales for the year totaled $8,850,000. 31. Estimated the accrued vacation pay for the year to be $75,000. 31. Paid First Insurance Co. $55,000 as fund trustee for the pension plan. The annual pension cost is $87,000. 169. Based on the following information, journalize the necessary adjusting entries for Howard Company: Dec. 31.

Estimated the accrued product warranty expense for the year to be 2.3% of sales. Sales for the year totaled $6,005,000.

31. Estimated the accrued vacation pay for the year to be $75,225. 31. Paid Reliable Insurance Co. $275,000 as fund trustee for the pension plan. The annual pension cost is $350,000. 170. Nelson Industries warrants its products for 1 year. The estimated product warranty is 4.3% of sales. Sales were $475,000 for September. In October, a customer received warranty repairs requiring $215 of parts and $65 of labor. (a)

Journalize the adjusting entry required at September 30, the end of the first month of the current year, to record the estimated product warranty expense. Journalize the entry for the warranty work provided in October.

(b)

171. Based on the following information, journalize the necessary adjusting entries for Kelly Company: Dec. 31.

Estimated the accrued product warranty expense for the year to be 1.5% of sales. Sales for the year totaled $7,760,000.

31.

Estimated the accrued vacation pay for the year to be $46,000.

31.

Paid Reliable Insurance Co. $85,000 as fund trustee for the pension plan. The annual

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies pension cost is $109,000. 172. Ecco Company sold $150,000 of kitchen appliances with 6-month warranties during September. The cost to repair defects under the warranty is estimated at 6% of the sales price. On October 15, a customer required a $200 part replacement, plus $85 labor under the warranty. Provide the journal entry for (a) the estimated expense on September 30 and (b) the October 15 warranty work. 173. Florida Keys Construction installs swimming pools. It estimates that warranty obligations are 3% of sales. For the year just ending, Florida Keys’ sales were $1,450,000. Previous quarterly entries debiting Product Warranty Expense totaled $28,700. Determine the estimated warranty expense for the year and journalize the necessary adjusting entry for the fourth quarter. 174. Aqua Construction installs swimming pools. It estimates that warranty obligations are 5% of sales. For the year just ending, Aqua’s sales were $1,500,000. Previous quarterly entries debiting Product Warranty Expense totaled $48,700. Determine the estimated warranty expense for the year and journalize the necessary adjusting entry for the fourth quarter. 175. Lamar Industries warrants its products for 1 year. The estimated product warranty expense is 3% of sales. Sales for June were $190,000. In July, a customer received warranty repairs requiring $185 of parts and $50 of labor. (a) Journalize the adjusting entry required at June 30, the end of the first month of the current year, for the estimated product warranty expense. (b) Journalize the entry for the warranty work provided in July. 176. Several months ago, Jones Company experienced a spill of hazardous materials into the White River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $405,000. The company contested the fine. In addition, an employee is seeking $180,000 in damages related to the spill. Finally, a homeowner has sued the company for $260,000. Although the homeowner lives 30 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $260,000. Jones’ legal counsel believes the following will happen in relationship to these incidents: • • • • (a)

It is probable that the EPA fine will stand. An out-of-court settlement for $165,000 has recently been reached with the employee, with the final papers to be signed next week. Counsel believes that the homeowner’s case is weak and will be decided in favor of Jones Company. Other litigation related to the spill is possible, but the damage amounts are uncertain. Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Damage Awards and Fines” to recognize the expense for the period. Prepare any note disclosure related to the spill.

(b)

177. Several months ago, Maximilien Company experienced a spill of radioactive materials into the Missouri River from one of its plants. As a result, the Environmental Protection Agency (EPA) fined the company $1,750,000. The company contested the fine. In addition, an employee is seeking $975,000 in damages related to the spill. Finally, a homeowner has sued the company for $580,000. Although the homeowner lives 15 miles downstream from the plant, he believes that the spill has reduced his home’s resale value by $580,000 Maximilien's legal counsel believes the following will happen in relationship to these incidents: • •

It is probable that the EPA fine will stand. An out-of-court settlement for $650,000 has recently been reached with the employee, with the final papers to be signed next week.

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies • •

Counsel believes that the homeowner’s case is weak and will be decided in favor of Maximilien Company. Other litigation related to the spill is possible, but the damage amounts are uncertain.

(a)

Based on this information, journalize the contingent liabilities associated with the spill. Use the account “Environmental Awards and Fines” to recognize the expense for the period.

(b)

Prepare any note disclosure related to the spill.

178. Hadley Industries warrants its products for 1 year. The estimated product warranty expense is 4% of sales. Assume that sales were $210,000 for June. In July, a customer received warranty repairs requiring $205 of parts and $75 of labor. (a) (b)

Journalize the adjusting entry required at June 30, the end of the first month of the current year, for the estimated product warranty expense. Journalize the entry for the warranty work provided in July.

179. The current assets and current liabilities for Kolbie Company and Newton Company are as follows: Kolbie Company (in millions) For the Year Ending December 31

Newton Company (in millions) For the Year Ending December 31

Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Other current assets* Total current assets

$ 8,352 6,034 3,029 446 2,195 $20,056

$ 8,546 752 5,152 660 2,829 $17,939

Current liabilities: Accounts payable Accrued and other current liabilities Total current liabilities

$4,970 3,329 $8,299

$10,430 6,361 $16,791

*These represent prepaid expenses and other non-quick current assets. (a) Determine the quick ratio for both companies. Round to two decimal places. (b) Interpret the quick ratio difference between the two companies. 180. Core Company had the following assets and liabilities as of December 31: ASSETS Cash Accounts receivable Inventory Equipment Powered by Cognero

$58,000 25,000 20,000 50,000 Page 28

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies LIABILITIES Current portion of long-term debt Accounts payable Long-term debt

20,000 12,000 25,000

Determine the current ratio, working capital, and quick ratio. Round ratios to one decimal place. 181. The following information is available for Davis Company and Bender Inc.: Account Cash Cash equivalents Current notes receivable Accounts receivable Prepaid expenses Inventory Fixed assets Accumulated depreciation—fixed assets Accounts payable Current accrued liabilities Mortgage payable Equity Total (a) (b)

Davis Company Dr. Cr. $ 321 88 56 603 55 714 920 $ 415 260 213 917 952 $2,757 $2,757

Bender Inc. Dr. Cr. $ 425 95 46 307 85 898 755 $ 225 198 149 824 1,215 $2,611 $2,611

Compute the quick ratio for each company. Round ratios to two decimal places. Comment on which one is more able to meet current liabilities.

182. For Company A and Company B: (a) (b)

Compute the quick ratio for each company. Round ratios to two decimal places. Comment on which one is more able to meet current liabilities.

Account Cash Cash equivalents Trade notes receivable Accounts receivable Prepaid expenses Inventory Fixed assets Accumulated depreciation—Fixed assets Accounts payable Current accrued liabilities Mortgage payable Equity Total

Company A Dr. Cr. $21 8 7 6 5 14 20 $5 26 13 17

$81

20 $81

Company B Dr. Cr. $25 10 6 7 5 8 55 $25 8 19 24

$116

40 $116

183. Salif, Inc. has 15 full-time manufacturing employees. Its weekly payroll averages $17,800, but it varies from week to Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies week primarily due to overtime worked. Last month, the weekly average climbed to $18,700, but no additional overtime had been authorized. All employees swipe their badges at the beginning and end of their shift. They are also supposed to swipe their badges when they come and go at lunchtime. The computer automatically computes the hours worked for each employee. A clerk prints out the time sheets, which are then approved by each employee’s supervisor and a manager. The manager rarely finds any problems with the time sheets and frequently signs them without checking them carefully. Once the time sheets are approved, the clerk sends the information to a payroll processor, who completes all the remaining payroll functions. Employees’ net pay is direct-deposited into their accounts, and they receive a pay stub each week. When management investigates, they discover that a supervisor had authorized additional overtime for two employees to complete an important project. However, the supervisor had not obtained formal authorization for the overtime. The authorization was given verbally by the plant manager. What internal control procedure would have avoided the extra overtime expense? 184. Grant Co. had the following account balances at December 31, the end of its fiscal year: Accounts Payable Salaries Payable Unearned Fees Income Taxes Payable Notes Payable

$ 56,000 12,200 8,900 3,200 240,000

The note payable is an 8-year note with $30,000 due within the next year. Prepare the “Liabilities” section of the balance sheet for the company.

Indicate the answer choice that best completes the statement or answers the question. 185. Sterling Inc. has two long-term notes outstanding. One is a 5-year note for $50,000. An equal amount of principal must be repaid each year of the loan. The other is a 7-year note for $210,000. In the next calendar year, the company will pay $21,000 of the principal. What is total amount of the notes that will be reported as current liabilities on its balance sheet? a. $229,000 b. $71,000 c. $40,000 d. $31,000

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies Answer Key 1. True 2. True 3. True 4. True 5. True 6. False 7. False 8. True 9. False 10. False 11. False 12. False 13. False 14. False 15. True 16. True 17. False 18. False 19. False 20. False 21. True 22. False 23. True 24. False 25. False Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 26. False 27. False 28. True 29. True 30. False 31. True 32. False 33. True 34. False 35. False 36. True 37. False 38. False 39. True 40. False 41. d 42. d 43. c 44. c 45. c 46. d 47. b 48. a 49. b 50. a 51. b Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 52. c 53. c 54. d 55. b 56. a 57. b 58. c 59. c 60. b 61. d 62. b 63. d 64. c 65. d 66. b 67. c 68. d 69. b 70. d 71. c 72. a 73. c 74. b 75. d 76. c Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 77. b 78. b 79. b 80. b 81. d 82. c 83. b 84. c 85. b 86. b 87. a 88. d 89. a 90. a 91. c 92. d 93. a 94. b 95. c 96. b 97. a 98. d 99. b 100. b 101. a 102. d Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 103. a 104. d 105. c 106. b 107. d 108. a 109. b 110. c 111. d 112. c 113. c 114. a 115. c 116. a 117. a 118. b 119. a 120. d 121. c 122. d 123. a 124. c 125. c 126. c 127. b Powered by Cognero

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies 128. b 129. c 130. d 131. c 132. c 133. b 134. c 135. d 136. d 137. a 138. b 139. c 140. d 141. (a) Cash 125,000 Notes Payable 125,000 (b) Interest Expense 6,250 Notes Payable 15,352 Cash 21,602 142. Description (a) Accounts Payable Notes Payable

Debit 10,000

(b) Notes Payable Interest Expense* Cash

Credit 10,000

10,000 200 10,200

*$10,000 × 6% × 120 ÷ 360 143. a. $140,000 b. $138,600 [$140,000 – ($140,000 × 6% × 60 ÷ 360)] 144. Apr. 30

Accounts Payable—Misner Co. Notes Payable—Misner Co.

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150,000 150,000 Page 36

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies May 30

Notes Payable—Misner Co. Interest Expense Cash

145. (a) (1) Cash Interest Expense* Notes Payable

150,000 750 150,750

686,000 14,000 700,000

(2) Notes Payable Cash

700,000

(b) (1) Notes Receivable Cash Interest Revenue

700,000

(2) Cash Notes Receivable

700,000

700,000

686,000 14,000*

700,000

*$700,000 × 8% × 90 ÷ 360 146. James Co. (Borrower) June 1 Inventory Accounts Payable—O’Leary Co. 30 Accounts Payable—O’Leary Co. Notes Payable—O’Leary Co. Aug. 29 Notes Payable—O’Leary Co. Interest Expense* Cash O’Leary Co. (Creditor) June 1 Accounts Receivable—James Co. Sales 30 Notes Receivable—James Co. Accounts Receivable—James Co. Aug. 29 Cash Notes Receivable—James Co. Interest Revenue*

90,000 90,000 90,000 90,000 90,000 750 90,750 90,000 90,000 90,000 90,000 90,750 90,000 750

*$90,000 × 5% × 60 ÷ 360 147. Regis Co. (Borrower) June 1 Inventory Accounts Payable 30 Accounts Payable Notes Payable Powered by Cognero

60,000 60,000 60,000 60,000 Page 37

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies Aug. 29 Notes Payable Interest Expense* Cash Winthrop Co. (Creditor) June 1 Accounts Receivable Sales 30 Notes Receivable Accounts Receivable Aug. 29 Cash Notes Receivable Interest Revenue*

60,000 500 60,500

60,000 60,000 60,000 60,000 60,500 60,000 500

*$60,000 × 5% × 60 ÷ 360 148. (a) Oct. 1 Cash Interest Expense* Notes Payable

89,100 900 90,000

Nov. 30 Notes Payable Cash

90,000

(b) Oct. 1 Cash Notes Payable

90,000

Nov. 30 Notes Payable Interest Expense* Cash

90,000 900

90,000

90,000

90,900

*$90,000 × 6% × 60 ÷ 360 149. Aug. 1 Inventory Accounts Payable

75,000 75,000

Sept. 1 Accounts Payable Notes Payable

75,000

Nov. 30 Notes Payable Interest Expense* Cash

75,000 1,125

75,000

76,125

*$75,000 × 6% × 90 ÷ 360 150. (a) (b)

$480,000 × 8% × 60 ÷ 360 = $6,400 for each alternative. (1) $480,000 interest-bearing note: $480,000 proceeds

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies (2)

$480,000 discounted note: $480,000 – $6,400 interest = $473,600 proceeds

151. Gross earnings Federal income tax withholding Social security tax (6.0% × $2,500) Medicare tax (1.5% × $2,500 ) Net pay

$2,500.00 (525.00) (150.00) (37.50) $1,787.50

152. (a) Regular pay (40 hrs. × $40) Overtime pay (20 hrs. × $60) Gross pay (b) Gross pay Social security tax (6.0% × $2,800) Medicare tax (1.5% × $2,800) Federal withholding Net pay

$1,600.00 1,200.00 $2,800.00 $2,800.00 $168.00 42.00 614.00

153. (a) (1) 40 hours at $15 $600.00 8 hours at $30 240.00 (2) Deductions: Federal income tax $200.00 United Fund deduction 50.00 Social security tax (6.0% of $840) 50.40 Medicare tax (1.5% of $840) 12.60 Total deductions (3) Cash paid (b) Social security and Medicare taxes (7.5% × $840) State unemployment tax (5.4% × $840) Federal unemployment tax (0.8% × $840) Total employer’s payroll taxes 154. (a) Sales Salaries Expense Office Salaries Expense Social Security Tax Payable Medicare Tax Payable Federal Income Tax Payable Medical Insurance Payable Salaries Payable (b) Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable* Federal Unemployment Tax Payable** Powered by Cognero

(824.00) $1,976.00

$840.00

(313.00) $527.00 $ 63.00 45.36 6.72 $115.08

125,000 35,000 10,200 2,550 32,300 7,370 107,580 14,300 10,200 2,550 1,350 200 Page 39

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies *$25,000 × 5.4% **$25,000 × 0.8% 155. Payroll Tax Expense Social Security Tax Payable (6.0% × $120,000) Medicare Tax Payable (1.5% × $120,000) State Unemployment Tax Payable (5.4% × $10,000) Federal Unemployment Tax Payable (0.8% × $10,000)

9,620 7,200 1,800 540 80

156. Salaries Expense [($15 × 40 + ($22.50 × 6)] Social Security Taxes Payable ($735 × 6.0%) Medicare Taxes Payable ($735 × 1.5%) Federal Withholding Taxes Payable Salaries Payable

735.00

Payroll Tax Expense Social Security Taxes Payable ($735 × 6.0%) Medicare Taxes Payable ($735 × 1.5%) State Unemployment Comp. Taxes Payable ($735 × 5.4%) Fed. Unemployment Comp. Taxes Payable ($735 × 0.8%)

100.70

157. Social security tax (6.0% × $180,000) Medicare tax (1.5% × $180,000) State unemployment (5.4% × $24,000) Federal unemployment (0.8% × $24,000) Total payroll taxes (a): Wages Expense Social Security Tax Payable Medicare Tax Payable Employees Federal Income Tax Payable Wages Payable (b): Payroll Tax Expense Social Security Tax Payable Medicare Tax Payable State Unemployment Tax Payable Powered by Cognero

44.10 11.03 120.00 559.87 44.10 11.03 39.69 5.88

$10,800 2,700 1,296 192 $14,988

180,000 10,800 2,700 32,000 134,500

14,988 10,800 2,700 1,296 Page 40

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Chapter 10: Liabilities: Current, Installment Notes, and Contingencies Federal Unemployment Tax Payable