APPENDIX E TIME VALUE OF MONEY CHAPTER LEARNING OBJECTIVES 1. Compute interest and future values. Simple interest is computed on the principal only, while compound interest is computed on the principal and any interest earned that has not been withdrawn. To solve for future value of a single amount, prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. Solve for future value of an annuity, prepare a time diagram of the problem. Identify the amount of the periodic payments (receipts), the number of payments (receipts), and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the future value factor specified at the intersection of the number of payments and the interest rate. 2. Compute present values. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). To solve for present value of a single amount, prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. To solve for present value of an annuity, prepare a time diagram of the problem. Identify the amount of future periodic receipts or payments (annuities), the number of payments (receipts), and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of payments and the interest rate. To compute the present value of notes and bonds, determine the present value of the principal amount and the present value of the interest payments. Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. To determine the present value of the series of interest payments, multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond. 3. Use a financial calculator to solve time value of money problems. Financial calculators can be used to solve the same and additional problems as those solved with time value of money tables. Enter into the financial calculator the amounts for all of the known elements of a time value of money problem (periods, interest rate, payments, future or present value), and it solves for the unknown element. Particularly useful situations involve interest rates and compounding periods not presented in the tables.
E-2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
Interest is the difference between the amount borrowed and the principal.
Answer: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
2.
Compound interest is computed on the principal and any interest earned that has not been paid or received.
Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
3.
The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.
Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
4.
When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.
Answer: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
5.
The process of determining the present value is referred to as discounting the future amount.
Answer: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
6.
A higher discount rate produces a higher present value.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
7.
In computing the present value of an annuity, it is not necessary to know the number of discount periods.
Answer: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
8.
Many companies calculate the future value of the cash flows involved in an investment in evaluating long-term capital investments.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPAPC: Project Management, IMA: Investment Decision, Sector: General, IFRS: No
9.
Financial calculators can be used to solve the same problems as those solved with time value of money tables.
Answer: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPAPC: Project Management, IMA: Decision Analysis, Sector: General, IFRS: No
10.
With a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem.
Answer: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPAPC: Project Management, IMA: Decision Analysis, Sector: General, IFRS: No
For Instructor Use Only
Time Value of Money
E-3
MULTIPLE CHOICE QUESTIONS Note: Students will need future value and present value tables for some questions. 11.
Compound interest is the return on principal a. only. b. for one or more periods. c. plus interest for two or more periods. d. for one period.
Answer: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
12.
The factor 1.0609 is taken from the 3% column and 2 periods row in certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1
Answer: a, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
13.
If €40,000 is deposited in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. €32,878 b. €48,000 c. €48,620 d. €48,666
Answer: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
14.
The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate.
Answer: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
15.
All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value.
Answer: d, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPAPC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
16.
Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1
Answer: b, LO: 1, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPAPC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
For Instructor Use Only
E-4 17.
Test Bank for Financial Accounting: IFRS Edition, 4e McGoff Company deposits €20,000 in a fund at the end of each year for 5 years. The fund pays interest of 4% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying a. €20,000 by the future value of 1 factor. b. €100,000 by 1.04. c. €100,000 by 1.20. d. €20,000 by the future value of an annuity factor.
Answer: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
18.
The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2.
Answer: b, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
19.
If $40,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $65,156 b. $420,000 c. $503,116 d. $600,000
Answer: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
20.
Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin
Answer: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
21.
In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting.
Answer: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
22.
Present value is based on a. the dollar amount to be received. b. the length of time until the amount is received. c. the interest rate. d. All of these answer choices are correct.
Answer: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
For Instructor Use Only
Time Value of Money 23.
E-5
Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond. b. The determination of the declining-balance depreciation expense. c. The determination of the amount to report for non-current notes payable. d. The determination of the amount to report for lease liability.
Answer: b, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
24.
If you are able to earn an 8% rate of return, what amount would you need to invest to have €60,000 one year from now? a. €55,494 b. €55,556 c. €54,546 d. €59,400
Answer: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
25.
If you are able to earn a 15% rate of return, what amount would you need to invest to have €25,000 one year from now? a. €24,753 b. €21,875 c. €21,250 d. €21,740
Answer: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
26.
If the single amount of €10,000 to be received in 2 years is discounted at 11%, its present value is a. €9,090. b. €8,116. c. €9,010. d. €13,770.
Answer: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
27.
If the single amount of €5,000 is to be received in 3 years and discounted at 6%, its present value is a. €4,198. b. €4,716. c. €4,333. d. €4,700.
Answer: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
28.
Which of the following discount rates will produce the smallest present value? a. 8% b. 9% c. 10% d. 4%
Answer: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPAPC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
For Instructor Use Only
E-6 29.
Test Bank for Financial Accounting: IFRS Edition, 4e Suppose you have a winning lottery ticket and you have the option of accepting €5,000,000 three years from now or taking the present value of the €5,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. €4,198,100. b. €4,319,200. c. €4,450,000. d. €5,000,000.
Answer: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
30.
The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate €8,000 for a down payment 5 years from now on a new car is a. €1,600. b. €5,978. c. €5,969. d. €5,600.
Answer: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
31.
The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate €15,000 for your first tuition payment when you start college in 3 years is a. €12,750. b. €11,745. c. €12,957. d. €13,290.
Answer: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
32.
The present value of €10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest.
Answer: a, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
33.
Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 €150,000 Year 2 €250,000 Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment? a. €342,975 b. €206,613 c. €400,000 d. €200,000
Answer: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Decision Modeling, AICPAPC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
For Instructor Use Only
Time Value of Money 34.
E-7
If Sloane Joyner invests $14,019.75 now and she will receive $40,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10%
Answer: d, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
35.
Suzy Douglas has been offered an investing opportunity which requires an immediate deposit of €110,310 and will earn 8% per year. At the end of the investment’s life it will return €300,000 to Suzy. How many years must Suzy wait to receive the €300,000? a. 10 b. 11 c. 12 d. 13
Answer: d, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
36.
Peter Johnson invests $71,033.60 now for a series of $10,000 annual returns beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive? a. 10 b. 12 c. 13 d. 15
Answer: c, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
37.
In order to compute the present value of an annuity, it is necessary to know the a. discount rate. b. number of discount periods and the amount of the periodic payments/receipts. c. both the discount rate and the number of discount periods and the amount of the periodic payments/receipts. d. other information in addition to the discount rate and the number of discount periods and the amount of the periodic payments/receipts.
Answer: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
38.
A €10,000, 6%, 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following periodinterest combinations? a. 5 interest periods, 6% interest b. 20 interest periods, 6% interest c. 20 interest periods, 1.5% interest d. 5 interest periods, 1.5% interest
Answer: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
For Instructor Use Only
E-8 39.
Test Bank for Financial Accounting: IFRS Edition, 4e Hazel Company has just purchased equipment that requires annual payments of $80,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $228,398 b. $320,000 c. $93,950 d. $300,270
Answer: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA-BB: Strategic/Critical Thinking, AICPA-FN: Decision Modeling, AICPAPC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
40.
Perdue Company has purchased equipment that requires annual payments of $50,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the equipment? a. $300,000 b. $205,570 c. $276,286 d. $192,750
Answer: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
41.
If a bond has a stated rate of interest of 6%, but the market rate of interest is 8%, the bond a. will sell at a discount. b. will sell at a premium. c. may sell at either a premium or a discount. d. will sell at its face value.
Answer: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
42.
When determining the proceeds received when issuing a bond, the factor applied to the amount of the interest payments is determined from the table of the a. present value of 1. b. present value of an annuity. c. future value of 1. d. future value of an annuity.
Answer: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
43.
When determining the proceeds received when issuing a bond, the factor applied to the amount of the bond principal is determined from the table of the a. present value of 1. b. present value of an annuity. c. future value of 1. d. future value of an annuity.
Answer: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
44.
If a bond has a stated rate of 10% and is discounted at 10%, then the proceeds received at issuance will be a. equal to the face value of the bonds. b. greater than the face value of the bonds. c. less than the face value of the bonds. d. zero.
Answer: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPAPC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
For Instructor Use Only
Time Value of Money 45.
E-9
Howard Company is about to issue €4,000,000 of 5-year bonds, with a stated rate of interest of 10%, payable semiannually. The market rate for such securities is 12%. How much can Howard expect to receive for the sale of these bonds? a. €3,705,578. b. €4,000,000. c. €4,324,440. d. None of these answer choices are correct.
Answer: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
EXERCISES Ex. 46 Jose Reynolds deposited €10,000 in an account paying interest of 4% compounded annually. What amount will be in the account at the end of 4 years? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 46
(3 min.)
Use Table 1. €10,000 × 1.16986 (4 periods and 4%) = €11,698.60 Ex. 47 Wingate Company borrowed €90,000 on January 2, 2020. This amount plus accrued interest of 6% compounded annually will be repaid at the end of 3 years. What amount will Wingate repay at the end of the third year? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 47
(3 min.)
Use Table 1. €90,000 × 1.19102 (3 periods and 6%) = €107,191.80 Ex. 48 Pleasant Company has decided to begin accumulating a fund for plant expansion. The company deposited $80,000 in a fund on January 2, 2016. Pleasant will also deposit $40,000 annually at the end of each year, starting in 2016. The fund pays interest at 4% compounded annually. What is the balance of the fund at the end of 2020 (after the 2020 deposit)? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 48
(5 min.)
Use Tables 1 and 2. $80,000 × 1.21665 (5 periods and 4%; Table 1) = $ 97,332.00 $40,000 × 5.41632 (5 periods and 4%; Table 2) = 216,652.80 Fund Balance at 12-31-20 $313,984.80
For Instructor Use Only
E - 10
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 49 Mandy How plans to buy an automobile and can deposit $3,000 toward the purchase today. If the annual interest rate is 8%, how much can Mandy expect to have as a down payment in 3 years? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 49
(3 min.)
Use Table 1 $3,000 × 1.2597 = $3,779.13. Ex. 50 Rob Honda plans to buy a home and can deposit $15,000 for the purchase today. If the annual interest rate is 8%, how much can Rob expect to have for a down payment in 5 years? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 50
(3 min.)
Use Table 1 $15,000 × 1.46933 = $22,039.95. Ex. 51 Bill and Ellen Sweatt plan to invest $2,500 a year in an educational IRA for their granddaughter, Sloane Martin. They will make these deposits on December 31 of each year. Bill and Ellen feel they can safely earn 8%. How much will be in this account on December 31 of the 18th year? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 51
(3 min.)
Use Table 2 $2,500 × 37.45024 = $93,625.60. Ex. 52 Bill Cigarettes acquired a bad habit of smoking in high school. Bill spends approximately $70 a month or $840 a year on cigarettes. He is not concerned with health issues, but he is keenly aware of financial issues. Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking. Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 52
(3 min.)
Use Table 2 $840 × 45.76196 = $38,440.05.
For Instructor Use Only
Time Value of Money
E - 11
Ex. 53 Robin Clark has a cell phone that she uses only for emergencies. The cost of the phone is $40 a month. The satellite company is offering unlimited weekends for an additional $10 a month ($120 a year). Robin thinks it would be “cool” to have this benefit and, after all, $10 a month is not much. Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of accepting the unlimited weekends offer. Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 53
(3 min.)
Use Table 2 $120 × 51.16012 = $6,139.21. Ex. 54 Lamb Company deposited $15,000 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 54
(3 min.)
Use Table 2. $15,000 × 6.80191 (6 periods and 5%) = $102,028.65 Ex. 55 Martin Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000. The deposits are made at the end of each year to a fund paying 5% interest compounded annually. What amount will be in the sinking fund at the end of the 10 years? Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 55
(3 min.)
Use Table 2. $72,000 × 12.57789 (10 periods and 5%) = $905,608.08 Ex. 56 (a) (b)
What is the present value of $90,000 due 7 years from now, discounted at 9%? What is the present value of $150,000 due 5 years from now, discounted at 12%?
Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 56
(5 min.)
Use Table 3. (a) $90,000 × .54703 (7 periods and 9%) = $49,232.70 (b) $150,000 × .56743 (5 periods and 12%) = $85,114.50
For Instructor Use Only
E - 12
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 57 Flower Company is considering an investment which will return a lump sum of €2,500,000 six years from now. What amount should Flower Company pay for this investment to earn an 11% return? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 57
(3 min.)
Use Table 3. €2,500,000 × .53464 (6 periods and 11%) = €1,336,600 Ex. 58 Chang Company earns 12% on an investment that will return $400,000 eleven years from now. What is the amount Chang Company should invest now to earn this rate of return? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 58
(3 min.)
Use Table 3. $400,000 × .28748 (11 periods and 12%) = $114,992 Ex. 59 If Kelly Cranford invests €11,970 now, she will receive €40,000 at the end of 14 years. What annual rate of return will Kelly earn on her investment? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 59
(3 min.)
Use Table 3. Answer: 9% €11,970 ÷ €40,000 = .29925
Read across the 14-period row in Table 3 to find .29925 in the 9% column.
Ex. 60 Luis Rodriguez wants to buy a car in 3 years. He will need $3,000 for a down payment. The annual interest rate is 9%. How much money must Luis invest today for the purchase? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 60
(3 min.)
Use Table 3 $3,000 × .77218 = $2,316.54. Ex. 61 Amy Brown plans to buy a surround sound stereo system for €1,100 after 3 years. If the interest rate is 6%, how much money should Amy set aside today for the purchase? For Instructor Use Only
Time Value of Money
E - 13
Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 61
(3 min.)
Use Table 3 €1,100 × .83962 = $923.58. Ex. 62 Compute the future value of $6,000 invested every year at an interest rate of 9%. You invest the money for 20 years with the first payment made at the end of the year. Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 62
(3 min.)
Use Table 2 $6,000 × 51.16012 = $306,960.72. Ex. 63 Kim Black plans to buy a truck for €24,000 after 3 years. If the interest rate is 6%, how much money should Kim set aside today for the purchase? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 63
(3 min.)
Use Table 3. €24,000 × .83962 = €20,150.88 Ex. 64 DMV leases a building for 20 years. The lease requires 20 annual payments of $12,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 64
(3 min.)
Use Table 4. $12,000 + ($12,000 ´ 8.36492) = $112,379.04 Ex. 65 Frye Company is considering investing in an annuity contract that will return €50,000 annually at the end of each year for 20 years. What amount should Frye Company pay for this investment if it earns an 8% return? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 65
(3 min.)
Use Table 4. For Instructor Use Only
E - 14
Test Bank for Financial Accounting: IFRS Edition, 4e
€50,000 ´ 9.81815 (20 periods and 8%) = €490,907.50 Ex. 66 Sarah Denny purchased an investment for $40,260.48. From this investment, she will receive $6,000 annually for the next 10 years starting one year from now. What rate of interest will Sarah be earning on her investment? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 66
(3 min.)
Use Table 4. Answer: 8% $40,260.48 ÷ $6,000 = 6.71008 (10 periods and 8%) = 6.71008 Ex. 67 You are purchasing a car for €25,000, and you obtain financing as follows: €2,500 down payment, 12% interest, semiannual payments over 5 years. Instructions Compute the payment you will make every 6 months. Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 67
(3 min.)
Use Table 4. €25,000 cost – €2,500 down payment = €22,500 Payment ´ 7.36009 = €22,500 Payment = €22,500/7.36009 = €3,057.03 Ex. 68 Frostmore Company is considering investing in an annuity contract that will return $40,000 annually at the end of each year for 20 years. What amount should Frostmore pay for this investment if it earns an 8% return? Answer: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 68
(3 min.)
Use Table 4 $40,000 × 9.81815 (20 periods and 8%) = $392,726. Ex. 69 Cecilia Jeffries purchased an investment for €49,090.75. From this investment, she will receive €5,000 annually for the next 20 years starting one year from now. What rate of interest will Cecilia be earning on her investment? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
For Instructor Use Only
Time Value of Money
For Instructor Use Only
E - 15
E - 16
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 69
(3 min.)
Use Table 4. Answer: 8% (€49,090.75 ÷ €5,000) = 9.81815
Read across the 20-period row in Table 4 to find 9.81815 in the 8% column.
Ex. 70 Lucky Lou has just won the lottery and will receive an annual payment of $100,000 every year for the next 20 years. If the annual interest rate is 8%, what is the present value of the winnings? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 70
(3 min.)
Use Table 4 $100,000 × 9.81815 = $981,815. Ex. 71 CVS leases a building for 20 years. The lease requires 20 annual payments of €10,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA-BB: Resource Management, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 71
(3 min.)
Use Table 4 €10,000 + (€10,000 × 8.36492) = €93,649.20. Ex. 72 Tuber Company issued $2,000,000, 10%, 2-year bonds which pay interest semiannually. Compute the amount at which the bonds would sell if investors required a rate of return of 8%. Answer: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 72
(5 min.)
Present value of the principal: $2,000,000 × .85480 (Table 3, 4 periods and 4%) ........ Present value of the interest payments: $2,000,000 × .05 = $100,000 $100,000 × 3.62990 (Table 4, 4 periods and 4%) .......... Proceeds from issuance of bonds ..............................................
For Instructor Use Only
$1,709,600 362,990 $2,072,590
Time Value of Money
E - 17
Ex. 73 Barrett Company issued 9%, 5-year, €3,000,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2020, and are issued on that date. The discount rate of interest for such bonds on April 1, 2020, is 8%. What cash proceeds did Barrett Company receive from issuance of the bonds? Answer: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Quantitative Methods, Sector: General, IFRS: No
Solution 73
(5 min.)
Present value of the interest payments: €3,000,000 × 9% x 6/12 = €135,000 €135,000 × PV of 1 due periodically for 10 periods at 4% €135,000 × 8.11090 (Table 4) = €1,094,972 Present value of the principal: €3,000,000 × PV of 1 due in 10 periods at 4% €3,000,000 × .67556 (Table 3) = €2,026,680 Proceeds = €1,094,972 + €2,026,680 = €3,121,652
COMPLETION STATEMENTS 74.
Payments or receipts of equal dollar amounts are referred to as __________________.
Answer: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
75.
The _____________________ of an annuity is the sum of all the payments plus the accumulated compound interest on them.
Answer: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
76.
The process of determining the present value is referred to as _________________ the future amount.
Answer: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
77.
To compute the present value of a bond, both the ______________ payments and the ___________ amount must be discounted.
Answer: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
Answers to Completion Statements 74. 75. 76. 77.
annuities future value discounting interest, principal.
For Instructor Use Only
E - 18
Test Bank for Financial Accounting: IFRS Edition, 4e
MATCHING 78.
Match the items below by entering the appropriate code letter in the space provided. A. Compound interest B. Future value of a single amount C. Future value of an annuity
D. Present value of a single amount E. Present value of an annuity
_____ 1. The value today of a future amount to be received or paid. _____ 2. The value at a future date of a given amount invested. _____ 3. Return on principal plus interest for two or more periods. _____ 4. Value today of a series of future amounts to be received or paid. _____ 5. The sum of all the payments or receipts plus the accumulated compound interest on them. Answer: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Problem Solving/Decision Making, IMA: Business Economics, Sector: General, IFRS: No
Answers to Matching 1. D 2. B 3. A
4. E 5. C
For Instructor Use Only
APPENDIX F ACCOUNTING FOR PARTNERSHIPS CHAPTER LEARNING OBJECTIVES 1. Discuss and account for the formation of a partnership. The principal characteristics of a partnership are (a) association of individuals, (b) mutual agency, (c) limited life, (d) unlimited liability, and (e) co-ownership of property. When formed, a partnership records each partner's initial investment at the fair value of the assets at the date of their transfer to the partnership. 2. Explain how to account for net income or net loss of a partnership. Partnerships divide net income or net loss on the basis of the income ratio, which may be (a) a fixed ratio, (b) a ratio based on beginning or average capital balances, (c) salaries to partners and the remainder on a fixed ratio, (d) interest on partners' capital and the remainder on a fixed ratio, and (e) salaries to partners, interest on partners' capital, and the remainder on a fixed ratio. The financial statements of a partnership are similar to those of a proprietorship. The principal differences are (a) the partnership shows the division of net income on the income statement, (b) the owners' equity statement is called a partners’ capital statement, and (c) the partnership reports each partner's capital on the statement of financial position. 3. Explain how to account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record the (a) sale of noncash assets, (b) allocation of the gain or loss on realization, (c) payment of partnership liabilities, and (d) distribution of cash to the partners on the basis of their capital balances. 4. Prepare journal entries when a new partner is either admitted or withdraws. The entry to record the admittance of a new partner by the purchase of a partner's interest affects only partners' capital accounts. The entries to record the admittance by investment of assets in the partnership (a) increase both net assets and total capital and (b) may result in recognition of a bonus to either the old partners or the new partner. The entry to record a withdrawal from the firm when the partners pay from their personal assets affects only partners' capital accounts. The entry to record a withdrawal when payment is made from partnership assets (a) decreases net assets and total capital and (b) may result in recognizing a bonus either to the retiring partner or the remaining partners.
F-2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
The personal assets, liabilities, and personal transactions of partners are excluded from the accounting records of the partnership.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
The act of any partner is binding on all other partners if the act appears to be appropriate for the partnership.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
3.
A major advantage of the partnership form of organization is that the partners have unlimited liability.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
4.
Partnership creditors may have a claim on the personal assets of any of the partners if the partnership assets are not sufficient to settle claims.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
5.
The partnership agreement between partners must be in writing.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
6.
If a partner invests noncash assets in a partnership, they should be recorded by the partnership at their fair value.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
7.
L. Hampton invests the following assets in a new partnership: €30,000 in cash, and equipment that cost $70,000 but has a book value of €34,000 and fair value of €40,000. Hampton, Capital will be credited for €64,000.
Ans: F, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Solution: $30,000 + $40,000 = $70,000
8.
Two proprietorships cannot combine and form a partnership.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
9.
If a partner's investment in a partnership includes equipment that has accumulated depreciation of $8,000, it would not be appropriate for the partnership to record the accumulated depreciation.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
10.
If a partner's investment in a partnership consists of Accounts Receivable of HK$35,000 and an Allowance for Doubtful Accounts of HK$7,000, it would not be appropriate for the partnership to record the Allowance for Doubtful Accounts.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 11.
F-3
Unless stated otherwise in the partnership contract, profits and losses are shared among the partners in the ratio of their capital equity balances.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
12.
If salary allowances and interest on capital are stipulated in the partnership profit and loss sharing agreement, they are implemented only if income is sufficient to cover the amounts required by these features.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
13.
Unless the partnership agreement specifically indicates an income ratio, partnership net income or loss is not allocated to the partners.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14.
Partnership income or loss need not be closed to partners' capital accounts each period because of the unlimited life characteristic of partnerships.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
If a partnership has a loss for the period, the closing entry to transfer the loss to the partners will require a credit to the Income Summary account.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
The partners' drawing accounts are closed each period into the Income Summary account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
17.
Salary allowances to partners are a major expense on most partnership income statements.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
An interest allowance in sharing partnership net income (or net loss) is related to the amount of partners' invested capital during the period.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
19.
The financial statements of a partnership are similar to those of a proprietorship.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
The income earned by a partnership will always be greater than the income earned by a proprietorship because in a partnership there is more than one owner contributing to the success of the business.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
21.
The function of the Partners' Capital Statement is to explain the changes in partners' capital account balances during a period.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
F-4 22.
Test Bank for Financial Accounting: IFRS Edition, 4e A detailed listing of all the assets invested by a partner in a partnership appears on the Partners' Capital Statement.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
Total partners' equity of a partnership is equal to the sum of all partners' capital account balances.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
The distribution of cash to partners in a partnership liquidation is always made based on the partners' income sharing ratio.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
The liquidation of a partnership means that a new partner has been admitted to the partnership.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
26.
The admission of a new partner results in the legal dissolution of the existing partnership and the beginning of a new partnership.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
27.
If a new partner is admitted into a partnership by investment, the total assets and total capital will change.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
28.
A bonus to old partners results when the new partner's capital credit on the date of admittance is greater than his or her investment in the firm.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
29.
If a new partner invests in a partnership at book value and acquires a 1/4 interest in total partnership capital, it indicates that a bonus was paid to the original partners.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
30.
A bonus to the remaining partners results when a retiring partner receives partnership assets which are less than his or her capital balance on the date of withdrawal.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
31.
A partnership is an association of no more than two persons to carry on as co-owners of a business for profit.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
32.
Once assets have been invested in the partnership, they are owned jointly by all partners.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 33.
F-5
Each partner's initial investment in a partnership should be recorded at book value.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
34.
Partnership income is shared in proportion to each partner's capital equity interest unless the partnership contract specifically indicates the manner in which net income or net loss is to be divided.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
35.
In a liquidation, the final distribution of cash to partners should be on the basis of their income ratios.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
36.
In an admission of a partner by investment of assets, the total net assets and total capital of the partnership do not change.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
37.
The withdrawal of a partner legally dissolves the partnership.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
F-6
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 38.
A hybrid form of business organization with certain features like a corporation is a(n) a. limited liability partnership. b. limited liability company. c. "S" corporation. d. sub-chapter "S" corporation.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
39.
A partnership a. has only one owner. b. pays taxes on partnership income. c. must file an information tax return. d. is not an accounting entity for financial reporting purposes.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
40.
A general partner in a partnership a. has unlimited liability for all partnership debts. b. is always the general manager of the firm. c. is the partner who lacks a specialization. d. is liable for partnership liabilities only to the extent of that partner's capital equity.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
41.
The individual assets invested by a partner in a partnership a. revert back to that partner if the partnership liquidates. b. determine that partner's share of net income or loss for the year. c. are jointly owned by all partners. d. determine the scope of authority of that partner.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
42.
Which one of the following would not be considered a disadvantage of the partnership form of organization? a. Limited life b. Unlimited liability c. Mutual agency d. Ease of formation
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
43.
The partnership form of business is a. restricted to law and medical practices. b. restricted to firms having fewer than 10 partners. c. not restricted to any particular type of business. d. most often used in relatively large companies.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 44.
F-7
Which of the following is not a principal characteristic of the partnership form of business organization? a. Mutual agency b. Association of individuals c. Limited liability d. Limited life
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
The partnership agreement should include each of the following except the a. date of the partnership inception. b. principal location of the firm. c. surviving family members in the event of a partner's death. d. Each of these should be included.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46.
Which of the following statements is true regarding the form of a legally binding partnership contract? a. The partnership contract must be in writing. b. The partnership contract may be based on a handshake. c. The partnership contract may be implied. d. The partnership contract cannot be oral.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
47.
Which of the following statements about a partnership is correct? a. The personal assets of a partner are included in the partnership accounting records. b. A partnership is not required to file an information tax return. c. Each partner's share of income is taxable to the partnership. d. A partnership represents an accounting entity for financial reporting purposes.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
48.
In a partnership, mutual agency means a. each partner acts on his own behalf when engaging in partnership business. b. the act of any partner is binding on all other partners, only if partners act within their scope of authority. c. an act by a partner is judged as binding on other partners depending on whether the act appears to be appropriate for the partnership. d. that partners must pay taxes on a mutual or combined basis.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
49.
A partnership a. is dissolved only by the withdrawal of a partner. b. is dissolved upon the acceptance of a new partner. c. dissolution means the business must liquidate. d. has unlimited life.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
F-8 50.
Test Bank for Financial Accounting: IFRS Edition, 4e The partner in a limited partnership that has unlimited liability is referred to as the a. lead partner. b. head partner. c. general partner. d. unlimited partner.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
51.
Limited partnerships a. must have at least one general partner. b. guarantee that a partner will receive a return. c. guarantee that a partner will get back his original investment. d. are limited to only three partners.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
52.
The Salinas-Milliken partnership is terminated when creditor claims exceed partnership assets by $80,000. Salinas is a millionaire and Milliken has no personal assets. Milliken’s partnership interest is 75% and Salinas’s is 25%. Creditors a. must collect their claims equally from Milliken and Salinas. b. may collect the entire $80,000 from Salinas. c. must collect their claims 75% from Milliken and 25% from Salinas. d. may not require Salinas to use his personal assets to satisfy the $80,000 in claims.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
53.
Which of the following statements about partnerships is incorrect? a. Partnership assets are co-owned by partners. b. If a partnership is terminated, the assets do not legally revert to the original contributor. c. If the partnership agreement does not specify the manner in which net income is to be shared, it is distributed according to capital contributions. d. Each partner has a claim on assets equal to the balance in the partner's capital account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
54.
Which of the following is not an advantage of the partnership form of business? a. Mutual agency b. Ease of formation c. Ease of decision making d. Freedom from governmental regulations and restrictions
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
55.
The largest companies in the United States are primarily organized as a. limited partnerships. b. partnerships. c. corporations. d. proprietorships.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 56.
F-9
The basis for dividing partnership net income or net loss is referred to as any of the following except the a. income ratio. b. income and loss ratio. c. profit and loss ratio. d. income sharing ratio.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
57.
Which of the following statements is incorrect regarding partnership agreements? a. It may be referred to as the “articles of co-partnership.” b. An oral agreement is preferable to a written article. c. It should specify the different relationships that are to exist among the partners. d. It should state procedures for submitting disputes to arbitration.
Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
58.
Bagley invests personally owned equipment, which originally cost $220,000 and has accumulated depreciation of $60,000 in the Bagley and Eggers partnership. Both partners agree that the fair value of the equipment was $120,000. The entry made by the partnership to record Bagley’s investment should be a. Equipment ............................................................................ 220,000 Accumulated Depreciation—Equipment...................... 60,000 Bagley, Capital ............................................................ 160,000 b. Equipment ............................................................................ 160,000 Bagley, Capital ............................................................ 160,000 c. Equipment ............................................................................ 120,000 Loss on Purchase of Equipment .......................................... 40,000 Accumulated Depreciation—Equipment .............................. 60,000 Bagley, Capital ............................................................ 220,000 d. Equipment ............................................................................ 120,000 Bagley, Capital ............................................................ 120,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Nate is investing in a partnership with Deidre. Nate contributes as part of his initial investment, Accounts Receivable of €60,000; an Allowance for Doubtful Accounts of €9,000; and €6,000 cash. The entry that the partnership makes to record Nate’s initial contribution includes a a. credit to Nate, Capital for €66,000. b. debit to Accounts Receivable for €51,000. c. credit to Nate, Capital for €57,000. d. debit to Allowance for Doubtful Accounts for €9,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €60,000 - €9,000 + €6,000 = €57,000 (Accts. rec. – Allow. for dbtfl. accts. + Cash = Initial cap. contrib.)
60.
Which of the following would not be recorded in the entry for the formation of a partnership? a. Accumulated depreciation b. Allowance for doubtful accounts c. Accounts receivable d. All of these would be recorded.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
F - 10 61.
Test Bank for Financial Accounting: IFRS Edition, 4e Todd is investing in a partnership with Joseph. Todd contributes equipment that originally cost $42,000, has a book value of $20,000, and a fair value of $26,000. The entry that the partnership makes to record Todd’s initial contribution includes a a. debit to Equipment for $22,000. b. debit to Equipment for $42,000. c. debit to Equipment for $26,000. d. credit to Accumulated Depreciation for $22,000.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
62.
Ming contributes, as part of her initial investment, accounts receivable with an allowance for doubtful accounts. Which of the following reflects a proper treatment? a. The balance of the accounts receivable account should be recorded on the books of the partnership at its net realizable value. b. The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed. c. The allowance account should not be carried onto the books of the partnership. d. The accounts receivable and allowance should not be recorded on the books of the partnership because a partner must invest cash in the business.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
63.
Which one of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Salary allowance to partners c. Supplies used d. Freight-out
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
A partner invests into a partnership a building with an original cost of HK$360,000 and accumulated depreciation of HK$160,000. This building has a HK$280,000 fair value. As a result of the investment, the partner’s capital account will be credited for a. HK$280,000. b. HK$200,000. c. HK$360,000. d. HK$480,000.
Ans: A, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
65.
Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of €10,000 and a fair value of €14,000. Sandy will invest a building with a book value of €30,000 and a fair value of €42,000 with a mortgage of €15,000. At what amount should the building be recorded? a. €30,000 b. €27,000 c. €42,000 d. €45,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 66.
F - 11
Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of €10,000 and a fair value of €14,000. Sandy will invest a building with a book value of €30,000 and a fair value of €42,000 with a mortgage of €15,000. What amount should be recorded in Sandy’s capital account? a. €30,000 b. €27,000 c. €42,000 d. €14,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €42,000 - €15,000 = €27,000 (FV Bldg. – Mtg. = Cap. contrib.)
67.
Brian and Sandy are forming a partnership. Brian will invest a truck with a book value of €10,000 and a fair value of €14,000. Sandy will invest a building with a book value of €30,000 and a fair value of €42,000 with a mortgage of €15,000. What amount should be recorded in Brian’s capital account? a. €30,000 b. €27,000 c. €42,000 d. €14,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
68.
Brekke and Fig decide to organize a partnership. Brekke invests $30,000 cash, and Fig contributes $24,000 cash and equipment having a book value of $12,000. Choose the entry to record Fig’s investment in the partnership assuming the equipment has a fair value of $18,000. a. Cash ..................................................................................... 24,000 Equipment ........................................................................... 12,000 Fig, Capital ................................................................. 36,000 b. Equipment ........................................................................... 12,000 Fig, Capital ................................................................. 12,000 c. Cash ..................................................................................... 24,000 Fig, Capital ................................................................. 24,000 d. Cash ..................................................................................... 24,000 Equipment ........................................................................... 18,000 Fig, Capital ................................................................. 42,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
F - 12 69.
Test Bank for Financial Accounting: IFRS Edition, 4e M. Abadie and S. Collier combine their individual sole proprietorships to start the Abadie Collier partnership. M. Abadie and S. Collier invest in the partnership as follows Book Value Fair Value Abadie Collier Abadie Collier Cash $21,000 $6,000 $21,000 $6,000 Accounts Receivable 10,000 5,000 10,000 5,000 Allowance for Doubtful Accounts (1,500) (600) (2,100) (900) Equipment 15,000 24,000 13,500 9,000 Accumulated Depreciation (3,000) (9,000) The entries to record the investment will include a credit to: a. Abadie, Capital of $41,500. b. Collier, Capital of $19,100. c. Abadie, Capital of $43,000. d. Collier, Capital of $25,100.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $6,000 + $5,000 + $9,000 - $900 = $19,100 (Cash + Accts. rec. + Equip. – Allow. for dbtfl. accts. = Cap. contrib.)
70.
Partners Gary and Elaine have agreed to share profits and losses in an 80:20 ratio respectively, after Gary is allowed a salary allowance of €30,000 and Elaine is allowed a salary allowance of €15,000. If the partnership had net income of €30,000 for 2020, Elaine’s share of the income would be a. €15,000. b. €12,000. c. €18,000. d. €3,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €30,000 - €30,000 - €15,000 = - €15,000; €15,000 - (20%) (€15,000) = €12,000 [NI – Salary, G – Salary, E = Net loss; Salary, E – (E’s % NI x Net loss) = E’s Share of NI]
71.
The partnership agreement of Alix, Gise, and Bosco provides for the following income ratio: (a) Alix, the managing partner, receives a salary allowance of £108,000, (b) each partner receives 15% interest on average capital investment, and (c) remaining net income or loss is divided equally. The average capital investments for the year were: Alix £600,000, Gise £1,200,000, and Bosco £1,800,000. If partnership net income is £720,000, the amount distributed to Gise should be: a. £180,000. b. £186,000. c. £204,000. d. £240,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: £720,000 - £108,000 - (.15) (£600,000 + £1,200,000 + £1,800,000) = £72,000; (.15) (£1,200,000) + (£72,000 / 3) = £204,000 [NI – Salary, A – (Int. rate x (Avg. cap. inv. A + Avg. cap. inv. G + Avg. cap. inv. B)) = NI to share; ((Int. rate x (G’s cap. inv.)) + (NI to share ÷ 3) = Amt. dist. to G]
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 72.
F - 13
The partnership agreement of Alix, Gise, and Bosco provides for the following income ratio: (a) Alix, the managing partner, receives a salary allowance of £108,000, (b) each partner receives 15% interest on average capital investment, and (c) remaining net income or loss is divided equally. The average capital investments for the year were: Alix £600,000, Gise £1,200,000, and Bosco £1,800,000. If partnership net income is £540,000, the amount distributed to Alix should be a. £90,000. b. £162,000. c. £180,000. d. £198,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: £540,000 - £108,000 - (.15) (£600,000 + £1,200,000 + £1,800,000) = - £108,000; £108,000 + (.15) (£600,000) + (-£108,000 ÷ 3) = + £162,000 [NI – Salary, A – (Int. rate x (Avg. cap. inv. A + Avg. cap. inv. G + Avg. cap. inv. B)) = NI to share; Salary, A + ((Int. rate x (A’s cap. inv.)) + (NI to share ÷ 3) = Amt. dist. to A]
73.
Partners Cantor and Dickens have capital balances in a partnership of €160,000 and €240,000, respectively. They agree to share profits and losses as follows: Cantor Dickens As salaries €40,000 €48,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was €200,000, what will be the distribution of income to Dickens? a. €92,000 b. €108,000 c. €80,000 d. €40,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €200,000 - €40,000 - €48,000 - (.10) (€160,000 + €240,000) = €72,000; €48,000 + (.10) (€240,000) + (€72,000/2) = €108,000 [NI – Salary, C – Salary, D – (Int. rate x (Cap. bal. C + Cap. bal. D)) = NI to share; Salary, D + (Int. rate x Cap. bal. D) + (NI to share ÷ 2) = Amt. dist. to D]
74.
Partners Cantor and Dickens have capital balances in a partnership of €160,000 and €240,000, respectively. They agree to share profits and losses as follows: Cantor Dickens As salaries €40,000 €48,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If income for the year was €120,000, what will be the distribution of income to Cantor? a. €52,000 b. €64,000 c. €40,000 d. €56,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €120,000 - €40,000 - €48,000 - (.10) (€160,000 + €240,000) = - €8,000; €40,000 + (.10) (€160,000) + (- €8,000/2) = €52,000 [NI – Salary, C – Salary, D – (Int. rate x (Cap. bal. C + Cap. bal. D)) = NI to share; Salary, C + (Int. rate x Cap. bal. C) + (NI to share ÷ 2) = Amt. dist. to C]
FOR INSTRUCTOR USE ONLY
F - 14 75.
Test Bank for Financial Accounting: IFRS Edition, 4e Partners Cantor and Dickens have capital balances in a partnership of €160,000 and €240,000, respectively. They agree to share profits and losses as follows: Cantor Dickens As salaries €40,000 €48,000 As interest on capital at the beginning of the year 10% 10% Remaining profits or losses 50% 50% If net loss for the year was €8,000, what will be the distribution to Dickens? a. €48,000 income b. €4,000 income c. €4,000 loss d. €8,000 loss
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: - €8,000 - €40,000 - €48,000 - (.10) (€160,000 + €240,000) = - €136,000; €48,000 + (.10) (€240,000) - (€136,000/2) = €4,000 [NL – Salary, C – Salary, D – (Int. rate x (Cap. bal. C + Cap. bal. D)) = NL to share; Salary, D + (Int. rate x Cap. bal. D) – (NL to share ÷ 2) = Amt. dist. to D]
76.
Partners Eli and Alex have agreed to share profits and losses in an 80:20 ratio respectively, after Eli is allowed a salary allowance of $70,000 and Alex is allowed a salary allowance of $35,000. If the partnership had net income of $70,000 for 2020, Alex’s share of the income would be a. $35,000. b. $28,000. c. $42,000. d. $7,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $70,000 - $70,000 - $35,000 = - $35,000; $35,000 - (.20) ($35,000) = $28,000 [NI – Salary, E – Salary, A = NI to share; Salary, A + (A’s % NI x NI to share) = Amt. dist. to A]
77.
The most appropriate basis for dividing partnership net income when the partners do not plan to take an active role in daily operations is a. on a fixed ratio. b. interest on capital balances and salaries to the partners. c. on a ratio based on average capital balances. d. salaries to the partners and the remainder on a fixed ratio.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
78.
The Mayer and Rodin partnership agreement stipulates that profits and losses will be shared equally after salary allowances of £400,000 for Mayer and £200,000 for Rodin. At the beginning of the year, Mayer’s Capital account had a balance of £800,000, while Rodin’s ' Capital account had a balance of £700,000. Net income for the year was £500,000. The balance of Rodin’s Capital account at the end of the year after closing is a. £950,000. b. £200,000. c. £850,000. d. £900,000.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: £500,000 - £400,000 - £200,000 = - £100,000; £200,000 - (£100,000/2) = £150,000; £700,000 + £150,000 = £850,000 [NI – Salary, M – Salary, R = NI to share; Salary, R + (NI to share ÷ 2) = Chng. in cap. bal., R; Beg. cap. bal., R + Chng. in cap. bal., R = End. cap. bal., R]
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
FOR INSTRUCTOR USE ONLY
F - 15
F - 16 79.
Test Bank for Financial Accounting: IFRS Edition, 4e A partner's share of net income is recognized in the accounts through a. adjusting entries. b. closing entries. c. correcting entries. d. accrual entries.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
80.
The partnership of Bher and Dhillips reports net income of €120,000. The partners share equally in income and losses. The entry to record the partners' share of net income will include a a. credit to Income Summary for €120,000. b. credit to Bher, Capital for €60,000. c. debit to Dhillips, Capital for €60,000. d. credit to Dhillips, Drawing for €60,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Solution: €120,000/2 = €60,000 (NI ÷ 2) = Ptnr. Share of NI
81.
Michelle receives $210,000 and Stephanie receives $140,000 in a split of $350,000 net income. Which expression does not reflect the income splitting arrangement? a. 3:2 b. 3/5 & 2/5 c. 6:4 d. 2:1
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $350,000/5 = $70,000; $70,000 ´ 2 = $140,000; $70,000 ´ 3 = $210,000 (NI ÷ 5 = 1 share of NI; 2 shares of NI = S’s share of NI; 3 shares of NI = M’s share of NI)
82.
An income ratio based on capital balances might be appropriate when a. service is a primary consideration. b. some, but not all, partners plan to work in the business. c. funds invested in the partnership are considered the critical factor. d. little net income is expected.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
83.
If the partnership agreement specifies salaries to partners, interest on partners' capital, and the remainder on a fixed ratio, and partnership net income is not sufficient to cover both salaries and interest, a. only salaries are allocated to the partners. b. only interest is allocated to the partners. c. the entire net income is shared on a fixed ratio. d. both salaries and interest are allocated to the partners.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 84.
F - 17
Which of the following would not be considered an expense of a partnership in determining income for the period? a. Expired insurance b. Income tax expense c. Rent expense d. Utilities expense
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
85.
The net income of the Crowe and Browning partnership is €450,000. The partnership agreement specifies that Crowe and Browning have a salary allowance of €120,000 and €180,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of €300,000. Any remaining net income or net loss is shared equally. What is Crowe’s share of the €450,000 net income? a. €120,000 b. €150,000 c. €165,000 d. €195,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: €450,000 - €120,000 - €180,000 - (.10) (2) (€300,000) = €90,000; €120,000 + (.10) (€300,000) + (€90,000/2) = €195,000 [NI – Salary, C – Salary, B – (Int. rate x (Cap. bal. C + Cap. bal. B)) = NI to share; Salary, C + (Int. rate x Cap. bal. C) + (NI to share ÷ 2) = Amt. dist. to C]
86.
The net income of the Crowe and Browning partnership is $450,000. The partnership agreement specifies that Crowe and Browning have a salary allowance of $120,000 and $180,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $300,000. Any remaining net income or net loss is shared equally. What is the balance of Browning's Capital account at the end of the year after net income has been distributed? a. €510,000 b. €480,000 c. €555,000 d. €525,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €450,000 - €120,000 - €180,000 - (.10) (2) (€300,000) = €9,000; €180,000 + (.10) (€300,000) + (€90,000/2) = €255,000; €300,000 + €255,000 = €555,000 [NI – Salary, C – Salary, B – (Int. rate x (Cap. bal. C + Cap. bal. B)) = NI to share; Salary, B + (Int. rate x Cap. bal. B) + (NI to share ÷ 2) = Amt. dist. to B; Beg. cap. bal., B + Amt. dist. to B = End. cap. bal., B]
FOR INSTRUCTOR USE ONLY
F - 18 87.
Test Bank for Financial Accounting: IFRS Edition, 4e The net income of the Travis and Tucker partnership is $125,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $100,000 (Travis) and $150,000 (Tucker) have been allocated. At the beginning of the year, Travis’s Capital account had a balance of $250,000 and Tucker’s Capital account had a balance of $325,000. What is the balance of Tucker’s Capital account at the end of the year after profits and losses have been distributed? a. $325,000 b. $50,000 c. $412,500 d. $387,500
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: $125,000 - $100,000 - $150,000 = - $125,000; $325,000 + $150,000 - ($125,000/2) = $412,500 [NI – Salary, Tr. – Salary, Tu. = NI to share; Beg. cap. bal., Tu + Salary, Tu – (NI to share ÷ 2) = End. cap. bal., Tu]
88.
A partners' capital statement explains a. the amount of legal liability of each of the partners. b. the types of assets invested in the business by each partner. c. how the partnership will be capitalized if a new partner is admitted to the partnership. d. the changes in each partner's capital account and in total partnership capital during a period.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
89.
Each of the following is used in preparing the partners’ capital statement except the a. statement of financial position. b. income statement. c. partners’ capital accounts. d. partners’ drawing accounts.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90.
The owners' equity statement for a partnership is called the a. partners' proportional statement. b. partners' capital statement. c. statement of shareholders' equity. d. capital and drawing statement.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
91.
Which of the following would not cause an increase in partnership capital? a. Drawings b. Net income c. Additional capital investment by the partners d. Initial capital investment by the partners
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 92.
F - 19
Mary Winsor’s capital statement reveals that her drawings during the year were £50,000. She made an additional capital investment of £25,000 and her share of the net loss for the year was £10,000. Her ending capital balance was £200,000. What was Winsor beginning capital balance? a. £225,000 b. £185,000 c. £235,000 d. £260,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: X + £25,000 - £50,000 - £10,000 = £200,000; X = £235,000 (Beg. cap. bal., J + Cap. contrib. – Drwgs. – J’s % NL = End. cap. bal., J)
93.
Jon Winek started the year with a capital balance of €135,000. During the year, his share of partnership net income was €120,000 and he withdrew €22,500 from the partnership for personal use. He made an additional capital contribution of €37,500 during the year. The amount of Jon Winek’s capital balance that will be reported on the year-end statement of financial position will be a. €120,000. b. €292,500. c. €225,000. d. €270,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: €135,000 + €120,000 - €22,500 + €37,500 = €270,000 (Beg. cap. bal., W + W’s % NI – Drwgs. + Cap. contrib. = End. cap. bal., W)
94.
The Partners' Capital Statement for TSB Company reported the following information in total: Capital, January 1 ................................................. €240,000 Additional investment ............................................ 80,000 Drawings ............................................................... 160,000 Net income ............................................................ 200,000 The partnership has three partners: Toub, Sauls, and Birch with ending capital balances in a ratio 40:20:40. What are the respective ending balances of the three partners? a. Toub, €160,000; Sauls, €80,000; Birch, €160,000. b. Toub, €144,000: Sauls, €72,000; Birch, €144,000. c. Toub, €272,000; Sauls, €136,000; Birch, €272,000. d. Toub, €180,000; Sauls, €96,000; Birch, €180,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: €240,000 + €80,000 - €160,000 + €200,000 = €360,000; (€360,000) (.4) = €144,000; (€360,000) (.2) = €72,000 [Beg. cap. + Add. invest. – Drwgs. + NI = End. cap.; (End. cap. x T’s %) = T’s end. cap. bal.; (End. cap. x S’s %) = S’s end. cap. bal.; (End. cap. x B’s %) = B’s end. cap. bal.]
95.
The total column of the Partners' Capital Statement for Chang Company is as follows: Capital, January 1 ................................................. HK$600,000 Additional investment ............................................ 240,000 Drawings ............................................................... 360,000 Net income ............................................................ 720,000
FOR INSTRUCTOR USE ONLY
F - 20
Test Bank for Financial Accounting: IFRS Edition, 4e The partnership has three partners. The first two partners have ending capital balances that are equal. The ending balance of the third partner is half of the ending balance of the first partner. What is the ending capital balance of the third partner? a. HK$288,000 b. HK$192,000 c. HK$240,000 d. HK$264,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: HK$600,000 + HK$240,000 - HK$360,000 + HK$720,000 = HK$1,200,000; HK$1,200,000/5 = HK$240,000 (Beg. cap. + Add. invest. – Drwgs. + NI = End. cap.; End. cap. ÷ 5 = 3rd ptnr.’s end. cap. bal.)
96.
The partners' drawing accounts are a. reported on the income statement. b. reported on the statement of financial position. c. closed to Income Summary. d. closed to the partners' capital accounts.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
The partners’ capital statement includes each of the following except a. partnership expenses. b. additional investments. c. drawings. d. net income.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
98.
The statement of financial position of a partnership will a. report retained earnings below the partnership capital accounts. b. show a separate capital account for each partner. c. show a separate drawing account for each partner. d. show the amount of income that was distributed to each partner.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
The liquidation of a partnership may result from each of the following except the a. bankruptcy of the partnership. b. death of a partner. c. retirement of a partner. d. sale of the business by the partners.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
100.
In the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated a. first to creditors and the remainder to partners. b. to the partners on the basis of their capital balances. c. to the partners on the basis of their income ratios. d. only after all creditors have been paid.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 101.
F - 21
In the liquidation of a partnership, any partner who has a capital deficiency a. has a personal debt to the partnership for the amount of the deficiency. b. is automatically terminated as a partner. c. will receive a cash distribution only on the basis of his or her income-sharing ratio. d. is not obligated to make up the capital deficiency.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
102.
Partners Ana, Beth, and Cathy have capital account balances of $90,000 each. The income and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash assets with a book value of $75,000 are sold for $30,000. The balance of Beth’s Capital account after the sale is a. $67,500. b. $76,500. c. $81,000. d. $99,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $90,000 - (.20) ($75,000 - $30,000) = $81,000 [Beg. cap. bal., B – (B’s % NI x (BV assets – Cash recd.)) = End. cap. bal., B]
103.
The partners' income and loss sharing ratio is 2:3:5, respectively. CHENARD, JENNINGS, AND BLAIR PARTNERSHIP Statement of Financial Position December 31, 2020 Assets
Owners' Equity and Liabilities
Noncash assets Cash
€ 285,000 45,000
Total
€330,000
Chenard, Capital Jennings, Capital Blair, Capital Liabilities Total
€ 60,000 90,000 30,000 150,000 €330,000
If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated by selling the noncash assets for $195,000 and creditors are paid in full, what is the amount of cash that can be safely distributed to each partner? a. CHENARD, €36,000; JENNINGS, €54,000; BLAIR, €0. b. CHENARD, €42,000; JENNINGS, €63,000; BLAIR, €15,000. c. CHENARD, €34,500; JENNINGS, €55,500; BLAIR, €0. d. CHENARD, €33,000; JENNINGS, €57,000; BLAIR, €0. Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: €60,000 + (.2) (€195,000 - €285,000) - (2/5) (€15,000) = €36,000; €90,000 + (.3) (€195,000 - €285,000) - (3/5) (€15,000) = €54,000; €30,000 + (.5) (€195,000 - €285,000) + €15,000 = €0 [Cap. bal., C + (C’s % NI x (Cash recd. – BV assets)) – (C.’s rel. % NI x B’s cap. def.) = Cash to dist. to C; Cap. bal., J + (J’s % NI x (Cash recd. – BV assets)) – (J’s rel. % NI x B’s cap. def.) = Cash to dist. to J; Cap. bal., B + (B’s % NI x (Cash recd. – BV assets)) + Cap. contrib. from C and J = Cash to dist. to B]
FOR INSTRUCTOR USE ONLY
F - 22 104.
Test Bank for Financial Accounting: IFRS Edition, 4e The partners' income and loss sharing ratio is 2:3:5, respectively. CHENARD, JENNINGS, AND BLAIR PARTNERSHIP Statement of Financial Position December 31, 2020 Assets
Owners' Equity and Liabilities
Noncash assets Cash
€285,000 45,000
Total
€330,000
CHENARD, Capital JENNINGS, Capital BLAIR, Capital Liabilities Total
€ 60,000 90,000 30,000 150,000 €330,000
If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated by selling the noncash assets for €375,000, and creditors are paid in full, what is the total amount of cash that CHENARD will receive in the distribution of cash to partners? a. €18,000 b. €117,000 c. €78,000 d. €75,000 Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: €60,000 + (.2) (€375,000 - €285,000) = €78,000 [Cap. bal., C + (C’s % NI x (Cash recd. – BV assets)) = Cash to dist. to C]
105.
The partners' income and loss sharing ratio is 2:3:5, respectively. CHENARD, JENNINGS, AND BLAIR PARTNERSHIP Statement of Financial Position December 31, 2020 Assets
Owners' Equity and Liabilities
Noncash assets Cash
285,000 € 45,000
Total
€330,000
CHENARD, Capital JENNINGS, Capital BLAIR, Capital Liabilities Total
€ 60,000 90,000 30,000 150,000 €330,000
If the CHENARD, JENNINGS, and BLAIR Partnership is liquidated and the noncash assets are worthless, the creditors will look to what partner's personal assets for settlement of the creditors' claims? a. The personal assets of Partner JENNINGS. b. The personal assets of Partners CHENARD and BLAIR. c. The personal assets of Partners CHENARD, JENNINGS, and BLAIR. d. The personal assets of the partners are not available for partnership debts. Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 106.
F - 23
If a partner has a capital deficiency and does not have the personal resources to eliminate it, a. the creditors will have to absorb the capital deficiency. b. the other partners will absorb the capital deficiency on the basis of their respective capital balances. c. the other partners will have to absorb the capital deficiency on the basis of their respective income sharing ratios. d. neither the creditors nor the other partners will have to absorb the capital deficiency.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
107.
When a partnership terminates business, the sale of noncash assets is called a. liquidation. b. realization. c. recognition. d. disposition.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
108.
The liquidation of a partnership a. cannot be a voluntary act of the partners. b. terminates the business. c. eliminates those partners with a capital deficiency. d. cannot occur unless all partners approve.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
109.
The liquidation of a partnership is a process containing the following steps: 1. 2. 3. 4.
Pay partnership liabilities in cash. Allocate the gain or loss on realization to the partners on their income ratios. Sell noncash assets for cash and recognize a gain or loss on realization. Distribute remaining cash to partners on the basis of their remaining capital balances.
Identify the proper sequencing of the steps in the liquidation process. a. 3, 2, 4, 1. b. 3, 2, 1, 4. c. 1, 3, 2, 4. d. 1, 4, 3, 2. Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
110.
In the final step of the liquidation process, remaining cash is distributed to partners a. on an equal basis. b. on the basis of the income ratios. c. on the basis of the remaining capital balances. d. regardless of capital deficiencies.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
F - 24 111.
Test Bank for Financial Accounting: IFRS Edition, 4e In the liquidation process, if a capital account shows a deficiency a. the partner with a deficiency has an obligation to the partnership for the amount of the deficiency. b. it may be written off to a "Loss" account. c. it is disregarded until after the partnership books are closed. d. it can be written off to a "Gain" account.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
112.
Before distributing any remaining cash to partners in a partnership liquidation, it is necessary to do each of the following except a. sell noncash assets for cash. b. recognize a gain or loss on realization. c. allocate the gain or loss to the partners based on their capital balances. d. pay partnership liabilities in cash.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
113.
Mandy, Annie, and Tammy formed a partnership with income-sharing ratios of 50%, 30%, and 20%, respectively. Cash of $300,000 was available after the partnership’s assets were liquidated. Prior to the final distribution of cash, Mandy’s capital balance was $200,000, Annie’s capital balance was $150,000, and Tammy had a capital deficiency of $50,000. Assuming Tammy contributes cash to match her capital deficiency, Mandy should receive a. $175,000. b. $168,750. c. $131,250. d. $200,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
114.
Alex, Bob, and Ciera are partners, sharing income 2:1:2. After selling all of the assets for cash, dividing gains and losses on realization, and paying liabilities, the balances in the capital accounts are as follows: Alex, $10,000 Cr; Bob, $10,000 Cr; and Ciera, $30,000 Cr. How much cash should be distributed to Alex? a. $6,000 b. $20,000 c. $10,000 d. $16,667
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
115.
In liquidation, balances prior to the distribution of cash to the partners are: Cash €900,000; Peterson, Capital €420,000; Laney, Capital €390,000, and Howell, Capital €90,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Peterson? a. €375,000 b. €408,750 c. €420,000 d. €450,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 116.
F - 25
In liquidation, balances prior to the distribution of cash to the partners are: Cash €765,000; Peterson, Capital €420,000; Laney, Capital €390,000, and Howell, Capital €45,000 deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to Laney if Howell does not pay his deficiency? a. €367,000 b. €378,750 c. €356,250 d. €390,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: €390,000 - (2/8) (€45,000) = €378,750 [Cap. bal., L – (L’s rel. % NI x Cap. def., H) = Cash to dist. to L]
117.
In liquidation, balances prior to the distribution of cash to the partners are: Cash £240,000; Paley, Capital £112,000; Stengel, Capital £104,000, and King, Capital £24,000. The income ratio is 6:2:2, respectively. How much cash should be distributed to Paley? a. £100,000 b. £104,000 c. £112,000 d. £120,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
118.
In liquidation, balances prior to the distribution of cash to the partners are: Cash £204,000; Paley, Capital £112,000; Stengel, Capital £104,000, and King, Capital £12,000 deficiency. The income ratio is 6:2:2, respectively. How much cash should be distributed to Stengel if King does not pay his deficiency? a. £98,000 b. £101,000 c. £95,000 d. £104,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: £104,000 - (2/8) (£12,000) = £101,000 [Cap. bal., S – (S’s rel. % NI x Cap. def., K) = Cash to dist. to S]
119.
Use the following account balance information for Granobfin Partnership with income ratios of 2:4:4 for Granger, Noble, and Finn, respectively. Assets Inventory €438,000 Accounts receivable 132,000 Cash 54,000 €624,000
Liabilities and Owner’s Equity Granger, Capital €138,000 Noble, Capital 48,000 Finn, Capital 312,000 Accounts payable 126,000 €624,000
FOR INSTRUCTOR USE ONLY
F - 26
Test Bank for Financial Accounting: IFRS Edition, 4e Assume that, as part of liquidation proceedings, Granobfin sells its noncash assets for €510,000. The amount of cash that would ultimately be distributed to Finn would be a. €312,000. b. €288,000. c. €204,000. d. €516,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: €312,000 + (.4) (€510,000 - €132,000 - €438,000) = €288,000 [Cap. bal., F + (F’s % NI x (Cash recd. – BV assets)) = Cash to dist. to F]
120.
Use the following account balance information for Granobfin Partnership with income ratios of 2:4:4 for Granger, Noble, and Finn, respectively. Assets Liabilities and Owner’s Equity Inventory €438,000 Granger, Capital €138,000 Accounts Noble, Capital 48,000 receivable 132,000 Finn, Capital 312,000 Cash 54,000 Accounts payable 126,000 €624,000 €624,000 Assume that, as part of liquidation proceedings, Granobfin sells its noncash assets for €360,000. As a result, one of the partners has a capital deficiency which that partner decides not to repay. The amount of cash that would ultimately be distributed to Finn would be a. €312,000. b. €228,000. c. €144,000. d. €204,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: €312,000 + (.4) (€360,000 - €132,000 - €438,000) - (4/6) (€36,000) = €204,000 [Cap. bal., F + (F’s % NI x (Cash recd. – BV assets)) – (F’s rel. % NI x N’s cap. def.) = Cash to dist. to F] a
121. R. Schoen purchases a 25% interest for $60,000 when the Hise, Poole, Lagos partnership has total capital of $540,000. Prior to the admission of Schoen, each partner has a capital balance of $180,000. Each partner relinquishes an equal amount of his capital balance to Schoen. The amount to be relinquished by Lagos is a. $30,000. b. $38,000. c. $45,000. d. $75,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: (.25) ($540,000 + $60,000) - $60,000 = $90,000; $90,000/3 = $30,000 [Purch. int. % x (Tot. cap + Contrib. cap.) – Contrib. cap. = Cap. to relinq./3]
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
F - 27
122. Jackson is admitted to a partnership with a 25% capital interest by a cash investment of £360,000. If total capital of the partnership is £1,560,000 before admitting Jackson, the bonus to Jackson is a. £120,000. b. £60,000. c. £180,000. d. £240,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: (.25) (£1,560,000 + £360,000) - £360,000 = £120,000 [Purch. int. % x (Tot. cap + Contrib. cap.) – Contrib. cap. = Bonus]
a
123. Elkins and Landry are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Elkins, €140,000 and Landry, €120,000. On that date, they agree to admit Neumark as a partner with a one-third capital interest. If Neumark invests €100,000 in the partnership, what is Elkins’s capital balance after Neumark’s admittance? a. €120,000 b. €126,667 c. €128,000 d. €140,000
Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: (1/3) (€140,000 + €120,000 + €100,000) = €120,000; €140,000 - (3/5) (€120,000 - €100,000) = €128,000 [Purch. int. % x (Tot. cap + Contrib. cap) = Cap. bal., N; Beg. cap. bal., E – (E’s rel. % NI x (Cap. bal., N – Contrib. cap)) = End. cap. bal., E] a
124. Elkins and Landry are partners who share income and losses in the ratio of 3:2, respectively. On August 31, their capital balances were: Elkins, €140,000 and Landry, €120,000. On that date, they agree to admit Neumark as a partner with a one-third capital interest. If Neumark invests €160,000 in the partnership, what is Landry’s capital balance after Neumark’s admittance? a. €140,000 b. €128,000 c. €126,000 d. €120,000
Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (1/3) (€140,000 + €120,000 + €160,000) = €140,000; €120,000 + (2/5) (€160,000 - €140,000) = €128,000 [Purch. int. % x (Tot. cap + Contrib. cap) = Cap. bal., N; Beg. cap. bal., L + (L’s rel. % NI x (Contrib. cap – Cap. bal., N)) = End. cap. bal., L] a
125. Encisco and Ollinger are partners who share profits and losses equally and have capital balances of $280,000 and $245,000, respectively. Parks is admitted into the partnership by investing $245,000 for a 30% capital interest. The account balance of Ollinger, Capital after the admission of Parks would be a. $231,000. b. $238,000. c. $252,000. d. $245,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [(.30) ($280,000 + $245,000 + $245,000)] - $245,000 = $-14,000; $245,000 + ($-14,000/2) = $238,000 [Purch. int. % x (Tot. cap + Contrib. cap) – Contrib. cap. = Bonus; Beg. cap. bal., O + (Bonus ÷ 2) = End. cap. bal., O]
FOR INSTRUCTOR USE ONLY
F - 28 a
Test Bank for Financial Accounting: IFRS Edition, 4e
126. Rogers and Wissinger have partnership capital balances of $576,000 and $432,000, respectively. Wissinger negotiates to sell his partnership interest to Mergenthaler for $504,000. Rogers agrees to accept Mergenthaler as a new partner. The partnership entry to record this transaction is a. Cash ..................................................................................... 504,000 Mergenthaler, Capital .................................................. 504,000 b. Wissinger, Capital ................................................................ 504,000 Mergenthaler, Capital .................................................. 504,000 c. Cash ..................................................................................... 72,000 Wissinger, Capital ................................................................ 432,000 Mergenthaler, Capital .................................................. 504,000 d. Wissinger, Capital ................................................................ 432,000 Mergenthaler, Capital .................................................. 432,000
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
127. Gable and Devito share partnership profits and losses in the ratio of 6:4. Gable’s Capital account balance is $160,000 and Devito’s Capital account balance is $100,000. Nance is admitted to the partnership by investing $180,000 and is to receive a one-fourth ownership interest. Gable, Devito and Nance’s capital balances after Nance’s investment will be Gable Devito Nance a. $160,000 $100,000 $180,000 b. $202,000 $128,000 $110,000 c. $198,000 $132,000 $110,000 d. $195,000 $135,000 $110,000
Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (1/4) ($160,000 + $100,000 + $180,000) = $110,000; $160,000 + (6/10) ($180,000 - $110,000) = $202,000; $100,000 + (4/10) ($180,000 $110,000) = $128,000 [Purch. int. % x (Tot. cap + Contrib. cap) = Cap. bal., N; Beg. cap. bal., G – (G’s rel. % NI x (Contrib. cap – Cap. bal., N)) = End. cap. bal., G; Beg. cap. bal., D – (D’s rel. % NI x (Contrib. cap – Cap. bal., N)) = End. cap. bal., D] a
128. Jill and Smita have partnership capital account balances of $1,056,000 and $792,000, respectively and share profits and losses equally. Sierra is admitted to the partnership by investing $440,000 for a one-fourth ownership interest. The balance of Smita’s Capital account after Sierra is admitted is a. $726,000. b. $792,000. c. $858,000. d. $572,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (.25) ($1,056,000 + $792,000 + $440,000) = $572,000; $792,000 + (.5) ($440,000 - $572,000) = $726,000 [Purch. int. % x (Tot. cap + Contrib. cap) = Cap. bal., Si; Beg. cap. bal., Sm – (Sm’s rel. % NI x (Contrib. cap – Cap. bal., Si)) = End. cap. bal., Sm] a
129. The admission of a new partner to an existing partnership a. may be accomplished only by investing assets in the partnership. b. requires purchasing the interest of one or more existing partners. c. causes a legal dissolution of the existing partnership. d. is almost always accompanied by the liquidation of the business.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
F - 29
130. When a partnership interest is purchased a. every partner’s capital account is affected. b. the transaction is a personal transaction between the purchaser and the selling partner(s). c. the buyer receives equity equal to the amount of cash paid. d. all partners will receive some part of the purchase price.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
131. Wu and Mannis each sell 1/3 of their partnership interest to Patel, receiving $105,000 each. At the time of the admission, each partner has a $315,000 capital balance. The entry to record the admission of Patel will show a a. debit to Cash for $210,000. b. credit to Patel, Capital for $315,000. c. debit to Mannis, Capital for $315,000. d. debit to Wu, Capital for $105,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (2 ´ $315,000)/3 = $210,000; $315,000 - $210,000 = $105,000 [((Beg. cap. bal., W + Beg. cap. bal., M) ÷ 3) = Beg. cap. bal., P; Beg. cap. bal., W – Beg. cap. bal. P = Dr. to Beg. cap. bal., W] a
132. Bingham and Ecuyer sell 1/4 of their partnership interest to Ives receiving £600,000 each. At the time of admission, Bingham and Ecuyer each had a £1,050,000 capital balance. The admission of Ives will cause the net partnership assets to a. increase by £1,200,000. b. remain at £2,100,000. c. decrease by £1,200,000. d. remain at £3,300,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (2) (£1,050,000) = £2,100,000 (2 x Beg. cap. bal., B or Beg. cap. bal., E) = New ptnrsp. assets) a
133. Faget and Hein sell to Melges a 1/3 interest in the Faget - Hein partnership. Melges will pay Faget and Hein each €140,000 for admission into the organization. Before this transaction, Faget and Hein show capital balances of €210,000 each. The journal entry to record the admission of Melges will a. show a debit to Cash for €280,000. b. not show a debit to Cash. c. show a debit to Hein, Capital for €140,000. d. show a credit to Melges, Capital for €280,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
134. Letourneau invests €20,000 in cash (admission by investment) in the Seiler-Shaw partnership to acquire a 1/4 interest. In this case a. the accounting will be the same as a purchase of an interest. b. the total net assets of the new partnership are unchanged from the previous partnership. c. the total capital of the new partnership is greater than the total capital of the old partnership. d. Letourneau’s income ratio will automatically be 1/4.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
F - 30 a
Test Bank for Financial Accounting: IFRS Edition, 4e
135. Which of the following is correct when admitting a new partner into an existing partnership? Purchase of an Interest Admission by Investment a. Total net assets unchanged unchanged b. Total capital increased unchanged c. Total net assets unchanged increased d. Total capital unchanged unchanged
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
136. When admitting a new partner by investment, a bonus to old partners a. is usually unjustified because book values clearly reflect partnership net worth. b. is sometimes justified because goodwill may exist and it is not reflected in the accounts. c. results if the debit to cash is less than the new partner's capital credit. d. results if the debit to cash is equal to the new partner's capital credit.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
137. When admitting a new partner by investment, a bonus to old partners is allocated on a. the basis of capital balances. b. the basis of the original investment of the old partners. c. the basis of income ratios before the admission of the new partner. d. a seniority basis.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
138. A bonus to a new partner a. is prohibited by GAAP. b. results when the new partner's capital credit is less than his or her investment of assets in the firm. c. may occur when recorded book values are lower than market values. d. results when the new partner's capital credit is greater than his or her investment of assets in the firm.
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
139. A bonus to a new partner will a. increase the capital balances of existing partners based on their income ratios before the admission of the new partner. b. increase the capital balances of existing partners based on their income ratios after the admission of the new partner. c. decrease the capital balances of existing partners based on their income ratios before the admission of the new partner. d. decrease the capital balances of existing partners based on their capital balances before the admission of the new partner.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
F - 31
140. On November 30, capital balances are Forsyth €720,000, Lagassi €600,000 and Kelly $600,000. The income ratios are 20%, 20% and 60% respectively. Forsyth decides to retire from the partnership. The partnership pays Forsyth €600,000 cash for her partnership interest. After Forsyth’s retirement, what is the balance of Kelly’s capital account? a. €528,000 b. €600,000 c. €672,000 d. €690,000
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
141. On November 30, capital balances are Forsyth €720,000, Lagassi €600,000 and Kelly €600,000. The income ratios are 20%, 20% and 60% respectively. Forsyth decides to retire from the partnership. In order for Lagassi and Kelly to have equal capital interests after the retirement of Forsyth, how much partnership cash would have to be paid to Forsyth for her partnership interest? a. €0. b. €640,000 c. €720,000 d. Any amount paid to Forsyth will cause Lagassi and Kelly to still have equal capital balances.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics a
142. Dawn, Garret and Josh have partnership capital account balances of $225,000, $450,000 and $105,000, respectively. The income sharing ratio is Dawn, 50%; Garret, 40%; and Josh, 10%. Dawn desires to withdraw from the partnership and it is agreed that partnership assets of $195,000 will be used to pay Dawn for her partnership interest. The balances of Garret’s and Josh’s Capital accounts after Dawn’s withdrawal would be a. Garret, $450,000; Josh, $105,000. b. Garret, $474,000; Josh, $111,000. c. Garret, $426,000; Josh, $99,000. d. Garret, $435,000; Josh, $90,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $225,000 - $195,000 = $30,000; $450,000 + (4/5) ($30,000) = $474,000; $105,000 + (1/5) ($30,000) = $111,000 [Beg. cap. bal., D – Cash pd. = End. cap. def., D; Beg. cap. bal., G + (G’s rel. % NI x D’s cap. def.) = End. cap. bal., G; Beg. cap. bal., J + (J’s rel. % NI x D’s cap. def.) = End. cap. bal., J]
FOR INSTRUCTOR USE ONLY
F - 32 a
Test Bank for Financial Accounting: IFRS Edition, 4e
143. Able Baker, and Carter have partnership capital account balances of $600,000 each. Income and losses are shared equally. Carter agrees to sell three-fourths of his ownership interest to Able for $525,000 and one-fourth to Baker for $187,500. Able and Baker will use personal assets to purchase Carter’s interest. The partnership's entry to record Carter’s withdrawal from the partnership would be a. Carter, Capital ..................................................................... 712,500 Cash ........................................................................... 712,500 b. Carter, Capital ..................................................................... 712,500 Able, Capital ............................................................... 350,000 Baker, Capital ............................................................. 125,000 c. Carter, Capital ..................................................................... 600,000 Able, Capital ............................................................... 450,000 Baker, Capital ............................................................. 150,000 d. Able, Capital ........................................................................ 534,375 Baker, Capital ..................................................................... 178,125 Carter, Capital ........................................................... 712,500
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600,000 ´ .25 = $150,000; $600,000 ´ .75 = $450,000 [Beg. cap. bal., A x Purch. int. %, A = Cr. to cap. bal., A; Beg. cap. bal., B x Purch. int. %, B = Cr. to cap. bal., B] a
144. When a partner withdraws from the firm, which of the following reflects the correct partnership effects? Payment from Payment from Partners' Personal Assets Partnership Assets a. Total net assets decreased decreased b. Total capital decreased decreased c. Total net assets unchanged decreased d. Total capital unchanged unchanged
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
145. Which of the following is not a necessary action that the partnership must take upon the death of a partner? a. Determine the net income or net loss for the year to date. b. Discontinue business operations. c. Close the books. d. Prepare financial statements.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
146. On November 30, capital balances are Roses €300,000, Ellis €250,000 and Gise €250,000. The income ratios are 20%, 20% and 60%, respectively. Roses decides to retire from the partnership. The partnership pays Roses €350,000 cash for her partnership interest. After Rose’s retirement, what is the balance of Ellis’s capital account? a. €237,500 b. €240,000 c. €250,000 d. €325,000
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €250,000 + (2/8) (€300,000 - €350,000) = €237,500 [Beg. cap. bal., E + (E’s rel. % NI x (Beg. cap. bal., R – Cash pd.) = End. cap. bal., E]
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
F - 33
147. On November 30, capital balances are Ross €300,000, Ellis €250,000 and Gise €250,000. The income ratios are 20%, 20% and 60%, respectively. Ross decides to retire from the partnership. The partnership pays Ross $250,000 cash for her partnership interest. After Ross’s retirement, what is the balance of Gise’s capital account? a. €220,000 b. €250,000 c. €280,000 d. €287,500
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: €250,000 + (6/8) (€300,000 - €250,000) = €287,500 [Beg. cap. bal., G + (G’s rel. % NI x (Beg. cap. bal., R – Cash pd.) = End. cap. bal., G] a
148. On November 30, capital balances are Ross €300,000, Ellis €250,000 and Gise €250,000. The income ratios are 20%, 20% and 60%, respectively. Ross decides to retire from the partnership. In order for Ellis and Gise to have equal capital interests after the retirement of Ross, how much partnership cash would have to be paid to Ross for her partnership interest? a. €0 b. €266,667 c. €300,000 d. Any amount paid to Ross will cause Ellis and Gise to still have equal capital balances.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
149.
All of the following are characteristics of partnerships except a. co-ownership of property. b. mutual agency. c. unlimited life. d. association of individuals.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
150.
The Gorni, Chambers, and Hale partnership is terminated when the claims of company creditors exceed partnership assets by £100,000. The capital balances for Gorni, Chambers, and Hale are £70,000, £10,000, and £0, respectively. The original claims of the creditors were negotiated by Chambers and Hale. Which partner(s) is(are) personally and individually liable for all partnership liabilities? a. Gorni b. Chambers c. Chambers and Hale d. Gorni, Chambers, and Hale
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
151.
When a partner invests noncash assets in a partnership, the assets should be recorded at their a. book value. b. carrying value. c. fair value. d. original cost.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
F - 34 152.
Test Bank for Financial Accounting: IFRS Edition, 4e The partnership agreement of Ashford and Cohen provides for salary allowances of $90,000 to Ashford and $70,000 to Cohen, with the remaining income or loss to be divided equally. During the year, Ashford and Cohen each withdraw cash equal to 80% of their salary allowances. If partnership net income is $200,000, Ashford’s equity in the partnership would a. increase more than Cohen’s. b. decrease more than Cohen’s. c. increase the same as Cohen’s. d. decrease the same as Cohen’s.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
153.
Which of the following statements is correct? a. Salaries to partners and interest on partners' capital are expenses of the partnership. b. Salaries to partners are expenses of the partnership but not interest on partners' capital. c. Interest on partners' capital is an expense of the partnership but not salaries to partners. d. Neither salaries to partners nor interest on partners' capital are expenses of the partnership.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
154.
In the liquidation of a partnership, the gains and losses from assets sold are a. divided equally among the partners. b. divided among the partners in the stated income ratio. c. divided among the partners in proportion to their capital equity interests. d. ignored.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
155.
If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is allocated to the partners with credit balances a. equally. b. on the basis of their income ratios. c. on the basis of their capital balances. d. on the basis of their original investments.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
156.
An entry is not required in the liquidation of a partnership to record the a. payment of cash to creditors. b. distribution of cash to the partners. c. sale of noncash assets. d. allocation of a capital deficiency to partners with credit balances when the deficient partner is expected to pay the deficiency.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
157.
The first step in the liquidation of a partnership is to a. allocate a gain or loss on realization to the partners. b. distribute remaining cash to the partners. c. pay partnership liabilities. d. sell noncash assets and recognize a gain or loss on realization.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships 158.
F - 35
Leno joins the partnership of Kingsley and Mccaffrey by paying $95,000 in cash. If the net assets of the partnership are still the same amount after Leno has been admitted as a partner, then Leno a. must have been admitted by investment of assets. b. must have been admitted by purchase of a partner's interest. c. must have received a bonus upon being admitted. d. could have been admitted by an investment of assets or by a purchase of a partner's interest.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
159.
Motts is admitted to a partnership with a 25% capital interest by a cash investment of €90,000. If total capital of the partnership is €390,000 before admitting Motts, the bonus to Motts is a. €30,000. b. €15,000. c. €45,000. d. €60,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitive Methods Solution: (.25) (€390,000 + €90,000) - €90,000 = €30,000 [(Purch. int. % x (Tot. cap + Contrib. cap)) – Contrib. cap = Bonus, M]
FOR INSTRUCTOR USE ONLY
F - 36
Test Bank for Financial Accounting: IFRS Edition, 4e
BRIEF EXERCISES Be. 160 Randy and John decide to organize a partnership. Randy invests $15,000 cash, and John contributes $10,000 and equipment having a book value of $3,500 and a fair value of $7,000 Instructions Prepare the entry to record each partner’s investment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 160
(5 min.)
Cash ...................................................................................................... Randy, Capital ...........................................................................
15,000
Cash ...................................................................................................... Equipment.............................................................................................. John, Capital ..................................................................................
10,000 7,000
15,000
17,000
Be. 161 Poncho and Chico decide to merge their proprietorships into a partnership called Ranger Company. The statement of financial position of Ranger Company shows: Account Receivable
€15,000
Less: Allowance for doubtful accounts
(1,500)
Equipment
€20,000
Less: Accumulated depreciation
(10,000)
€13,500
€10,000
The partners agree that the net realizable value of the receivables is €12,500 and that the fair value of the equipment is €13,000. Instructions Indicate how the four accounts should appear in the opening statement of financial position of the partnership. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 161
F - 37
(5 min.) RANGER COMPANY Statement of Financial Position (partial)
Assets Equipment Accounts Receivable Less: Allowance for Doubtful Accounts
€13,000 €15,000 (2,500)
€12,500
Be. 162 Ali & Tyson Co. reports net income of $50,000. The income ratios are Ali 60% and Tyson 40%. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 162
(4-6 min.) Division of Net Income Ali
Income allocated, $50,000 Ali ($50,000 x 60%) Tyson ($50,000 x 40%) Total division of net income
Tyson
Total
$20,000 $20,000
$50,000
$30,000 $30,000
The entry to record the division of net income is: Income Summary ................................................... Ali, Capital .................................................. Tyson, Capital ............................................
50,000 30,000 20,000
Be. 163 Frank and Jesse Co. reports net income of €40,000. Partner salary allowances are Frank €20,000 and Jesse €10,000. Indicate the division of net income to each partner, assuming the income ratios are Frank 70% and Jesse 30%. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
F - 38
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 163
(5-8 min.)
Division of Net Income Frank Salary allowance €20,000 Interest allowance on partners’ capital 0 Total salaries and interest 20,000 Remaining income, €10,000 (€40,000 - €30,000) Frank €10,000 x 70%) 7,000 Jesse (€10,000 x 30%) Total remainder Total division of net income €27,000 The entry to record the division of net income is: Income Summary ............................................................ Frank, Capital ...................................................... Jesse, Capital .....................................................
Jesse €10,000 0 10,000
Total €30,000 0 30,000
3,000 10,000 €40,000
€13,000 40,000
27,000 13,000
Be. 164 The Fran & Mary Co. reports net income of $30,000. Interest allowances are Fran $3,000 and Mary $5,000; partner salary allowances are Fran $18,000 and Mary $10,000 and the remainder is shared equally. Instructions Indicate the division of net income to each partner, and prepare the entry to distribute the net income. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 164
(5-8 min.)
Division of Net Income Fran Salary allowance $18,000 Interest allowance on partners’ capital 3,000 Total salaries and interest 21,000 Remaining income, ($6,000) ($30,000 - $36,000) Fran ($6,000 x 50%) (3,000) Mary ($6,000 x 50%) Total remainder Total division of net income $18,000 The entry to record the division of net income is: Income Summary ............................................................ Fran, Capital ....................................................... Mary, Capital .......................................................
FOR INSTRUCTOR USE ONLY
Mary $10,000 5,000 15,000
Total $28,000 8,000 36,000
(3,000) $12,000
(6,000) $30,000
30,000 18,000 12,000
Accounting for Partnerships
F - 39
Be. 165 After liquidating noncash assets and paying creditors, account balances in the Yahn Co. are Cash €36,000, Jude, Capital (Cr.) €11,000, Paul, Capital (Cr,) €8,000, J. D., Capital (Cr.) €10,000 and Alice, Capital (Cr.) €7,000. The partners share income equally. Instructions Journalize the final distribution of cash to the partners. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 165
(5-8 min.)
Jude, Capital ........................................................................................ Paul, Capital ........................................................................................ J. D., Capital ........................................................................................ Alice, Capital ........................................................................................ Cash ............................................................................................. a
11,000 8,000 10,000 7,000 36,000
BE 166
In BigEasy Co., capital balances are Adrienne $60,000 and Dino $75,000. The partners share income equally. Javier is admitted to the firm with a 40% interest by an investment of cash of $85,000. Journalize the admission of Javier. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 166
(3 min.)
Cash ...................................................................................................... Adrienne, Capital (50% × $3,000*) ........................................................ Dino, Capital (50% × $3,000*) ............................................................... Javier, Capital (40% × $220,000)...............................................
85,000 1,500 1,500 88,000
*[(60,000 + $75,000 + $85,000) × 40%] – $85,000 = $3,000. a
BE 167
Thao and Leslie are partners who share profits 60% and 40%. Their capital balances were both €120,000 before Kiley was admitted to the partnership. Kiley contributed €160,000 in cash to the partnership for a 30% interest. Instructions Compute the capital balances of Thao and Leslie after Kiley is admitted to the partnership. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 167
(4 min.)
Thao’s capital balance: €120,000 + {€160,000 – [(€240,000 + €160,000) × .30]} × .60 = €144,000 Leslie’s capital balance: €120,000 + {€160,000 – [(€240,000 + €160,000) ×.30]} × .40 = €136,000
FOR INSTRUCTOR USE ONLY
F - 40 a
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 168
Capital balances in Carson Co. are Dene $50,000, Aneta $38,000, and Harriet $25,000. The partners share income equally. Harriet receives $31,000 from partnership assets in withdrawing from the firm. Instructions Journalize the withdrawal of Harriet. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 168
(3 min.)
Harriet, Capital ....................................................................................... Dene, Capital (50% × $6,000) ............................................................... Aneta, Capital (50% × $6,000) .............................................................. Cash .............................................................................................
25,000 3,000 3,000 31,000
EXERCISES Ex. 169 A. Wiggins, L. Stokes, and K. Hayes are forming a partnership. Wiggins is transferring €75,000 of personal cash to the partnership. Stokes owns land worth €25,000 and a small building worth €120,000, which she transfers to the partnership. Hayes transfers to the partnership cash of €14,000, accounts receivable of €48,000 and equipment worth €28,000. The partnership expects to collect €45,000 of the accounts receivable. Instructions (a) Prepare the journal entries to record each of the partners’ investments. (b) What amount would be reported as total owners’ equity immediately after the investments? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 169 (a)
(b)
(10 min.)
Cash ............................................................................................. Wiggins, Capital ...................................................................
75,000
Land ............................................................................................. Building ......................................................................................... Stokes, Capital .....................................................................
25,000 120,000
Cash ............................................................................................. Accounts Receivable .................................................................... Equipment ..................................................................................... Allowance for Doubtful Accounts ......................................... Hayes, Capital ......................................................................
14,000 48,000 28,000
€75,000 + €145,000 + €87,000 = €307,000
FOR INSTRUCTOR USE ONLY
75,000
145,000
3,000 87,000
Accounting for Partnerships
F - 41
Ex. 170 S. Pellah (beginning capital, $80,000) and M. Berry (beginning capital $120,000) are partners. During 2020 the partnership earned net income of $90,000, and Pellah made drawings of $24,000 while Berry made drawings of $32,000. Instructions (a) Assume the partnership income-sharing agreement calls for income to be divided 40% to Pellah and 60% to Berry. Prepare the journal entry to record the allocation of net income. (b) Assume the partnership income-sharing agreement calls for income to be divided with a salary of $40,000 to Pellah and $35,000 to Berry, with the remainder divided 40% to Pellah and 60% to Berry. Prepare the journal entry to record the allocation of net income. (c) Assume the partnership income-sharing agreement calls for income to be divided with a salary of $50,000 to Pellah and $45,000 to Berry, interest of 10% on beginning capital, and the remainder divided 50%-50%. Prepare the journal entry to record the allocation of net income. (d) Compute the partners’ ending capital balances under the assumption in part (c). Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 170 (a)
(b)
(c)
(15 min.)
Income Summary .......................................................................... Pellah, Capital ($90,000 X 40%) ......................................... Berry, Capital ($90,000 X 60%) ..........................................
90,000
Income Summary .......................................................................... Pellah, Capital [$40,000 + ($15,000 X 40%)] .................... Berry, Capital [$35,000 + ($15,000 X 60%)] ....................
90,000
Income Summary .......................................................................... Pellah, Capital ..................................................................... Berry, Capital ......................................................................
90,000
36,000 54,000 46,000 44,000 45,500 44,500
Pellah: [$50,000 + $8,000 – ($25,000 X 50%)] Berry: [$45,000 + $12,000 – ($25,000 X 50%)] (d)
Pellah: $80,000 + $45,500 – $24,000 = $101,500 Berry: $120,000 + $44,500 – $32,000 = $132,500
Ex. 171 The Jamison and Stephens partnership reports net income of €50,000. Partner salary allowances are Jamison €18,000 and Stephens €12,000. Any remaining income is shared 60:40. Instructions Determine the amount of net income allocated to each partner. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitive Methods
FOR INSTRUCTOR USE ONLY
F - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 171
(5 min.)
Salary allowance Remaining income, €15,000 Jamison (€20,000 × 60%) Stephenss (€20,000 × 40%) Total division
Jamison €18,000
Stephens €12,000
Total €30,000
8,000 €20,000
20,000 €50,000
12,000 €30,000
Ex. 172 Carraway and Boos have a partnership agreement which includes the following provisions regarding sharing net income or net loss: 1. A salary allowance of $48,000 to Carraway and $36,000 to Boos. 2. An interest allowance of 10% on capital balances at the beginning of the year. 3. The remainder to be divided 60% to Carraway and 40% to Boos. The capital balance on January 1, 2020, for Carraway and Boos was $90,000 and $120,000, respectively. During 2020, the Carraway and Boos Partnership had sales of $495,000, cost of goods sold of $290,000, and operating expenses of $85,000. Instructions Prepare an income statement for the Carraway and Boos Partnership for the year ended December 31, 2020. As a part of the income statement, include a Division of Net Income to each of the partners. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 172
(15 min.) CARRAWAY AND BOOS PARTNERSHIP Income Statement For the Year Ended December 31, 2020
Sales revenue .......................................................................................................... Cost of goods sold ................................................................................................... Gross profit .............................................................................................................. Operating expenses................................................................................................. Net income ..............................................................................................................
$495,000 290,000 205,000 85,000 $120,000
Division of Net Income
Salary allowance Interest allowance ($90,000 × 10%) ($120,000 × 10%) Total interest Total salaries and interest Remaining income, $15,000 Carraway ($15,000 × 60%) Boosr ($15,000 × 40%) Total remainder
Carraway $48,000
Boos $36,000
Total $ 84,000
9,000 12,000 57,000
48,000
21,000 105,000
9,000 6,000 15,000 FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Total division Ex. 173
$66,000
$54,000
F - 43
$120,000
Barr & Eglin Co. reports net income of €42,000. The partnership agreement provides for annual salaries of €24,000 for Barr and €18,000 for Eglin and interest allowances of €4,000 to Barr and €6,000 to Eglin. Any remaining income or loss is to be shared 70% by Barr and 30% by Eglin. Instructions Compute the amount of net income distributed to each partner. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 173
(8 min.)
Salary allowance Interest allowance Total salaries and interest Remaining deficiency (€10,000) Barr (€10,000 × 70%) Eglin (€10,000 × 30%) Total division
Barr €24,000 4,000 28,000
Eglin €18,000 6,000 24,000
Total €42,000 10,000 52,000
(3,000) €21,000
(10,000) €42,000
(7,000) €21,000
Ex. 174 The Zhuzer Company at December 31 has cash $50,000, noncash assets $250,000, liabilities $138,000, and the following capital balances: Zhu $112,000 and Zerkel $50,000. The firm is liquidated, and $265,000 in cash is received for the noncash assets. Zhu and Zerkel income ratios are 60% and 40%, respectively. Instructions Prepare the entries to record: (a) The sale of noncash assets. (b) The allocation of the gain or loss on liquidation to the partners. (c) Payment of creditors. (d) Distribution of cash to the partners. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 174 (a)
(b)
(c) (d)
(10 min.)
Cash ............................................................................................. Noncash Assets ................................................................... Gain on Realization ..............................................................
265,000
Gain on Realization....................................................................... Zhu, Capital ($15,000 X 60%) .............................................. Zerkel, Capital ($15,000 X 40%) ..........................................
15,000
Liabilities ....................................................................................... Cash .....................................................................................
138,000
Zhu, Capital...................................................................................
121,000
FOR INSTRUCTOR USE ONLY
250,000 15,000 9,000 6,000 138,000
F - 44
Test Bank for Financial Accounting: IFRS Edition, 4e
Zerkel, Capital ............................................................................... Cash ..................................................................................... Ex. 175
56,000 177,000
Prepare a partners' capital statement for Whatito Company based on the following information. Whatley Hito Beginning capital €30,000 €27,000 Drawings during year 15,000 8,000 Net income was €45,000, and the partners share income 60% to Whatley and 40% to Hito. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 175
(8 min.) WHATITO COMPANY Partners' Capital Statement
Beginning capital Add: Net income Less: Drawings Ending capital
Whatley €30,000 27,000 57,000 15,000 €42,000
Hito €27,000 18,000 45,000 8,000 €37,000
Total €57,000 45,000 102,000 23,000 €79,000
Ex. 176 On December 31, Nola Company has cash $30,000, noncash assets $150,000, and liabilities $80,000. Capital balances were Harper $55,000 and Kahle $45,000. The firm is liquidated, and the noncash assets are sold for $115,000. Harper and Kahle share income in a 60:40 ratio. Instructions Prepare entries to record (a) the sale of noncash assets and (b) the allocation of the gain (loss) on liquidation to the partners. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 176
(6 min.)
(a) Cash ............................................................................................... Loss on Realization ........................................................................ Noncash Assets ...................................................................
115,000 35,000
(b) Harper, Capital ($35,000 × 60%) ................................................... Kahle, Capital ($35,000 × 40%) ..................................................... Loss on Realization ..............................................................
21,000 14,000
150,000
35,000
Ex. 177 The ABC Partnership is to be liquidated and you have been hired to prepare a Schedule of Cash Payments for the partnership. Partners Alexa, Bitsy, and Coco share income and losses in the ratio of 4:3:3, respectively. Assume the following: 1. The noncash assets were sold for €70,000. 2. Liabilities were paid in full. FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
F - 45
3. The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.)
FOR INSTRUCTOR USE ONLY
F - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
Instructions Using the above information, complete the Schedule of Cash Payments below: ABC PARTNERSHIP Schedule of Cash Payments Item Cash + Balances before liquidation 25,000 +
Noncash Assets = 150,000 =
Liabilities +
Alexa Capital +
Bitsy Capital +
Coco Capital
50,000
25,000
35,000
65,000
+
+
+
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177
(20 min.) ABC PARTNERSHIP Schedule of Cash Payments
Item Balances before liquidation Sale of noncash assets (1) New balance Pay liabilities (2) New balances Allocate capital deficiency New balances Cash distribution (3) Final balances
Noncash Assets = Liabilities +
Cash
+
25,000
+ 150,000
=
50,000
70,000 + (150,000) 95,000 + -0(50,000) 45,000 + -0-
= = = =
45,000 + (45,000) -0-
= =
-0-0-
Alexa
Bitsy
Coco
Capital
+
Capital
+
Capital
+
25,000
+
35,000
+
65,000
+ 50,000 + (50,000) -0+
(32,000) (7,000)
+ +
(24,000) 11,000
+ +
(24,000) 41,000
(7,000)
+
11,000
+
41,000
7,000 -0-
+ +
(3,500) 7,500 (7,500) -0-
+ + +
(3,500) 37,500 (37,500) -0-
-0-
+
-0-
-0-
Ex. 178 The MFP Partnership is to be liquidated when the ledger shows the following: Cash Noncash Assets Liabilities Mossimo, Capital Fandango, Capital Plank, Capital
$ 50,000 200,000 50,000 75,000 100,000 25,000
Mossimo, Fandango, and Plank’s income ratios are 6:3:1, respectively. Instructions Prepare separate entries to record the liquidation of the partnership assuming that the noncash assets are sold for $140,000 in cash. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships Solution 178
F - 47
(15 min.)
1. Cash................................................................................................. Loss on Realization.......................................................................... Noncash Assets ......................................................................
140,000 60,000
2. Mossimo, Capital ($60,000 × 6/10) .................................................. Fandango, Capital ($60,000 × 3/10) ................................................ Plank, Capital ($60,000 × 1/10) ....................................................... Loss on Realization .................................................................
36,000 18,000 6,000
3. Liabilities .......................................................................................... Cash ........................................................................................
50,000
4. Mossimo, Capital ($75,000 – $36,000) ............................................ Fandango, Capital ($100,000 – $18,000) ........................................ Planks, Capital ($25,000 – $6,000).................................................. Cash ($50,000 + $140,000 – $50,000) ...................................
39,000 82,000 19,000
200,000
60,000 50,000
140,000
Ex. 179 Prior to the distribution of cash to the partners, the accounts of ABC Company are: Cash €35,000, Acock, Capital (Dr.) €5,000, Buster, Capital (Cr.) €25,000, and Cutter, Capital (Cr.) €15,000. They share income on a 5:3:2 basis. Instructions Prepare entries to record (a) the absorption of Acock’s capital deficiency by the other partners and (b) the distribution of cash to the partners with credit balances. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 179 (a)
(b)
(8 min.)
Buster, Capital (€5,000 × 3/5) ....................................................... Cutter, Capital (€5,000 × 2/5) ....................................................... Acock, Capital ......................................................................
3,000 2,000
Buster, Capital (€25,000 – €3,000) ............................................... Cutter, Capital (€15,000 – €2,000)................................................ Cash .....................................................................................
22,000 13,000
5,000
35,000
Ex. 180 The HK Partnership is liquidated when the ledger shows: Cash Noncash Assets Liabilities Howell, Capital Kenton, Capital
$60,000 90,000 44,000 100,000 6,000
Henson and Kaenzig income ratios are 3:2, respectively. Instructions Prepare a schedule of cash payments, assuming that the noncash assets were sold for $65,000. Assume that any partner’s capital deficiencies cannot be paid to the partnership. FOR INSTRUCTOR USE ONLY
F - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(10 min.) HK Partnership Schedule of Cash Payments Cash
Balances before liquidation $ 60,000 Sale of noncash assets and allocation of losses 65,000 New Balances 125,000 Pay Liabilities (44,000) New Balances 81,000 Allocate capital deficiency Cash Distribution $(81,000) Final balances $-0-
+
Noncash Assets
= Liabilities +
Howell Capital
$90,000
$44,000
$100,000
$6,000
(15,000) 85,000
(10,000) (4,000)
85,000 (4,000) $(81,000) $-0-
(4,000) 4,000 $ -0$-0-
(90,000) -0-0$
-0$-0-
44,000 (44,000) -0$
-0$-0-
+
Kenton Capital
*($90,000 - $65,000 = $25,000; $25,000 × (3/5) = $15,000; **$25,000= $25,000 × (2/5) = $10,000. a
Ex. 181
Hu, Marcos, and Letterman share income on a 6:3:1 basis. They have capital balances of €80,000, €60,000, and €45,000, respectively, when Buffett is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Buffett into the partnership if Buffett purchases one-half of Hu’s equity for €45,000; one-half of Marcos’s equity for €22,000; and one-third of Letterman’s equity for €18,000. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181
(5 min.)
Hu, Capital (€80,000 /2)......................................................................... Marcos, Capital (€60,000 /2) ................................................................. Letterman, Capital (€45,000 /3) ............................................................. Buffett, Capital .............................................................................. a
40,000 30,000 15,000 85,000
Ex. 182
Yuanne Sipp and Letitia Grimes share partnership income on a 3:2 basis. They have capital balances of $560,000 and $280,000, respectively, when Tammy Tuck is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Tammy Tuck under each of the following assumptions: (a) Tuck invests $320,000 for a 25% ownership interest. (b) Tuck invests $220,000 for a 25% ownership interest. (c) Tuck invests an amount that gives him a 25% ownership interest. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
Solution 182
(a)
(20 min.)
Cash.............................................................................................. Tuck, Capital ........................................................................ Sipp, Capital (3/5 × $30,000) ............................................... Grimes, Capital (2/5 × $30,000) ........................................... Total capital of existing partnership Investment by new partner, Tuck Total capital of new partnership
(b)
320,000 290,000 18,000 12,000
$ 840,000 320,000 $1,160,000
Tuck’s capital credit ($1,160,000 × 25%)
$290,000
Investment by new partner, Tuck Tuck’s capital credit Bonus to existing partners
$320,000 290,000 $ 30,000
Cash.............................................................................................. Sipp, Capital ($45,000 × 3/5) ........................................................ Grimes, Capital ($45,000 × 2/5) ................................................... Tuck, Capital ........................................................................ Total capital of existing partnership Investment by new partner, Tuck Total capital of new partnership
(c)
F - 49
220,000 27,000 18,000 265,000
$ 840,000 220,000 $1,060,000
Tuck’s capital credit ($1,060,000 × 25%)
$265,000
Investment by new partner, Tuck Tuck’s capital credit Reduction of existing partners
$220,000 265,000 $ (45,000)
Cash.............................................................................................. Tuck, Capital ........................................................................
280,000 280,000
$840,000 ÷ .75 = $1,120,000; $1,120,000 – $840,000 = $280,000 a
Ex. 183
Kim Locke and Mary Leigh Coker have capital accounts of €420,000 and €480,000, respectively. Jeff Doggett and Danny Cambrey are to join the partnership. Doggett invests €425,000 in the partnership for which he receives a capital credit of €425,000. Cambrey purchases a one-half interest from Locke for €300,000 and a one-fourth interest from Coker for €90,000. Instructions (a) Prepare the journal entries to record the admission of Doggett and Cambrey to the partnership. (b)
Determine the capital balances of the partners after the admission of Doggett and Cambrey.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
F - 50 a
Solution 183
(a)
(b)
a
Test Bank for Financial Accounting: IFRS Edition, 4e (10 min.)
Cash ............................................................................................. Doggett, Capital ...................................................................
425,000
Locke, Capital (€420,000 /2) ......................................................... Coker, Capital (€480,000 /4) ......................................................... Cambrey, Capital .................................................................
210,000 120,000
Locke (€420,000 – €210,000) Coker (€480,000 – €120,000) Doggett Cambrey Total Capital
425,000
330,000
€ 210,000 360,000 425,000 330,000 €1,325,000
Ex. 184
Daggett, Lamppin, and Pendergast are partners who share profits and losses 50%, 30%, and 20%, respectively. Their capital balances are $150,000, $90,000, and $60,000, respectively. Instructions (a) Assume Sanford joins the partnership by investing $140,000 for a 25% interest with bonuses to the existing partners. Prepare the journal entry to record his investment. (b) Assume instead that Daggett leaves the partnership. Daggett is paid $170,000 with a bonus to the retiring partner. Prepare the journal entry to record Daggett’s withdrawal. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 184
(a)
(b)
a
(10 min.)
Cash............................................................................ Sanford, Capital ($440,000 ´ 25%) ....................... Daggett, Capital ($30,000 ´ 50%) ....................... Lamppin, Capital ($30,000 ´ 30%) ....................... Pendergast, Capital ($30,000 ´ 20%) ...................
140,000
Daggett, Capital .......................................................... Lamppin, Capital ($20,000 ´ 3/5)................................ Pendergast, Capital ($20,000 ´ 2/5) ............................. Cash ......................................................................
150,000 12,000 8,000
110,000 15,000 9,000 6,000
170,000
Ex. 185
Brislin, Humphreys, and Watkins share income and losses in a ratio of 3:2:5, respectively. The capital account balances of the partners are as follows: Brislin Capital Humphreys, Capital Watkins, Capital
€600,000 360,000 260,000
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships a
Ex. 185
F - 51
(Cont.)
Instructions Prepare the journal entry on the books of the partnership to record the withdrawal of Watkins under the following independent circumstances: 1. The partners agree that Watkins should be paid €280,000 by the partnership for his interest. 2. The partners agree that Watkins should be paid €220,000 by the partnership for his interest. 3. Brislin agrees to pay Watkins €180,000 for one-half of his capital interest and Heller agrees to pay Watkins €180,000 for one-half of his capital interest in a personal transaction among the partners. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 185
(15 min.)
1. Watkins, Capital ............................................................................... Brislin, Capital .................................................................................. Humphreys, Capital ......................................................................... Cash ........................................................................................ (To record withdrawal and bonus to Watkins) Bonus to Watkins €20,000 (€280,000 – €260,000) Allocation to reduce remaining partners' capital: Brislin (3/5 × €20,000) €12,000 Humphreys (2/5 × €20,000) 8,000 €20,000
260,000 12,000 8,000 280,000
2. Watkins, Capital ............................................................................... 260,000 Brislin, Capital ......................................................................... Humphreys, Capital................................................................. Cash ........................................................................................ (To record withdrawal of Watkins and bonus to remaining partners) Bonus to remaining partners €40,000 (€260,000 – €220,000) Allocation to increase remaining partners' capital: Brislin (3/5 × €40,000) €24,000 Humphreys (2/5 × €40,000) 16,000 €40,000 3. Watkins, Capital ............................................................................... Brislin, Capital ......................................................................... Humphreys, Capital................................................................. (To record withdrawal of Watkins) Total net assets and total capital of the partnership do not change.
FOR INSTRUCTOR USE ONLY
24,000 16,000 220,000
260,000 130,000 130,000
F - 52 a
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 186
Elam, Kamins, and Rubio have capital balances of $150,000, $100,000, and $75,000, respectively, and their income ratios are 4:2:4. Instructions Record the withdrawal of Rubio from the partnership under each of the following assumptions: 1. Rubio is paid $75,000 from partnership assets. 2. Rubio is paid $93,000 from partnership assets. 3. Rubio is paid $60,000 from partnership assets. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analysis, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 186
(10 min.)
1. Rubio, Capital .................................................................................. Cash........................................................................................
75,000
2. Rubio, Capital .................................................................................. Elam, Capital ($18,000 × 4/6) .......................................................... Kamins, Capital ($18,000 × 2/6) ...................................................... Cash........................................................................................
75,000 12,000 6,000
3. Rubio, Capital .................................................................................. Elam, Capital ($15,000 × 4/6) ................................................. Kamins, Capital ($15,000 × 2/6) ............................................. Cash........................................................................................
75,000
75,000
93,000 10,000 5,000 60,000
COMPLETION STATEMENTS 187. Partnership ______________ occurs whenever a partner withdraws or a new partner is admitted. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
188. A partnership characteristic which enables each partner to act on behalf of the partnership when engaging in partnership business is called ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
189. A major disadvantage of the partnership form of organization is ______________, which makes each partner personally and individually liable for all partnership liabilities. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
190. The capital accounts indicate each partner's ______________ investment, while the partner's drawing accounts are ______________ owner's equity accounts. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
191. The ______________ ratio specifies the basis for sharing income and losses. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
F - 53
192. An income ratio based on ______________ balances may be appropriate when the amount of funds invested in the partnership is critical to the partnership. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
193. A ______________ allowance or ______________ on partners' capital accounts are not expenses of the partnership when they are specified as the basis for sharing income and losses. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
194. In liquidating a partnership, it is necessary to convert ______________ into cash and to allocate any ______________ or ______________ to the partners based on their income ratios. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
195. A debit balance in a partner's capital account is called a _____________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
196.A new partner may be admitted to the partnership by ______________ the interest of an existing partner, or by ______________ assets in the partnership. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
197.When a new partner's capital interest on the date of admittance is less than his or her investment in the firm, a ______________ results for the ______________ partner(s). Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
198.If a bonus is given to a new partner, the old partners' capital accounts are decreased based on their ______________ ratio prior to the admission of the new partner. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 187. 188. 189. 190. 191. 192.
dissolution mutual agency unlimited liability permanent, temporary income capital
193. 194. 195. 196. 197. 198.
salary, interest noncash assets, gains, losses capital deficiency purchasing, investing bonus, old Income
MATCHING 199. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Mutual agency Unlimited liability Partnership agreement Income ratio Partners' capital statement Admission by investment
G. H. I. J.
Purchase of an interest Partnership liquidation Capital deficiency Distribution of cash to partners in liquidation of a partnership.
FOR INSTRUCTOR USE ONLY
F - 54
Test Bank for Financial Accounting: IFRS Edition, 4e
_____ 1. Each partner is personally and individually liable for partnership debts. _____ 2. Made on basis of partners' capital balances. _____ 3. Explains changes in individual partner's capital accounts during a period. _____ 4. Each partner can bind the partnership so long as the action appears to be appropriate for the partnership. _____ 5. Business terminates. _____ 6. Results in an increase in total net assets and total capital of the partnership. _____ 7. Capital account with a debit balance. _____ 8. The basis for sharing income and losses. _____ 9. Total net assets and total capital of the partnership do not change. _____ 10. Written contract establishing duties and responsibilities of partners. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5.
B J E A H
6. 7. 8. 9. 10.
F I D G C
SHORT-ANSWER ESSAY QUESTIONS S-A E 200 Identify and explain the principal characteristics of the partnership form of business organization. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 200 The principal characteristics of a partnership form of organization are as follows: (a)
It is a voluntary association of two or more individuals based on a legally binding contract.
(b)
The partners act in a mutual agency relationship; that is, each partner acts on behalf of the partnership when engaging in partnership business.
(c)
A partnership has limited life. That is, a partnership may be ended voluntarily at any time through the acceptance of a new partner into the firm or the withdrawal of a partner. And, a partnership may be ended involuntarily by the death or incapacity of a partner.
(d)
The partners have unlimited liability. Each partner is personally and individually liable for all partnership liabilities. FOR INSTRUCTOR USE ONLY
Accounting for Partnerships (e)
F - 55
All partnership assets are co-owned by the partners; that is, the assets are owned jointly by all the partners.
S-A E 201 Castle and Berry are discussing how income and losses should be divided in a partnership they plan to form. What factors should be considered in determining the division of net income or net loss? Ans: N/A, LO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 201 Factors to be considered in determining how income and loss should be divided are: (1) a fixed ratio is easy to apply and it may be an equitable basis in some circumstances; (2) capital balance ratios when the funds invested in the partnership are considered the most critical factor; and (3) salary allowance and/or interest allowance coupled with a fixed ratio. This last approach gives specific recognition to differences that may exist among partners by providing salary allowances for time worked and interest allowances for capital invested. S-A E 202 Are the financial statements of a partnership similar to those of a corporation? Discuss. Ans: N/A, LO: 2, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 202 The financial statements of a partnership are similar to those of a corporation. The differences are due to the number of partners involved. The income statement for a partnership is identical to the income statement for a corporation except for the division of net income. The owners' equity statement is called the partners' capital statement. This statement shows the changes in each partner's capital account and in total partnership capital during the year. On the statement of financial position each partner's capital balance is reported in the owners' equity section. S-A E 203 A partnership is liquidated by selling the non-cash assets, paying the creditors in full, and distributing the remaining assets to the partners. Explain why gains and losses on the realization of non-cash assets are distributed to the partners based on their income ratios, whereas cash is distributed to the partners based on their equity as shown in their capital accounts. What effects does the payment or nonpayment of a capital deficiency have on the distribution of cash to the partners? Ans: N/A, LO: 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 203 Gains and losses on the realization of non-cash assets are like income and losses; that is, they are income statement items and, therefore, are distributed to partners based on their income and loss ratios. Cash is a statement of financial position item and is the basis for any residual equity after liquidation; therefore, the final asset amount of cash should be distributed to partners in accordance with their equity balances.
FOR INSTRUCTOR USE ONLY
F - 56
Test Bank for Financial Accounting: IFRS Edition, 4e
When the capital deficiency is paid, the payment is credited to the partner with the debit balance in the capital account. Then, the remaining cash is distributed to the partners with credit balances on the basis of their balances. If the capital deficiency is not paid, the deficiency is allocated to the partners with credit balances on the basis of their income ratios. The remaining cash is then distributed to these partners on the basis of their capital balances. S-A E 204 (Ethics) Three doctors, Marshall Murrey, Andrew Shaw, and Austin Taylor, opened a family medicine clinic. All three doctors had been lifelong friends. All belonged to the same religious faith. All were very active in church affairs, and tried to mold their professional behavior to their religious beliefs. About a year ago, Dr. Murrey announced that he was leaving the church. The others noticed that his personality also began to change. He began to dress in flamboyant styles, and he started wearing expensive-looking jewelry. His temper became unstable—one minute he was calm, and the next, he might be throwing charts down the hall and screaming. He started coming to the office late, and forgetting to see some of his patients before he left again. The other two at first were stunned at the changes. His wife asked them whether they thought he might have a drinking problem. After finally deciding to investigate, they found what looked to them like a large amount of cocaine, (hundreds of plastic sacks of white powder) tucked away in boxes of old medical equipment. Frightened, Drs. Shaw and Taylor decided to act quickly. Their partnership agreement said nothing about dissolving the partnership—only about what to do if one of them died. They therefore secretly rented office space across town and began to move the most necessary equipment and supplies to the new office. A month later, they changed the locks on the old office and began seeing patients in the new office without any notice to Dr. Murrey at all. Dr. Murrey simply came in at around ten o'clock as usual, and found himself locked out of an empty office. Required: Did Drs. Shaw and Taylor act ethically in their ending of the partnership? Explain. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Decision Analysis
Solution 204 No, Drs. Shaw and Taylor did not act ethically in the way they ended the partnership. It is important to distinguish between legal obligations and ethical obligations. The partnership may well be legally dissolved by their action. However, ethically, they had no right to act unilaterally, without giving Dr. Murrey a chance to defend himself or to correct his behavior. It also looks like they may have had an obligation to report their apparent cocaine "find" to the appropriate authorities, or at least to determine whether the substance was, in fact, cocaine. It is clear that the doctors had the right and obligation to protect Dr. Murrey’s patients, but there is no evidence given that he was actually endangering his patients. Drs. Shaw and Taylor’s actions seem to be cowardly, and an attempt to keep from facing unpleasant realities.
FOR INSTRUCTOR USE ONLY
Accounting for Partnerships
F - 57
S-A E 205 (Communication) Walter Bector and Sandy Melos began detail work on automobiles as a hobby. First, they used a mail-order kit to add "pin striping" to their own cars, a 1968 Mustang and a 1970 GTO Judge, respectively. Then Walter added more flourishes, including his name. Sandy practiced painting flames on his Judge. Gradually, their cars became recognized around town and others began to ask them to add a flourish here or there to their cars. They were talked into attending a "muscle car" show in a nearby large city to show off their cars. They had more requests for work than they could handle. Now, they are considering quitting their other jobs and making this a permanent business. Sandy, for example, turns down more jobs than he accepts and still gets more requests every week. Walter and Sandy are unsure how to proceed. They like the idea of a partnership, but they only know they work well together—things like how to split payment have just been settled individually for each job, depending on which one did more work. Walter’s father suggests a written partnership agreement. Walter disagrees. He believes that it will spoil the whole arrangement by reducing it to words. Required: Write a brief note to Walter explaining why he needs a partnership agreement. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
F - 58
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 205 Dear Walter, Your dad asked me to write to you. I am an accountant with the CPA firm Clinton, Grant, and Thomas, and I do a lot of work for partnerships. I understand that you don't want a written partnership agreement. I'd like to share with you a few things you may not have considered. First, I completely agree that a written agreement won't solve all your problems. I would even say that a poorly written agreement is worse than none at all. However, I don't know any partnerships in this town that have lasted for more than a year or two that don't have a written agreement. If they didn't have one at first, they learned by hard experience exactly why they needed one. I'd say the biggest advantage is that it forces both of you to spell out what you expect of the other party. You have discussed, I understand, how profits are to be split. Do both of you agree entirely? What if you decide another method would be more fair? What do you plan to do if you want to add a partner? Who makes the decisions about which building to rent, and what kind of help to hire? All these things can be spelled out in a partnership agreement. I hope you will seriously consider drawing up a good partnership agreement. Otherwise, you may condemn yourselves to spending more time clearing up misunderstandings than on fixing up cars. Let me know if I can help. I know a couple of attorneys in town who could get the job done without charging an arm and a leg. Sincerely, (signature)
FOR INSTRUCTOR USE ONLY
APPENDIX G ACCOUNTING INFORMATION SYSTEMS CHAPTER LEARNING OBJECTIVES 1. Describe the nature and purpose of a subsidiary ledger. A subsidiary ledger is a group of accounts with a common characteristic. It facilitates the recording process by freeing the general ledger from details of individual balances. 2. Record transactions in special journals. Companies use special journals to group similar types of transactions. In a special journal, generally only one line is used to record a complete transaction.
TRUE-FALSE STATEMENTS 1.
A subsidiary ledger is a group of control accounts which provides information to the managers for controlling the operation of the company.
Answer: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
2.
An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.
Answer: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
3.
The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.
Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
4.
The total of the individual account balances in the accounts receivable subsidiary ledger should agree with the total of the individual account balances in the accounts payable subsidiary ledger.
Answer: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
5.
Control accounts are always located in the general ledger.
Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
6.
A control account and subsidiary ledger can be established for inventory.
Answer: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
7.
A subsidiary ledger provides up-to-date information on specific account balances.
Answer: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Reporting, AICPAPC: Problem Solving/Decision Making, IMA: Reporting, Sector: General, IFRS: No
8.
An advantage of using a subsidiary ledger is that one employee must post to both the subsidiary ledger and the general ledger.
Answer: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Risk Analysis, AICPA-PC: Project Management, IMA: Internal Controls, Sector: General, IFRS: No
9.
Special journals are used to record unique transactions which do not occur very often.
G-2
Test Bank for Financial Accounting: IFRS Edition, 4e
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
10.
A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.
Answer: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
11.
The cash payments journal only has one column because all entries recorded in this journal require a credit to the Cash account.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
12.
A cash payments journal should not be used to record transactions which require payment by check.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
13.
If a transaction cannot be recorded in a special journal, it indicates that the company should adopt an electronic accounting system.
Answer: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Decision Modeling, AICPAPC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
14.
A debit column for Sales Returns and Allowances may be found in the cash payments journal.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
15.
A single-column purchases journal is used to record purchases of merchandise on account.
Answer: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
16.
Using special journals can save time in posting because column totals are often posted rather than individual entries.
Answer: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
17.
The reference column in a sales journal is used to indicate the general ledger account number when the entry is posted.
Answer: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
18.
Postings are generally made more frequently to the general ledger control accounts than to the individual accounts in the subsidiary ledgers.
Answer: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
19.
The amounts appearing in the Inventory column of the cash payments journal are posted individually to the accounts in the accounts payable subsidiary ledger.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
20.
Transaction amounts recorded in the general journal are never posted to accounts in the subsidiary ledger.
Answer: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
For Instructor Use Only
Subsidiary Ledgers and Special Journals 21.
G-3
When control and subsidiary accounts are involved, there must be a dual posting.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
22.
An accounting information system involves data collection, data processing, and information dissemination.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
23.
Each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger at the end of an accounting period.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
24.
When special journals are employed, all postings must be monthly or daily but cannot be both.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
25.
Totaling the columns of a journal and proving the equality of the totals is called footing and cross-footing a journal.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
26.
Only transactions that cannot be entered in a special journal are recorded in the general journal.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
For Instructor Use Only
G-4
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 27.
Postings to the control accounts in the general ledger are made a. annually. b. daily. c. monthly. d. weekly.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
28.
The balance of a control account in the general ledger a. must always be zero. b. must equal the amount of total assets. c. is always greater than the composite balance of individual accounts in a related subsidiary ledger. d. must equal the composite balance of individual accounts in a related subsidiary ledger.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
29.
A subsidiary ledger is a. used in place of the general ledger if the general ledger is destroyed or stolen. b. a group of accounts used by branches and subsidiaries of a corporate business. c. a group of accounts with a common characteristic that provides detailed information about a control account in the general ledger. d. used to post excess transactions if a general ledger account becomes full during an accounting period.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
30.
Postings are made daily to the a. Accounts Receivable control account. b. Accounts Payable control account. c. Accounts Receivable subsidiary ledger. d. control accounts in the general ledger.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
31.
A subsidiary ledger frees the general ledger from details of a. individual balances. b. external transactions. c. internal transactions. d. the control account.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
32.
A company would not likely use subsidiary ledgers for a. inventory. b. retained earnings. c. equipment. d. accounts receivable.
Answer: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
For Instructor Use Only
Subsidiary Ledgers and Special Journals 33.
G-5
Postings are made daily to subsidiary ledgers so that a. employees are kept busy. b. debits equal credits. c. individual account information is kept current. d. the control account will balance to the subsidiary ledger.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
34.
Accounts Receivable and Accounts Payable are examples of a. nominal accounts. b. controlling accounts. c. subsidiary ledger accounts. d. both nominal accounts and controlling accounts.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
35.
The composite balance of individual accounts in the accounts payable subsidiary ledger must a. equal the composite balance of the individual accounts in the accounts receivable subsidiary ledger. b. always be zero. c. equal the balance of the accounts payable account in the general ledger. d. agree with the total of the Accounts payable column in the cash receipt journal.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
36.
The one characteristic that all entries recorded in a cash payments journal have in common is a. that they all represent purchases of merchandise. b. a credit to the cash account. c. that they are all posted to the accounts payable subsidiary ledger. d. a debit to the accounts payable or purchases accounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB None, AICPA FC: Measurement, IMA: Information Management
37.
In which journal would a customer's partial payment on account be recorded? a. Sales journal b. Cash receipts journal c. General journal d. Cash payments journal
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
38.
In which journal would a cash purchase of inventory be recorded? a. Purchases journal b. General journal c. Cash payments journal d. None of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
39.
The individual amounts in the sales journal are posted to the accounts receivable subsidiary ledger a. daily. b. weekly. c. monthly. d. yearly.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB None, AICPA FC: Measurement, IMA: Information Management
For Instructor Use Only
G-6
Test Bank for Financial Accounting: IFRS Edition, 4e
40.
A sales journal is used to record a. only cash sales of merchandise. b. sales of all assets on credit and for cash. c. only credit sales of merchandise. d. credit sales of merchandise, sales returns and allowances, and sales discounts.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
41.
If a transaction cannot be recorded in a special journal a. the company must refuse to enter into the transaction. b. it is recorded in the general journal. c. it is recorded directly in the accounts in the general ledger. d. it is recorded as an adjustment on the work sheet.
Answer: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
42.
The one characteristic that all entries recorded in a cash receipts journal have in common is a. a credit to the Cash account. b. that they all represent collections from customers. c. that they originate from the sales of merchandise. d. a debit to the Cash account.
Answer: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
43.
A one-column purchases journal indicates that a. only purchases of merchandise on account can be recorded. b. all purchases of merchandise can be recorded. c. all acquisitions on account can be recorded. d. another column must be added so that debits and credits can be recorded.
Answer: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
44.
The one characteristic that all entries recorded in a multiple-column purchases journal have in common is a a. credit to the Cash account. b. debit to the Cash account. c. debit to the Accounts Payable account. d. credit to the Accounts Payable account.
Answer: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
45.
A company which uses special journals should record a transaction involving the purchase of merchandise for cash in a a. single-column purchases journal. b. multiple-column purchases journal. c. cash payments journal. d. general journal.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
For Instructor Use Only
Subsidiary Ledgers and Special Journals 46.
G-7
If merchandise from a cash sale is returned by a customer for a refund, the sales return is recorded in the a. general journal. b. cash receipts journal. c. cash payments journal. d. sales journal.
Answer: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
47.
Which of the following is not a special journal? a. Sales journal b. Purchases journal c. General journal d. Cash receipts journal
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
48.
Correcting entries are journalized in a. a special journal. b. the general journal. c. the general ledger. d. a correcting journal.
Answer: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
49.
Adjusting entries are recorded a. only on the worksheet. b. only in the general ledger. c. in the general journal. d. in the special journals.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
50.
All of the column totals in the cash receipts journal are posted to general ledger accounts except the a. Accounts Receivable column total. b. Cash column total. c. Sales column total. d. Other Accounts column total.
Answer: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
51.
If a transaction cannot be recorded in a special journal, it is a. not recorded. b. a correcting entry. c. recorded in the general journal. d. an error.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
For Instructor Use Only
G-8
Test Bank for Financial Accounting: IFRS Edition, 4e
52.
A company uses a sales journal, a cash receipts journal, a purchases journal, a cash payments journal, and a general journal. A cash sales return would be recorded in the a. sales journal. b. cash receipts journal. c. cash payments journal. d. general journal.
Answer: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
53.
The entries in a sales journal will show a. all sales of merchandise. b. the cash sales of the company. c. the credit sales of merchandise. d. all sales of the company.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
54.
Entries in a sales journal a. are made from sales invoices. b. will indicate the invoice number in the reference column of the sales journal. c. will occupy two lines of the sales journal. d. indicate either a cash debit or accounts receivable debit.
Answer: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
55.
An entry in a sales journal will not a. require a debit to Accounts Receivable. b. show a sales invoice number. c. affect the reference column of the journal. d. include a credit to the Sales Revenue account.
Answer: c, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
56.
If an owner withdraws cash for personal use, the transaction should be recorded in the a. sales journal. b. cash receipts journal. c. general journal. d. cash payments journal.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
57.
If a company purchases merchandise for cash, the transaction should be recorded in the a. purchases journal. b. general journal. c. cash payments journal. d. sales journal.
Answer: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: Retail, IFRS: No
58.
Cash from sales of merchandise will be recorded in the a. purchases journal. b. sales journal. c. cash receipts journal. d. general journal.
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G-9
Answer: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: Retail, IFRS: No
For Instructor Use Only
G - 10 Test Bank for Financial Accounting: IFRS Edition, 4e 59.
Postings from the purchases journal to the general ledger are made a. daily. b. monthly. c. weekly. d. yearly.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
60.
The individual amounts in the Accounts Payable column in the cash payments journal are posted to the subsidiary ledger a. daily. b. monthly. c. weekly. d. yearly.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
61.
Debit postings to the individual accounts in an accounts receivable subsidiary ledger generally come from the a. sales journal. b. cash receipts journal. c. purchases journal. d. cash payments journal.
Answer: a, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
62.
Entries in a sales journal are a. posted only to accounts in an accounts receivable subsidiary ledger. b. posted only to accounts in the general ledger. c. posted to accounts in an accounts receivable subsidiary ledger and to accounts in the general ledger. d. never posted.
Answer: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
63
Which one of the following columns in a cash receipts journal is not posted in total to an account in the general ledger? a. Cash column b. Sales Discounts column c. Accounts Receivable column d. Other Accounts column
Answer: d, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
64.
The use of special journals to record transactions a. eliminates the need for a general ledger. b. can save time in the posting process. c. eliminates the need for a general journal. d. should only be used if the volume of transactions is small.
Answer: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
For Instructor Use Only
Subsidiary Ledgers and Special Journals 65.
G - 11
Posting a sales journal to the accounts in the general ledger requires a a. debit to Cash and a credit to Sales Revenue. b. debit to Sales and a credit to Inventory. c. debit to Accounts Receivable and a credit to Cost of Goods Sold. d. debit to Accounts Receivable and a credit to Sales Revenue.
Answer: d, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
66.
The entries recorded in the Other Accounts column of a cash payments journal a. are posted to the accounts payable subsidiary ledger daily. b. are posted individually to accounts in the general ledger. c. are not posted individually but are posted as a column total to the general ledger. d. do not require posting.
Answer: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
67.
The entry to record the granting of credit to a customer for a sales return is posted to a. the accounts receivable subsidiary ledger only. b. the general ledger only. c. both the accounts receivable subsidiary ledger and the general ledger. d. both the accounts payable subsidiary ledger and the general ledger.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
68.
Proving the equality of the totals in the columns of multiple-column special journals is called a. posting to the subsidiary. b. debiting and crediting. c. footing and crossfooting. d. updating the master file.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: FSA, Sector: General, IFRS: No
69.
If a company records merchandise it returns to suppliers in the general journal, then a. a posting must be made only to the accounts payable control account. b. a posting must be made only to the accounts payable subsidiary ledger account. c. a dual posting must be made. d. there will be a debit to Inventory.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
70.
Reno’s Wholesale uses a sales journal. An entry in this journal will include a a. debit to Cash; credit to Sales Revenue. b. debit to Accounts Receivable; credit to Sales Revenue. c. debit to Sales Discounts; credit to Cash. d. debit to Accounts Payable; credit to Sales Returns and Allowances.
Answer: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
71.
Which accounts in the general ledger are affected when the monthly posting is made from the sales journal? a. Accounts Receivable; accounts receivable subsidiary accounts b. Accounts Receivable subsidiary accounts; Sales Revenue c. Accounts Receivable; Sales Revenue d. Accounts Receivable; Sales Discounts For Instructor Use Only
G - 12 Test Bank for Financial Accounting: IFRS Edition, 4e Answer: c, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
For Instructor Use Only
Subsidiary Ledgers and Special Journals 72.
G - 13
Which of the following is not a true statement about the daily posting of the sales journal? a. There is a debit posting to accounts in the accounts receivable subsidiary ledger. b. There is no credit posting. c. The reference column in the sales journal is checked when the posting is complete for each entry in the journal. d. The invoice number supporting the sales transaction is posted to the reference column in the subsidiary ledger.
Answer: d, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
73.
Evidence that the monthly posting of the sales journal total has been accomplished is indicated by a. a signature of the accountant doing the posting. b. a date under the double-line total. c. the general ledger account numbers under the double-lined total. d. inspecting the postings in the accounts payable subsidiary ledger.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
74.
Which of the following economic events would not be recorded in the cash receipts journal? a. Cash sales of merchandise b. Collections of accounts receivable c. Cash from sale of land d. Cash purchases of merchandise
Answer: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
75.
The "Other Accounts" column in a cash receipts journal is also referred to as the a. miscellaneous column. b. excess column. c. sundry accounts column. d. compound-entry column.
Answer: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
76.
An entry in the "Other Accounts" column in a cash receipts journal could occur when the credit is to a. Owner's Drawings. b. Accounts Payable. c. Owner's Capital. d. Inventory.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
77.
The process of totaling the columns of a journal is termed a. ruling. b. columnizing. c. sizing. d. footing.
Answer: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
For Instructor Use Only
G - 14 Test Bank for Financial Accounting: IFRS Edition, 4e 78.
An (x) below the "Other Accounts" column in a cash receipts journal indicates the a. total has been posted to the general ledger. b. total is not posted to the general ledger. c. column has been footed. d. column has been cross-footed.
Answer: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
79.
Cross-footing a cash receipts journal means a. the equality of debits and credits in the journal has been proved. b. each line of the journal has a horizontal total. c. the columns of the journal have been cross-referenced. d. all necessary postings have been completed.
Answer: a, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
80.
Which of the following would not be an appropriate heading for a column in the cash receipts journal? a. Cash b. Accounts Payable c. Sales Discounts d. Sales Revenue
Answer: b, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Reflective Thinking, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Project Management, IMA: Business Applications, Sector: General, IFRS: No
81.
Entries in the purchases journal are made a. from sales invoices. b. from the general journal. c. without supporting documentation. d. from purchase invoices.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
82.
Proving the postings of a single-column purchases journal would involve comparing the a. general ledger posting to Accounts Payable to the debit postings of the accounts receivable subsidiary ledger. b. general ledger debit posting to Accounts Payable to the general ledger credit posting to Inventory. c. general ledger credit posting to Accounts Payable to the general ledger debit posting to Inventory. d. debit postings to the accounts receivable subsidiary ledger to the credit postings to the accounts payable subsidiary ledger.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
83.
If a company uses a multiple-column purchases journal, which of the following possible headings for debit columns of the journal would not be appropriate? a. Accounts Payable b. Inventory c. Supplies d. Other Accounts
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
For Instructor Use Only
Subsidiary Ledgers and Special Journals 84.
G - 15
The reference column of a multiple-column cash payments journal after posting a. will only contain check marks. b. will be blank. c. will only contain account numbers. d. may contain either account numbers or check marks.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
85.
The reference column of the accounts in the accounts payable subsidiary ledger after posting may show a. only P references. b. CP, P, or G references. c. G, P, or S references. d. only CP references.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
86.
All of the following are advantages of using subsidiary ledgers except they a. eliminate errors in individual accounts. b. free the general ledger of excessive details. c. show, in a single account, transactions affecting one customer or one creditor. d. make possible a division of labor.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
87.
Which of the following is not an advantage of a subsidiary ledger? a. Shows transactions affecting one customer or one creditor in a single account. b. Helps locate errors in individual accounts. c. Puts greater detail in the general ledger. d. Makes possible a division of labor.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
88.
Credit sales of assets other than merchandise are recorded in the a. cash payments journal. b. cash receipts journal. c. general journal. d. sales journal.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
89.
When the totals of the sales journal are posted at the end of the month, there will be credits to a. Sales Revenue and Inventory and debits to Accounts Receivable and Cost of Goods Sold. b. Accounts Receivable and Cost of Goods Sold and debits to Sales Revenue and Inventory. c. Sales Revenue and debits to each individual customer account. d. the Sales Revenue account only, and no debits.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
For Instructor Use Only
G - 16 Test Bank for Financial Accounting: IFRS Edition, 4e 90.
The Other Accounts column of a multi-column journal is often referred to as the a. Sundry Accounts column. b. Controlling Account column. c. Credit Account column. d. Debit Account column.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
91.
Companies record credit purchases of equipment or supplies in the a. cash payments journal. b. cash receipts journal. c. general journal. d. one-column purchases journal.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
92.
In the expanded purchases journal, debits are made in which columns? a. Accounts Payable, Inventory, and Supplies b. Inventory, Supplies, and Other Accounts c. Cash, Supplies, and Other Accounts d. Accounts Payable, Cash, and Inventory
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
93.
If a customer takes a sales discount, an entry is made in the a. cash receipts journal. b. sales journal. c. cash payments journal. d. general journal.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 17
EXERCISES Ex. 94 After Artie Company had completed all posting for the month of December, the sum of the balances in the following accounts payable subsidiary ledger did not agree with the balance of the control account in the general ledger. Name Aston's Address 286 Buck Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 2 P25 2,400 2,400 Name Carson Company Address 818 Western Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 7,600 10 CP23 7,600 — 20 P32 3,300 3,300 29 J15 300 3,600 Name Diana Fenn Company Address 90210 Baker Boulevard —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 9,900 18 CP28 9,900 — 29 P34 12,600 2,700 Name Maria Lopez Address 2720 Sommers Avenue —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 8 P27 6,000 6,000 27 P33 8,000 14,000 Name Oster Supplies Address 1560 Puckett Street —————————————————————————————————————————— Date Item Post. Ref. Debit Credit Balance —————————————————————————————————————————— Dec. 1 Balance 8,200 7 P26 5,600 12,800 12 J11 420 12,380 For Instructor Use Only
G - 18 Test Bank for Financial Accounting: IFRS Edition, 4e 20 Ex. 94
CP29
8,000
20,380
(cont.)
The balance in the Accounts Payable control account of $37,380 has been verified as correct. Also assume that the journals references in the Post Ref. columns of the accounts payable subsidiary ledger have been verified as correct. Instructions Determine the errors in the preceding accounts payable subsidiary accounts and prepare a corrected schedule of accounts payable. Answer: N/A, LO: 1, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 94
(10 min.)
IDENTIFICATION OF ERRORS: Carson Company The $300 represents merchandise returned and should be subtracted from the balance owed. Correct balance is $3,000. Diana Fenn Company The $12,600 represents new purchases on account and should be added to the previous balance of zero. The correct balance is $12,600. Oster Supplies There is an addition error. Adding $5,600 to the beginning balance of $8,200 yields a balance of $13,800. Subtracting merchandise returned of $420 leaves a balance of $13,380. The $8,000 is a payment on account, not an increase. The correct balance is $5,380. ACCOUNTS PAYABLE SUBSIDIARY LEDGER ACCOUNT BALANCES Aston's Carson Company Diana Fenn Company Maria Lopez Oster Supplies Total
$ 2,400 3,000 12,600 14,000 5,380 $37,380
Ex. 95 On December 1, the accounts receivable control account balance in the general ledger of Mitus Company was $9,000. The accounts receivable subsidiary ledger contained the following detailed customer balances: Acme $1,500, Baker $2,100, Fare $2,600, and Grote $2,800. The following information is available from the company's special journals for the month of December: Cash Receipts Journal: Cash received from Fare $1,900, from Acme $2,100, from Santos $1,700, and from Baker $1,800. Sales Journal: Sales to Santos $3,300, to Fare $1,700, to Acme $2,300, and to Grote $2,400.
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 19
Additionally, Fare returned defective merchandise for credit for $900. Acme returned defective merchandise for $600 which he had purchased for cash.
For Instructor Use Only
G - 20 Test Bank for Financial Accounting: IFRS Edition, 4e Instructions (a) Using T-accounts for Accounts Receivable Control and the detail customer accounts, post the activity for the month of December. (b)
Reconcile the accounts receivable control account with the subsidiary ledger by preparing a detail list of customer balances at December 31.
Answer: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 95 (a)
(10 min.)
Control Account:
Accounts Receivable 9,000 9,700 10,300
(SJ) Bal.
(CR) (G)
7,500 900
Subsidiary Accounts: Acme (S) Bal.
1,500 2,300 1,700
(CR)
Baker 2,100 Bal.
Fare (S) Bal.
2,600 1,700 1,500
(CR) (G)
2,100 300
(CR)
Grote 1,900 900
(S) Bal.
2,800 2,400 5,200
Santos (S) Bal. (b)
3,300 1,600
(CR)
1,700
Listing of accounts receivable at end of the month: Acme Baker Fare Grote Santos Total
$ 1,700 300 1,500 5,200 1,600 $10,300
Accounts receivable balance
For Instructor Use Only
1,800
Subsidiary Ledgers and Special Journals
G - 21
Ex. 96 Gates Company maintains four special journals and a general journal to record its transactions. Using the code below, indicate in the space provided the appropriate journal for recording the transactions listed. Code S CR CP P G
Journals Sales journal Cash receipts journal Cash payments journal Single-column purchases journal General journal
____
1. Shareholders invested cash in the business in exchange for ordinary shares.
____
2. Purchased store supplies on account.
____
3. Sold merchandise to customer on account.
____
4. Purchased a 2-year fire insurance policy for cash.
____
5. Received a check from a customer as payment on account.
____
6. Paid for store supplies purchased in transaction 2.
____
7. Purchased merchandise on account.
____
8. Issued a credit memorandum to a customer who returned defective merchandise previously sold on account.
____
9. Purchased office equipment for cash.
____ 10. Made an adjusting entry for store supplies used during the period. Answer: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 96 1. 2. 3. 4. 5.
CR G S CP CR
(5 min.) 6. 7. 8. 9. 10.
CP P G CP G
Ex. 97 Sasser Company uses a sales journal, a cash receipts journal, and a general journal to record transactions with its customers. Record the following transactions in the appropriate journals. The cost of all merchandise sold was 70% of the sales price. July
2
Sold merchandise for $21,000 to B. Stine on account. Credit terms 2/10, n/30. Sales invoice No. 100.
July
5
Received a check for $800 from R. Hyatt in payment of his account.
July
8
Sold merchandise to F. Wendel for $900 cash.
For Instructor Use Only
G - 22 Test Bank for Financial Accounting: IFRS Edition, 4e July 10
Received a check in payment of Sales invoice No. 100 from B. Stine minus the 2% discount.
Ex. 97
(cont.)
July 15
Sold merchandise for $9,000 to J. Nott on account. Credit terms 2/10, n/30. Sales invoice No. 101.
July 18
Borrowed $25,000 cash from United Bank signing a 6-month, 10% note.
July 20
Sold merchandise for $18,000 to C. Karn on account. Credit terms 2/10, n/30. Sales invoice No. 102.
July 25
Issued a credit memorandum for $600 to C. Karn as an allowance for damaged merchandise previously sold on account.
July 31
Received a check from J. Nott for $5,000 as payment on account. SASSER COMPANY Sales Journal
S1 —————————————————————————————————————————— Invoice Acct. Rec. Dr. COGS Dr. Date Account Debited No. Ref. Sales Revenue Cr. Inventory Cr. —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————
SASSER COMPANY General Journal G1 —————————————————————————————————————————— Date Explanations Ref. Debit Credit —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— —————————————————————————————————————————— ——————————————————————————————————————————
For Instructor Use Only
Subsidiary Ledgers and Special Journals Ex. 97
G - 23
(cont.) SASSER COMPANY Cash Receipts Journal
CR1 ——————————————————————————————————————————— Sales Accounts Sales Other COGS Dr. Accounts Cash Discounts Rec. Revenue Accounts Inventory Cr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— Answer: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPA-PC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 97
(15 min.) SASSER COMPANY Sales Journal
S1 ——————————————————————————————————————————— Invoice Acct. Rec. Dr. COGS Dr. Date Account Debited No. Ref. Sales Revenue Cr. Inventory Cr. ——————————————————————————————————————————— July 2 B. Stine 100 21,000 14,700 ——————————————————————————————————————————— July 15 J. Nott 101 9,000 6,300 ——————————————————————————————————————————— July 20 C. Karn 102 18,000 12,600 ——————————————————————————————————————————— SASSER COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— July 25 Sales Returns and Allowances 600 ——————————————————————————————————————————— Accounts Receivable—C. Karn 600 ———————————————————————————————————————————
For Instructor Use Only
G - 24 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 97
(cont.) SASSER COMPANY Cash Receipts Journal
CR1 ——————————————————————————————————————————— Sales Accounts Sales Other Accounts Cash Discounts Rec. Revenue Accounts COGS Dr. Date Credited Ref. Dr. Dr. Cr. Cr. Cr. Inventory Cr. ——————————————————————————————————————————— July 5 R. Hyatt 800 800 ——————————————————————————————————————————— July 8 Sales 900 900 630 ——————————————————————————————————————————— July 10 B. Stine 20,580 420 21,000 ——————————————————————————————————————————— July 18 Notes Pay. 25,000 25,000 ——————————————————————————————————————————— July 31 J. Nott 5,000 5,000 ——————————————————————————————————————————— Ex. 98 Ward Company uses a single-column purchases journal, a cash payments journal, and a general journal to record transactions with its suppliers and others. Record the following transactions in the appropriate journals. Transactions Oct.
5
Purchased merchandise on account for $15,000 from Groton Company. Terms: 2/10, n/30; FOB shipping point.
Oct.
6
Paid $7,200 to Federated Insurance Company for a two-year fire insurance policy.
Oct.
8
Purchased supplies on account for $700 from Flynn Supply Company. Terms: 2/10, n/30.
Oct. 11
Purchased merchandise on account for $14,000 from Buehler Corporation. Terms: 2/10, n/30; FOB shipping point.
Oct. 13
Issued a debit memorandum for $3,000 to Buehler Corporation for merchandise purchased on October 11 and returned because of damage.
Oct. 15
Paid Groton Company for merchandise purchased on October 5, less discount.
Oct. 16
Purchased merchandise for $8,000 cash from Clifford Company.
Oct. 21
Paid Buehler Corporation for merchandise purchased on October 11, less merchandise returned on October 13, less discount.
Oct. 25
Purchased merchandise on account for $22,000 from Dooley Company. Terms: 2/10, n/30; FOB shipping point.
Oct. 31
Purchased office equipment for $30,000 cash from Paten Office Supply Company.
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 25
Ex. 98 (cont.) WARD COMPANY Purchases Journal
P1 ——————————————————————————————————————————— Inventory Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— WARD COMPANY General Journal
G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— WARD COMPANY Cash Payments Journal
CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— ——————————————————————————————————————————— For Instructor Use Only
G - 26 Test Bank for Financial Accounting: IFRS Edition, 4e Answer: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 98
(15 min.) WARD COMPANY Purchases Journal
P1 ——————————————————————————————————————————— Inventory Dr. Date Account Credited Ref. Accounts Payable Cr. ——————————————————————————————————————————— Oct. 5 Groton Company 15,000 ——————————————————————————————————————————— Oct. 11 Buehler Corporation 14,000 ——————————————————————————————————————————— Oct. 25 Dooley Company 22,000 ——————————————————————————————————————————— WARD COMPANY General Journal G1 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit ——————————————————————————————————————————— Oct. 8 Supplies 700 ——————————————————————————————————————————— Accounts Payable—Flynn Supply Company 700 ——————————————————————————————————————————— Oct. 13 Accounts Payable—Buehler Corp. 3,000 ——————————————————————————————————————————— Inventory 3,000 ——————————————————————————————————————————— WARD COMPANY Cash Payments Journal CP1 ——————————————————————————————————————————— Other Accounts Accounts Accounts Payable Inventory Cash Date Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— Oct. 6 Prepaid Insurance 7,200 7,200 ——————————————————————————————————————————— Oct. 15 Groton Company 15,000 300 14,700 ——————————————————————————————————————————— Oct. 16 Inventory 8,000 8,000 ——————————————————————————————————————————— Oct. 21 Buehler Corp. 11,000 220 10,780 ——————————————————————————————————————————— Oct. 31 Equipment 30,000 30,000 ———————————————————————————————————————————
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 27
Ex. 99 Sandy Company uses both special journals and a general journal. The company accountant made the following errors during July. 1. Incorrectly added the credit entries in a customer's account in the accounts receivable subsidiary ledger. The total was listed as $2,690; it should have been $2,790. 2. A remittance of $400 from Tom Short was correctly recorded in the cash receipts journal, but the amount was posted incorrectly to the account of customer Will Short in the subsidiary ledger. 3. A purchase of merchandise on account from Easton Company for $1,000 was incorrectly entered in the purchases journal at $10,000. 4. In the sales journal, the entries were incorrectly added for the month. The monthly total was listed as $21,620; it should have been $21,260. Instructions Indicate how each of the above errors might be discovered. Answer: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 99
(10 min.)
1. The subsidiary ledger will not agree with the general ledger control account. Refooting the subsidiary ledger should locate the error. 2. The error will be discovered when the customer receives his statement. Mr. Tom Short's statement will indicate a balance of $400 more than he owes. 3. The error may not be discovered until the payment is sent to the supplier. Then, hopefully Easton will send back the excess payment. Additionally, analysis of gross profit may indicate it is inordinately out of line with prior periods. 4. When the accounts receivable control account is reconciled with the accounts receivable subsidiary ledger, it will be $360 higher than the subsidiary ledger. Refooting the sales journal should then locate the error. Ex. 100 Below are some typical transactions incurred by Harley Company. ____
1. Purchase of merchandise on account.
____
2. Collection on account from customers.
____
3. Payment of employee's wages.
____
4. Sales of merchandise for cash.
____
5. Close Income Summary to Retained Earnings.
____
6. Adjusting entry for depreciation on machinery.
____
7. Payment of creditors on account.
____
8. Purchase of office equipment on credit.
____
9. Sales discount taken on goods sold on credit. For Instructor Use Only
G - 28 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 100 (cont.) ____ 10. Sales of merchandise on account. ____ 11. Purchase of a delivery truck for cash. ____ 12. Return of merchandise purchased on credit. ____ 13. Payment of rent in advance. ____ 14. Adjusting entry for accrued interest expense. ____ 15. Purchase of office supplies for cash. For each transaction, indicate by the code letter the appropriate journal where the transaction would be journalized. CR — Cash Receipts Journal CP — Cash Payments Journal S — Sales Journal P — Single-Column Purchases Journal G — General Journal Answer: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 100
(10 min.)
1. 2. 3. 4. 5.
6. 7. 8. 9. 10.
P CR CP CR G
G CP G CR S
11. 12. 13. 14. 15.
CP G CP G CP
Ex. 101 Circle the correct answer to each situation. (a)
(b)
A sales journal will be used for: Credit Sales
Cash Sales
Sales Discounts
Yes
Yes
Yes
No
No
A single-column purchases journal will be used for: Cash Purchases Yes
(c)
No
No
Purchases on Account Yes
No
Purchase Returns and Allowances Yes
No
A multiple-column purchases journal will be used for: Cash Purchases Yes
No
Supplies Purchased on Account Yes
No
For Instructor Use Only
Equipment Purchases on Account Yes
No
G - 29
Subsidiary Ledgers and Special Journals Ex. 101 (cont.) (d)
(e)
A cash payments journal will be used for: Payments to Creditors
Purchases Discounts
Payment of Dividends
Yes
Yes
Yes
No
No
No
A cash receipts journal will be used for: Sale of Shares Yes
Purchases Discounts
No
Yes
No
Cash Sales Yes
No
Answer: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 101
(5 min.)
(a) Yes, No, No (b) No, Yes, No (c) No, Yes, Yes
(d) Yes, Yes, Yes (e) Yes, No, Yes
Ex. 102 Listed below are various column headings that may appear in special journals. Using the following code letters, identify for each column heading (1) the special journal where the column heading would appear, and (2) whether the amounts entered under the column heading would be posted in total, individually, or both in total and individually. (Note: column headings may appear in more than one special journal) Code: Special Journals S = Sales journal P = Single-column purchases journal CR = Cash receipts journal CP = Cash payments journal Heading
Code: Posting I = Individual posting T = Total posting B = Both individual and total posting Special Journal
Posting
1. Accounts Payable—Cr.
___________
___
2. Sales Revenue—Cr.
___________
___
3. Sales Discounts—Dr.
___________
___
4. Inventory—Dr.
___________
___
5. Cash—Cr.
___________
___
6. Accounts Receivable—Dr.
___________
___
7. Other Accounts—Cr.
___________
___
8. Inventory—Cr.
___________
___
For Instructor Use Only
G - 30 Test Bank for Financial Accounting: IFRS Edition, 4e 9. Accounts Receivable—Cr.
___________
___
___________
___
Ex. 102 (cont.) 10. Accounts Payable—Dr.
Answer: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 102
(8 min.)
Heading 1. Accounts Payable—Cr. 2. Sales Revenue—Cr. 3. Sales Discounts—Dr. 4. Inventory—Dr. 5. Cash—Cr. 6. Accounts Receivable—Dr. 7. Other Accounts—Cr. 8. Inventory—Cr. 9. Accounts Receivable—Cr. 10. Accounts Payable—Dr.
Special Journal P S, CR CR P, CP CP S CR CP, CR, S CR CP
Posting B T T T T B I T B B
Ex. 103 Horton Company uses four special journals, (cash receipts, cash payments, sales, and purchases journal) in addition to a general journal. On November 1, 2020, the control accounts in the general ledger had the following balances: Cash $12,000, Accounts Receivable $200,000 and Accounts Payable $42,000. Selected information on the final line of the special journals for the month of November is presented below: Cash Receipts Journal: Cash Dr. ?
Sales Discount Dr. $600
Accounts Receivable Cr. $3,400
Sales Revenue Cr. $29,000
Other Accounts Cr. Acct. Ref. Amount (X) $1,000
C. of G. S. Dr. Inventory Cr. $17,400
Cash Payments Journal: Other Accounts Dr. Acct. Ref. Amount (X) $1,600
Accounts Payable Dr. ?
Purchases Journal: Accounts Payable Inventory Cr. Dr. ? $37,000
Supplies Dr. $2,400
Supplies Dr. $1,450
Inventory Cr. $700
Cash Cr. $14,600
Other Accounts Dr. Acct. Ref. Amount (X) $3,300
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 31
Additional Data: The Sales Journal total was $41,000. A customer returned merchandise for credit for $360 and Horton Company returned store supplies to a supplier for credit for $400.
For Instructor Use Only
G - 32 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 103 (cont.) Instructions (a) Determine the missing amounts in the special journals. (b)
Determine the balances in the general ledger accounts (Cash, Accounts Receivable, and Accounts Payable) at the end of November.
Answer: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 103 (a)
(15 min.)
The missing amounts can be determined by crossfooting the journals. Cash Receipts Credits ($3,400 + $29,000 + $1,000) Debits Cash debit
$33,400 600 $32,800
Cash Payments Credits ($700 + $14,600) Debits ($1,600 + $2,400) Accounts payable debit
$15,300 4,000 $11,300
Purchases Debits ($37,000 + $1,450 + $3,300) Credits Accounts payable credit
$41,750 -0$41,750
(b) (CR) Bal.
(CP) (G)
Cash 12,000 (CP) 32,800 30,200 Accounts Payable 11,300 400 (P) Bal.
14,600
Accounts Receivable 200,000 (CR) 3,400 (S) 41,000 (G) 360 Bal. 237,240
42,000 41,750 72,050
Ex. 104 Easton Company began business on October 1. The sales journal, as it appeared at the end of the month, follows: SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post. Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Oct. 5 Donna Miner 10001 575 11 Mike Barr 10002 335 16 Donna Miner 10003 818 19 Laura Cher 10004 447 For Instructor Use Only
Subsidiary Ledgers and Special Journals 26
Myron Silas
10005
G - 33
1,184 3,359
Ex. 104 (cont.) 1. Open general ledger T-accounts for Accounts Receivable (No. 112) and Sales Revenue (No. 401) and an accounts receivable subsidiary T-account ledger with an account for each customer. Make the appropriate postings from the sales journal. Fill in the appropriate posting references in the sales journal above. 2. Prove the accounts receivable subsidiary ledger by preparing a schedule of accounts receivable. Answer: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 104
(15 min.)
1. SALES JOURNAL Page 1 ——————————————————————————————————————————— Invoice Post Date Account Debited Number Ref. Amount ——————————————————————————————————————————— Oct. 5 Donna Miner 10001 ✓ 575 11 Mike Barr 10002 ✓ 335 16 Donna Miner 10003 ✓ 818 19 Laura Cher 10004 ✓ 447 26 Myron Silas 10005 ✓ 1,184 3,359 (112)/(401) GENERAL LEDGER
SUBSIDIARY LEDGER
Accounts Receivable 10/31 (S1) 3,359
112
Sales Revenue 10/31 (S1)
401 3,359
10/11 (S1)
Barr, Mike 335
10/19 (S1)
Cher, Laura 447
10/5 (S1) 10/16 (S1)
10/26 (S1) 2.
SCHEDULE OF ACCOUNTS RECEIVABLE
For Instructor Use Only
Miner, Donna 575 818 1,393 Silas, Myron 1,184
G - 34 Test Bank for Financial Accounting: IFRS Edition, 4e Mike Barr Laura Cher Donna Miner Myron Silas Total Accounts Receivable Ex. 105
$ 335 447 1,393 1,184 $3,359
CASH PAYMENTS JOURNAL Page 45 ——————————————————————————————————————————— Other Accounts Ck. Account Post. Accounts Payable Inventory Cash Date No. Debited Ref. Dr. Dr. Cr. Cr. ——————————————————————————————————————————— 2020 Jan. 4 659 M. Tate (a) 4,000 40 3,960 11 660 Prepaid Rent (b) 1,000 1,000 13 661 Inventory (c) 565 565 14 662 Cash Dividends (d) 2,000 2,000 18 663 Welch (e) 1,300 1,300 20 664 Inventory (f) 450 450 29 665 Equipment (g) 3,400 3,400 7,415 5,300 40 12,675 (h) (i) (j) (k) Using the cash payments journal above, identify each of the posting references indicated by a letter, as representing: (1)
a posting to a general ledger account.
(2)
a posting to a subsidiary ledger account.
(3)
that no posting is required.
Answer: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 105 a. b. c. d. e. f.
2 1 1 1 2 1
(10 min.) g. h. i. j. k.
1 3 1 1 1
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 35
Ex. 106 Shown below is a page from a special journal. 1. What is the name of this journal? 2. Give an explanation for each of the transactions in this journal. 3. Explain the following: (a) the numbers under the bottom lines. (b) the checks entered into the Post. Ref. column. (c) the numbers 113 and 416 in the Post. Ref. column. (d) the (x) below the Other Accounts column. ——————————————————————————————————————————— Accounts Credited
Date
Post Ref.
Cash Dr.
Sales Accounts Sales Other COGS Dr. Discounts Receivable Revenue Accounts Inventory Cr. Dr. Cr. Cr. Cr.
——————————————————————————————————————————— May 27 28 29 31
Ted Roth ✓ Notes Receivable 113 Interest Revenue 416 Don Calb
✓
980 4,480 370 400 6,230 (111)
20
1,000 4,000 480 370
20 (412)
400 1,400 (114)
370 (411)
260 4,480 (x)
260 (505)(120)
Answer: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA-BB: Industry/Sector Perspective, AICPA-FN: Measurement, AICPAPC: Problem Solving/Decision Making, IMA: Business Applications, Sector: General, IFRS: No
Solution 106
(10 min.)
1. Cash receipts journal. 2. May 27— Ted Roth has paid for merchandise previously purchased on account. He is paying within the discount period and taking the discount. May 28— A note receivable has matured. Payment is received for the $4,000 face value and $480 of interest revenue. May 29— A cash sale of merchandise is made for $370. The cost of the merchandise sold was $260. May 31— Don Calb has paid $400 on account. 3. (a) The numbers in parentheses under the bottom line of the journal indicate that these column totals have been posted to the general ledger accounts with these account numbers. (b) The checks in the posting reference column of the journal indicate that the accounts receivable subsidiary account for that customer has been credited for the amount shown in the accounts receivable column of this journal. (c) The 113 indicates that account No. 113 in the general ledger, Notes Receivable, has been credited for the $4,000. The 416 indicates that account No. 416 in the general ledger, Interest Revenue, has been credited for $480. (d) The (x) below the Other Accounts column indicates that this column total is not posted. All the amounts in this column have already been posted individually to the appropriate general ledger account. For Instructor Use Only
G - 36 Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 107.
The accounts receivable ______________ provides detailed information about customer accounts which is summarized in one ______________ account in the general ledger.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
108.
If a certain type of transaction occurs with great frequency, it is more efficient to create a ______________ to record that type of transaction.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None AICPA FC: Measurement, IMA: Information Management
109.
If a company maintains special journals, sales of merchandise on credit should be recorded in a _______________ whereas sales of merchandise for cash should be recorded in the _______________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
110.
The use of special journals often saves time in the _______________ process.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
111.
The entries in the Accounts Receivable Credit column of the cash receipts journal must be posted _______________ to the accounts in the accounts receivable subsidiary ledger and in _______________ to the control account in the general ledger.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
112.
Transactions that cannot be entered in a special journal are recorded in the _______________, and if control and subsidiary accounts are involved, there must be a _______________ posting.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
113.
Only transactions that cannot be entered in a _______________ journal are recorded in the _______________ journal.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Information Management
Answers to Completion Statements 107. subsidiary ledger, control 108. special journal 109. sales journal, cash receipts journal 110. posting 111. individually, total 112. general journal, dual 113. special, general
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 37
MATCHING 114. Match the items below by entering the appropriate code letter in the space provided. A. Cost effectiveness B. Enterprise resource planning systems C. General ledger accounting system D. Manual accounting system E. Special journals
F. G. H. I. J.
Subsidiary ledger Control account Accounts receivable ledger Accounting information system Flexibility
____
1. A general ledger account which summarizes detailed information in a subsidiary ledger.
____
2. Benefits of information must exceed the cost of providing it.
____
3. The accounting system should accommodate a variety of users.
____
4. Software programs that integrate various accounting functions.
____
5. Group of accounts with a common characteristic which provides detailed information.
____
6. Collects and processes transaction data and communicates financial information.
____
7. Integrate all aspects of the organization, including accounting, sales, and manufacturing.
____
8. Used to record high volume, similar type transactions.
____
9. Transactions are journalized and posted by hand.
____ 10. A subsidiary ledger that contains individual customer accounts. Answers to Matching 1. 2. 3. 4. 5.
G A J C F
6. 7. 8. 9. 10.
I B E D H
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA FC: Measurement, IMA: Information Management
SHORT-ANSWER ESSAY QUESTIONS S-A E 115 Maggie Mize operates a small business and uses a manual system of accounting. Transactions are entered in the general journal and posted to accounts in the general ledger at the end of the month. Although the volume of transactions has increased significantly in the past year, Ms. Mize does not feel that it would be cost-effective to install an electronic accounting system. She hires you as a consultant to make recommendations about how to record transactions more efficiently. Briefly describe the principles that you would consider in making recommendations to Ms. Mize.
For Instructor Use Only
G - 38 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 115 In order for Ms. Mize to have a more efficient accounting system, three principles must be followed. These principles are cost effectiveness, usefulness, and flexibility. Cost effectiveness simply means that the benefits received must outweigh the costs. Usefulness refers to the fact that the system must provide the users with timely, accurate, and understandable information. And flexibility means that the system must be able to adapt to changing needs. Applying these principles to Ms. Mize's situation would lead to the recommendation for the use of special journals. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Technology, AICPA FC: Measurement, IMA: Information Management
S-A E 116 (a) When do companies normally post to (1) subsidiary accounts and (2) the general ledger control accounts? (b) Describe the relationship between a control account and a subsidiary ledger. Solution 116 (a) (1) (2)
Transactions to subsidiary accounts are generally posted daily. In contrast, postings to the control accounts are usually made in total at the end of the month. (b) A control account is a general ledger account that summarizes subsidiary ledger data. Subsidiary ledger accounts keep track of specific account activity (i.e., specific debtors or creditors). A subsidiary ledger is an addition to, and an expansion of, the general ledger. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA FC: Measurement, IMA: Information Management
S-A E 117 At the end of the month, the accountant for Slater Company prepared a schedule of accounts receivable from the accounts receivable subsidiary ledger. Its total did not agree with the balance in the Accounts Receivable control account in the general ledger. Briefly describe the procedure that should be followed in reconciling the two balances. Solution 117 The first step would be to go back and double check the total of the accounts receivable subsidiary ledger. There may have been a math error which caused the total to be incorrect. If the math is accurate, then the next step would be to review the postings in the accounts receivable control account. This review includes checking both the accuracy of the math and the accuracy of the posting from the journals. If the control account is correct, then the next step is to repeat the procedure with each individual subsidiary account. If the error still has not been found, then the final step is to look at the journals to see if there were any entries that failed to get recorded. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA FC: Measurement, IMA: Internal Controls, Information Management
S-A E 118 Why would special journals used in different businesses not be identical in format? What type of business would maintain a cash receipts journal but not include a column for accounts receivable?
For Instructor Use Only
Subsidiary Ledgers and Special Journals
G - 39
Solution 118 The purpose of special journals is to facilitate the recording process of the business entity. Therefore, the columns included in any special journal should correspond to the unique needs of the entity. In particular, one type of business which might not require an Accounts Receivable column would be grocery stores. These businesses rarely sell on credit to their customers. The minimum frequency of the transaction implies no need for an Accounts Receivable column in the cash receipts journal. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA FC: Measurement, IMA: Information Management
S-A E 119 (Ethics) Saira Ortiz has been a manager at Qwikall, a large telecommunications company, for ten years. She has worked very hard, but she had to take two unpaid leaves of absence to assist her sick mother, and then later, she took unpaid leave when her children needed care. As a result, she has received only two promotions during that time. She realizes that she probably will not receive any more promotions, since the company views her as somewhat unstable. Last week, a newly promoted manager bragged that he could just "sniff out" accounting errors. Saira, angered at his arrogance, deliberately recorded sales salaries as rent expense. Other accountants were present when she did so. The dollar amounts of her changes were not significant. Required: Has there been a violation of ethical standards? Explain. Solution 119 There has certainly been a violation of integrity. Saira has no right to let her personal animosity toward a fellow employee cause her to misrecord journal entries. The fact that others knew of her actions does not make what she did right—in fact it causes them to be accomplices. Even though the amounts are not significant, and net income is not affected, Saira's action is wrong. There is also reason for concern that Saira's frustration will show itself in more serious forms of sabotage. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA FC: Measurement, AICPA PC: Professional Demeanor, IMA: Internal Controls
S-A E 120 (Communication) You are a supervisor in the accounting department of a large manufacturing company. Two weeks ago, you were anxious to leave for your vacation, and so you hurriedly recorded a whole stack of journal entries so that the others would not have as much to do while you were gone. When you returned, you realized that you had entered a payment on account of a customer, Norbert, as payment on another customer's account, Norton. Even worse, you realized that Norbert's payment had been on an overdue account, and that Norton had received a refund for overpayment. Required: Write a memo to Alma Gutierrez, your boss, explaining your mistake.
For Instructor Use Only
G - 40 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 120 MEMO TO:
Alma Gutierrez, Controller
FROM: Marty Kline, Accounting Supervisor DATE:
October 15, 200x
I'm ba–ack! Unfortunately, I already have a problem. It seems that my mind went on vacation before the rest of me did. You remember that I sent you a note telling you that I had recorded all those journal entries—well, I got almost all of them right. I recorded Norbert's payment in Norton's account. I found it out when I saw Norbert’s account in the file of accounts sent for collection. I thought I remembered a payment—and I had. When I checked further, I found out that I had recorded the payment in Norton's account. Unfortunately, Customer Service was on the ball and sent Norton a refund—of a payment they never made! I am trying to sort all this out—I've already removed Norbert from the collection list and I'm sending them an apology letter. What do you wish to do about the refund that Norton got? I'm really sorry about all this. Next year, I'll try not to be so “helpful.” (signature) Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA FC: Reporting, AICPA PC: Communications, IMA: Internal Controls, Information Management
For Instructor Use Only
CHAPTER 1 ACCOUNTING IN ACTION CHAPTER LEARNING OBJECTIVES 1. Identify the activities and users associated with accounting. Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. The major users and uses of accounting are as follows: (a) Management uses accounting information to plan, organize, and run the business. (b) Investors (owners) decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on the basis of accounting information. Other groups that use accounting information are taxing authorities, regulatory agencies, customers, and labor unions. 2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics are the standards of conduct by which actions are judged as right or wrong. Effective financial reporting depends on sound ethical behavior. Accounting is based on standards, such as International Financial Reporting Standards (IFRS). IFRS generally uses one of two measurement principles, historical cost or fair value principle. Two main assumptions are the monetary unit assumption and the economic entity assumption. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption requires that the activities of each economic entity be kept separate from the activities of its owner(s) and other economic entities. 3. State the accounting equation, and define its components. The basic accounting equation is: Assets = Liabilities + Equity Assets are resources a business owns. Liabilities are creditors' claims on total assets. Equity is the ownership claim on total assets. The expanded accounting equation is: Assets = Liabilities + Share Capital—Ordinary + Revenues – Expenses – Dividends Share capital—ordinary is affected when the company issues new ordinary shares in exchange for cash. Revenues are the gross increase in equity resulting from business activities for the purpose of earning income. Expenses are the costs of assets consumed or services used in the process of earning revenue. Dividends are payments the company makes to its shareholders.
1-2
Test Bank for Financial Accounting: IFRS Edition, 4e
4. Analyze the effects of business transactions on the accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase in a specific liability, or (3) increase in equity. 5. Describe the five financial statements and how they are prepared. An income statement presents the revenues and expenses, and resulting net income or loss, for a specific period of time. A retained earnings statement summarizes the changes in retained earnings for a specific period of time. A statement of financial position reports the assets, liabilities, and equity at a specific date. A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. A comprehensive income statement adds or subtracts any other comprehensive income to net income to arrive at comprehensive Income. a
6. Explain the career opportunities in accounting. Accounting offers many different jobs in fields such as public and private accounting, government, and forensic accounting. Accounting is a popular major because there are many different types of jobs, with unlimited potential for career advancement.
TRUE-FALSE STATEMENTS 1.
Owners of business firms are the only people who need accounting information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2.
Transactions that can be measured in dollars and cents are recorded in the financial information system. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3.
The hiring of a new company president is an economic event recorded by the financial information system. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4.
Management of a business enterprise is the major external user of information. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
5.
Accounting communicates financial information about a business enterprise to both internal and external users. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
6.
Accounting information is used only by external users with a financial interest in a business enterprise. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
7.
Financial statements are the major means of communicating accounting information to interested parties. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
8.
Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
9.
The origins of accounting are attributed to Luca Pacioli, a famous mathematician. For Instructor Use Only
Accounting in Action
1-3
Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
10.
The State Administration of Taxation in the People's Republic of China is an example of an internal user of accounting information. Ans: F LO1 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
11.
The German Confederation of Trade Unions is an example of an external user of accounting information. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
12.
Accountants rely on a fundamental business concept—ethical behavior—in reporting financial information. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
13.
The primary accounting standard-setting body in the United States is the International Accounting Standards Board. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
14.
The Financial Accounting Standards Board is a part of the International Accounting Standards Board. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
15.
The two primary accounting standard-setting bodies are the International Accounting Standards Board and the Financial Accounting Standards Board. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
16.
Most companies in the United States follow standards issued by the IASB. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
17.
International Financial Reporting Standards are determined by the IASB. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
18.
The process of reducing the differences between Generally Accepted Accounting Principles and International Financial Reporting Standards is known as convergence. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
19.
IFRS follows one measurement principle known as the historical cost principle. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
20.
Even though a partnership is not a separate legal entity, for accounting purposes the partnership affairs should be kept separate from the personal activities of the owners. Ans: T LO2 BT: C Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
21.
The economic entity assumption requires that the activities of an entity be kept separate and distinct from the activities of its owner and all other economic entities. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
22.
The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
23.
In order to possess future service potential, an asset must have physical substance. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1-4 24.
Test Bank for Financial Accounting: IFRS Edition, 4e Owners' claims to total business assets take precedence over the claims of creditors because owners invest assets in the business and are liable for losses. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
25.
The basic accounting equation states that Assets = Liabilities. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
26.
Share capital is the total amount paid in by shareholders for shares purchased. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
27.
The principal source of equity is amounts paid in by shareholders. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
28.
Expenses are increases in equity that result from operating the business. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
29.
The two components of equity are retained earnings and share capital. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
30.
The purchase of an asset on account increases assets and decreases equity. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
31.
Providing services for cash increases assets and equity. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
32.
Accountants record both internal and external transactions. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
33.
Internal transactions do not affect the basic accounting equation because they are economic events that occur entirely within one company. Ans: F LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
34.
The purchase of store equipment for cash reduces the equity by an equal amount. Ans: F LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
35.
The purchase of office equipment on credit increases total assets and total liabilities. Ans: T LO4 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
36.
The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company during a period. Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
37.
Net income for the period is determined by subtracting total expenses and dividends from total revenues. Ans: F LO5
38.
BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
The ending retained earnings balance is reported on the statement of financial position. Ans: T LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
39.
The statement of financial position is also known as the balance sheet. Ans: T LO5
40
BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Compared to IFRS, GAAP tend to be simpler and less detailed. Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 41.
Foreign companies whose shares are traded on U.S. stock markets must use GAAP. Ans: F LO5
a
42.
1-5
BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
The study of accounting is not useful for a business career unless your career objective is to become an accountant. Ans: F LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
43.
Expressing an opinion as to the fairness of the information presented in financial statements is a service performed by CAs and CPAs. Ans: T LO6 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Additional True-False Questions 44.
Identifying is the process of keeping a chronological diary of events measured in dollars and cents. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
45.
Management consulting includes examining the financial statements of companies and expressing an opinion as to the fairness of their presentation. Ans: F LO1 BT: K Difficulty; Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
46.
Accountants do not have to worry about issues of ethics. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
47.
The monetary unit assumption requires that all dollar amounts be rounded to the nearest dollar. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
48.
The basic accounting equation is in balance when the creditor and ownership claims against the business equal the assets. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
49.
External transactions involve economic events between the company and some other enterprise or party. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
50.
In the retained earnings statement, revenues are listed first, followed by expenses, and net income (or net loss). Ans: F LO5 BT: K Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1-6
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 51.
Accountants refer to an economic event as a a. purchase. b. sale. c. transaction. d. change in ownership. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
52.
The accounting process includes each of the following except a. communication. b. convergence. c. identification. d. recording. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
53.
Communication of economic events is the part of the accounting process that involves a. identifying economic events. b. quantifying transactions into dollars and cents. c. preparing accounting reports. d. recording and classifying information. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
54.
Which of the following events cannot be quantified into dollars and cents and recorded as an accounting transaction? a. The appointment of a new accounting firm to perform an audit. b. The purchase of a new computer. c. The sale of store equipment. d. Payment of income taxes. Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
55.
Recording of economic events involves a. keeping a systematic, chronological diary of events. b. analyzing reported information. c. explaining the meaning of reported data. d. preparing accounting reports. Ans: a LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
56.
The accounting process involves all of the following except a. identifying economic events that are relevant to the business. b. communicating financial information to users by preparing financial reports. c. recording non-quantifiable economic events. d. analyzing and interpreting financial reports. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 57.
1-7
The accounting process is correctly sequenced as a. identification, communication, recording. b. recording, communication, identification. c. identification, recording, communication. d. communication, recording, identification. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
58.
Which of the following techniques is not used by accountants to interpret and report financial information? a. Graphs. b. Special memos for each class of external users. c. Charts. d. Ratios. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
59.
Bookkeeping primarily involves which of the following parts of the accounting process? a. Identification. b. Communication. c. Recording. d. Analysis. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
60.
Which of the following would not be considered an external user of accounting data for the GHI Company? a. Taxing authority representative. b. Management. c. Creditors. d. Customers. Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
61.
Which of the following would not be considered internal users of accounting data for a company? a. The president of a company. b. The controller of a company. c. Creditors of a company. d. Salesmen of a company. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
62.
Which of the following is an external user of accounting information? a. Labor unions. b. Finance directors. c. Company officers. d. Managers. Ans: a LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1-8 63.
Test Bank for Financial Accounting: IFRS Edition, 4e Which one of the following is not an external user of accounting information? a. Regulatory agencies. b. Customers. c. Investors. d. All of these answer choices are correct. Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
64.
Which of the following would not be considered an internal user of accounting data for GHI Company? a. President of the company. b. Production manager. c. Merchandise inventory clerk. d. President of the employees' labor union. Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
65.
Internal users of accounting information include all of following except the a. CEO of Sony. b. Human resources department at Hyundai. c. Marketing department at Braun. d. shareholders of Airbus. Ans: d LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
66.
Internal users of accounting information include a. the shareholders of Royal Dutch Shell. b. the State Administration of Taxation of China. c. the Chief Financial officer of Credit Suisse. d. the International Accounting Standards Board. Ans: c LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
67.
External users of accounting information include all of following except a. the shareholders of Air Italy. b. the management of Pirelli. c. a potential customers of Olivetti. d. All of these answer choices are correct. Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
68.
External users of accounting information include the a. lnternational Accounting Standards Board. b. shareholders of Ferragamo. c. Marketing department at Olivetti. d. CEO of Air Italy. Ans: b LO1 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
69.
The origins of accounting are generally attributed to the work of a. Christopher Columbus. b. Abner Doubleday. c. Luca Pacioli. d. Leonardo da Vinci. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 70.
1-9
Financial accounting provides economic and financial information for each of the following except a. creditors. b. investors. c. managers. d. other external users. Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
71.
The final step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. recognize an ethical situation. c. identify the alternatives and weigh the impact of each alternative on stakeholders. d. recognize the ethical issues involved. Ans: c LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
72.
The first step in solving an ethical dilemma is to a. identify and analyze the principal elements in the situation. b. identify the alternatives. c. recognize an ethical situation and the ethical issues involved. d. weigh the impact of each alternative on various stakeholders. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
73.
Ethics are the standards of conduct by which one's actions are judged as a. right or wrong. b. honest or dishonest. c. fair or unfair. d. All of these answer choices are correct. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
74.
The historical cost principle requires that companies record assets at their a. appraisal value. b. cost. c. market price. d. list price. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
75.
IFRS are determined by the a. Internal Accounting Standards Body. b. International Accounting Studies Board. c. International Accounting Standards Board. d. International Auditors' Standards Body. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
76.
GAAP stands for a. Generally Accepted Auditing Procedures. b. Generally Accepted Accounting Principles. c. Generally Accepted Auditing Principles. d. Generally Accepted Accounting Procedures. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 10 77.
Test Bank for Financial Accounting: IFRS Edition, 4e The Duce Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be recorded and reported as assets at a. $300 million. b. $800 million. c. $200 million. d. $500 million. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
78.
Convergence refers to a. using the same accounting principles from one period to the next. b. use of the same accounting principles by all companies. c. the elimination of all accounting standard-setting bodies except the International Accounting Standards Board. d. the process of reducing the differences between IFRS and GAAP. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
79.
The body that has the power to prescribe the accounting practices and standards used by most US companies is the a. FASB. b. IASB. c. GAAP. d. IFRS. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
80.
The fair value principle a. is one of the two costing principles followed by the IASB. b. is more useful than the historical cost principle for valuing some assets. c. dictates that an asset should be valued at the price at which it could be sold. d. All of these answer choices are correct. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
81.
Most assets are generally valued at cost because fair values a. are not useful for decision-making. b. may not be representationally faithful. c. are not relevant. d. may be higher or lower than historical cost. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
82.
Harrod's Inc. purchased land for ₤50,000 in 2010. At December 31, 2020, an appraisal determined the fair value of the land is ₤65,000. If Harrod's follows the historical cost principle, in the 2020 financial statements, the land will be reported at a. ₤50,000 on the statement of financial position. b. ₤65,000 on the statement of financial position. c. ₤50,000 on the income statement. d. ₤65,000 on the income statement. Ans: a LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 83.
1 - 11
Hyundai Inc. purchased land for W118,000,000 in 2011. At December 31, 2020, an appraisal determined the fair value of the land is W136,000,0000. If Hyundai follows the cost principle, the land will be reported on the statement of financial position at a. W100,000,000. b. W118,000,000. c. W136,000,000. d. W154,000,000. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
84.
Bumi Corporation purchased an investment in the ordinary shares of another corporation for Rp250,000,000 in 2018. The shares are actively traded on the Indonesian Stock Exchange. The fair value of the investment at December 31, 2020 is Rp268,000,000. If the company follows the fair value principle, the investment will be reported in the 2020 financial statement at a. Rp250,000,000 on the statement of financial position. b. Rp268,000,000 on the statement of financial position. c. Rp250,000,000 on the retained earnings statement. d. Rp268,000,000 on the retained earnings statement. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
85.
Asian Company purchased land for W92,000,000 in 2003. At December 31, 2020, an appraisal determined the fair value of the land is W106,000,000. The company has an investment in the ordinary shares of another company for which it paid W49,000,000 in 2018. The shares are actively traded on the South Korea Stock Exchange. The fair value of the investment at December 31, 2020 is W63,000,000. The land and investment will be reported on the December 31, 2020 statement of financial position at a. W92,000,000 and W49,000,000, respectively. b. W92,000,000 and W63,000,000, respectively. c. W106,000,000 and W49,000,000, respectively. d. W106,000,000 and W63,000,000, respectively. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
86.
The proprietorship form of business organization a. must have at least three owners in most states. b. requires that the owner be personally liable for all debts of the business. c. combines the records of the business with the personal records of the owner. d. is characterized by a legal distinction between the business as an economic unit and the owner. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
87.
The economic entity assumption requires that the activities a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of an entity be kept separate from the activities of its owner. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 12 88.
Test Bank for Financial Accounting: IFRS Edition, 4e A business organized as a corporation a. is not a separate legal entity in most countries. b. requires that shareholders be personally liable for the debts of the business. c. is owned by its shareholders. d. terminates when one of its original shareholders dies. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
89.
The partnership form of business organization a. is a separate legal entity. b. is a common form of organization for service-type businesses. c. enjoys an unlimited life. d. has limited liability. Ans: b LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
90.
Which of the following is not an advantage of the corporate form of business organization? a. Limited liability of shareholders b. Transferability of ownership c. Unlimited personal liability for shareholders d. Unlimited life Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
91.
A small neighborhood barber shop that is operated by its owner would likely be organized as a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: d LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
92.
John and Sam met at law school and decide to start a small law practice after graduation. They agree to split revenues and expenses evenly. The most common form of business organization for a business such as this would be a a. joint venture. b. partnership. c. corporation. d. proprietorship. Ans: b LO2 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
93.
Which of the following is true regarding the corporate form of business organization? a. Corporations are the most prevalent form of business organization. b. Corporate businesses are generally smaller in size than partnerships and proprietorships. c. The revenues of corporations are greater than the combined revenues of partnerships and proprietorships. d. Corporations are separate legal entities organized exclusively under federal law. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 94.
1 - 13
A basic assumption of accounting that requires activities of an entity be kept separate from the activities of its owner is referred to as the a. stand alone concept. b. monetary unit assumption. c. corporate form of ownership. d. economic entity assumption. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
95.
The assumption that enables accounting to quantify (measure) economic events is the a. economic entity assumption. b. cost principle. c. historical cost principle. d. monetary unit assumption. Ans: d LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
96.
A business whose owners enjoy limited liability is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Ans: c LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
97.
The common characteristic possessed by all assets is a. long life. b. great monetary value. c. tangible nature. d. future economic benefit. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
98.
Equity is best depicted by the following: a. Assets = Liabilities. b. Liabilities + Assets. c. Residual equity + Assets. d. Assets – Liabilities. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
99.
The basic accounting equation may be expressed as a. Assets - Equity = Liabilities. b. Assets – Liabilities = Equity. c. Assets = Liabilities + Equity. d. All of these answer choices are correct. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
100.
Liabilities a. are future economic benefits. b. are existing debts and obligations. c. possess service potential. d. are things of value used by the business in its operation. Ans: b LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 14 101.
Test Bank for Financial Accounting: IFRS Edition, 4e Liabilities of a company would not include a. notes payable. b. accounts payable. c. wages payable. d. cash. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
102.
Liabilities of a company are owed to a. debtors. b. benefactors. c. creditors. d. underwriters. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
103.
Equity can be described as a. creditorship claim on total assets. b. ownership claim on total assets. c. benefactor's claim on total assets. d. debtor claim on total assets. Ans: b LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
104.
Equity is often referred to as a. residual equity. b. leftovers. c. spoils. d. second equity. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
105.
When assets are distributed to the shareholders of a corporation, these distributions are termed a. depletions. b. consumptions. c. dividends. d. a credit line. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
106.
A dividend is a. a distribution of the company's earnings to its shareholders. b. equal to liabilities minus equity. c. equal to assets minus equity. d. equal to revenues less expenses. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
107.
Revenues would not result from a. sale of merchandise. b. issuance of ordinary shares. c. performance of services. d. rental of property. Ans: b LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 108.
1 - 15
Sources of increases to equity are a. issuance of shares. b. purchases of merchandise. c. dividends. d. expenses. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
109.
The basic accounting equation cannot be restated as a. Assets – Liabilities = Equity. b. Assets – Equity = Liabilities. c. Equity + Liabilities = Assets. d. Assets + Liabilities = Equity. Ans: d LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
110.
Equity is decreased by all of the following except a. issuance of shares. b. dividends. c. expenses. d. net losses. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
111.
If total liabilities increased by ¥45,000 and equity increased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 decrease b. ¥55,000 increase c. ¥35,000 increase d. ¥35,000 decrease Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
112.
If total liabilities decreased by ¥45,000 and equity increased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 increase b. ¥35,000 decrease c. ¥35,000 increase d. ¥45,000 decrease Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
113.
If total liabilities decreased by ¥35,000 and equity increased by ¥5,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥30,000 decrease b. ¥30,000 increase c. ¥35,000 increase d. ¥40,000 increase Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 16 114.
Test Bank for Financial Accounting: IFRS Edition, 4e If total liabilities decreased by ¥45,000 and equity decreased by ¥10,000 during a period of time, then total assets must change by what amount and direction during that same period? a. ¥55,000 increase b. ¥35,000 increase c. ¥55,000 decrease d. ¥35,000 decrease Ans: c LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
115.
If total liabilities increased by ¥31,000 during a period of time and equity decreased by ¥9,000 during the same period, then the amount and direction of the period’s change in total assets is a(n) a. ¥31,000 increase. b. ¥40,000 increase. c. ¥22,000 decrease. d. ¥22,000 increase. Ans: d LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
116.
The equity section of a statement of financial position has two components: a. share capital and liablities. b. assets and liablities. c. share capital and retained earnings. d. share capital and assets. Ans: c LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
117.
A company increases its share capital by a. selling ordinary shares to its investors. b. performing services for cash. c. selling goods on account. d. paying dividends to its shareholders. Ans: a LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
118.
The retained earnings section of the statement of financial position is determined by a. assets,liabilities and share capital. b. revenues, expenses and share capital. c. share capital, dividends and residual equity. d. revenues, expenses and dividends. Ans: d LO3 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
119.
All of the following transactions increase revenue except the a. sale of additional ordinary shares by British Airways. b. sale of clothing by the French Connection. c. performance of acccounting services by PricewaterhouseCoopers. d. sale of pertroleum by Royal Dutch Shell. Ans: a LO3 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 120.
1 - 17
As of December 31, 2020, Dolce & Gabanna Inc. had assets of €9,500,000, share capital of €3,500,000 and retained earnings of €4,000,000. Total liabilities as of that date are a. €0. b. €2,000,000. c. €6,000,000. d. €5,500,000. Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
121.
On its December 31, 2020 statement of financial position, Adaro Corporation reported liabilities of Rp7,698,000,000, share capital of Rp3,993,000,000 and retained earnings of Rp6,303,000,000. Total assets as of December 31, 2020 are a. Rp14,001,000,000. b. Rp11,691,000,000. c. Rp10,296,000,000. d. Rp17,994,000,000. Ans: d LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
122.
As of December 31, 2020, Oxford-Welsh Inc. had assets of ₤9,780,000, liabilities of ₤2,970,000, and share capital of ₤4,230,000. Retained earnings as of that date are a. ₤2,580,000. b. ₤5,550,000. c. ₤6,810,000. d. ₤7,200,000. Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
123.
As of December 31, 2020, Thames Company reported assets of ₤8,640,000, liabilities of ₤2,560,000 and retained earnings of ₤4,420,000. Share capital reported on the December 31, 2020 statement of financial position is a. ₤1,660,000. b. ₤1,860,000. c. ₤6,980,000. d. ₤6,080,000. Ans: a LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
124.
As of December 31, 2020, Deitrich Inc. had assets of €17,400,000, liabilities of €6,200,000, share capital of ₤4,400,000 and retained earnings of €6,800,000. Total equity as of that date is a. €4,400,000. b. €3,750,000. c. €11,200,000. d. €4,400,000. Ans: c LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
125.
As of December 31, 2020, Lojas Company reported assets of R$9,250,000, liabilities of R$2,750,000, share capital of R$2,475,000 and retained earnings of R$4,025,000. Total equity reported on the statement of financial position as of that date is a. R$1,550,000. b. R$6,500 000. c. R$4,025 000. d. R$2,475.000. Ans: b LO3 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 18 126.
Test Bank for Financial Accounting: IFRS Edition, 4e On January 11, 2020, Britannica Corporation sold ordinary shares to investors for ₤6,550,000. This transaction will increase assets and a. decrease liabilities by ₤6,550,000. b. decrease equity by ₤6,550,000. c. increase revenues by ₤6,550,000. d. increase equity by ₤6,550,000. Ans: d LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
127.
Burgundy Inc. purchased supplies on account for €26,000. This transaction will a. increase liabilities and decrease equity by €26,000. b. increase assets and decrease equity by €26,000. c. increase assets and increase liabilities by €26,000. d. have no effect on the accounting equation. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
128.
Sao Paulo Company performed services on account for R$160,000. This transaction will a. increase assets and liabilities by R$160,000. b. increase assets and equity by R$160,000. c. increase liabilities and equity by R$160,000. d. have no effect on the accounting equation. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
129.
Bennoit Corporation paid dividends totaling €295,000 to its shareholders. This transaction will decrease assets and a. decrease equity by €295,000. b. decrease liabilities by €295,000. c. increase expenses by €295,000. d. have no effect on the accounting equation. Ans: a LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
130.
Gafisa Inc. performed services for R$390,000. The company collected R$130,000 in cash. The balance will be collected in 30 days. Performing services for R$390,000 will increase a. assets by R$130,000 and equity by R$260,000. b. assets by R$130,000, liablities by R$260,000 and equity by R$390,000. c. liabilites and equity by R$390,000. d. assets and equity by R$390,000. Ans: d LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
131.
On June 6, Wing Wah Inc. purchased supplies on account for HK$80,000. On June 30, the company paid half of the balance due. The June 30 payment will a. decrease Cash and increase Supplies Expense by HK$ 80,000. b. increase Cash and decrease Accounts Receivable by HK$40,000. c. decrease Cash and decrease Accounts Payable by HK$40,000. d. decrease Supplies and increase Supplies Expense by HK$40,000. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 132.
1 - 19
On November 4, Vivo Company performed services on account for R$295,000. On November 26, the company collected the balance due. The November 26 transaction will increase a. Cash and Accounts Payable by R$295,000. b. Accounts Receivable and Service Revenue by R$295,000 c. Cash and decrease Accounts Receivable by R$295,000 d. Service Revenue and decrease Accounts Receivable by R$295,000. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
133.
Freirs Company paid the monthly rent of €6,000. This transaction will a. increase Cash and decrease Rent Expense by €6,000. b. decrease Cash and decrease Rent Expense by €6,000. c. decrease Cash and increase Rent Expense by €6,000. d. have no effect on the accounting equation. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
134.
Vita Corporation performed services on account for €22,000. This transaction will a. increase Cash and increase Service Revenue by €22,000. b. increase Accounts Receivable and increase Service Revenue by €22,000. c. decrease Accounts Payable and increase Cash by €22,000. d. increase Cash and decrease Accounts Receivable by €22,000. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
135.
On February 1, Potter Company paid £900 for advertisements to run during the month of February. This transaction will a. decrease Cash and increase Advertising Expense by £900. b. increase Advertising Expense and increase Accounts Payable by £900. c. decrease Accounts Payable and decrease Cash by £900. d. decrease Cash and decrease Advertising Expense by £900. Ans: a LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
136.
McDonagal Inc. sold ordinary shares for £2,200,000. This transaction will increase a. Cash and increase Retained Earnings by £2,200,000. b. Cash and increase Share Capital by £2,200,000. c. Service Revenue and increase Share Capital by £2,200,000. d. Service Revenue and increase Cash by £2,200,000. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
137.
An investment of cash by an owner of a business increases assets and a. increases liabilities. b. increases equity. c. decreases equity. d. decreases liabilities. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 20
Test Bank for Financial Accounting: IFRS Edition, 4e
138.
The purchase of supplies on account increases assets and a. also decreases assets so there is no net change. b. increases liabilities. c. decreases equity. d. increases equity. Ans: b LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
139.
A payment on account decreases a. assets and equity. b. liabilities and equity. c. assets and liabilities. d. assets, liabilities and equity. Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
140.
The accounting equation for Gudgeyes Enterprises is as follows: Assets Liabilities $280,000 = $120,000 +
Equity $160,000
If Gudgeyes purchases office equipment on account for $24,000, the accounting equation will change to Assets Liabilities Equity a. $280,000 = $120,000 + $160,000 b. $304,000 = $120,000 + $184,000 c. $304,000 = $152,000 + $152,000 d. $304,000 = $144,000 + $160,000 Ans: d LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
141.
As of June 30, 2020, Dallas Company has assets of $210,000 and equity of $15,000. What are the liabilities for Dallas Company as of June 30, 2020? a. $225,000 b. $180,000 c. $195,000 d. $210,000 Ans: c LO4 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
142.
Equity is increased by a. dividends. b. revenues. c. expenses. d. liabilities. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
143.
Equity is decreased by a. assets. b. revenues. c. expenses. d. liabilities. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 144.
1 - 21
If total liabilities increased by $6,000, then a. assets must have decreased by $6,000. b. equity must have increased by $6,000. c. assets must have increased by $6,000, or equity must have decreased by $6,000. d. assets and equity each increased by $3,000. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
145.
Collection of a $500 accounts receivable a. increases an asset $500; decreases an asset $500. b. increases an asset $500; decreases a liability $500. c. decreases a liability $500; increases equity $500. d. decreases an asset $500; decreases a liability $500. Ans: a LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
146.
Revenues are a. the cost of assets consumed during the period. b. gross increases in equity resulting from business activities. c. the cost of services used during the period. d. actual or expected cash outflows. Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
147.
If an individual asset is increased, then a. there must be an equal decrease in a specific liability. b. there must be an equal decrease in equity. c. there must be an equal decrease in another asset. d. None of these answer choices are correct. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
148.
If services are rendered for credit, then a. assets will decrease. b. liabilities will increase. c. equity will increase. d. liabilities will decrease. Ans: c LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
149.
If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. equity will increase. d. assets will decrease. Ans: d LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
150.
If a corporation distributes cash to its shareholders, then a. there has been a violation of accounting principles. b. equity will increase. c. equity will decrease. d. there will be a new liability showing the shareholders owe money to the business. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 22 151.
Test Bank for Financial Accounting: IFRS Edition, 4e As of December 31, 2020, Sievers Company has assets of ₤180,000 and equity of ₤80,000. What are the liabilities for Sievers Company as of December 31, 2020? a. ₤100,000. b. ₤40,000. c. ₤60,000. d. ₤80,000. Ans: a LO4 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
152.
Which of the following events is not a business transaction? a. Issuance of shares in exchange for cash b. Hired employees c. Incurred utility expenses for the month d. Earned revenue for services provided Ans: b LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
153.
Net income results when a. Assets > Liabilities. b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses. Ans: c LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
154.
Retained earnings at the end of the period is equal to a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities. Ans: b LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
155.
A statement of financial position shows a. revenues, liabilities, and equity. b. expenses, dividends and equity. c. revenues, expenses, and dividends. d. assets, liabilities, and equity. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
156.
An income statement a. summarizes the changes in equity for a specific period of time. b. reports the changes in assets, liabilities, and equity over a period of time. c. reports the assets, liabilities, and equity at a specific date. d. presents the revenues and expenses for a specific period of time. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
157.
If the retained earnings account increases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. net loss is less than dividends. c. the company must have sold shares. d. net income is greater than dividends. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 23
Use the following information for questions 158–160. Carla’s Computer Repair Shop started the year with total assets of $720,000 and total liabilities of $480,000. During the year, the business recorded $1,200,000 in computer repair revenues, $680,000 in expenses, and the company paid dividends of $120,000. 158.
Equity at the end of the year was a. $640,000. b. $600,000. c. $760,000. d. $520,000. Ans: a LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
159.
The net income reported by Carla's Computer Repair Shop for the year was a. $400,000. b. $520,000. c. $240,000. d. $1,080,000. Ans: b LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
160.
Total equity changed by what amount from the beginning of the year to the end of the year? a. $120,000. b. $520,000. c. $240,000. d. $400,000. Ans: d LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
161.
The statement of financial position is frequently referred to as a. an operating statement. b. the balance sheet. c. the statement of cash flows. d. the statement of changes in equity. Ans: b LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
162.
The primary purpose of the statement of cash flows is to report a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash. Ans: c LO5 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
163.
All of the financial statements are for a period of time except the a. income statement. b. retained earnings statement. c. statement of financial position. d. statement of cash flows. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 24 164.
Test Bank for Financial Accounting: IFRS Edition, 4e The ending retained earnings amount is shown on a. the statement of financial position only. b. the retained earnings statement only. c. both the income statement and the retained earnings statement. d. both the statement of financial position and the retained earnings statement. Ans: d LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
165.
Benito Company began the year with equity of €630,000. During the year, the company recorded revenues of €900,000, expenses of €684,000, and paid dividends of €72,000. What was Benito’s equity at the end of the year? a. €918,000. b. €774,000. c. €1,458,000. d. €846,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
166.
Carter Company issued ordinary shares to Sam Carter in exchange for his investment of £80,000 cash in the business. The company recorded revenues of £740,000, expenses of £640,000, and paid dividends of £40,000. What was Carter's net income for the year? a. £60,000. b. £140,000. c. £100,000. d. £180,000. Ans: c LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
167.
Marilu Company began the year with equity of $225,000. During the year, Marilu issued additional ordinary shares in exchange for cash of $315,000, recorded expenses of $900,000, and paid dividends of $60,000. If Marilu’s ending equity was $690,000, what was the company’s revenue for the year? a. $1,050,000. b. $1,110,000. c. $1,365,000. d. $1,425,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
168.
Nguyen Company began the year with equity of $651,000. During the year, Nguyen issued ordinary shares for $882,000, recorded expenses of $2,520,000, and paid dividends of $168,000. If Nguyen’s ending equity was $1,593,000, what was the company’s revenue for the year? a. $2,580,000. b. $2,748,000. c. $3,462,000. d. $3,630,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 2.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 25
Use the following information for questions 169–170. Saira’s Service Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year, the business recorded $630,000 in revenues, $330,000 in expenses, and paid dividends of $60,000. 169.
Equity at the end of the year was a. $360,000. b. $300,000. c. $240,000. d. $270,000. Ans: b LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
170.
The net income reported by Saira’s Service Shop for the year was a. $240,000. b. $300,000. c. $180,000. d. $570,000. Ans: b LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Use the following information for questions 171–172. Metzger Company compiled the following financial information as of December 31, 2020: Revenues Retained earnings (1/1/20) Equipment Expenses Cash Dividends Supplies Accounts payable Accounts receivable Share capital-ordinary 171.
€420,000 210,000 240,000 375,000 105,000 30,000 15,000 60,000 45,000 195,000
Metzger’s total assets on December 31, 2020 are a. €825,000. b. €630,000. c. €360,000. d €405,000. Ans: d LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
172.
Metzger’s total equity on December 31, 2020 is a. €330,000. b. €300,000. c. €420,000. d. €375,000. Ans: c LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 26 173.
Test Bank for Financial Accounting: IFRS Edition, 4e Copper Company’s equity at the beginning of August 2020 was $900,000. During the month, the company earned net income of $180,000 and paid dividends of $60,000. At the end of August 2020, what is the amount of equity? a. $780,000 b. $900,000 c. $1,020,000 d. $1,140,000 Ans: c LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
174.
On January 1, 2020, Affleck Company reported equity of $705,000. During the year, the company paid dividends of $30,000. At December 31, 2020, the amount of equity was $780,000. What amount of net income or net loss would the company report for 2020? a. Net income of $75,000 b. Net loss of $105,000 c. Net income of $45,000 d. Net income of $105,000 Ans: d LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Use the following information for questions 175–177. Stahl Consulting started the year with total assets of €200,000 and total liabilities of €50,000. During the year, the business recorded €160,000 in catering revenues and €80,000 in expenses. Stahl issued ordinary shares of €30,000 and paid dividends of €50,000 during the year. 175.
The equity at the end of the year was a. €210,000. b. €180,000. c. €80,000. d. €20,000. Ans: a LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
176.
The net income reported by Stahl Consulting for the year was a. €160,000. b. €110,000. c. €80,000. d. €30,000. Ans: c LO5 BT: AP Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
177.
Equity changed by what amount from the beginning of the year to the end of the year? a. €150,000 b. €140,000 c. €60,000 d. €30,000 Ans: c LO5 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 178.
1 - 27
During the year 2020, Diego Company earned revenues of $180,000, had expenses of $100,000, purchased assets with a cost of $20,000 and paid dividends of $12,000. Net income for the year is a. $180,000. b. $80,000. c. $68,000. d. $60,000. Ans: b LO5 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
179.
At October 1, Smithson Enterprises reported equity of $280,000. During October, no capital shares were issued and the company earned net income of $32,000. If equity at October 31 totals $256,000, what amount of dividends were paid during the month? a. $0 b. $8,000 c. $24,000 d. $56,000 Ans: d LO5 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
180.
At October 1, Smithson Enterprises reported equity of $280,000. During October, no capital shares were issued and the company posted a net loss of $24,000. If equity at October 31 totals $256,000, what amount of dividends were paid during the month? a. $0 b. $8,000 c. $24,000 d. $84,000 Ans: a LO5 BT: AN Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
181.
At October 1, Smithson Enterprises reported equity of $280,000. During October, capital shares of $16,000 were issued and the company earned net income of $48,000. If equity at October 31 totals $320,000, what amount of dividends were paid during the month? a. $0 b. $24,000 c. $32,000 d. $40,000 Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
182.
At October 1, Smithson Enterprises reported equity of $280,000. During October, capital shares of $40,000 were issued and the company posted a net loss of $24,000. If equity at October 31 totals $280,000, what amount of dividends were paid during the month? a. $0 b. $16,000 c. $24,000 d. $40,000 Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 28 183.
Test Bank for Financial Accounting: IFRS Edition, 4e During October, Mica Inc. sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Net income for the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
184.
During January, Bruni Corporation earned revenue of €135,000, incurred expenses of €66,000, and paid dividends of €9,000. The income statement will report net income for the month of a. €60,000. b. €69,000. c. €78,000. d. €135,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
185.
During June, Sing Tao Inc. sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Net income for June is a. HK$1,980,000. b. HK$1,920,000. c. HK$24,820,000. d. HK$26,940,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
186.
During May, Brunhilde Company earned revenue of €318,000, incurred expenses of €204,000, of which €144,000 were on account, and paid dividends of €48,000. Net income (loss) for the month is a. (€60,000). b. €66,000. c. €114,000. d. €174,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
187.
During 2020, Li & Fung Corporation earned revenue of HK$12,300,000, incurred expenses of expenses of HK$9,260,000, and paid dividends of HK$840,000. Net income for 2020 is a. HK$2,200,000. b. HK$3,040,000. c. HK$11,460,000. d. HK$12,300,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 188.
1 - 29
During March, Bindi Company earned revenue of €540,000 on account of which €356,000 had been collected by the end of the month. The company incurred expenses of €312,000. The company paid all of its expenses in cash as well as paying dividends of €92,000. Net income (loss) for the month is a. (€48,000). b. €44,000. c. €136,000. d. €228,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
189.
Mica Inc. began operations in October, 2020. During October, Mica sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Retained earnings at the end the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
190.
Mica Inc. began operations in October, 2020. During October, Mica sold ordinary shares for €800,000, earned revenue of €88,000, incurred expenses of €48,000, and paid dividends of €4,000. Equity at the end of the month is a. €36,000. b. €40,000. c. €836,000. d. €840,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
191.
Bruni Corporation began operations on January 1, 2020. During January, Bruni earned revenue of €135,000, incurred expenses of €66,000, and paid dividends of €9,000. Retained earnings at the end the month is a. €60,000. b. €69,000. c. €78,000. d. €135,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
192.
Sing Tao Inc. began operations on June 2, 2020. During June, Sing Tao sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Retained earnings at June 30, 2020 a. HK$1,920,000. b. HK$1,980,000. c. HK$24,820,000. d. HK$26,941,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 30 193.
Test Bank for Financial Accounting: IFRS Edition, 4e Sing Tao inc. began operations on June 2, 2020. During June, Sing Tao sold ordinary shares for HK$22,900,000, earned revenue of HK$4,040,000, incurred expenses of HK$2,060,000, and paid dividends of HK$60,000. Equity at the end of June is a. HK$1,920,000. b. HK$1,980,000. c. HK$24,820,000. d. HK$26,941,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
194.
Nigiri Inc. began operations on October 1, 2020. During October, Nigiri sold ordinary shares for ¥660,000,000, earned net income of ¥96,000,000, and paid dividends of ¥2,967,000. Retained earnings at the end of October is a. ¥756,000,000. b. ¥753,033,000. c. ¥96,000,000. d. ¥93,033,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
195.
Nigiri Inc. began operations on October 1, 2020. During October, Nigiri sold ordinary shares for ¥660,000,000, earned net income of ¥96,000,000, and paid dividends of ¥2,967,000. Equity at the end of October is a. ¥756,000,000. b. ¥753,033,000. c. ¥96,000,000. d. ¥93,033,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
196.
Le Bateau Company began operations on March 1, 2020. During March, Le Bateau sold ordinary shares for €9,000,000 and incurred a net loss of €1,220,000. Equity at the end of March is a. (€1,220,000). b. €7,780,000. c. €10,220,000. d. cannot be determined from the information given. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
197.
During July, its first period of operations, Aju Inc. sold ordinary shares for W1,440,000,000, earned net income of W195,000,000, and paid dividends of W40,500,000. Retained earnings at the end of July is a. W1,635,000,000. b. W1,594,500,000. c. W1,399,500,000. d. W154,500,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 198.
1 - 31
During July, its first period of operations, Aju Inc. sold ordinary shares for W1,060,000,000, earned net income of W130,000,000, and paid dividends of W27,000,000. Equity at the end of July is a. W1,190,000,000. b. W1,163,000,000. c. W1,033,000,000. d. W103,000,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Use the following information for questions 199–203 O' Hara Company began operations on December 1, 2020. Presented below is selected information related to O' Hara Company at December 31, 2020. Equipment Cash Service Revenue Rent Expense Accounts Payable Share Capital-ordinary 199.
₤160,000 56,000 432,000 52,000 64,000 112,000
Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Dividends
₤ 24,000 108,000 188,000 40,000 60,000
At December 31, 2020, assets total a. £216,000. b. £280,000. c. £324,000. d. £388,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
200.
At December 31, 2020, liabilities total a. £64,000. b. £104,000. c. £148,000. d. £164,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
201.
Net income for the month of December is a. £108,000. b. £168,000. c. £224,000. d. £264,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
202.
Retained earnings at December 31, 2020 is a. £60,000. b. £88,000. c. £108,000. d. £220,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 32 203.
Test Bank for Financial Accounting: IFRS Edition, 4e Equity at December 31, 2020, is a. £592,000. b. £484,000. c. £372,000. d. £220,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Use the following information for questions 204–208 EI Greco Corporation began operations on January 1, 2020. Presented below is selected information related to EI Greco at December 31, 2020. Equipment Cash Service Revenue Rent Expense Accounts Payable Share Capital-Ordinary Supplies 204.
€435,000 126,000 972,000 117,000 66,000 252,000 45,000
Utilities Expense Accounts Receivable Salaries and Wages Expense Notes Payable Dividends Salaries and Wages Payable Advertising Expense
€ 54,000 123,000 363,000 144,000 135,000 24,000 60,000
The statement of financial position at December 31, 2020 reports total assets of a. €480,000. b. €606,000. c. €684,000. d. €729,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
205.
The statement of financial position at December 31, 2020 reports total liabilities of a. €90,000. b. €180,000. c. €234,000. d. €357,000. Ans: c LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
206.
Net income (loss) reported on the income statement for the month of December is a. €378,000. b. €270,000. c. €243,000. d. €144,000. Ans: a LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
207.
Retained earnings reported on the statement of financial position at December 31, 2020 is a. €495,000. b. €378,000. c. €252,000. d. €243,000. Ans: d LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 208.
1 - 33
The statement of financial position at December 31, 2020 reports equity of a. €630,000. b. €495,000. c. €378,000. d. €252,000. Ans: b LO5 BT: AN Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
209. All of the following are services offered by public accountants except a. budgeting. b. auditing. c. tax planning. d. consulting. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
210. Which list below best describes the major services performed by public accountants? a. Bookkeeping, mergers, budgets. b. Employee training, auditing, bookkeeping. c. Auditing, taxation, management consulting. d. Cost accounting, production scheduling, recruiting. Ans: c LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
211. Preparing tax returns and engaging in tax planning is performed by a. public accountants only. b. private accountants only. c. both public and private accountants. d. IRS accountants only. Ans: c LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
212. A private accountant can perform many activities in a business organization but would not work in a. budgeting. b. accounting information systems. c. external auditing. d. tax accounting. Ans: c LO6 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Additional Multiple Choice Questions 213.
Which of the following is not part of the accounting process? a. Recording b. Identifying c. Financial decision making d. Communicating Ans: c LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
214.
The first part of the accounting process is a. communicating. b. identifying. c. processing. d. recording. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 34 215.
Test Bank for Financial Accounting: IFRS Edition, 4e Keeping a systematic, chronological diary of events that are measured in dollars and cents is called a. communicating. b. identifying. c. processing. d. recording. Ans: d LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
216.
Internal users of accounting information include all of the following except a. company officers. b. investors. c. marketing managers. d. production supervisors. Ans: b LO1 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
217.
Most companies in the United States follow standards issued by the a. Financial Accounting Standards Board. b. International Accounting Standards Board. c. Internal Revenue Service. d. Securities and Exchange Commission. Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
218.
A proprietorship is a business a. owned by one person. b. owned by two or more persons. c. organized as a separate legal entity under state corporation law. d. owned by a governmental agency. Ans: a LO2 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
219.
Roy’s Downtown Diner received a bill of $400 from the Emeril Advertising Agency. The owner, Roy James, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in Retained Earnings. c. an increase in Accounts Payable and a decrease in Retained Earnings. d. a decrease in Accounts Payable and an increase in Retained Earnings. Ans: c LO4 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
220.
Ryder Company purchases $600 of equipment from Montez Inc. for cash. The effect of this transaction on the components of the basic accounting equation of Ryder Company is a. an increase in assets and liabilities. b. a decrease in assets and liabilities. c. no change in total assets. d. an increase in assets and a decrease in liabilities. Ans: c LO4 BT: C Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action 221.
1 - 35
Fontaine Fox Company buys a $12,000 van on credit. This transaction will affect the a. income statement only. b. statement of financial position only. c. income statement and retained earnings statement only. d. income statement, retained earnings statement, and statement of financial position. Ans: b LO4 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
222.
A net loss will result during a time period when a. assets exceed liabilities. b. assets exceed equity. c. expenses exceed revenues. d. revenues exceed expenses. Ans: c LO5 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
a
223. Auditing is a. the examination of financial statements by a CA or CPA in order to provide an opinion on their accuracy. b. a part of accounting that involves only recording of economic events. c. an area of accounting that involves such activities as cost accounting, budgeting, and accounting information systems. d. conducted by the Securities and Exchange Commission to ensure that registered financial statements are presented fairly. Ans: a LO6 BT: K Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BRIEF EXERCISES BE 224 Match the following external users of financial accounting information with the type of decision that user will make with the information. a. b. c. d
Creditor Investor Regulatory Agency Taxing Authority
_______
(1) Is the company operating within prescribed guidelines?
_______
(2) Is the company complying with tax laws?
_______
(3) Is the company able to pay its debts?
_______
(4) Is the company a good investment?
Solution 224 1. 2. 3. 4.
c d a b
LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 36
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 225 Match the following terms and definitions. a. Accounts receivable b. Creditor
c. Accounts payable d. Note payable
_______ (1) Amounts due from customers _______ (2) Amounts owed to suppliers for goods and services purchased _______ (3) Amounts owed to bank _______ (4) Party to whom money is owed Solution 225 1. 2. 3. 4.
a c d b
LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 226 Indicate which of these items is an asset (A), liability (L) or equity (E) account. _______
(1) Supplies
_______
(2) Dividends
_______
(3) Buildings
_______
(4) Note Payable
_______
(5) Taxes Payable
Solution 226 1. 2. 3. 4. 5.
Assets (A) Equity (E) Asset (A) Liability (L) Liability (L)
LO3 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 227 Use the accounting equation to answer the following questions. 1. Force 10 Sails Co. has total assets of $120,000 and total liabilities of $65,000. What is equity? 2. Marcy Fun Center has total assets of $225,000 and equity of $105,000. What are total liabilities?
For Instructor Use Only
Accounting in Action
1 - 37
3. Franco’s Restaurant has total liabilities of $50,000 and equity of $75,000. What are total assets? Solution 227 1. $120,000 – $65,000 = $55,000 equity 2. $225,000 – $105,000 = $120,000 total liabilities 3. $50,000 + $75,000 = $125,000 total assets LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 228 Determine the missing items. Assets = Liabilities
+
Equity
¥85,000
¥52,000
(a)
(b)
¥28,000
¥34,000
¥89,000
(c)
¥55,000
Solution 228 a. ¥33,000 b. ¥62,000 c. ¥34,000 LO3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 229 Classify each of these items as an asset (A), liability (L), or equity (E). _____ 1. Accounts receivable _____ 2. Accounts payable _____ 3. Share capital-ordinary _____ 4. Supplies _____ 5. Utilities expense _____ 6. Cash _____ 7. Note payable _____ 8. Equipment Solution 229 1. 2.
A L
(5 min.) 5. 6.
E A
For Instructor Use Only
1 - 38 3. 4.
E A
Test Bank for Financial Accounting: IFRS Edition, 4e 7. 8.
L A
LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 39
BE 230 Identify the impact on the accounting equation of each of the following transactions. 1. Purchase office supplies on account. 2. Paid secretary weekly salary. 3. Purchased office furniture for cash. 4. Received monthly utility bill to be paid at later time. Solution 230 1. 2. 3. 4.
(5 min.)
Increase assets and increase liabilities. Decrease assets and decrease equity. Increase assets and decrease assets. Increase liabilities and decrease equity.
LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 231 Statement of financial position amounts as of December 31, 2020 for Lori’s Tutoring Service are listed below. Prepare a statement of financial position in good form. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Solution 231
$
1,600 1,300 800 ?
(5 min.) LORI’S TUTORING SERVICE Statement of Financial Position December 31, 2020
Assets Accounts Receivable Cash Total assets
$1,300 800 $2,100
Equity and Liabilities Share Capital-Ordinary Accounts Payable Total equity and liabilities
LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
$ 500 1,600 $2,100
1 - 40
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 232 Identify whether the following items would be reported on the income statement (IS) or statement of financial position (FP). 1. 2. 3. 4. 5.
Cash Service Revenue Notes Payable Interest Expense Accounts Receivable
Solution 232 1. 2. 3. 4. 5.
Statement of Financial Position (FP) Income Statement (IS) Statement of Financial Position (FP) Income Statement (IS) Statement of Financial Position (FP)
LO5 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
BE 233 Use the following information to calculate for the year ended December 31, 2020 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies Operating expenses Accounts payable Accounts receivable Beginning retained earnings
¥ 1,000 12,000 9,000 3,000 5,000
Revenues Cash Dividends Notes payable Equipment
¥21,000 13,000 1,000 1,000 6,000
Solution 233 (a)
¥9,000
(b)
¥13,000
(c)
¥23,000
LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 41
BE 234 Listed below in alphabetical order are the statement of financial position items of Rowan Company at December 31, 2020. Prepare a statement of financial position and include a complete heading. Accounts payable Accounts receivable Buildings Cash Equipment Share capital - ordinary
$
19,000 25,000 96,000 14,000 5,000 121,000
Solution 234 ROWAN COMPANY Statement of Financial Position December 31, 2020 ASSETS Buildings Equipment Accounts receivable Cash Total assets
$ 96,000 5,000 25,000 $ 14,000 $140,000 EQUITY AND LIABILITIES
Equity Share capital-ordinary Liabilities Accounts payable Total equity and liabilities
121,000 19,000 $140,000
LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
EXERCISES Ex. 235 Determine the missing amount for each of the following. Assets = Liabilities + Equity 1. (a) €30,000 €75,000 2. €125,000 (b) €85,000 3. €140,000 €65,000 (c) Solution 235 1. (a) = €105,000 (€30,000 + €75,000) 2. (b) = €40,000 (€125,000 - €85,000) 3. (c) = €75,000 (€140,000 - €65,000) LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 236 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or equity item. Code Asset A Liability L Equity E _____ 1. Rent Expense
_____
6. Cash
_____ 2. Equipment
_____
7. Accounts Receivable
_____ 3. Accounts Payable
_____
8. Dividends
_____ 4. Share Capital-Ordinary
_____
9. Service Revenue
_____ 5. Insurance Expense
_____ 10. Notes Payable
Solution 236 1. 2. 3. 4. 5.
E A L E E
6. 7. 8. 9. 10.
A A E E L
LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 237 At the beginning of the year, Keats Company had total assets of $750,000 and total liabilities of $250,000. Answer the following questions viewing each situation as being independent of the others. (1) If total assets increased $200,000 during the year, and total liabilities decreased $75,000, what is the amount of equity at the end of the year? (2) During the year, total liabilities increased $230,000 and equity decreased $90,000. What is the amount of total assets at the end of the year? (3) If total assets decreased $40,000 and equity increased $130,000 during the year, what is the amount of total liabilities at the end of the year?
For Instructor Use Only
Accounting in Action
1 - 43
Solution 237 Beginning Change Ending Beginning Change Ending Beginning Change Ending
Total Assets $750,000 200,000 $950,000
–
Total Liabilities $250,000 (75,000) $175,000
=
Total Liabilities $250,000 230,000 $480,000
Total Assets $750,000 $890,000 (2) Total Assets $750,000 (40,000) $710,000
Equity =
$775,000 (1)
+
Equity $500,000 (90,000) $410,000
+
Equity $500,000 130,000 $630,000
Total Liabilities $250,000 =
$ 80,000 (3)
LO3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 238 Jill's Car Cleaning has the following statement of financial position items: Equipment Accounts Payable Cash Supplies Accounts Receivable Identify which items are
Notes Payable Share Capital-Ordinary Retained Earnings
(1) Assets (2) Liabilities (3) Equity
Solution 238 (1) Assets— Equipment, Cash, Supplies, Accounts Receivable (2) Liabilities—Accounts Payable, Notes Payable (3) Equity—Share Capital-Ordinary, Retained Earnings LO3 BT: C Difficulty: Easy TOT: .5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 239 On June 1, 2020, Bush Company prepared a statement of financial position that shows the following: Assets (no cash) ............................................................... ₤100,000 Liabilities ........................................................................... 75,000 Equity ................................................................................ 25,000
For Instructor Use Only
1 - 44 Ex. 239
Test Bank for Financial Accounting: IFRS Edition, 4e (cont.)
Shortly thereafter, all of the assets were sold for cash. How would the statement of financial position appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets
Assets
Balances Immediately After Sale – Liabilities = Equity
Cash A
₤110,000
₤________
₤________
₤________
Cash B
100,000
________
________
________
Cash C
90,000
________
________
________
Solution 239
Cash A Cash B Cash C
Cash Received for the Assets ₤110,000 100,000 90,000
Balances Immediately After Sale Assets – Liabilities = Equity ₤110,000 ₤75,000 ₤35,000 100,000 75,000 25,000 90,000 75,000 15,000
LO3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 240 At the beginning of 2020, Bonds Company had total assets of $650,000 and total liabilities of $370,000. Answer each of the following questions. 1. If total assets increased $60,000 and equity decreased $90,000 during the year, determine the amount of total liabilities at the end of the year. 2. During the year, total liabilities decreased $75,000 and equity increased $50,000. Compute the amount of total assets at the end of the year. 3. If total assets decreased $100,000 and total liabilities increased $55,000 during the year, determine the amount of equity at the end of the year. Solution 240 1. Ending Total Liabilities
= ($650,000 + $60,000) – ($650,000 – $370,000 - $90,000) = $710,000 – $190,000 = $520,000
2. Ending Total Assets
= ($370,000 – $75,000) + ($650,000 – $370,000 + $50,000) = $295,000 + $330,000 = $625,000
3. Ending Equity
= ($650,000 – $100,000) – ($370,000 + $55,000) = $550,000 – $425,000 = $125,000
LO3 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 45
Ex. 241 Compute the missing amount in each category of the accounting equation. Assets $279,000 $223,000 $ ?
(a) (b) (c)
Liabilities $ ? $ 79,000 $173,000
Equity $143,000 $ ? $325,000
Solution 241 (a) $136,000 ($279,000 – $143,000 = $136,000). (b) $144,000 ($223,000 – $79,000 = $144,000). (c) $498,000 ($173,000 + $325,000 = $498,000). LO3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 242 From the following list of selected accounts taken from the records of McDreamy Homeopathic Center, identify those that would appear on the statement of financial position. a. b. c. d. e.
Share Capital-Ordinary Service Revenue Land Salaries and Wages Expense Notes Payable
f. g. h. i. j.
Accounts Payable Cash Rent Expense Supplies Utilities Expense
Solution 242 a, c, e, f, g, i LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 243 Selected transactions for Tall Timber Tree Service are listed below. 1. Made cash investment to start the business. 2. Paid for monthly advertising. 3. Purchased supplies on account. 4. Billed customers for services performed. 5. Paid cash dividends. 6. Received cash from customers billed in (4). 7. Incurred utilities expense on account. 8. Purchased additional supplies for cash. 9. Received cash from customers when service was performed.
For Instructor Use Only
1 - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
Instructions List the numbers of the above transactions and describe the effect of each transaction on assets, liabilities, and equity. For example, the first answer is: (1) Increase in assets and increase in equity. Solution 243 1. Increase in assets and increase in equity. 2. Decrease in assets and decrease in equity. 3. Increase in assets and increase in liabilities. 4. Increase in assets and increase in equity. 5. Decrease in assets and decrease in equity. 6. Increase in assets and decrease in assets. 7. Increase in liabilities and decrease in equity. 8. Increase in assets and decrease in assets. 9. Increase in assets and increase in equity. LO3, 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 244 Lawrence Legal Eagles Company entered into the following transactions during March 2020. 1. Purchased office equipment for $21,500 from Business Equipment, Inc. on account. 2. Paid $4,000 cash for March rent on office furniture. 3. Received $15,000 cash from customers for legal work billed in February. 4. Provided legal services to Amy Construction Company for $3,000 cash. 5. Paid Northern States Power Co. $11,000 cash for electric usage in March. 6. Lawrence invested an additional $32,000 in the business. 7. Paid Business Equipment, Inc. for the office equipment purchased in (1) above. 8. Incurred advertising expense for March of $1,200 on account. Instructions Indicate with the appropriate letter whether each of the transactions above results in: (a) an increase in assets and a decrease in assets. (b) an increase in assets and an increase in equity. (c) an increase in assets and an increase in liabilities. (d) a decrease in assets and a decrease in equity. (e) a decrease in assets and a decrease in liabilities. (f) an increase in liabilities and a decrease in equity. (g) an increase in equity and a decrease in liabilities. Solution 244 1. 2. 3. 4.
(c) (d) (a) (b)
5. 6. 7. 8.
(d) (b) (e) (f)
LO6, 4 BT: C Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 47
Ex. 245 Two items are omitted from each of the following summaries of statement of financial position and income statement data for two companies for the year 2020, Holly Enterprises and Craig Stevens. Holly Enterprises Beginning of year: Total assets € 98,000 Total liabilities 70,000 Total equity (a) End of year: Total assets 160,000 Total liabilities 120,000 Total equity 40,000 Changes during year in equity: Additional investment (b) Dividends 25,000 Total revenues 215,000 Total expenses 180,000 Instructions Determine the missing amounts.
Solution 245 (a)
Total assets (beginning of year) Total liabilities (beginning of year) Total equity (beginning of year)
€98,000 (70,000) €28,000
(b)
Total equity (end of year) Total equity (beginning of year) Increase in equity
€40,000 (28,000) €12,000
Total revenues Total expenses Net income
€215,000 (180,000) € 35,000
Increase in equity Less: Net income Add: Dividends Additional investment (c)
€12,000 (€35,000) 25,000)
Total assets (beginning of year) Total equity (beginning of year) Total liabilities (beginning of year)
(10,000) €2,000 €129,000 (80,000) € 49,000
For Instructor Use Only
Craig Stevens €129,000 (c) 80,000 180,000 50,000 130,000 25,000 (d) 100,000 65,000
1 - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 245 (cont.) (d) Total equity (end of year) Total equity (beginning of year) Increase in equity
€130,000 (80,000) € 50,000
Total revenues Total expenses Net income
€100,000 (65,000) € 35,000
Increase in equity Less: Net income Additional investment Dividends
€50,000 € 35,000 25,000
(60,000) €(10,000)
LO3, 4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 246 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Each increase and decrease in equity is explained. Assets Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Accounts Receivable + Supplies +
+$15,000 - 2,000 750 + 2,500 +$6,600 - 1,500 - 2,500 650 + 550 550 - 3,500
= Equipment
Liab.
Accounts = Payable +
Share Cap. +
Rev. - Exp.
- Div. Iss. Sh.
+$3,000
+$750 + $9,100
Serv. Rev.
− 1,500 − $650 + 500
Solution 246 Investment Service revenue Dividends Rent expense Salaries expense Utilities expense Increase in equity
Equity Retained Earnings
+$15,000 +$5,000
Instructions (a) Determine how much equity increased for the month. (b) Compute the amount of net income for the month.
(a)
+
$15,000 9,100 (2,500) (650) (3,500) (500) $16,950
For Instructor Use Only
− $2,500 Div. Rent Exp.
− 3,500 − 500
Sal. Exp. Util. Exp.
Accounting in Action Solution 246 (b)
1 - 49
(cont.)
Service revenue Rent expense Salaries expense Utilities expense Net income
$9,100 (650) (3,500) (500) $4,450
LO4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 247 The Lim Company had the following assets and liabilities on the dates indicated. December 31 Total Assets Total Liabilities 2018 $530,000 $230,000 2019 $480,000 $210,000 2020 $590,000 $300,000 Lim began business on January 1, 2018, with an investment of $100,000. Instructions From an analysis of the change in equity during the year, compute the net income (or loss) for: (a) 2018, assuming Lim paid dividends of $25,000 for the year. (b) 2019, assuming Lim made an additional investment of $60,000 and paid no dividends in 2019. (c) 2020, assuming Lim made an additional investment of $10,000 and paid dividends of $30,000 in 2020. Solution 247 (a)
Equity—12/31/18 ($530,000 – $230,000) Equity—1/1/18 Increase in equity Add: Dividends Net income for 2018
$300,000 (100,000) 200,000 25,000 $225,000
(b)
Equity—12/31/19 ($480,000 – $210,000) Equity—1/1/19—see (a) Decrease in equity Less: Additional investment Net loss for 2019
$270,000 (300,000) (30,000) 60,000 $ (90,000)
(c)
Equity—12/31/20 ($590,000 – $300,000) Equity—1/1/20—see (b) Increase in equity Less: Additional investment
$290,000 (270,000) 20,000 (10,000) 10,000 30,000 $ 40,000
Add: Dividends Net income for 2020
LO4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 50
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 248 For each of the following, indicate whether the transaction affects revenue (R), expense (E), Dividends (D), Share Capital (SC), or no effect on equity (NOE). 1. 2. 3. 4. 5.
Made an investment to start the business. Billed customers for services performed. Purchased equipment on account. Paid monthly rent. Paid dividends.
Solution 248 1. 2. 3. 4. 5.
Share Capital (SC) Revenue (R) No effect (NOE) Expense (E) Dividends (D)
LO4 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 249 Presented below is a statement of financial position for Jim Henson Yard Service at December 31, 2020. JIM HENSON YARD SERVICE Statement of Financial Position December 31, 2020 Assets
Equity and Liabilities
Equipment Supplies Accounts receivable Cash
£11,000 9,000 6,000 13,000
Total assets
£39,000
Equity Share capital–ordinary Liabilities Accounts payable Notes payable Total equity & liabilities
₤16,000 8,000 15,000 ₤39,000
The following additional data are available for the year which began on January 1: All expenses (excluding supplies expense) total ₤6,000. Supplies on January 1 were ₤11,000 and ₤5,000 of supplies were purchased during the year. Net income for the year was ₤8,000 and dividends paid were ₤5,000. Instructions Determine the following: (Show all computations.) 1. Supplies used during the year. 2. Total expenses for the year. 3. Service revenues for the year. 4. Equity on January 1.
For Instructor Use Only
Accounting in Action
1 - 51
Solution 249 1. Computation of Supplies Used: Beginning Supplies, Jan. 1 Add: Purchases Less: Ending Supplies, Dec. 31 Equals: Supplies Used
₤11,000 5,000 (9,000) ₤ 7,000
2. Computation of Total Expenses: All Expenses (excluding supplies expense) Plus: Supplies Used Total Expenses
₤ 6,000 7,000 ₤13,000
3. Computation of Revenues: Net Income Plus: Total Expenses Total Revenues
₤ 8,000 13,000 ₤21,000
4. Computation of equity on January 1: Equity, December 31 Plus: Dividends Less: Net Income Equity, January 1
₤16,000 5,000 (8,000) ₤13,000
LO4 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving
Ex. 250 Analyze the transactions of a business organized as a proprietorship described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Assets
=
Liabilities
+
Equity
1. Received cash for services rendered.
______
_______
_______
2. Purchased office equipment on credit.
______
_______
_______
3. Paid employees' salaries.
______
_______
_______
4. Received cash from customer in payment on account.
______
_______
_______
5. Paid telephone bill for the month.
______
_______
_______
6. Paid for office equipment purchased in transaction 2.
______
_______
_______
7. Purchased office supplies on credit.
______
_______
_______
8. Paid dividends.
______
_______
_______
9. Obtained a loan from the bank.
______
_______
_______
10. Billed customers for services rendered.
______
_______
_______
For Instructor Use Only
1 - 52
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 250 Assets =
Liabilities
1. Received cash for services rendered.
+
2. Purchased office equipment on credit.
+
3. Paid employees' salaries.
–
4. Received cash from customer in payment on account.
+,–
5. Paid telephone bill for the month.
–
6. Paid for office equipment purchased in transaction 2.
–
–
7. Purchased office supplies on credit.
+
+
8. Paid dividends
–
9. Obtained a loan from the bank.
+
10. Billed customers for services rendered.
+
+
Equity +
+ –
–
– + +
LO4 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 251 For each of the following, indicate whether the transaction increased (+), decreased (-), or had no effect (NE) on assets, liabilities, and equity using the following format. Assets = Liabilities + Equity 1. 2. 3. 4. 5.
Issued ordinary shares in exchange for cash. Billed customers for services performed. Purchased equipment on account. Paid dividends. Paid for equipment purchased in 3. above.
Solution 251 Assets 1. 2. 3. 4. 5.
+ + + – –
=
Liabilities NE NE + NE –
+
Equity + + NE – NE
LO4 BT: C Difficulty: Easy TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 53
Ex. 252 Bill Phinnes decides to open a cleaning and laundry service near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in equity. Transactions (1) Issued ordinary shares in exchange for $20,000 cash on June 1. (2) Purchased laundry equipment for $5,000 paying $3,000 in cash and the remainder due in 30 days. (3) Purchased laundry supplies for $1,200 cash. (4) Received a bill from College News for $300 for advertising in the campus newspaper. (5) Cash receipts from customers for cleaning and laundry amounted to $1,500. (6) Paid salaries of $200 to student workers. (7) Billed the Lion Soccer Team $200 for cleaning and laundry services. (8) Paid $300 to College News for advertising that was previously billed in Transaction 4. (9) Paid dividends of $700. (10) Incurred utility expenses for month on account, $150. TransAccounts Accounts Share Retained action Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings (1) ——————————————————————————————————————————— Balance (2) ——————————————————————————————————————————— Balance (3) ——————————————————————————————————————————— Balance (4) ——————————————————————————————————————————— Balance (5) ——————————————————————————————————————————— Balance (6) ——————————————————————————————————————————— Balance (7) ——————————————————————————————————————————— Balance (8) ——————————————————————————————————————————— Balance
For Instructor Use Only
1 - 54 Ex. 252
Test Bank for Financial Accounting: IFRS Edition, 4e (cont.)
(9) ——————————————————————————————————————————— Balance (10) ——————————————————————————————————————————— Totals
Solution 252 TransAccounts Accounts Share Retained action Cash + Receivable + Supplies + Equipment = Payable + Capital + Earnings (1) +$20,000 +$20,000 ——————————————————————————————————————————— Balance $20,000 $20,000 (2) – 3,000 +$5,000 +$2,000 ——————————————————————————————————————————— Balance $17,000 $5,000 $2,000 $20,000 (3) – 1,200 +$1,200 ——————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,000 $20,000 (4) + 300 – $300 ——————————————————————————————————————————— Balance $15,800 $1,200 $5,000 $2,300 $20,000 – $300 (5) + 1,500 + 1,500 ——————————————————————————————————————————— Balance $17,300 $1,200 $5,000 $2,300 $20,000 $1,200 (6) – 200 - 200 ——————————————————————————————————————————— Balance $17,100 $1,200 $5,000 $2,300 $20,000 $1,000 (7) +$200 + 200 ——————————————————————————————————————————— Balance $17,100 $200 $1,200 $5,000 $2,300 $20,000 $1,200 (8) – 300 – 300 ——————————————————————————————————————————— Balance $16,800 $200 $1,200 $5,000 $2,000 $20,000 $1,200 (9) – 700 – 700 ——————————————————————————————————————————— Balance $16,100 $200 $1,200 $5,000 $2,000 $20,000 $500 (10) + 150 – 150 ——————————————————————————————————————————— Totals $16,100 $200 $1,200 $5,000 $2,150 $20,000 $350 LO4 BT: AP Difficulty: Medium TOT: 20 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 55
Ex. 253 For each of the following, describe a transaction that will have the stated effect on the elements of the accounting equation. (a) Increase one asset and decrease another asset. (b) Increase an asset and increase a liability. (c) Decrease an asset and decrease a liability. (d) Increase an asset and increase equity. (e) Increase one asset, decrease one asset, and increase a liability.
Solution 253 (a) Receive cash from customers on account. Purchase supplies for cash. (b) Purchase supplies on account. Purchase equipment and signed a note payable. (c) Pay cash to reduce accounts payable. Pay cash to reduce a note payable. (d) Issued ordinary shares in exchange for cash. Render services on account or for cash. (e) Buy equipment with a cash down payment with the remainder financed by a note payable. LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 254 The following transactions represent part of the activities of Tigger Company for the first month of its existence. Indicate the effect of each transaction upon the total assets of the business by one of the following phrases: increased total assets, decreased total assets, or no change in total assets. (a) Issued ordinary shares in exchange for cash. (b) Purchased a computer for cash. (c) Purchased office equipment with money borrowed from the bank. (d) Paid the first month's utility bill. (e) Collected an accounts receivable. (f) Paid dividends. Solution 254 (a) (b) (c) (d) (e)
Increased total assets. No change in total assets. Increased total assets. Decreased total assets. No change in total assets.
For Instructor Use Only
1 - 56
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 254 (f)
(cont.)
Decreased total assets.
LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 255 Selected transactions for Parton Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and equity. Sample: Issued ordinary shares in exchange for cash investment. The answer would be—Increase in assets and increase in equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on security system. Billed customers for services performed. Received cash from customers billed in 4. Paid dividends. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.
Solution 255 1. 2. 3. 4. 5. 6. 7. 8. 9.
Decrease in assets and decrease in equity. No net change in assets. Decrease in assets and decrease in equity. Increase in assets and increase in equity. No net change in assets. Decrease in assets and decrease in equity. Increase in liabilities and decrease in equity. Decrease in assets and decrease in equity. Increase in assets and increase in equity.
LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 256 A service proprietorship shows five transactions summarized below. The effect of each transaction on the accounting equation is shown, and also the new balance of each item in the equation. For each transaction (a) to (e) write an explanation of the nature of the transaction. Accounts EquipAccounts Cash + Rec. + ment + Land + Building = Payable + Equity ——————————————————————————————————————————— $5,000 $6,500 $10,000 $7,500 $50,000 $3,000 $76,000 a) –2,000 –2,000 3,000 6,500 10,000 7,500 50,000 1,000 76,000 b) +1,000 – 1,000 4,000 5,500 10,000 7,500 50,000 1,000 76,000
For Instructor Use Only
Accounting in Action Ex. 256
1 - 57
(cont.)
c) 4,000 d) +2,500 6,500 e) $6,500
5,500 5,500 +3,000 $8,500
+ 5,000 15,000
7,500
50,000
+5,000 6,000
15,000
7,500
50,000
6,000
$15,000
$7,500
$50,000
$6,000
76,000 + 2,500 78,500 + 3,000 $81,500
Solution 256 (a) (b) (c) (d) (e)
Paid cash to creditors. Received cash from customers on account. Bought equipment on account. Issued ordinary shares in exchange for cash. Provided services on account.
LO4 BT: C Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 257 There are ten transactions listed below. Match the transactions that have the identical effect on the accounting equation. You should end up with 5 matches. a. b. c. d. e. f. g. h. i. j.
Receive cash from customers on account. Issue ordinary shares in exchange for cash. Pay cash to reduce an accounts payable. Purchase supplies for cash. Pay cash to reduce a notes payable. Purchase supplies on account. Issue ordinary shares in exchange for noncash assets. Purchase equipment with a note payable. Pay utilities with cash. Pay dividends.
Solution 257 Match #1 #2 #3 #4 #5
= a, d = c, e = f, h = b, g = i, j
LO4 BT: C Difficulty: Medium TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 58
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 258 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Each increase and decrease in equity is explained. Assets Cash + 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
+€15,000 - 2,000 750 + 2,500 - 1,500 - 2,500 650 + 550 - 3,500
=
Accounts Receivable + Supplies +
Liab. +
Equipment =
Accounts Payable +
+€5,000
+€3,000
Equity Retained Earnings Share Cap + Rev. - Exp. +€15,000
Div. Iss. Share Serv. Rev.
+€750 +€6,600
+ €9,100
Serv. Rev.
- 1,500 - €2,500 Div. - €650 Rent Exp. -
550 + 500
Instructions (a) Prepare an income statement for the month ending July 31, 2020. (b) Prepare a retained earnings statement for the month ending July 31, 2020. Solution 258 (a) K. T. LANG & CO. Income Statement For the Month Ended July 31, 2020 Revenues Service revenue Expenses Salaries and wages expense €3,500 Rent expense 650 Utilities expense 500 Total expenses Net income
€9,100
4,650 €4,450
(b) K. T. LANG & CO. Retained Earnings Statement For the Month Ended July 31, 2020 Retained earnings, July 1 Add: Net income Less: Dividends Retained earnings, July 31
€
0 4,450 4,450 2,500 1,950
LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
- 3,500 Sal. Exp. - 500 Util. Exp.
Accounting in Action
1 - 59
Ex. 259 An analysis of the transactions made by K. T. Lang & Co., a law firm, for the month of July is shown below. Assets = Liab. + Equity Retained Earnings Accounts Accounts Share Cash + Receivable + Supplies + Equipment = Payable + Cap. + Rev. - Exp. - Div. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
+€15,000 - 2,000 750 + 2,500 +€6,600 - 1,500 - 2,500 650 + 550 550 - 3,500
+€15,000 +€5,000
+€3,000
+€750 + €9,100 - 1,500 - €2,500 - € 650 +
- 3,500 500
500
Instructions Prepare a statement of financial position at July 31, 2020. Solution 259 K. T. LANG & CO. Statement of Financial Position July 31, 2020 Assets Equipment Supplies Accounts receivable Cash Total assets
€ 5,000 750 6,050 7,150 €18,950 Equity and Liabilities
Equity Share capital-ordinary Retained earnings Liabilities Accounts payable Total equity and liabilities
€15,000 1,950
16,950 2,000 €18,950
LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 60
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 260 The following information relates to Ty Ringo Co. for the year 2020. Retained earnings, January 1, 2020 Dividends Service revenue Salaries and wages expense
$ 47,000 6,000 65,500 29,000
Advertising expense $1,500 Rent expense 9,500 Utilities expense 3,400
Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2020 Solution 260 TY RINGO CO. Income Statement For the Year Ended December 31, 2020 Revenues Service revenue Expenses Salaries and wages expense Rent expense Utilities expense Advertising expense Total expenses Net income
$65,500 $29,000 9,500 3,400 1,500 43,400 $22,100
TY RINGO CO. Retained Earnings Statement For the Year Ended December 31, 2020 Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, December 31
$47,000 22,100 69,100 6,000 $63,100
LO5 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
1 - 61
Ex. 261 Cyn Sclose is the bookkeeper for Ayala Company. Cyn has been trying to get the statement of financial position of Ayala Company to balance. Ayala’s statement of financial position is as follows.
AYALA COMPANY Statement of Financial Position December 31, 2020 Assets
Liabilities
Equipment Supplies Cash Dividends
$48,000 7,100 17,400 6,200
Total assets
$78,700
Accounts payable Accounts receivable Share capital-ordinary Retained earnings Total equity and liabilities
Instructions Prepare a correct statement of financial position. Solution 261 AYALA COMPANY Statement of Financial Position December 31, 2020 Assets Equipment Supplies Accounts receivable Cash Total assets
$48,000 7,100 12,500 17,400 $85,000 Equity and Liabilities
Equity Share capital-ordinary Retained earnings ($18,200 – $6,200) Liabilities Accounts payable Total equity and liabilities
$40,000 12,000
$52,000 33,000 $85,000
LO5 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analytical AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
$33,000 (12,500) 40,000 18,200 $78,700
1 - 62
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 262 Presented below is information related to Smith and Jones, Attorneys at Law. Retained earnings, January 1, 2020 Service revenue—2020 Total expenses—2020 Assets, January 1, 2020 Liabilities, January 1, 2020 Assets, December 31, 2020 Liabilities, December 31, 2020 Dividends—2020
$ 23,000 300,000 231,000 85,000 62,000 168,000 85,000 59,000
Instructions Prepare the 2020 retained earnings statement for Smith and Jones, Attorneys at Law. Solution 262 SMITH AND JONES, ATTORNEYS AT LAW Retained Earnings Statement For the Year Ended December 31, 2020 Retained earnings, January 1 .......................................................... Add: Net income............................................................................... Less: Dividends ................................................................................ Retained earnings, December 31 ....................................................
$ 23,000 69,000* 92,000 59,000 $ 33,000
*Legal service revenue..................................................................... Total expenses ..................................................................... Net income ...........................................................................
$300,000 231,000 $ 69,000
LO5 BT: AP Difficulty: Medium TOT: 7 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 263 Prepare an income statement, a retained earnings statement, and a statement of financial position for the acupuncture practice of Lei Chen, from the items listed below for the month of September. Retained earnings, September 1 Share capital-ordinary Accounts payable Equipment Service revenue Dividends Supplies expense Cash Utilities expense Supplies Salaries and wages expense Accounts receivable Rent expense
¥12,000 30,000 7,000 27,000 24,000 6,000 3,500 8,000 700 2,800 9,000 14,000 2,000 For Instructor Use Only
Accounting in Action Ex. 263
1 - 63
(cont.)
LEI CHEN, ACUPUNCTURIST Income Statement For the Month Ended September 30, 2020 —————————————————————————————————————————— Revenues ¥ Expenses
¥
¥
Total expenses
¥
Net income
¥
LEI CHEN, ACUPUNCTURIST Retained Earnings Statement For the Month Ended September 30, 2020 —————————————————————————————————————————— Retained Earnings, September 1 ¥ Add: ¥ Less: ¥
LEI CHEN, ACUPUNCTURIST Statement of Financial Position September 30, 2020 —————————————————————————————————————————— Assets ¥
Total assets ¥ Equity and Liabilities Equity
¥
Liabilities
¥
Total equity and liabilities
¥
For Instructor Use Only
1 - 64
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 263 LEI CHEN, ACUPUNCTURIST Income Statement For the Month Ended September 30, 2020 —————————————————————————————————————————— Revenues Service revenue ............................................................................... ¥24,000 Expenses Salaries and wages expense ........................................................... ¥9,000 Supplies expense ............................................................................. 3,500 Rent expense ................................................................................... 2,000 Utilities expense ............................................................................... 700 Total expenses ........................................................................... 15,200 Net income ................................................................................. ¥ 8,800 LEI CHEN, ACUPUNCTURIST Retained Earnings Statement For the Month Ended September 30, 2020 Retained Earnings, September 1 ........................................................... Add: Net income..................................................................................... Less: Dividends ...................................................................................... Retained Earnings, September 30 .........................................................
¥12,000 8,800 20,800 6,000 ¥14,800
LEI CHEN, ACUPUNCTURIST Statement of Financial Position September 30, 2020 —————————————————————————————————————————— Assets Equipment .............................................................................................. ¥27,000 Supplies ................................................................................................. 2,800 Accounts receivable ............................................................................... 14,000 Cash ....................................................................................................... 8,000 Total assets ...................................................................................... ¥51,800 Equity and Liabilities Equity Share capital-ordinary ...................................................................... ¥30,000 Retained earnings ............................................................................ 14,800 Liabilities Accounts payable ............................................................................. Total liabilities and equity ................................................................. LO5 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
¥44,800 7,000 ¥51,800
Accounting in Action
1 - 65
Ex. 264 Indicate whether the following items would appear on the statement of financial position (FP), income statement (IS), or retained earnings statement (RE). 1. 2. 3. 4. 5. 6.
Advertising expense Accounts receivable Dividends Rent revenue Salaries and wages payable Supplies
Solution 264
(5 min.)
1. Income statement (IS) 2. Statement of financial position (FP) 3. Retained earnings statement (RE)
4. Income statement (IS) 5. Statement of financial position (FP) 6. Statement of financial position (FP)
LO8 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 265 Listed below in alphabetical order are the statement of financial position items of Pieter Company at December 31, 2020. Prepare a statement of financial position and include a complete heading. Accounts Payable Accounts Receivable Buildings Cash Equipment Land Share Capital-Ordinary
$ 31,000 15,000 56,000 24,000 4,000 52,000 120,000
LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Solution 265
(5 min.) PIETER COMPANY Statement of Financial Position December 31, 2020 ASSETS
Land Buildings Equipment Accounts receivable Cash Total assets
$ 52,000 56,000 4,000 15,000 24,000 $151,000
For Instructor Use Only
1 - 66
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 265
(cont.) EQUITY and LIABILITIES
Share capital-ordinary Accounts payable Total equity and liabilities
$ 120,000 31,000 $151,000
LO5 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
Ex. 266 One item is omitted in each of the following summaries of statement of financial position and income statement data for three different corporations, X, Y, and Z. Determine the amounts of the missing items, identifying each corporation by letter. Corporation X Y Z Beginning of the Year: Assets ₤380,000 ₤150,000 ₤199,000 Liabilities 270,000 105,000 168,000 End of the Year: Assets 450,000 185,000 195,000 Liabilities 280,000 95,000 149,000 During the Year: Issued additional ordinaryshares ? 79,000 80,000 Dividends Revenue Expenses
90,000 195,000 170,000
83,000 ? 113,000
Solution 266 Corporation X (₤125,000) Beginning equity (₤380,000 – ₤270,000) Additional investments (₤260,000 – ₤110,000 – ₤25,000) Net income for year (₤195,000 – ₤170,000) Less dividends Ending equity (₤450,000 – ₤280,000) Corporation Y (₤162,000) Beginning equity (₤150,000 – ₤105,000) Additional investments Net income for year [Revenues = ₤162,000 (₤113,000 + ₤49,000)] Less dividends Ending equity (₤185,000 – ₤95,000)
For Instructor Use Only
₤110,000 125,000 25,000 260,000 90,000 ₤170,000
₤ 45,000 79,000 49,000 173,000 83,000 ₤ 90,000
? 187,000 175,000
Accounting in Action Solution 266
1 - 67
(cont.)
Corporation Z (₤77,000) Beginning equity (₤199,000 – ₤168,000) Additional investments Net income for year (₤187,000 – ₤175,000)
₤ 31,000 80,000 12,000 123,000 77,000 ₤ 46,000
Less dividends (₤123,000 – ₤46,000) Ending equity (₤195,000 – ₤149,000)
LO5 BT: AN Difficulty: Hard TOT: 10 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA PC: Problem Solving
Ex. 267 Indicate in the space provided by each item whether it would appear on the Income Statement (IS), Statement of Financial Position (FP), or Retained Earnings Statement (RE): a. ____
Service Revenue
g. ___ Accounts Receivable
b. ____
Utilities Expense
h. ___ Retained Earnings (ending)
c. ____
Cash
i.
___ Equipment
d. ____
Accounts Payable
j.
__ Advertising Expense
e. ____
Supplies
k.
__ Dividends
f.
Salaries and Wages Expense
l.
__ Notes Payable
____
Solution 267 a. IS b. IS c. FP d. FP e. FP f. IS
g. h. i. j. k. l.
FP RE, FP FP IS RE FP
LO5 BT: C Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 68
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 268 At September 1, the statement of financial position accounts for Stanley’s Restaurant were as follows: Accounts Payable Accounts Receivable Buildings Cash Equipment
$ 3,800 11,600 68,000 10,000 18,700
Land Share Capital-Ordinary Notes Payable Supplies
$33,000 ? 48,000 6,600
The following transactions occurred during the next two days: The company issued additional ordinary shares for $22,000 cash invested in the business. The accounts payable were paid in full. (No payment was made on the notes payable.) Instructions Prepare a statement of financial position at September 3, 2020. Solution 268 STANLEY'S RESTAURANT Statement of Financial Position September 3, 2020 ASSETS Land Buildings Equipment Supplies Accounts receivable Cash Total assets
$ 33,000 68,000 18,700 6,600 11,600 28,200 $166,100
For Instructor Use Only
Accounting in Action Solution 268
1 - 69
(cont.) EQUITY and LIABILITIES
Share capital-ordinary Notes payable Accounts payable Total equity and liabilities
$118,100 48,000 -0- . $166,100
Cash ($10,000 + $22,000 – $3,800) = $28,200 Accounts payable ($3,800 – $3,800) = $0 Share capital: Beginning balance ($147,900 – $51,800) Additional investment Ending balance
$ 96,100 22,000 $118,100
LO5 BT: AP Difficulty: Hard TOT: 10 min. AACSB: Analysis AICPA BB: Critical Thinking AICPA PC: Problem Solving
Ex. 269 Presented below are items for Wilson Company at December 31, 2020. Accounts payable Accounts receivable Cash Equipment Share capital-ordinary Notes payable
€45,000 36,000 27,000 62,000 30,000 50,000
Compute each of the following: 1. Total assets. 2. Total liabilities. Solution 269 1. Total assets = €125,000 (€36,000 + €27,000 + €62,000) 2. Total liabilities = €95,000 (€45,000 + €50,000) LO5 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 70
Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 270.
Accounting is an information system that identifies, _____________, and _____________ the economic events of an organization.
271.
The recording of economic events is called ______________, and is just one part of the _______________ process.
272.
Accounting standards issued in the United States by the Financial Accounting Standards Board are called _________________.
273.
The ________________ principle states that companies should record assets at their cost. The _________________ assumption requires that the activities of an entity be kept separate from the activities of its owner.
274.
275.
The residual claim on total assets of a business is known as ________________ and is equal to total assets minus total liabilities.
276.
Dividends ________________ equity but are not expenses.
277.
The ________________ reports the assets, liabilities, and equity of a business enterprise at a specific date.
a
278. The three major services rendered by a public accountant are ______________, ________________, and management ________________.
a
279. Accountants who are employees of business enterprises are referred to as ________________ accountants.
Answers to Completion Statements 270. 271. 272. 273. 274.
records, communicates 275. equity bookkeeping, accounting 276. reduce generally accepted accounting principles 277. statement of financial position historical cost 278. auditing, taxation, management consulting a economic entity 279. private (or managerial)
LO1-5 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
Accounting in Action
MATCHING 280. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Convergence Bookkeeping IASB Proprietorship Economic entity assumption
F. G. H. I. J.
Corporation Assets Equities Expenses Transactions
____
1. Activities of an entity must be kept separate from its owner’s activities.
____
2. Consumed assets or services.
____
3. Ownership is limited to one person.
____
4. Process of reducing differences between IFRS and GAAP.
____
5. Creditor and ownership claims against the assets of the business.
____
6. A separate legal entity under state laws.
____
7. Accounting organization that issues standards.
____
8. Involves only the recording of economic events.
____
9. Future economic benefits.
____ 10. Economic events recorded by accountants.
Answers to Matching 1. 2. 3. 4. 5.
E I D A H
6. 7. 8. 9. 10.
F C B G J
LO1-5 BT: K Difficulty: Easy TOT: 3 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 71
1 - 72
Test Bank for Financial Accounting: IFRS Edition, 4e
SHORT-ANSWER ESSAY QUESTIONS S-A E 281 Your friend, James, made this comment: My major is biology and I plan to research for cures for major illnesses. Thus, I have no need to study accounting. What is your response to James? Solution 281 James, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you: As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. Also, as an investor, you will be interested in the financial statements of other companies. You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements. LO1 BT: S Difficulty: Hard TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
S-A E 282 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Solution 282 The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest. Financial accounting information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give employee pay raises this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial accounting information for external users include: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due? LO1 BT: C Difficulty: Medium TOT: 5 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting S-A E 284
For Instructor Use Only
Accounting in Action
1 - 73
S-A E 283 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are business transactions and financial statements related to the accounting equation? Solution 283 The basic accounting equation is expressed as follows: Assets = Liabilities + Equity Assets are defined as resources owned by the business. Liabilities are creditor claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. Business transactions are economic events and activities that affect the elements of the basic accounting equation; that is, transactions cause increases or decreases in the assets, liabilities, and equity. The financial statements report the results and effects of transactions on the business' assets, liabilities, and equity. The statement of financial position is a summary expression of the basic accounting equation. LO3 BT: C Difficulty: Medium TOT: 4 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
a
S-A E 284 The accounting profession provides many career opportunities for individuals. Identify the major fields that exist in accounting and comment on the major functions performed by individuals in each of these areas. a
Solution 284
The major fields that exist in accounting are in the areas of (1) public accounting, (2) private accounting, and (3) not-for-profit accounting. In public accounting, an accountant may practice as: (1) an auditor who examines the financial statements of companies and expresses an opinion as to the fairness of presentation; (2) a tax specialist who gives tax advice, prepares tax returns, and represents clients before governmental agencies; and (3) a management accountant who engages in the development of accounting and computer systems and the design of organizational systems. Private (managerial) accountants perform many different activities within a company. Private accountants may be involved in: cost accounting, budgeting, general financial accounting, accounting information systems, and tax accounting. LO6 BT: K Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 74
Test Bank for Financial Accounting: IFRS Edition, 4e
S-A E 285
(Ethics)
Sam Dryer owns and operates Sam's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Sam's Burgers began to have problems. Most of the problems were related to Sam's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Sam does not have the cash or financial backing to expand further. He has therefore decided to sell his business. Jerry Finney is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Sam why he is selling Sam's Burgers. Sam replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Sam reasons that Jerry should not have asked him anyway, since profitable businesses don't come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Sam act ethically in not revealing fully his reasons for selling the business? Why or why not? Solution 285 1. The stakeholders include Sam Dryer Jerry Finney Newton, Ohio students of City College City College persons financing the purchase of Sam's Burgers 2. Sam did not act ethically in not revealing fully his reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Sam should have said something about his problems. He might ethically be allowed to put these in the best possible light, perhaps, but failure to disclose them at all is certainly unethical. This is especially true, since family concerns might well cause someone to sell a business that is otherwise doing well. Sam has shown an intent to deceive that is unethical, and might be actionable in court as well. LO2 BT: E Difficulty: Medium TOT: 5 min. AACSB: Ethics AICPA BB: Critical Thinking AICPA FN: Reporting
S-A E 286
(Communication)
Sue Havens is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients. She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only
For Instructor Use Only
Accounting in Action
1 - 75
$500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly. Solution 286 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. As a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows: 1245 Lily Lane Buena Vista, AR 77661 (Date) Dear Sue, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature) LO5 BT: C Difficulty: Medium TOT: 5 min. AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
1 - 76
Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP QUESTIONS 1. The Sarbanes-Oxley Act determines a. U.S tax regulations. b. internal control standards of U.S. publicly traded companies. c. internal control standards as enforced by the IASB. d. international tax regulations. Ans: B LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2. IFRS is considered to be more a. detailed than GAAP. b. rules-based and less principles-based than GAAP. c. principles-based and less rules-based than GAAP. d. None of these answer choices are correct. Ans: C LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3. Which of the following statements is false? a. Proprietorships, partnerships, and corporations are also found in countries that use IFRS. b. Non-U.S companies that trade shares in U.S markets must reconcile their accounting with GAAP. c. FASB and the IASB are working on a joint project related to the conceptual framework. d. GAAP is based on a conceptual framework that is similar to that used to develop IFRS. Ans: B LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4. Which of the following is true? a. Equity is defined under GAAP as the residual interest in the liabilities of the company. b. IFRS companies have agreed to adopt the Sarbanes-Oxley Act related to internal control in 2018. c. Transaction analysis is basically the same under GAAP and IFRS. d. Financial frauds have not occurred in U.S. companies because GAAP has detailed accounting and disclosure requirements. Ans: C LO6 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
CHAPTER 2 THE RECORDING PROCESS CHAPTER LEARNING OBJECTIVES 1. Describe how accounts, debits, and credits are used to record business transactions. An account is a record of increases and decreases in specific asset, liability, and equity items. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, share capital-ordinary, retained earnings, and revenues are increased by credits and decreased by debits. 2. Indicate how a journal is used in the recording process. The basic steps in the recording process are: (a) analyze each transaction for its effects on the accounts, (b) enter the transaction information in a journal, (c) transfer the journal information to the appropriate accounts in the ledger. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effects of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 3. Explain how a ledger and posting help in the recording process. The ledger is the entire group of accounts maintained by a company. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Posting is the transfer of journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 4. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. Its primary purpose is to prove the equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
2-2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
A new account is opened for each transaction entered into by a business firm. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
2.
The recording process becomes more efficient and informative if all transactions are recorded in one account. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
3.
When the volume of transactions is large, recording them in tabular form is more efficient than using journals and ledgers. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
4.
An account is often referred to as a T-account because of the way it is constructed. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
5.
A debit to an account indicates an increase in that account. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
6.
If a revenue account is credited, the revenue account is increased. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
7.
The normal balance of all accounts is a debit. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
8.
Debit and credit can be interpreted to mean increase and decrease, respectively. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
9.
The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
10.
A credit balance in a liability account indicates that an error in recording has occurred. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
11.
The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
12.
Revenues are a subdivision of retained earnings. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
13.
Under the double-entry system, revenues must always equal expenses. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
14.
Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
15.
All accounts reported in the statement of financial position are increased by using debits on the left-hand side of the T-account. Ans: F LO1 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 16.
2-3
The rules for debit and credit and the normal balance of Share Capital–Ordinary are the same as for assets. Ans: F LO1 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
17.
Companies report share capital–ordinary and dividends in the equity section of the statement of financial position. Ans: F LO1 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
18.
Transaction information may be entered directly into the accounts without using a journal. Ans: T LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
19.
Business documents can provide evidence that a transaction has occurred. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
20.
Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
21.
Transactions are entered in the ledger accounts and then transferred to journals. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
22.
All business transactions must be entered first in the general ledger. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
23.
A simple journal entry requires only one debit to an account and one credit to an account. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
24.
A compound journal entry requires several debits to one account and several credits to one account. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
25.
Transactions are recorded in alphabetic order in a journal. Ans: F LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
26.
A journal is also known as a book of original entry. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
27.
The complete effect of a transaction on the accounts is disclosed in the journal. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
28.
Entries that impact the income statement are called simple entries, whereas entries that impact the statement of financial position are called compound entries. Ans: F LO2 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
29.
The general ledger contains all the accounts that are reported on the statement of financial position, whereas the general journal contains all the accounts that are reported on the income statement. Ans: F LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
30.
The chart of accounts lists accounts and the account numbers that identify their location in the ledger starting with the accounts that are reported on the income statement. Ans: F LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2-4 31.
Test Bank for Financial Accounting: IFRS Edition, 4e The account titles used in journalizing transactions need not be identical to the account titles in the ledger. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
32.
The chart of accounts is a special ledger used in accounting systems. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
33.
A general ledger should be arranged in the order in which accounts are presented in the financial statements, beginning with the statement of financal position accounts. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
34.
The number and types of accounts used by different business enterprises are the same if generally accepted accounting principles are being followed by the enterprises. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
35.
Posting is the process of proving the equality of debits and credits in the trial balance. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
36.
After a transaction has been posted, the reference column in the journal should not be blank. Ans: T LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
37.
Posting involves transferring the journalized debits and credits to the statement of financial position. Ans: F LO3 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
38.
The trial balance lists accounts and their balances at a given point in time in the order in which they appear on the statement of financial position. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
39.
When debits do not equal credits on the trial balance, this indicates that the company has net income that needs to be transferred to the retained earnings account. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
40.
Errors on the statement of financial position are called transpositions and errors on the income statement are called irregularities. Ans: F LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
41.
Currency signs are typically used only in the trial balance and the financial statements. Ans: T LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
42.
The general rules of debit and credit, and the steps in the recording process–the journal, ledger, and chart of accounts–are the same under both GAAP and IFRS. Ans: T LO4 BT: K Difficulty: Medium TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
43.
A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process
2-5
Additional True-False Questions 44.
The double-entry system is a logical method for recording transactions and results in equal debits and credits for each transaction. Ans: T LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
45.
The normal balance of an expense account is a credit. Ans: F LO1 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
46.
The journal provides a chronological record of transactions. Ans: T LO2 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
47.
The ledger is merely a bookkeeping device and therefore does not provide much useful data for management. Ans: F LO3 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
48.
The chart of accounts is a listing of the accounts and the account numbers which identify their location in the ledger. Ans: T LO3 BT: C Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
49.
The primary purpose of a trial balance is to prove the mathematical equality of the debits and credits after posting. Ans: T LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
50.
The trial balance will not balance when incorrect account titles are used in journalizing or posting. Ans: F LO4 BT: K Difficulty: Easy TOT: .5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2-6
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 51.
An account consists of a. one part. b. two parts. c. three parts. d. four parts. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
52.
The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
53.
Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
54.
An account is a part of the financial information system and is described by all except which one of the following? a. An account has a debit and credit side. b. An account is a source document. c. An account may be part of a manual or a computerized accounting system. d. An account has a title. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
55.
The right side of an account a. is the correct side. b. reflects all transactions for the accounting period. c. shows all the balances of the accounts in the system. d. is the credit side. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
56.
An account consists of a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance. c. a title, a debit side, and a credit side. d. a title, a right side, and a debit balance. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 57.
A T-account is a. a way of depicting the basic form of an account. b. what the computer uses to organize bytes of information. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
58.
Credits a. decrease both assets and liabilities. b. decrease assets and increase liabilities. c. increase both assets and liabilities. d. increase assets and decrease liabilities. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
59.
A debit to an asset account indicates a. an error. b. a credit was made to a liability account. c. a decrease in the asset. d. an increase in the asset. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
60.
The normal balance of any account is the a. left side. b. right side. c. side which increases that account. d. side which decreases that account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
61.
The double-entry system requires that each transaction must be recorded a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
62.
Which of the following accounts does not have a normal credit balance? a. Share Capital–Ordinary b. Revenue account c. Liability account d. Dividends Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2-7
2-8 63.
Test Bank for Financial Accounting: IFRS Edition, 4e Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Share Capital–Ordinary account + Retained Earnings + Dividends – Revenue – Expenses. b. Assets + Dividends + Expenses = Liabilities + Share Capital–Ordinary + Retained Earnings + Revenues. c. Assets – Liabilities – Dividends = Share Capital–Ordinary + Retained Earnings + Revenues – Expenses. d. Assets = Revenues + Expenses – Liabilities. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
64.
Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Equity Credit Revenues Debit Expenses Credit b. Assets Liabilities Equity Revenues Expenses
Debit Credit Credit Credit Credit
c. Assets Liabilities Equity Revenues Expenses
Credit Debit Debit Credit Debit
d. Assets Liabilities Equity Revenues Expenses
Debit Credit Credit Credit Debit
Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
65.
The best interpretation of the word credit is the a. offset side of an account. b. increase side of an account. c. right side of an account. d. decrease side of an account. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
66.
In recording an accounting transaction in a double-entry system a. the number of debit accounts must equal the number of credit accounts. b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits. d. there must only be two accounts affected by any transaction. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 67.
2-9
An accounting convention is best described as a. an absolute truth. b. an accounting custom. c. an optional rule. d. something that cannot be changed. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
68.
A debit is not the normal balance for which account listed below? a. Dividends b. Cash c. Accounts Receivable d. Service Revenue Ans: d LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
69.
An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit an equity account for $500. c. Debit another asset account for $500. d. Credit a different asset account for $500. Ans: d LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
70.
An accountant has debited an asset account for $1,000 and credited a liability account for $500. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $500. b. Credit another liability account for $500. c. Credit an equity account for $500. d. Debit an equity account for $500. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
71.
Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
72.
An account will have a credit balance if the a. credits exceed the debits. b. first transaction entered was a credit. c. debits exceed the credits. d. last transaction entered was a credit. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 10 73.
Test Bank for Financial Accounting: IFRS Edition, 4e For the basic accounting equation to stay in balance, each transaction recorded must a. affect two or less accounts. b. affect two or more accounts. c. always affect exactly two accounts. d. affect the same number of asset and liability accounts. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
74.
Which of the following statements is true? a. Debits increase assets and increase liabilities. b. Credits decrease assets and decrease liabilities. c. Credits decrease assets and increase liabilities. d. Debits decrease liabilities and decrease assets. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
75.
Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
76.
An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a. A debit balance in the dividends account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
77.
If a company has overdrawn its bank balance, then a. its cash account will show a debit balance. b. its cash account will show a credit balance. c. the cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the cash account. Ans: b LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
78.
Which account below is not a subdivision of retained earnings? a. Dividends b. Revenues c. Expenses d. Share Capital-Ordinary Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 79.
2 - 11
When a company pays dividends a. the dividend doesn't have to be cash, it could be another asset. b. the dividends account will be increased with a credit. c. the retained earnings account will be directly increased with a debit. d. the dividends account will be decreased with a debit. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
80.
The Dividends account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is increased with debits and decreased with credits. d. is not a proper subdivision of retained earnings. Ans: c LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
81.
Which of the following statements is not true? a. Expenses increase equity. b. Expenses have normal debit balances. c. Expenses decrease equity. d. Expenses are a negative factor in the computation of net income. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
82.
A credit to a liability account a. indicates an increase in the amount owed to creditors. b. indicates a decrease in the amount owed to creditors. c. is an error. d. must be accompanied by a debit to an asset account. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
83.
In the first month of operations, the total of the debit entries to the cash account amounted to $700 and the total of the credit entries to the cash account amounted to $500. The cash account has a a. $500 credit balance. b. $700 debit balance. c. $200 debit balance. d. $200 credit balance. Ans: c LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
84.
Martin’s Mail Service purchased equipment for $8,000. Martin paid $1,000 in cash and signed a note for the balance. Martin debited the Equipment account, credited Cash and a. nothing further must be done. b. debited the retained earnings account for $7,000. c. credited another asset account for $1,000. d. credited a liability account for $7,000. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 12 85.
Test Bank for Financial Accounting: IFRS Edition, 4e Taylor Industries purchased supplies for £1,000. They paid £500 in cash and agreed to pay the balance in 30 days. The journal entry to record this transaction would include a debit to an asset account for ₤1,000, a credit to a liability account for ₤500. Which of the following would be the correct way to complete the recording of the transaction? a. Credit an asset account for ₤500. b. Credit another liability account for ₤500. c. Credit the retained earnings account for ₤500. d. Debit the retained earnings account for ₤500. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
86.
On January 14, Ericsson Industries purchased supplies of $500 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies. Ans: a LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
87.
On June 1, 2020, Alma Inc. reported a cash balance of €18,000. During June, Alma made deposits of €4,500 and made disbursements totalling €24,000. What is the cash balance at the end of June? a. €1,500 debit balance b. €22,500 debit balance c. €1,500 credit balance d. €6,000 credit balance Ans: c LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
88.
At January 1, 2020, LeAnna Industries reported retained earnings of $260,000. During 2020, LeAnna had a net loss of $60,000 and paid dividends of $40,000. At December 31, 2020, the amount of retained earnings is a. $260,000. b. $280,000. c. $200,000. d. $160,000. Ans: d LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
89.
Omega Company pays its employees twice a month, on the 7th and the 21st. On June 21, Omega Company paid employee salaries of $4,000. This transaction would a. increase equity by $4,000. b. decrease the balance in Salaries and Wages Expense by $4,000. c. decrease net income for the month by $4,000. d. be recorded by a $4,000 debit to Salaries and Wages Payable and a $4,000 credit to Salaries and Wages Expense. Ans: c LO1 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 90.
In the first month of operations for Widget Industries, the total of the debit entries to the cash account amounted to ₤18,000 (₤10,000 investment by the owners and revenues of ₤8,000). The total of the credit entries to the cash account amounted to ₤10,000 (purchase of equipment ₤4,000 and payment of expenses ₤6,000). At the end of the month, the cash account has a(n) a. ₤6,000 credit balance. b. ₤6,000 debit balance. c. ₤8,000 debit balance. d. ₤8,000 credit balance. Ans: c LO1 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
91.
Rusthe Company showed the following balances at the end of its first year: Cash Prepaid insurance Accounts receivable Accounts payable Notes payable Share capital-ordinary Dividends Revenues Expenses
$ 19,000 1,400 7,000 5,600 8,400 4,800 1,400 45,000 35,000
What did Rusthe Company show as total credits on its trial balance? a. $65,200 b. $63,800 c. $62,400 d. $66,600 Ans: b LO1 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS
92.
2 - 13
Ayala Company showed the following balances at the end of its first year: Cash $11,000 Prepaid insurance 500 Accounts receivable 2,500 Accounts payable 2,000 Notes payable 6,000 Share capital-ordinary 4,000 Dividends 500 Revenues 15,000 Expenses 12,500 What did Ayala Company show as total credits on its trial balance? a. $27,500 b. $27,000 c. $26,500 d. $28,000 Ans: b LO1 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA PC: PS
For Instructor Use Only
2 - 14 93.
Test Bank for Financial Accounting: IFRS Edition, 4e During February 2020, its first month of operations, the owner of Alona Enterprises invested cash of $125,000. Alona had cash revenues of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28? a. $15,000 credit b. $110,000 debit c. $145,000 debit d. $90,000 credit Ans: b LO1 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
94.
Which of the following statements is true regarding debits and credits? a. On the income statement, debits are used to increase account balances, whereas on the statement of financial position, credits are used to increase account balances. b. The basic equation on the statement of financial position is Assets + Liabilities = Equity. c. The rules for debit and credit and the normal balance of Share Capital-Ordinary are the same as for liabilities. d. On the income statement, revenues are increased by debits whereas on the statement of financial position retained earnings is increased by a credit. Ans: c LO1 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
95.
Which of the following accounts is reported in the equity section of the statement of financial position? a. Dividends b. Share capital-ordinary c. Revenues d. All of these answer choices are correct. Ans: b LO1 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
96.
Revenues are a. impacted by debits and credits in the same way that expenses are impacted by debits and credits. b. a subdivision of equity, providing information about why equity increased. c. reported on the statement of financial position as a current item. d. All of these answer choices are correct. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
97.
Basic steps in the recording process include all of the following except a. transfer the journal information to the appropriate account in the statement of financial position. b. analyze each transaction for its effect on the accounts. c. enter the transaction information in a journal. d. All of these answer choices are correct. Ans: a LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 98.
2 - 15
At January 31, 2020, the balance in Bota Inc.’s supplies account was $2,000. During February, Bota purchased supplies of $2,400 and used supplies of $3,200. At the end of February, the balance in the supplies account should be a. $2,000 debit. b. $2,800 credit. c. $4,400 debit. d. $1,200 debit. Ans: d LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
99.
At December 1, 2020, Gibson Company’s accounts receivable balance was €7,200. During December, Gibson had credit revenues of €30,000 and collected accounts receivable of €24,000. At December 31, 2020, the accounts receivable balance is a. €7,200 debit. b. €13,200 debit. c. €37,200 debit. d. €13,200 credit. Ans: b LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
100.
At October 1, 2020, Padilla Industries had an accounts payable balance of $90,000. During the month, the company made purchases on account of $75,000 and made payments on account of $120,000. At October 31, 2020, the accounts payable balance is a. $90,000. b. $30,000. c. $45,000. d. $120,000. Ans: c LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
101.
During 2020, its first year of operations, Yaspo’s Bakery had revenues of $200,000 and expenses of $110,000. The business paid dividends of $60,000. What is the amount of retained earnings at December 31, 2020? a. $0 b. $60,000 debit c. $30,000 credit d. $90,000 credit Ans: c LO2 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
102.
On July 7, 2020, Anaya Enterprises performed services for cash of $1,400. The entry to record this transaction would include a. a debit to Service Revenue of $1,400. b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400. d. a credit to Accounts Payable of $1,400. Ans: c LO2 BT: AP Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 16 103.
Test Bank for Financial Accounting: IFRS Edition, 4e At September 1, 2020, Crews Co. reported equity of ₤272,000. During the month, Crews generated revenues of ₤40,000, incurred expenses of ₤24,000, purchased equipment for ₤10,000 and paid dividends of ₤4,000. What is the amount of equity at September 30, 2020? a. ₤272,000 b. ₤16,000 c. ₤274,000 d. ₤284,000 Ans: d LO2 BT: AP Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
104.
The final step in the recording process is to a. analyze each transaction. b. enter the transaction in a journal. c. prepare a trial balance. d. transfer journal information to ledger accounts. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
105.
The usual sequence of steps in the transaction recording process is: a. journal à analyze à ledger. b. analyze à journal à ledger. c. journal à ledger à analyze. d. ledger à journal à analyze. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
106.
In recording business transactions, evidence that an accounting transaction has taken place is obtained from a. business documents. b. the taxing authority. c. the public relations department. d. the IASB. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
107.
After a business transaction has been analyzed and entered in the book of original entry, the next step in the recording process is to transfer the information to a. the company's bank. b. equity. c. ledger accounts. d. financial statements. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
108.
The first step in the recording process is to a. prepare financial statements. b. analyze each transaction for its effect on the accounts. c. post to a journal. d. prepare a trial balance. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 109.
2 - 17
Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check. Ans: c LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
110.
After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. book of original entry. d. ledger. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
111.
The usual sequence of steps in the recording process is to analyze each transaction, enter the transaction in the a. journal, and transfer the information to the ledger accounts. b. ledger, and transfer the information to the journal. c. book of accounts, and transfer the information to the journal. d. book of original entry, and transfer the information to the journal. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
112.
The final step in the recording process is to transfer the journal information to the a. trial balance. b. financial statements. c. ledger. d. file cabinets. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
113.
The recording process occurs a. once a year. b. once a month. c. repeatedly during the accounting period. d. infrequently in a manual accounting system. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
114.
A compound journal entry involves a. two accounts. b. three accounts. c. three or more accounts. d. four or more accounts. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 18
Test Bank for Financial Accounting: IFRS Edition, 4e
115.
A journal provides a. the balances for each account. b. information about a transaction in several different places. c. a list of all accounts used in the business. d. a chronological record of transactions. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
116.
When three or more accounts are required in one journal entry, the entry is referred to as a a. compound entry. b. triple entry. c. multiple entry. d. simple entry. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
117.
When only two accounts are required in one journal entry, the entry is referred to as a a. balanced entry. b. simple entry. c. posting. d. nominal entry. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
118.
Another name for the journal is the a. listing. b. book of original entry. c. book of accounts. d. book of source documents. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
119.
The standard format of a journal would not include a. a reference column. b. an account title column. c. a T-account. d. a date column. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
120.
Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 121.
2 - 19
A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors. Ans: b LO2 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
122
A complete journal entry does not show a. the date of the transaction. b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction. d. the accounts and amounts to be debited and credited. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
123.
The name given to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
124.
The standard form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin. Ans: c LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
125
When journalizing, the reference column is a. left blank. b. used to reference the source document. c. used to reference the journal page. d. used to reference the financial statements. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
126.
On June 1, 2020 Quang Le buys a copier machine for his business and finances this purchase with cash and a note. When journalizing this transaction, he will a. use two journal entries. b. make a compound entry. c. make a simple entry. d. list the credit entries first, which is proper form for this type of transaction. Ans: b LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 20 127.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following journal entries is recorded correctly and in the standard format? a. Salaries and Wages Expense ............................................. 1,000 Cash .............................................................................. 2,500 Rent Expense . ..................................................................... 1,500 b. Salaries and Wages Expense . ............................................ Rent Expense . ..................................................................... Cash ..............................................................................
1,000 1,500 2,500
c. Cash .................................................................................... Salaries and Wages Expense ....................................... Rent Expense ................................................................
2,500
d. Salaries and Wages Expense ............................................. Rent Expense ...................................................................... Cash . .............................................................................
1,000 1,500
1,000 1,500
2,500
Ans: d LO2 BT: AN Difficulty: Easy TOT: 1 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
128.
Which of the following statements is true regarding simple and compound entries? a. Simple entries can be prepared by anyone whereas compound entries need to be prepared by a skilled accountant. b. Simple entries are recorded on the income statement whereas compound entries are recorded on the statement of financial position. c. Simple entries involve one account, whereas compound entries involved 2 or more accounts. d. An example of a compound entry would be the purchase of a machine for $400 cash and a $2,000 note payable. Ans: d LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
129.
Compound entries a. would include an entry to record the purchase of a computer for cash. b. include at least two debits or two credits. c. require that all credits be listed before the debits for entries affecting the statement of financial position. d. should be broken into their component parts and recorded as simple entries. Ans: b LO2 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
130.
Accounts maintained within the ledger that appear on the statement of financial position include all of the following except a. Salaries and Wages Expense. b. Interest Payable. c. Supplies. d. Share Capital-Ordinary. Ans: a LO3 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 131.
2 - 21
The entire group of accounts maintained by a company is called the a. statement of cash flows. b. general journal. c. general ledger. d. trial balance. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
132.
An accounting record of the balances of all assets, liabilities, and equity accounts is called a. compound entry. b. general journal. c. general ledger. d. chart of accounts. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
133.
The usual ordering of accounts in the general ledger is a. assets, liabilities, share capital-ordinary, retained earnings, dividends, revenues, and expenses. b. assets, liabilities, dividends, share capital-ordinary, retained earnings, expenses, and revenues. c. liabilities, assets, share capital-ordinary, retained earnings, revenues, expenses, and dividends. d. Share capital-ordinary, retained earnings, assets, liabilities, dividends, expenses, and revenues. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
134.
Management could determine the amounts due from customers by examining which ledger account? a. Service Revenue b. Accounts Payable c. Accounts Receivable d. Supplies Ans: c LO3 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
135.
A three column form of account is so named because it has columns for a. debit, credit, and account name. b. debit, credit, and reference. c. debit, credit, and balance. d. debit, credit, and date. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 22 136.
Test Bank for Financial Accounting: IFRS Edition, 4e On August 13, 2020, Merrill Enterprises purchased equipment for $2,000 and supplies of $400 on account. Which of the following journal entries is recorded correctly and in the standard format? a. Equipment ............................................................................ 2,000 Account Payable............................................................. 2,400 Supplies .................................................................................. 400 b. Equipment. ........................................................................... Supplies ................................................................................ Accounts Payable ...........................................................
2,000 400 2,400
c. Accounts Payable ................................................................. Equipment ...................................................................... Supplies ..........................................................................
2,400
d. Equipment ............................................................................ Supplies ................................................................................ Accounts Payable. ..........................................................
2,000 400
2,000 400
2,400
Ans: d LO3 BT: AP Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
137.
Robitaille Company received a cash advance of $500 from a customer. As a result of this event, a. assets increased by $500. b. equity increased by $500. c. liabilities decreased by $500. d. revenues increased by $500. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
138.
Pastorek Company purchased equipment for $1,800 cash. As a result of this event, a. equity decreased by $1,800. b. total assets increased by $1,800. c. total assets remained unchanged. d. total liabilities increased by $1,800. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
139.
Root Company provided consulting services and billed the client $2,500. As a result of this event, a. assets remained unchanged. b. assets increased by $2,500. c. equity increased by $2,500. d. Both assets and equity increased by $2,500. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 140.
2 - 23
The first step in posting involves a. entering in the appropriate ledger account the date, journal page, and debit amount shown in the journal. b. writing in the journal the account number to which the debit amount was posted. c. writing in the journal the account number to which the credit amount was posted. d. entering in the appropriate ledger account the date, journal page, and credit amount shown in the journal. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
141.
A chart of accounts usually starts with a. asset accounts. b. expense accounts. c. liability accounts. d. revenue accounts. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
142.
The procedure of transferring journal entries to the ledger accounts is called a. journalizing. b. analyzing. c. reporting. d. posting. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
143.
A number in the reference column in a general journal indicates a. that the entry has been posted to a particular account. b. the page number of the journal. c. the dollar amount of the transaction. d. the date of the transaction. Ans: a LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
144.
A chart of accounts for a business firm a. is a graph. b. indicates the amount of profit or loss for the period. c. lists the accounts and account numbers that identify their location in the ledger. d. shows the balance of each account in the general ledger. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
145.
Posting a. should be performed in account number order. b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance. d. is accomplished by examining ledger accounts and seeing which ones need updating. Ans: b LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 24
Test Bank for Financial Accounting: IFRS Edition, 4e
146.
After journal entries are posted, the reference column a. of the general journal will be blank. b. of the general ledger will show journal page numbers. c. of the general journal will show "Dr" or "Cr". d. of the general ledger will show account numbers. Ans: b LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
147.
The explanation column of the general ledger a. is completed without exception. b. is nonexistent. c. is used infrequently. d. shows account titles. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
148.
A numbering system for a chart of accounts a. is prescribed by IFRS. b. is uniform for all businesses. c. usually starts with income statement accounts. d. usually starts with statement of financial position accounts. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
149.
The first step in designing a computerized accounting system is the creation of the a. general ledger. b. general journal. c. trial balance. d. chart of accounts. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
150.
Posting a. accumulates the effects of ledger entries and transfers them to the general journal. b. is done only for income statement activity; activity related to the statement of financial position does not require posting. c. is done only once per year. d. is done by posting all the debits and credits of one entry before moving on to the next entry. Ans: d LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
151.
The trial balance a. is a listing of all the accounts and their balances in the order the accounts appear on the statement of financial position. b. has as its primary purpose to prove (check) that all journal entries were made for the period. c. can be used to uncover errors in journalizing and posting. d. is used to prepare the statement of financial position while the general ledger is used to prepare the income statement. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 152.
2 - 25
Which of the following errors will prevent the trial balance from balancing? a. A transaction is not journalized. b. Transposition error related to the statement of financial position. c. A journal entry is posted twice. d. A journal entry to purchase $100 worth of equipment is posted as a $1,000 purchase. Ans: b LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
153.
Which of the following statements is false concerning use of currency signs? a. Currency signs do not appear in journals or ledgers. b. Currency signs are generally only shown for the first item in a column and for the column total. c. Currency signs are not typically used in the trial balance. d. All of these answer choices are correct. Ans: c LO4 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
154.
Which of the following statement is true regarding the recording process? a. Because IFRS rely more on fair value and less on historical cost than U.S. GAAP the double-entry accounting system is not widely used by companies who use IFRS. b. Both IFRS and U.S. GAAP, use the same general rules of debits and credits and the steps in the recording process. c. A trial balance using IFRS is organised by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order. d. All of the choices are correct regarding the recording process. Ans: b LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
155.
Under U.S. GAAP a. currency signs are generally used in the journal, ledger, trial balance, and financial statements. b. Share Capital-Ordinary is referred to as Retained Earnings. c. the statement of financial position is often called the statement of changes in financial position. d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS. Ans: d LO4 BT: K Difficulty: Hard TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
156.
The steps in preparing a trial balance include all of the following except a. listing the account titles and their balances. b. totaling the debit and credit columns. c. proving the equality of the two columns. d. transferring journal amounts to ledger accounts. Ans: d LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 26 157.
Test Bank for Financial Accounting: IFRS Edition, 4e A trial balance may balance even when each of the following occurs except when a. a transaction is not journalized. b. a journal entry is posted twice. c. incorrect accounts are used in journalizing. d. a transposition error is made. Ans: d LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
158.
A list of accounts and their balances at a given time is called a(n) a. journal. b. posting. c. trial balance. d. income statement. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
159.
If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a. no errors have been made. b. no errors can be discovered. c. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation. Ans: d LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
160.
A trial balance is a listing of a. transactions in a journal. b. the chart of accounts. c. general ledger accounts and balances. d. the totals from the journal pages. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
161.
Customarily, a trial balance is prepared a. at the end of each day. b. after each journal entry is posted. c. at the end of an accounting period. d. only at the inception of the business. Ans: c LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
162.
A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized. b. A journal entry that is posted twice. c. Offsetting errors are made in recording the transaction. d. A transposition error when transferring the debit side of a journal entry to the ledger. Ans: d LO4 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process
2 - 27
Additional Multiple Choice Questions 163.
An account is an individual accounting record of increases and decreases in specific a. liabilities. b. assets. c. expenses. d. assets, liabilities, and equity items. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
164.
A debit is not the normal balance for which of the following type of account? a. Asset account b. Dividends account c. Expense account d. Share capital-ordinary account Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
165.
Which of the following rules is incorrect? a. Credits decrease the dividends account. b. Debits increase the share capital-ordinary account. c. Credits increase revenue accounts. d. Debits decrease liability accounts. Ans: b LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
166.
Which of the following statements is false? a. Revenues increase equity. b. Revenues have normal credit balances. c. Revenues are a positive factor in the computation of net income. d. Revenues are increased by debits. Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
167.
Which of the following is the correct sequence of steps in the recording process? a. Posting, journalizing, analyzing b. Journalizing, analyzing, posting c. Analyzing, posting, journalizing d. Analyzing, journalizing, posting Ans: d LO1 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
168.
Which of the following is false about a journal? a. It discloses in one place the complete effects of a transaction. b. It provides a chronological record of transactions. c. It helps to prevent or locate errors because debit and credit amounts for each entry can be readily compared. d. It keeps in one place all the information about changes in specific account balances. Ans: d LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 28 169.
Test Bank for Financial Accounting: IFRS Edition, 4e Sternberg Company purchases equipment for $1,200 and supplies for $400 from Tran Co. for $1,600 cash. The entry for this transaction will include a a. debit to Equipment $1,200 and a debit to Supplies Expense $400 for Tran. b. credit to Cash for Tran. c. credit to Accounts Payable for Sternberg. d. debit to Equipment $1,200 and a debit to Supplies $400 for Sternberg. Ans: d LO2 BT: K Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
170.
Wiser Inc. paid cash dividends of $300. The entry for this transaction will include a debit of $300 to a. Dividends. b. Supplies Expense. c. Shareholders' Expense. d. Salaries and Wages Expense. Ans: a LO2 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
171.
On October 3, Josh Antonio, a carpenter, received a cash payment for services previously billed to a client. Josh paid his telephone bill, and he also bought supplies on credit. For the three transactions, at least one of the entries will include a a. credit to Retained Earnings. b. credit to Notes Payable. c. debit to Accounts Receivable. d. credit to Accounts Payable. Ans: d LO2 BT: C Difficulty: Medium TOT: 1.5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
172.
Posting of journal entries should be done in a. account number order. b. alphabetical order. c. chronological order. d. dollar amount order. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
173.
The chart of accounts is a a. list of accounts and their balances at a given time. b. device used to prove the mathematical accuracy of the ledger. c. listing of the accounts and the account numbers which identify their location in the ledger. d. required step in the recording process. Ans: c LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
174.
Which of the following is incorrect regarding a trial balance? a. It proves that the debits equal the credits after posting. b. It proves that the company has recorded all transactions. c. A trial balance uncovers errors in journalizing and posting. d. A trial balance is useful in the preparation of financial statements. Ans: b LO4 BT: K Difficulty: Easy TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process 175.
A trial balance will not balance if a. a journal entry is posted twice. b. a wrong amount is used in journalizing. c. incorrect account titles are used in journalizing. d. a journal entry is only partially posted. Ans: d LO4 BT: C Difficulty: Medium TOT: 1 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 29
2 - 30
Test Bank for Financial Accounting: IFRS Edition, 4e
BRIEF EXERCISES BE 176 At June 1, 2020, Estrada Industries had an accounts receivable balance of ₤12,000. During the month, the company performed credit services of ₤30,000 and collected accounts receivable of ₤32,000. What is the balance in accounts receivable at June 30, 2020? Solution 176 The balance at the end of the month is ₤10,000, calculated as follows: Beginning accounts receivable Add: Credit sales Less: Collections Ending accounts receivable
₤12,000 30,000 (32,000) ₤10,000
LO1 BT: AP Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA PC: PS
BE 177 J. B. Goode has the following transactions during April of the current year. Indicate (a) the effect on the accounting equation and (b) the debit-credit analysis. Apr. 1 4 16 27
Opens a law office, investing $20,000 in cash. Pays rent in advance for 6 months, $10,800 cash. Receives $8,000 from clients for services provided. Pays secretary $3,000 salary.
For Instructor Use Only
The Recording Process
2 - 31
Solution 177
(a) A u g .
Effect on Accounting Equation
(b)
Debit-Credit Analysis
The asset Cash is increased; the equity account Share Capital-Ordinary is increased.
Debits increase assets: debit Cash $20,000. Credits increase equity: credit Share Capital-Ordinary $20,000.
The4asset Prepaid Rent is increased; the asset Cash is decreased.
Debits increase assets: debit Prepaid Rent $10,800. Credits decrease assets: credit Cash $10,800.
The 16asset Cash is increased; the revenue Service Revenue is increased.
Debits increase assets: debit Cash $8,000. Credits increase revenues: credit Service Revenue $8,000.
The 27expense Salaries and Wages Expense is increased; the asset Cash is decreased.
Debits increase expenses: debit Salaries and Wages Expense $3,000. Credits decrease assets: credit Cash $3,000.
1
LO1 BT: C Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS
BE 178 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–). Debit_
_Credit_
Normal Balance
1. Salaries and Wages Expense.
_______
______
______
2. Accounts Receivable.
_______
______
______
3. Service Revenue.
_______
______
______
4. Share Capital-Ordinary.
_______
______
______
5. Dividends.
_______
______
______
For Instructor Use Only
2 - 32
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 178 1. Salaries and Wages Expense. 2. Accounts Receivable.
Debit_ __ + __ __ +__
_Credit_ ___–__ ___–__
Normal Balance __ Dr___ __ Dr___
3. Service Revenue. 4. Share Capital-Ordinary. 5. Dividends.
__ –__ __ –__ __ +_ _
___+__ ___+__ ___–__
__ Cr___ __ Cr___ __ Dr___
LO1 BT: K Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 179 For each of the following transactions of Chen Inc., identify the account to be debited and the account to be credited. 1. Purchased 18-month insurance policy for cash. 2. Paid weekly payroll. 3. Purchased supplies on account. 4. Received utility bill to be paid at later date. Solution 179 Transaction 1 2 3 4
Debit Prepaid Insurance Salaries and Wages Expense Supplies Utilities Expense
Credit Cash Cash Accounts Payable Accounts Payable
LO2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 180 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. Kevin Diaz invested $40,000 cash in exchange for ordinary shares. 2. Hired an employee to be paid $400 per week, starting tomorrow. 3. Paid two years’ rent in advance, $7,200. 4. Paid the worker’s weekly salary. 5. Recorded revenue earned and received for the week, $1,500. Solution 180 1. Cash……. ......................................................................................... Share Capital-Ordinary ............................................................
40,000 40,000
2. No entry, not a transaction. 3. Prepaid Rent .................................................................................... Cash ........................................................................................ For Instructor Use Only
7,200 7,200
The Recording Process Solution 180
2 - 33
(cont.)
4. Salaries and Wages Expense .......................................................... Cash ........................................................................................
400
5. Cash………. ..................................................................................... Service Revenue .....................................................................
1,500
400 1,500
LO2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 181 Identify the impact on the accounting equation of the following transactions. 1. Purchased 36-month insurance policy for cash. 2. Purchased supplies on account. 3. Received utility bill to be paid at later date. 4. Paid utility bill previously accrued. Solution 181 1. 2. 3. 4.
Net effect is no change: Increases assets and decreases assets. Increases assets and increases liabilities. Increases liabilities and decreases equity. Decreases assets and decreases liabilities
LO2 BT: K Difficulty: Easy TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 182 Journalize the following transactions for Mercado Company for June 2020, the company’s first month of operations. You may omit explanations for the transactions. 1. Purchased equipment on account for $6,000. 2. Billed customers $5,000 for services performed. 3. Made payment of $1,500 on account for equipment purchased earlier in the month. 4. Collected $2,400 on customer accounts. Solution 182 1. Equipment ........................................................................................ Accounts Payable ...................................................................
6,000
2. Accounts Receivable ....................................................................... Service Revenue .....................................................................
5,000
3. Accounts Payable ............................................................................ Cash ........................................................................................
1,500
4. Cash................................................................................................. Accounts Receivable ..............................................................
2,400
LO2 BT: AP Difficulty: Medium TOT: 4 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
6,000 5,000 1,500 2,400
2 - 34
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 183 Use the information in BE 182 to answer the following questions. 1. What is the balance in Accounts Payable at June 30, 2020? 2. What is the balance in Accounts Receivable at June 30, 2020? Solution 183 1. Accounts Payable at June 30, 2020: Beginning accounts payable Purchases on account Payments on account Ending accounts payable
$ 0 6,000 (1,500) $4,500
2. Accounts Receivable at June 30, 2020: Beginning accounts receivable Billed to customers Collections from customers Ending accounts receivable
$ 0 5,000 (2,400) $2,600
LO3 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS
BE 184 The transactions of the Buy It Now Store are recorded in the general journal below. You are to post the journal entries to T-accounts. General Journal ____________________________________________________________________________ Date Account Titles Debit Credit ____________________________________________________________________________ 2020 Aug. 5 Accounts Receivable 2,800 Service Revenue 2,800 10
Cash
5,000 Service Revenue
19 25
5,000
Rent Expense Cash
1,000
Cash
1,400
1,000
Accounts Receivable
For Instructor Use Only
1,400
The Recording Process BE 184
2 - 35
(cont.) General Ledger Cash
Accounts Receivable
Service Revenue
Rent Expense
Solution 184 General Ledger Cash 8/10 8/25
5,000 1,400
8/31 Bal.
5,400
Accounts Receivable 8/19
1,000
8/5
2,800
8/31 Bal.
1,400
Service Revenue 8/5 8/10 8/31 Bal.
8/25
1,400
Rent Expense 2,800 5,000 7,800
8/19
1,000
8/31 Bal.
1,000
LO3 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 185 Prepare a trial balance from the ledger accounts of Attica Company as of January 31, 2020. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Dividends
$ 500 2,000 3,000 2,200 1,000
Rent Expense Service Revenue Supplies Salaries and Wages Expense
For Instructor Use Only
$ 500 5,000 200 1,000
2 - 36
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 185 ATTICA COMPANY Trial Balance January 31, 2020 Cash Accounts Receivable Supplies Accounts Payable Share Capital-Ordinary Dividends Service Revenue Rent Expense Salaries and Wages Expense
Debit $3,000 2,000 200
Credit
$ 500 2,200 1,000 5,000 500 1,000 $7,700
$7,700
LO4 BT: AP Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
BE 186 Prepare a corrected trial balance for Luzon Company. All accounts should have a normal balance. LUZON COMPANY Trial Balance March 31, 2020 Debit € 40,000
Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense
Credit €30,000
2,500 60,000 25,000 10,000 20,000 54,000 1,500 55,000 15,000 5,000 10,000 €142,500
For Instructor Use Only
€185,500
The Recording Process Solution 186 LUZON COMPANY Trial Balance March 31, 2020 Debit € 40,000 30,000 2,500 60,000
Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense
Credit
€ 25,000 10,000 20,000 54,000 1,500 55,000 15,000 5,000 10,000 €164,000
LO4 BT: AP Difficulty: Medium TOT: 6 min. AACSB: RT AICPA BB: CT AICPA PC: PS
For Instructor Use Only
€164,000
2 - 37
2 - 38
Test Bank for Financial Accounting: IFRS Edition, 4e
EXERCISES Ex. 187 The chart of accounts used by Ming Copy Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 101 Cash 209 Unearned Service Revenue 112 Accounts Receivable 311 Share Capital-Ordinary 126 Supplies 332 Dividends 157 Equipment 400 Service Revenue 200 Note Payable 610 Advertising Expense 201 Accounts Payable 729 Rent Expense ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. The company issues ordinary shares in exchange for ¥90,000,000 cash. ——————————————————————————————————————————— 2. Purchased three photocopy machines for ¥200,000,000, paying ¥50,000,000 cash and signing a 5-year, 10% note for the remainder. ——————————————————————————————————————————— 3. Purchased ¥5,000,000 supplies on credit. ——————————————————————————————————————————— 4. Cash photocopy revenue amounted to ¥7,000,000. ——————————————————————————————————————————— 5. Paid ¥500,000 cash for radio advertising. ——————————————————————————————————————————— 6. Paid ¥800,000 on account for supplies purchased in transaction 3. ——————————————————————————————————————————— 7. The company paid dividends of ¥1,500,000. ——————————————————————————————————————————— 8. Paid ¥1,200,000 cash for rent for the current month. ——————————————————————————————————————————— 9. Received ¥2,000,000 cash advance from a customer for future copying. ——————————————————————————————————————————— 10. Billed a customer for ¥450,000 for photocopy work done. ———————————————————————————————————————————
For Instructor Use Only
The Recording Process
2 - 39
Solution 187 ——————————————————————————————————————————— Number(s) Number(s) of account(s) of account(s) debited credited 1. The company issues ordinary shares in exchange for ¥90,000,000 cash. 101 311 ——————————————————————————————————————————— 2. Purchased three photocopy machines for ¥200,000,000, paying ¥50,000,000 cash and signing a 5-year, 10% note for the remainder. 157 101,200 ——————————————————————————————————————————— 3. Purchased ¥5,000,000 supplies on credit. 126 201 ——————————————————————————————————————————— 4. Cash photocopy revenue amounted to ¥7,000,000. 101 400 ——————————————————————————————————————————— 5. Paid ¥500,000 cash for radio advertising. 610 101 ——————————————————————————————————————————— 6. Paid ¥800,000 on account for supplies purchased in transaction 3. 201 101 ——————————————————————————————————————————— 7. The company paid dividends of ¥1,500,000. 332 101 ——————————————————————————————————————————— 8. Paid ¥1,200,000 cash for rent for the current month. 729 101 ——————————————————————————————————————————— 9. Received ¥2,000,000 cash advance from a customer for future copying. 101 209 ——————————————————————————————————————————— 10. Billed a customer for ¥450,000 for photocopy work done. 112 400 ——————————————————————————————————————————— LO1 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 40
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 188 Under a double-entry system, show how each item is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account. Debit or Credit 1.
An increase in Salaries and Wages Expense.
__________________
2.
A decrease in Accounts Payable.
__________________
3.
An increase in Prepaid Insurance.
__________________
4.
An increase in Share Capital-Ordinary.
__________________
5.
A decrease in Supplies.
__________________
6.
An increase in Dividends.
__________________
7.
An increase in Service Revenue.
__________________
8.
A decrease in Accounts Receivable.
__________________
9.
An increase in Rent Expense.
__________________
10.
A decrease in Equipment.
__________________
Solution 188 1.
An increase in Salaries and Wages Expense.
Debit _______
2.
A decrease in Accounts Payable.
Debit _______
3.
An increase in Prepaid Insurance.
Debit _______
4.
An increase in Share Capital-Ordinary.
Credit ______
5.
A decrease in Supplies.
Credit ______
6.
An increase in Dividends.
Debit _______
7.
An increase in Service Revenue.
Credit ______
8.
A decrease in Accounts Receivable.
Credit ______
9.
An increase in Rent Expense.
Debit _______
10.
A decrease in Equipment.
Credit ______
LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
The Recording Process
2 - 41
Ex. 189 Selected transactions for Sweet Home, a property management company, in its first month of business, are as follows. Jan. 2 Issued ordinary shares to investors for $15,000 cash. 3 Purchased used car for $4,000 cash for use in business. 9 Purchased supplies on account for $500. 11 Billed customers $1,800 for services performed. 16 Paid $200 cash for advertising. 20 Received $700 cash from customers billed on January 11. 23 Paid creditor $300 cash on balance owed. 28 Paid dividends of $2,000. Instructions For each transaction indicate the following. (a) The basic type of account debited and credited (asset (A), liability (L), equity (E)). (b) The specific account debited and credited (cash, rent expense, service revenue, etc.). (c) Whether the specific account is increased (incr.) or decreased (decr). (d) The normal balance of the specific account. Use the following format, in which the January 2 transaction is given as an example. Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit
(a) Basic Type E
Account Credited (b) (c) (d) Specific Normal Account Effect Balance Share Incr. Credit Cap.–Ord.
For Instructor Use Only
2 - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 189 Account Debited (a) (b) (c) (d) Basic Specific Normal Date Type Account Effect Balance Jan. 2 A Cash Incr. Debit 3 9
A A
11 A 16 E
20 A 23 L
28 E
(a) Basic Type E
Equip. Supplies
Incr. Incr.
Debit Debit
A L
Accts Rec.
Incr.
Debit
E
Advert. Expense
Incr.
Debit
A
Incr.
Debit
Decr.
Dividends Incr.
Cash Accts. Pay.
Account Credited (b) (c) (d) Specific Normal Account Effect Balance Share Incr. Credit Cap.–Ord. Cash Decr. Debit Accts. Pay. Incr. Credit Service Revenue Incr. Credit Decr.
Debit
A
Cash Accts. Rec.
Decr.
Debit
Credit
A
Cash
Decr.
Debit
Debit
A
Cash
Decr.
Debit
LO1 BT: C Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: PS
Ex. 190 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Debit or Credit
Accounts 1.
Service Revenue
_________________
2.
Rent Expense
_________________
3.
Accounts Receivable
_________________
4.
Accounts Payable
_________________
5.
Retained Earnings
_________________
6.
Supplies
_________________
7.
Insurance Expense
_________________
8.
Dividends
_________________
9.
Equipment
_________________
10.
Notes Payable
_________________ For Instructor Use Only
The Recording Process
2 - 43
Solution 190 Normal Balance Debit or Credit
Accounts 1.
Service Revenue
Credit
2.
Rent Expense
Debit
3.
Accounts Receivable
Debit
4.
Accounts Payable
Credit
5.
Retained Earnings
Credit
6.
Supplies
Debit
7.
Insurance Expense
Debit
8.
Dividends
Debit
9.
Equipment
Debit
10.
Notes Payable
Credit
LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 191 For each of the following accounts, indicate the effects of (a) a debit and (b) the normal account balance. 1. Notes Payable 2. Prepaid Insurance 3. Salaries and Wages Expense 4. Service Revenue 5. Equipment 6. Share Capital-Ordinary Solution 191 1. 2. 3. 4. 5. 6.
Notes Payable Prepaid Insurance Salaries and Wages Expense Service Revenue Equipment Share Capital-Ordinary
Debit Effect Decrease Increase Increase Decrease Increase Decrease
Normal Balance Credit Debit Debit Credit Debit Credit
LO1 BT: C Difficulty: Easy TOT: 7 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 44
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 192 During an accounting period, a business has numerous transactions affecting each of the following accounts. 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. ____ ____ ____ ____ ____
(1) (2) (3) (4) (5)
Advertising Expense Service Revenue Accounts Payable Accounts Receivable Share Capital-Ordinary
____ (6) Dividends ____ (7) Cash ____ (8) Salaries and Wages Expense ____ (9) Notes Payable ____ (10) Insurance Expense
Solution 192 (1) (2) (3) (4)
(a) (b) (c) (c)
(5) (6) (7) (8)
(b) (a) (c) (a)
(9) (10)
(c) (a)
LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 193 Eight transactions are recorded in the following T-accounts: CASH (1) (7)
35,000 22,500
ACCOUNTS RECEIVABLE
(2) (3) (4) (6) (8)
3,500 1,950 2,225 8,000 4,500
(5)
SUPPLIES (3)
(2)
SHARE CAPITAL-ORDINARY
8,000
(2)
13,500
35,000
(5) DIVIDENDS
10,000
(8)
SALARIES AND WAGES EXPENSE (4)
22,500
SERVICE REVENUE
ACCOUNTS PAYABLE (6)
(7)
EQUIPMENT
1,950
(1)
27,500
2,225
For Instructor Use Only
4,500
27,500
The Recording Process Ex. 193
2 - 45
(cont.)
Indicate for each debit and each credit: (a) whether an asset, liability, equity, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form: Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Equity + ——————————————————————————————————————————— (2) ——————————————————————————————————————————— (3) ——————————————————————————————————————————— (4) ——————————————————————————————————————————— (5) ——————————————————————————————————————————— (6) ——————————————————————————————————————————— (7) ——————————————————————————————————————————— (8) ——————————————————————————————————————————— Solution 193 Transaction Account Debited Account Credited No. Type Effect Type Effect ——————————————————————————————————————————— (1) (Example) Asset + Equity + ——————————————————————————————————————————— (2) Asset + Asset – Liability + ——————————————————————————————————————————— (3) Asset + Asset – ——————————————————————————————————————————— (4) Expense + Asset – ——————————————————————————————————————————— (5) Asset + Revenue + ——————————————————————————————————————————— (6) Liability – Asset – ——————————————————————————————————————————— (7) Asset + Asset – ——————————————————————————————————————————— (8) Equity – Asset – LO1 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 194 For each of the following accounts indicate (a) the type of account (Asset, Liability, Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance. Example 0. Cash
a. Asset account b. Debit increases, credit decreases c. Normal balance - debit Accounts
1. 2. 3. 4.
Accounts Payable Accounts Receivable Share Capital-Ordinary Dividends
5. 6. 7. 8.
Service Revenue Insurance Expense Notes Payable Equipment
Solution 194 1. a. Liability account. b. Debit decreases, credit increases. c. Normal balance - credit.
5. a. Revenue account. b. Debit decreases, credit increases. c. Normal balance - credit.
2. a. Asset account. b. Debit increases, credit decreases. c. Normal balance - debit.
6. a. Expense account. b. Debit increases, credit decreases. c. Normal balance - debit.
3. a. Equity account. b. Debit decreases, credit increases. c. Normal balance - credit.
7. a. Liability account. b. Debit decreases, credit increases. c. Normal balance - credit.
4. a. Equity account. b. Debit increases, credit decreases. c. Normal balance - debit.
8. a. Asset account. b. Debit increases, credit decreases. c. Normal balance - debit.
LO1 BT: C Difficulty: Easy TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 195 For each transaction given, enter in the tabulation given below a "D" for debit and a "C" for credit to reflect the increases and decreases of the assets, liabilities, and equity accounts. In some cases there may be a "D" and a "C" in the same box. Transactions: 1. Shareholders invest cash in the business in exchange for ordinary shares. 2. Pays insurance in advance for six months. 3. Pays secretary's salary. 4. Purchases supplies on account. 5. Pays electricity bill. 6. Borrows money from local bank. 7. Makes payment on account. 8. Receives cash due from customers.
For Instructor Use Only
The Recording Process Ex. 195 9. 10.
2 - 47
(cont.)
Provides services on account. The company pays dividends.
1
2
3
4
Transaction # 5 6
7
8
9
10
1 D
2 D,C
3 C
4 D C
Transaction # 5 6 C D C
7 C D
8 D,C
9 D
10 C
Assets Liabilities Share Capital-Ordinary Dividends Revenues Expenses
Solution 195
Assets Liabilities Share Capital-Ordinary Dividends Revenues Expenses
C D C D
D
LO1 BT: C Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 196 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. The company issues ordinary shares in exchange for ₤25,000 cash. 2. Purchased ₤400 of supplies on credit. 3. Purchased equipment for ₤10,000, paying ₤3,000 in cash and signed a 30-day, ₤7,000, note payable. 4. Real estate commissions billed to clients amount to ₤4,000. 5. Paid ₤700 in cash for the current month's rent. 6. Paid ₤200 cash on account for supplies purchased in transaction 2. 7. Received a bill for ₤600 for advertising for the current month. 8. Paid ₤2,200 cash for salaries. 9. The company paid dividends of ₤1,200. 10. Received a check for ₤3,000 from a client in payment on account for commissions billed in transaction 4.
For Instructor Use Only
2 - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 196 1. 2. 3.
4. 5. 6. 7. 8. 9. 10.
Cash ........................................................................................... Share Capital-Ordinary ......................................................
25,000
Supplies...................................................................................... Accounts Payable ..............................................................
400
Equipment .................................................................................. Cash .................................................................................. Notes Payable ...................................................................
10,000
Accounts Receivable .................................................................. Service Revenue ...............................................................
4,000
Rent Expense ............................................................................. Cash ..................................................................................
700
Accounts Payable....................................................................... Cash ..................................................................................
200
Advertising Expense................................................................... Accounts Payable ..............................................................
600
Salaries and Wages Expense .................................................... Cash ..................................................................................
2,200
Dividends.................................................................................... Cash ..................................................................................
1,200
Cash ........................................................................................... Accounts Receivable .........................................................
3,000
25,000 400 3,000 7,000 4,000 700 200 600 2,200 1,200
LO2 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 197 Identify the accounts to be debited and credited for each of the following transactions. 1. The owners invested $10,000 cash in the business in exchange for ordinary shares. 2. Purchased supplies on account for $1,000. 3. Billed customers $2,000 for services performed. 4. Paid salaries of $900. Solution 197 1. 2. 3. 4.
Account Debited Cash Supplies Accounts Receivable Salaries and Wages Expense
Account Credited Share Capital-Ordinary Accounts Payable Service Revenue Cash
LO2 BT: C Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
3,000
The Recording Process
2 - 49
Ex. 198 Transactions for Tom Petty Company for the month of October are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Issued ordinary shares in exchange for $50,000 cash. Purchased land costing $28,000 for cash. Purchased equipment costing $20,000 for $3,000 cash and the remainder on account. Purchased supplies on account for $800. Paid $1,000 for a one-year insurance policy. Received $3,000 cash for services performed. Received $4,000 for services previously performed on account. Paid salaries to employees for $2,500. Paid dividends of $1,000.
Solution 198 1. Cash................................................................................................. Share Capital-Ordinary ...........................................................
50,000
2. Land ................................................................................................. Cash ........................................................................................
28,000
3. Equipment ........................................................................................ Cash ........................................................................................ Accounts Payable ...................................................................
20,000
4. Supplies .......................................................................................... Accounts Payable ..................................................................
800
5. Prepaid Insurance ............................................................................ Cash ........................................................................................
1,000
6. Cash................................................................................................. Service Revenue .....................................................................
3,000
7. Cash................................................................................................. Accounts Receivable ..............................................................
4,000
8. Salaries and Wages Expense .......................................................... Cash ........................................................................................
2,500
9. Dividends ......................................................................................... Cash ........................................................................................
1,000
50,000 28,000
LO2 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
3,000 17,000 800 1,000 3,000 4,000 2,500 1,000
2 - 50
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 199 Match the basic step in the recording process described by each of the following statements. A. Analyze each transaction B. Enter each transaction in a journal C. Transfer journal information to ledger accounts ____ 1. This step is called posting. ____ 2. Business documents are examined to determine the effects of transactions on the accounts. ____ 3. This step is called journalizing. Solution 199 1. C
2. A
3. B
LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 200 Prepare journal entries for each of the following transactions. 1. 2. 3. 4.
Performed services for customers on account €6,000. Purchased €20,000 of equipment on account. Received €3,000 from customers in transaction 1. The company paid dividends of €1,000.
Solution 200 1. Accounts Receivable .............................................................................. Service Revenue ...........................................................................
6,000
2. Equipment .............................................................................................. Accounts Payable ..........................................................................
20,000
3. Cash ...................................................................................................... Accounts Receivable .....................................................................
3,000
4. Dividends ............................................................................................... Cash ..............................................................................................
1,000
LO2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
6,000 20,000 3,000 1,000
The Recording Process
2 - 51
Ex. 201 Glynn Company is a newly organized business. The list of accounts to be opened in the general ledger is as follows: Accounts Payable Prepaid Insurance Accounts Receivable Prepaid Rent Accumulated Depreciation Rent Expense Cash Salaries and Wages Expense Depreciation Expense Salaries and Wages Payable Equipment Service Revenue Insurance Expense Supplies Share Capital-Ordinary Supplies Expense Dividends Instructions Organize the accounts into the order in which they should appear in the ledger of Glynn Company and assign account numbers. Use the following system to assign account numbers. 1—199 200—299 300—399 400—499 500—599
Assets Liabilities Equity Revenues Expenses
Solution 201 There are several possible correct account number assignments. The following is one of the correct solutions. 101- Cash 112- Accounts Receivable 126- Supplies 130- Prepaid Insurance 140- Prepaid Rent 157- Equipment 158- Accumulated Depreciation 201- Accounts Payable 212- Salaries and Wages Payable 311- Share Capital-Ordinary 332- Dividends 400- Service Revenue 510- Salaries and Wages Expense 520- Supplies Expense 530- Rent Expense 540- Insurance Expense 550- Depreciation Expense LO3 BT: AP Difficulty: Medium TOT: 15 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
For Instructor Use Only
2 - 52
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 202 The transactions of Medina Information Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided. General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2020 Sept. 1 Cash 35,000 Share Capital-Ordinary 35,000 (Issued ordinary shares for cash) 4
8
15
18
Equipment Cash Notes Payable (Paid cash and issued 2-year, 9%, note for equipment)
30,000
Rent Expense Cash (Paid September rent)
1,000
Prepaid Insurance Cash (Paid one-year liability insurance) Cash
10,000 20,000
1,000 400 400 2,500
Service Revenue (Received cash for delivery services) 20
25
30
30
2,500
Salaries and Wages Expense Cash (Paid salaries for current period)
500
Utilities Expense Accounts Payable (Received a bill for September utilities)
600
500
600
Dividends Cash (Paid dividends)
1,800
Accounts Receivable Service Revenue (Billed customer for delivery service)
2,000
For Instructor Use Only
1,800
2,000
The Recording Process Ex. 202
2 - 53
(cont.) General Ledger
Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
For Instructor Use Only
2 - 54 Ex. 202
Test Bank for Financial Accounting: IFRS Edition, 4e (cont.)
Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Share Capital-Ordinary Account No. 311 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Dividends Account No. 332 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
For Instructor Use Only
The Recording Process Ex. 202
2 - 55
(cont.)
Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ———————————————————————————————————————————
MEDINA INFORMATION SERVICE Trial Balance September 30, 2020 ——————————————————————————————————————————— Accounts Debit Credit ———————————————————————————————————————————
———————————————————————————————————————————
For Instructor Use Only
2 - 56
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 202 General Journal J1 ——————————————————————————————————————————— Date Account Titles and Explanation Ref. Debit Credit ——————————————————————————————————————————— 2020 Sept. 1 Cash 101 35,000 Share Capital-Ordinary 311 35,000 (Issued ordinary shares for cash) 4
8
15
18
Equipment 155 Cash 101 Notes Payable 205 (Paid cash and issued 2-year, 9%, note for equipment)
30,000
Rent Expense Cash (Paid September rent)
719 101
1,000
Prepaid Insurance Cash (Paid one-year liability insurance)
130 101
400
Cash
101 400
2,500
Salaries and Wages Expense Cash (Paid salaries for current period)
726 101
500
Utilities Expense Accounts Payable (Received a bill for September utilities)
735 201
600
Dividends Cash (Paid dividends)
332 101
1,800
Accounts Receivable Service Revenue (Billed customer for delivery service)
112 400
2,000
Service Revenue (Received cash for delivery services) 20
25
30
30
For Instructor Use Only
10,000 20,000
1,000
400
2,500
500
600
1,800
2,000
The Recording Process Solution 202
2 - 57
(cont.) General Ledger
Cash Account No. 101 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 1 J1 35,000 35,000 4 J1 10,000 25,000 8 J1 1,000 24,000 15 J1 400 23,600 18 J1 2,500 26,100 20 J1 500 25,600 30 J1 1,800 23,800 Accounts Receivable Account No. 112 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 30 J1 2,000 2,000 Prepaid Insurance Account No. 130 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 15 J1 400 400 Equipment Account No. 155 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 4 J1 30,000 30,000 Accounts Payable Account No. 201 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 25 J1 600 600
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 202
(cont.)
Notes Payable Account No. 205 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 4 J1 20,000 20,000 Share Capital-Ordinary Account No. 311 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 1 J1 35,000 35,000
Dividends Account No. 332 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 30 J1 1,800 1,800 Service Revenue Account No. 400 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 18 J1 2,500 2,500 30 J1 2,000 4,500 Rent Expense Account No. 719 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 8 J1 1,000 1,000 Salaries and Wages Expense Account No. 726 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 20 J1 500 500
For Instructor Use Only
The Recording Process Solution 202
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(cont.)
Utilities Expense Account No. 735 ——————————————————————————————————————————— Date Explanation Ref. Debit Credit Balance ——————————————————————————————————————————— 2020 Sept. 25 J1 600 600 MEDINA INFORMATION SERVICE Trial Balance September 30, 2020 ——————————————————————————————————————————— Accounts Debit Credit ——————————————————————————————————————————— Cash $ 23,800 Accounts Receivable 2,000 Prepaid Insurance 400 Equipment 30,000 Accounts Payable $ 600 Notes Payable 20,000 Share Capital-Ordinary 35,000 Dividends 1,800 Service Revenue 4,500 Rent Expense 1,000 Salaries and Wages Expense 500 Utilities Expense 600 Totals $60,100 $60,100 ____________________________________________________________________________ LO: 3, 4,
BT: AP Difficulty: Hard TOT: 25 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 203 The bookkeeper for Dole Yard Service made a number of errors in journalizing and posting as described below: 1. A debit posting to accounts receivable for $500 was omitted. 2. A payment of accounts payable for $600 was credited to cash and debited to accounts receivable. 3. A credit to accounts receivable for $650 was posted as $65. 4. A cash purchase of equipment for $561 was journalized as a debit to equipment and a credit to notes payable. The credit posting was made for $516. 5. A debit posting of $300 for the purchase of supplies was credited to supplies. 6. A debit to insurance expense for $591 was posted as $519. 7. A debit posting for salaries expense for $900 was made twice. 8. A cash purchase of supplies for $700 was journalized and posted as a debit to supplies for $70 and a credit to cash for $70. For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Instructions For each error, indicate (a) whether the trial balance will balance; if the trial balance will not balance, indicate (b) the amount of the difference, and (c) the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. (A) (B) (C) Error In Balance Difference Larger Column 1 No $500 Credit
Solution 203 (A) In Balance No Yes No No No No No Yes
Error 1 2 3 4 5 6 7 8
(B) Difference $500 — 585 45 600 72 900 —
(C) Larger Column Credit — Debit Debit Credit Credit Debit —
LO3 BT: AN Difficulty: Hard TOT: 15 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
Ex. 204 Post the following transactions to T-accounts and determine each account's ending balance. 1. Supplies ........................................................................................... Accounts Payable ....................................................................
2,000
2. Accounts Receivable ........................................................................ Service Revenue .....................................................................
4,000
3. Cash ................................................................................................ Accounts Receivable ...............................................................
3,500
4. Accounts Payable ............................................................................ Cash ........................................................................................
1,000
2,000 4,000 3,500 1,000
Solution 204 Cash 3.
3,500
Bal.
2,500
Accounts Payable 4.
1,000
4.
For Instructor Use Only
1,000
1.
2,000
Bal.
1,000
The Recording Process Solution 204
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(cont.) Accounts Receivable
2.
4,000
Bal.
500
3.
Service Revenue 3,500
2.
4,000
Bal.
4,000
Supplies 1.
2,000
Bal.
2,000
LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 205 The trial balance of Drysdale Company shown below does not balance. DRYSDALE COMPANY Trial Balance June 30, 2020 ——————————————————————————————————————————— Debit Credit Cash ................................................................................................ ₤ 2,600 Accounts Receivable ....................................................................... 7,600 Supplies ........................................................................................... 600 Equipment ........................................................................................ 8,300 Accounts Payable ............................................................................ ₤ 9,766 Share Capital-Ordinary .................................................................... 1,952 Dividends ......................................................................................... 1,500 Service Revenue ............................................................................. 15,200 Salaries and Wages Expense.......................................................... 3,800 Maintenance and Repairs Expense ................................................. 1,600 Totals ...................................................................................... ₤26,000 ₤26,918 An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of ₤170 received from a customer on account was debited to Cash ₤710 and credited to Accounts Receivable ₤710. 3. A dividend of ₤300 was posted as a credit to Dividends, ₤300 and credit to Cash ₤300. 4. A debit of ₤120 was not posted to Salaries and Wages Expense. 5. The purchase of equipment on account for ₤700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for ₤700. 6. Services were performed on account for a customer, ₤310, for which Accounts Receivable was debited ₤310 and Service Revenue was credited ₤31. 7. A payment on account for ₤225 was credited to Cash for ₤225 and credited to Accounts Payable for ₤252.
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Test Bank for Financial Accounting: IFRS Edition, 4e
Instructions Prepare a correct trial balance. Solution 205 DRYSDALE COMPANY Trial Balance June 30, 2020 ——————————————————————————————————————————— Debit Credit Cash [2,600 – 540 (2)] ..................................................................... ₤ 2,060 Accounts Receivable [7,600 + 540 (2)] ............................................ 8,140 Supplies ........................................................................................... 600 Equipment [8,300 + 700 (5)] ............................................................ 9,000 Accounts Payable [9,766 – 477 (7)] ................................................. ₤9,289 Share Capital-Ordinary .................................................................... 1,952 Dividends [1,500 + 300 + 300 (3)] .................................................... 2,100 Service Revenue [15,200 + 279 (6)] ................................................ 15,479 Salaries and Wages Expense [3,800 + 120 (4)] .............................. 3,920 Maintenance and Repairs Expense [1,600 – 700 (5)] ...................... 900 Totals ........................................................................................ ₤26,720 ₤26,720
LO4 BT: AN Difficulty: Hard TOT: 25 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
Ex. 206 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A payment of $800 to a creditor was recorded by a debit to Accounts Payable of $80 and a credit to Cash of $800. 2. A $480 payment for a printer was recorded by a debit to Equipment of $48 and a credit to Cash for $48. 3. An account receivable in the amount of $1,500 was collected in full. The collection was recorded by a debit to Cash for $1,500 and a debit to Accounts Payable for $1,500. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800. Solution 206 1. The trial balance totals will be unequal. The credit column will be $720 larger than the debit column. 2. The trial balance totals will be misstated but not unequal. For Instructor Use Only
The Recording Process Solution 206
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(cont.)
3. The trial balance totals will be unequal. The debit column will be $3,000 larger than the credit column. 4. The trial balance totals will be misstated but not unequal. LO4 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Analysis AICPA BB: CT AICPA PC: PS
Ex. 207 M. Caria and Associates is a financial planning service. The account balances at December 31, 2020 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Buildings Cash Equipment Land Notes Payable Notes Receivable Share Capital-Ordinary Supplies
$
13,000 19,000 120,000 26,500 71,000 42,000 95,000 8,100 179,700 1,100
Instructions Prepare a trial balance with the accounts arranged in proper order.
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 207 M. CARIA AND ASSOCIATES Trial Balance December 31, 2020 Cash ................................................................................................. Accounts Receivable........................................................................ Supplies ........................................................................................... Notes Receivable ............................................................................. Equipment ........................................................................................ Buildings........................................................................................... Land ................................................................................................. Accounts Payable ............................................................................ Notes Payable .................................................................................. Share Capital-Ordinary .................................................................... Totals.......................................................................................
Debit $ 26,500 19,000 1,100 8,100 71,000 120,000 42,000
Credit
$ $287,700
13,000 95,000 179,700 $287,700
LO4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 208 The ledger accounts of the Redlands Place Gym at June 30, 2020 are shown below: Accounts Payable Accounts Receivable Buildings Cash Dividends Equipment Notes Payable Share Capital-Ordinary Supplies
$ 14,100 1,050 81,400 20,000 10,500 12,900 49,000 63,100 350
Instructions Prepare a trial balance with the ledger accounts arranged in the proper order. Include the appropriate heading.
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Solution 208 REDLANDS PLACE GYM Trial Balance June 30, 2020 Cash ................................................................................................ Accounts Receivable ....................................................................... Supplies ........................................................................................... Equipment ........................................................................................ Buildings .......................................................................................... Accounts Payable ............................................................................ Notes Payable ................................................................................. Share Capital-Ordinary .................................................................... Dividends ......................................................................................... Totals ......................................................................................
Debit $ 20,000 1,050 350 12,900 81,400
$ 14,100 49,000 63,100 10,500 $126,200
LO4 BT: AP Difficulty: Medium TOT: 10 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex. 209 The ledger account balances for Perkins Company are listed below. Accounts Payable Accounts Receivable Cash Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Unearned Service Revenue Utilities Expense
€ 10,000 7,000 13,000 9,000 4,000 40,000 25,000 2,000 12,000
Instructions Prepare a trial balance in proper form for Perkins at December 31, 2020.
For Instructor Use Only
Credit
$126,200
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 209 PERKINS COMPANY Trial Balance December 31, 2020 Debit €13,000 7,000
Cash Accounts Receivable Accounts Payable Unearned Service Revenue Share Capital-Ordinary Dividends Service Revenue Salaries and Wages Expense Utilities Expense
Credit € 10,000 2,000 9,000
4,000 40,000 25,000 12,000 €61,000
€61,000
LO4 BT: AP Difficulty: Medium TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
Ex 210 The bookkeeper for Stan Lei Auto Repair made a number of errors in journalizing and posting, as described below. 1. A credit posting of $500 to Accounts Receivable was omitted. 2. A debit posting of $750 for Prepaid Insurance was debited to Insurance Expense. 3. A collection from a customer of $100 in payment of its account was journalized and posted as a debit to Cash $100 and a credit to Service Revenue $100. 4. A credit posting of $300 to Property Taxes Payable was made twice. 5. A cash purchase of supplies for $250 was journalized and posted as a debit to Supplies $25 and a credit to Cash $25. 6. A debit of $475 to Advertising Expense was posted as $457 Instructions For each error: (a) Indicate whether the trial balance will balance. (b) If the trial balance will not balance, indicate the amount of the difference. (c) Indicate the trial balance column that will have the larger total. Consider each error separately. Use the following form, in which error (1) is given as an example. Error (1)
(a) In Balance No
(b) Difference $500
(c) Larger Column debit
For Instructor Use Only
The Recording Process Solution 210
Error
(a) In Balance
(b) Difference
(c) Larger Column
1. 2. 3. 4. 5. 6.
No Yes Yes No Yes No
$500 — — 300 — 18
Debit — — Credit — Credit
LO4 BT: AN Difficulty: Hard TOT: 8 min. AACSB: Analytic AICPA BB: CT AICPA PC: PS
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 211.
An _______________ is a record of increases and decreases in specific assets, liabilities, and equity items.
212.
The process of entering an amount on the left side of an account is called ____________ the account, and making an entry on the right side is called _________________ the account.
213.
______________, _______________, and _______________ have debit normal account balances whereas _______________, ________________, ________________, and ________________ have credit normal account balances.
214.
The
five
subdivisions
of
equity
are:
________________,
________________,
________________, ________________, and ________________. 215.
The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ________________, and transfer the _______________ information to appropriate accounts in the ________________.
216.
A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.
217.
An accounting record where transactions are initially recorded in chronological order is called a ________________.
218.
When three or more accounts are required in one journal entry, the entry is referred to as a ________________ entry.
219.
The entire group of accounts and their balances maintained by a company is called the ________________.
220.
A two column list of all accounts and their balances at a given time is a ______________.
Answers to Completion Statements 211. account 212. debiting, crediting 213. Assets, expenses, dividends, share capital-ordinary, retained earnings, liabilities, revenues 214. share capital-ordinary, retained earnings, dividends, revenues, expenses 215. analyze, journal, journal, ledger
216. business documents 217. journal 218. compound 219. general ledger 220. trial balance
LO1-4 BT: K Difficulty: Easy TOT: 8 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
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MATCHING 221. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Account Normal account balance Debit Revenue account Compound entry
F. G. H. I. J.
Journal Posting Chart of accounts Trial balance Simple entry
____
1. An entry that involves three or more accounts.
____
2. Transferring journal entries to ledger accounts.
____
3. The side which increases an account.
____
4. A list of all the accounts used by an enterprise.
____
5. A record of increases and decreases in specific assets, liabilities, and equity items.
____
6. Left side of an account.
____
7. An entry that involves only two accounts.
____
8. A book of original entry.
____
9. A list of accounts and their balances at a given time.
____ 10. Has a credit normal balance
Answers to Matching 1. 2. 3. 4. 5.
E G B H A
6. 7. 8. 9. 10.
C J F I D
LO1-4 BT: K Difficulty: Easy TOT: 3 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
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Test Bank for Financial Accounting: IFRS Edition, 4e
SHORT-ANSWER ESSAY QUESTIONS S-A E 222 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance. Solution 222 An account is an individual accounting record of increases and decreases in specific asset, liability, and equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, equity, revenue, and expense. Accounts with normal debit balances, such as assets and expenses, are increased when debited and decreased when credited. Accounts with normal credit balances, such as liabilities and revenues, are increased when credited and decreased when debited. LO1 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 223 Your roommate, a marketing major, thinks that debit means decrease and credit means increase. And, that every account can be debited and credited and as result, every account can have both a debit and a credit balance. Explain to your roommate (1) the meaning of debit and credit; (2) which accounts can only be debited, which can only be credited, and which can be both debited and credited; and (3) which accounts normally have debit balances and which credit balances.
Solution 223 The terms debit and credit mean the left and right side, respectively, of every account. Some accounts such as Dividends and Expenses are only debited; other accounts such as Share Capital-Ordinary and Revenues are only credited; and finally, some accounts such as Cash, Accounts Receivable, and Accounts Payable can be debited and credited. Accounts with debit balances include Assets, Dividends, and Expenses. Accounts with credit balances include Liabilities, Share Capital-Ordinary and Revenues. LO1 BT: C Difficulty: Medium TOT: 5 min. AACSB: RT AICPA BB: CT AICPA FN: Reporting
S-A E 224 A fellow classmate is confused about how debits and credits relate to the basic accounting equation. State the basic accounting equation, convert it into the expanded accounting equation, and then explain how it ties into the rules for debits and credits.
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Solution 224 The basic accounting equation is: Assets = Liabilities + Equity The expanded equation divides Equity into its various parts, reflecting the shareholders' investment, dividends, revenues, and expenses: Assets = Liabilities + Share Capital-Ordinary + Retained Earnings – Dividends + Revenues – Expenses This expanded equation can then be re-arranged to explain why certain accounts have debit (lefthand) balances, while other accounts have credit (right-hand) balances, as follows: Assets + Dividends + Expenses = Liabilities + Share Capital-Ordinary + Retained Earnings + Revenues The accounts on the left-hand side of the equation have left-hand, or debit balances, while the accounts on the right-hand side of the equation have right-hand, or credit balances. Accounts with debit balances are increased with debits and decreased with credits, while accounts with credit balances are increased with credits and decreased with debits. LO1 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication
S-A E 225 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain. Solution 225 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. LO4 BT: AN Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
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Test Bank for Financial Accounting: IFRS Edition, 4e
S-A E 226 John Dough, a fellow employee, wants to understand the basic steps in the recording process. Identify and briefly explain the steps in the order in which they occur. Solution 226 The basic steps in the recording process are: 1.
Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts.
2.
Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.
3.
Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.
LO2 BT: C Difficulty: Medium TOT: 5min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 227 All recordable transactions are initially recorded in the journal. Discuss the contributions that the journal makes to the recording process. Solution 227 The journal makes several significant contributions to the recording process: (1) It discloses in one place the complete effects of a transaction; (2) It provides a chronological record of transactions; and, (3) It helps to prevent and locate errors because the debit and credit amounts for each entry can be readily compared. LO2 BT: C Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
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S-A E 228 A bookkeeping student has come to you for tutoring on the recording process. She is confused about the relationship between the chart of accounts and the ledger. Explain the purpose of the chart of accounts and the general ledger. In your explanation indicate the relationship between these two items as well. Solution 228 The chart of accounts lists all of the accounts that a company uses and their account numbers that identify their location in the ledger. The numbering system used to identify the accounts usually starts with the statement of financial position accounts followed by the income statement accounts. The general ledger contains all of the accounts of a company and their respective balances at any point in time. The ledger is organized by account number with assets coming first, then liabilities, equity, revenue, and expense accounts. LO3 BT: C Difficulty: Easy TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 229 The process of transferring the information in the journal to the general ledger is called posting. Explain the posting process, including the importance of the journal page number and the account numbers. Solution 229 The posting process begins with locating the account(s) being debited in the general ledger. Then entering the date of the entry, the journal page number where the entry originated and debit portion of the entry in the date, reference and debit columns, respectively. Once this done, the account number(s) of the account(s) being debited is (are) entered in the reference column in the journal. Next, the credit portion of the journal entry is posted to the appropriate accounts in the ledger following the same steps as noted for the debit portion. The importance of the journal page number, in the reference column of each account in the general ledger accounts, is to indicate where to find the original entry. The general ledger account numbers, in the reference column of the journal, indicate that the entry has been posted. LO3 BT: S Difficulty: Medium TOT: 5 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 230 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise.
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 230 You have a very good point regarding the steps of the accounting cycle. If a company only has a few transactions, it might be possible to simply analyze them and then record each in T-accounts. However, nearly all businesses have many transactions each day. There must be a systematic way to process these transactions. The steps of the accounting cycle represent this process. After analyzing each transaction, a journal entry needs to be prepared. The journal represents a chronological listing of every transaction for a business. This allows users to review past transactions. Your approach does not leave a trail that can be reviewed at a later date. Once the journal entries are made, posting allows each line of the journal to be transferred into the ledger. This process increases and decreases individual accounts in the ledger. At the end of the accounting period, the balance of each account is determined and the trial balance is prepared. Based on your approach, if someone saw a credit to cash for $10,000 and wondered what the debit was, that person would have to go through every ledger account to locate the corresponding debit. By having a general journal, the person can view the entire transaction, thus easily seeing the account that was debited. Your approach may work for a very simple business, but it would result in problems for the majority of businesses and accountants. LO2,3 BT: S Difficulty: Medium TOT: 7 min. AACSB: Comm. AICPA BB: CT AICPA PC: Communication
S-A E 231 (Ethics) Jim Coleman, Jr. was appointed the manager of Maris Properties, a recently formed company that manages residential rental properties. Linda Grider is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Coleman believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Jim Coleman, Sr. The elder Mr. Coleman has set up Maris Properties in order to test his son's management skills before allowing him to manage the more lucrative commercial property business. Mr. Coleman, Sr. provided the capital for Maris, and maintains close contact with the company. He allowed his son, however, to hire his own employees. Mr. Coleman has asked Ms. Grider to change the name of the Travel and Entertainment account to Property Development. He hopes to deflect his father's attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Grider resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired. Required: 1. Who are the stakeholders in this situation? 2. Should Ms. Grider agree to the change in the Travel and Entertainment account to Property Development? Explain.
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S-A E 231 (cont.) Solution 231 1. The stakeholders in this situation include Mr. Coleman, Jr. Linda Grider Mr. Coleman, Sr. Bankers and others who might rely on the financial statements 2. Ms. Grider definitely should not agree to the name change. The intention of the person making the change is to deceive someone who has a right to know the affairs of the business, fully and completely. Though Ms. Grider was hired by Mr. Coleman, Jr., and though she may agree with his business methods, she cannot be a party to such deceit. LO1 BT: E Difficulty: Medium TOT: 7 min. AACSB: Ethics AICPA BB: CT AICPA PC: Professional Demeanor
S-A E 232 (Communication) A classmate is considering dropping his accounting class because he cannot understand the rules of debits and credits. a. Can the student be successful in the course without an understanding of the rules of debits and credits? b. Explain the rules of debits and credits in a way that will help him understand them. Solution 232 a. No. Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters. b. You may be trying to memorize the rules of debits and credits, only to discover that this does not work. Here are some other ways to master this very important topic: •
Make sure that you understand the accounting equation. Assets equal the total of liabilities and equity. Equity is not an account but rather a group of accounts that includes share capital-ordinary, retained earnings, revenues, expenses, and dividends. Share capital-ordinary, retained earnings, and revenues cause equity to increase while expenses and dividends cause equity to decrease.
•
Next, make sure that you understand the accounting meaning of the terms debits and credits. For accounting, debit means left and credit means right. Don’t try to add any more to these definitions.
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 232 •
(cont.)
Then, work with the rules of debits and credits. These rules determine whether a debit or credit increases or decreases an account. Start with assets. Assets increase with a debit and thus decrease with a credit. Think about the cash account—when cash is received, the account is increased with a debit. When cash is paid, the account is decreased with a credit. The remaining accounts are on the right side of the equal sign in the accounting equation. All of the other rules of debits and credits keep the equation in balance. Liabilities, share capital-ordinary, retained earnings and revenues are all increased with credits. Expenses and dividends are the two accounts that cause equity to decrease, thus they must be increased with a debit.
LO1 BT: S Difficulty: Hard TOT: 10 min. AACSB: RT AICPA BB: CT AICPA PC: Communication
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The Recording Process
2 - 77
GAAP QUESTIONS 1. The expanded accounting equation under GAAP is as follows a. Assets = Liabilities + Common Stock + Retained Earnings - Dividends - Revenues Expenses. b. Assets = Liabilities + Common Stock + Retained Earnings - Dividends + Revenues Expenses c. Assets + Liabilities = Common Stock + Retained Earnings - Dividends + Revenues Expenses d. Assets = Liabilities + Common Stock - Retained Earnings - Dividends + Revenues Expenses Ans: B LO5 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
2. A trial balance a. will not balance if a correct journal entry is posted twice. b. proves that all transactions have been recorded. c. proves that transactions are recorded correctly. d. is the same under GAAP and IFRS. Ans: D LO5 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
3. One difference between GAAP and IFRS is that a. the limitations of a trial balance are different between GAAP and IFRS. b. IFRS uses more fair value measurement than GAAP. c. GAAP uses a different posting process than IFRS. d. IFRS uses accruals accounting concepts and GAAP uses primarily the cash basis of accounting. Ans: B LO5 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
4. The general policy for using proper currency signs (dollar, yen, pound, etc) is the same for both GAAP and this textbook. This policy is as follows a. Currency signs are shown in trial balances and financial statements. b. Currency signs are shown for all compound journal entries. c. Currency signs are only shown in the trial balances. d. Currency signs only appear ledgers and journal entries Ans: A LO5 BT: K Difficulty: Medium TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting
For Instructor Use Only
CHAPTER 3 ADJUSTING THE ACCOUNTS
CHAPTER LEARNING OBJECTIVES . 1. Explain the accrual basis of accounting and the reasons for adjusting entries. The time period assumption assumes that the economic life of a business is divided into artificial time periods. Accrual-basis accounting means that companies record events that change a company's financial statements in the periods in which those events occur, rather than in the periods in which the company receives or pays cash. Companies make adjusting entries at the end of an accounting period. Such entries ensure that companies record revenues in the period in which the performance obligation is satisfied and recognize expenses in the period in which they are incurred. The major types of adjusting entries are deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses). 2. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue for services performed in the current accounting period. 3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Companies make adjusting entries for accruals to record revenues for services performed and expenses incurred in the current accounting period that have not been recognized through daily entries. 4. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments. a
a
5. Prepare adjusting entries for the alternative treatment of deferrals. Companies may initially debit prepayments to an expense account. Likewise they may credit unearned revenues to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses include a debit to an asset account and a credit to an expense account. Adjusting entries for unearned revenues include a debit to a revenue account and a credit to a liability account.
6. Discuss financial reporting concepts. To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, it should be comparable, consistent, verifiable, timely, and understandable. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The time period assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be
3-2
Test Bank for Financial Accounting: IFRS Edition, 4e prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments. The historical cost principle states that companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. The expense recognition principle dictates that efforts (expense) be matched with results (revenues). The full disclosure principle requires that companies disclose circumstances and events that matter to financial statements users. The cost constraint weighs the cost that companies incur to provide a type of information against its benefits to financial statement users.
For Instructor Use Only
Adjusting the Accounts
3-3
TRUE-FALSE STATEMENTS 1.
Many business transactions affect more than one time period.
Ans: T, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving
2.
The time period assumption states that the economic life of a business entity can be divided into artificial time periods.
Ans:T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving
3.
The time period assumption is often referred to as the expense recognition principle.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving
4.
A company's calendar year and fiscal year are always the same.
Ans: F, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
5.
Accounting time periods that are one year in length are referred to as interim periods.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
6.
Under International Financial Reporting Standards (IFRS) the time period assumption means companies must issue financial statements using a calendar year time period.
Ans: F, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
7.
International Financial Reporting Standards (IFRS) include a revenue recognition principle that states that “let the revenues follow the expenses.”
Ans: F, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
8.
Under International Financial Reporting Standards (IFRS) revenues occur when assets are used up or when liabilities are incurred to generate revenue.
Ans: F, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
9.
Under International Financial Reporting Standards (IFRS) the cash-basis of accounting requires companies to record transactions in the period in which the events occur.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
10.
Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.
Ans: F, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
11.
The cash basis of accounting is not in accordance with IFRS.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
12.
The expense recognition principle requires that efforts be matched with accomplishments.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
13.
Expense recognition is tied to revenue recognition.
Ans: T, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
14.
The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3-4 15.
Test Bank for Financial Accounting: IFRS Edition, 4e Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.
Ans: F, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
16.
An adjusting entry always involves two statement of financial position accounts.
Ans: F, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
17.
Adjusting entries are often made because some business events are not recorded as they occur.
Ans: T, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
18.
Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
19.
A company must make adjusting entries every time it prepares an income statement and a statement of financial position.
Ans: T, LO 1, BT: K, Difficulty: Medium TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
20.
Adjusting entries are needed to enable financial statements to conform to International Financial Reporting Standards (IFRS).
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
21.
Types of adjusting entries include deferral of unearned revenue, which requires the company to record a liability on the statement of financial position.
Ans: T, LO 1, BT: K, Difficulty: Hard, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
22.
Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities.
Ans: F, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
23.
Accrued revenues are revenues which have been received but not yet earned.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
24.
The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.
Ans: F, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
25.
Accumulated Depreciation is a liability account and has a credit normal account balance.
Ans: F, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
26.
A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.
Ans: T, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
27.
The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.
Ans: F, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
28.
Unearned revenue is a prepayment that requires an adjusting entry when services are performed.
Ans: T, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 29.
3-5
A contra asset account is subtracted from a related account in the statement of financial position.
Ans: T, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Communications, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
30.
If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.
Ans: F, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
31.
The cost of a depreciable asset less accumulated depreciation is the book value of the asset.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
32.
Adjusting entries impact at least one income statement and at least one statement of financial position account.
Ans: T, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
33.
An example of an adjusting entry that increases an expense on the income statement and decreases an asset on the statement of financial position is the expiration of prepaid expenses with the passage of time.
Ans: T, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
34.
A contra account found on the statement of financial position behaves contrary to accounting rules by being debited on the right and credited on the left.
Ans: F, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
35.
Unearned revenue on the books of Chocolate Company, the landlord, can be a prepaid asset on the statement of financial position of its tenant, Cupcake, Inc.
Ans: T, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
36.
When a company receives cash for future service, it debits unearned revenue on the income statement and credits cash on the statement of financial position.
Ans: F, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
37.
Unearned revenue is reported on the income statement whereas deferred revenue is reported on the statement of financial position.
Ans: F, LO 2, BT: K, Difficulty: Medium TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
38.
An adjusting entry for accrued revenues increases an asset account on the statement of financial position and increases a revenue account on the income statement.
Ans: T, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
39.
Accrued expenses result in an adjustment to both the income statement and the statement of financial position.
Ans: T, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
40.
Accrued revenues are revenues that have been earned and received before financial statements have been prepared.
Ans: F, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
41.
Financial statements can be prepared from the information provided by an adjusted trial balance.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3-6 42.
Test Bank for Financial Accounting: IFRS Edition, 4e The accounts in the adjusted trial balance contain all the data the company needs to prepare its statement of financial position.
Ans: T, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
43.
The total amount of debits on the adjusted trial balance will equal the amount of assets on the statement of financial position.
Ans: F, LO 4, BT: K, Difficulty: Hard, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
44.
In an adjusted trial balance, all assets and liabilities reported on the statement of financial position are properly stated.
Ans: T, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
45.
Under GAAP revaluation to fair value of items such as land and building is permitted, which is not permitted under IFRS.
Ans: F, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
46.
The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.
Ans: T, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving a
47.
Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.
Ans: T, LO 5, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
48.
An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.
Ans: F, LO 5, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
49.
To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.
Ans: F, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
50.
Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.
Ans: T, LO 6, Bloom: C, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
51.
Consistency in accounting means that a company uses the same accounting principles from one accounting period to the next accounting period.
Ans: T, LO 6, Bloom: C, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
52.
The quality of consistency pertains to the use of the same accounting principles by firms in the same industry.
Ans: F, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
53.
The time period assumption states that the business will remain in operation for the foreseeable future.
Ans: F, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Adjusting the Accounts a
54.
3-7
For accounting purposes, business transactions should be kept separate from the personal transactions of the shareholders of the business.
Ans: T, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA a
55.
The economic entity assumption states that economic events can be identified with a particular unit of accountability.
Ans: T, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Reporting a
56.
The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.
Ans: T, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA a
57.
The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.
Ans: T, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics a
58.
A common application of materiality is weighing the factual nature of cost figures versus the relevance of fair value.
Ans: F, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: FSA
Additional True-False Questions 59.
The expense recognition principle requires that expenses be matched with revenues.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
60.
In general, adjusting entries are required each time financial statements are prepared.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
61.
Every adjusting entry affects one statement of financial position account and one income statement account.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
62.
The Accumulated Depreciation account is a contra asset account that is reported on the statement of financial position.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
63.
Accrued revenues are amounts recorded and received but not yet earned.
Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
64.
An adjusted trial balance should be prepared before the adjusting entries are made.
Ans: F, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3-8 a
65.
Test Bank for Financial Accounting: IFRS Edition, 4e When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.
Ans: F, LO 8, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
MULTIPLE CHOICE QUESTIONS 66.
Monthly and quarterly time periods are called a. calendar periods. b. fiscal periods. c. interim periods. d. quarterly periods.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
67.
The time period assumption states that a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.
Ans: d, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
68.
An accounting time period that is one year in length, but does not begin on January 1, is referred to as a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.
Ans: a, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
69.
Adjustments would not be necessary if financial statements were prepared to reflect net income from a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.
Ans: d, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
70.
Management usually desires ________ financial statements and the taxing authorities require all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly
Ans: b, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
71.
The time period assumption is also referred to as the a. calendar assumption. b. cyclicity assumption. c. periodicity assumption. d. fiscal assumption. For Instructor Use Only
Adjusting the Accounts
3-9
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
72.
In general, the shorter the time period, the difficulty of making the proper adjustments to accounts a. is increased. b. is decreased. c. is unaffected. d. depends on if there is a profit or loss.
Ans: a, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
73.
Which of the following is not a common time period chosen by businesses as their accounting period? a. Daily b. Monthly c. Quarterly d. Annually
Ans: a, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
74.
Which of the following time periods would not be referred to as an interim period? a. Monthly b. Quarterly c. Semi-annually d. Annually
Ans: d, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
75.
The fiscal year of a business is usually determined by a. a government agency. b. Shareholders. c. the business. d. the IASB.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
76.
Which of the following is in accordance with IFRS? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting
Ans: a, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
For Instructor Use Only
3 - 10 77.
Test Bank for Financial Accounting: IFRS Edition, 4e The revenue recognition principle dictates that revenue should be recognized in the accounting records a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.
Ans: b, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
78.
In a service-type business, revenue is considered earned a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
79.
The expense recognition principle matches a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses.
Ans: b, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
80.
Ron's Hot Rod Shop follows the revenue recognition principle. Ron services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Ron on August 5. Ron receives the check in the mail on August 6. When should Ron show that the revenue was earned? a. July 31 b. August 1 c. August 5 d. August 6
Ans: a, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
81.
A company spends $10 million dollars for an office building. Over what period should the cost be written off? a. When the $10 million is expended in cash. b. All in the first year. c. Over the useful life of the building. d. After $10 million in revenue is earned.
Ans: c, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
82.
The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends to shareholders should be matched with shareholders' investments. d. cash payments should be matched with cash receipts.
Ans: b, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
For Instructor Use Only
Adjusting the Accounts 83.
3 - 11
A flower shop makes a large sale and provides flowers to a customer for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows IFRS and applies the revenue recognition principle. When is the $1,000 considered to be earned? a. December 5. b. December 10. c. November 30. d. December 1.
Ans: c, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
84.
A candy factory's employees work overtime to finish an order that is sold and shipped on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in a. February. b. March. c. the period when the workers receive their checks. d. either in February or March depending on when the pay period ends.
Ans: a, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
85.
Expenses sometimes make their contribution to revenue in a different period than when they are paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the statement of financial position at the end of the time period? a. Due from Employees. b. Due to Employer. c. Salaries and Wages Payable. d. Salaries and Wages Expense.
Ans: c, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
86.
Under accrual-basis accounting a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under IFRS.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
87.
Adjusting entries are required a. yearly. b. quarterly. c. monthly. d. every time financial statements are prepared.
Ans: d, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
88.
Which one of the following is not an application of revenue recognition? a. Recording revenue as an adjusting entry on the last day of the accounting period. b. Accepting cash from an established customer for services to be performed over the next three months. c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.
Ans: b, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 12 89.
Test Bank for Financial Accounting: IFRS Edition, 4e Which statement is correct? a. As long as a company consistently uses the cash basis of accounting, IFRS allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting.
Ans: b, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
90.
The following is selected information from Alpha-Beta-Gamma Corporation for the fiscal year ending October 31, 2020. Cash received from customers €600,000 Revenue earned 660,000 Cash paid for expenses 340,000 Cash paid for computers on November 1, 2019 that will be used for 3 years (annual depreciation is $32,000) 96,000 Expenses incurred, including interest, but excluding any depreciation 400,000 Proceeds from a bank loan, part of which was used to pay for the computers 200,000 Based on the accrual basis of accounting, what is Alpha-Beta-Gamma Corporation’s net income for the year ending October 31, 2020? a. €388,000. b. €228,000. c. €124,000. d. €260,000.
Ans: b, LO 1, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
91.
Wing Company had the following transactions during 2019: • • • •
Sales of ¥72,000 on account Collected ¥32,000 for services to be performed in 2020 Paid ¥10,000 cash in salaries Purchased airline tickets for ¥4,000 in December for a trip to take place in 2020
What is Wing’s 2019 net income using accrual accounting? a. ¥62,000. b. ¥94,000. c. ¥90,000. d. ¥58,000. Ans: a, LO 1, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
92.
Wing Company had the following transactions during 2019: • • • •
Sales of ¥72,000 on account Collected ¥32,000 for services to be performed in 2020 Paid ¥10,000 cash in salaries Purchased airline tickets for ¥4,000 in December for a trip to take place in 2020
For Instructor Use Only
Adjusting the Accounts
3 - 13
What is Wing’s 2019 net income using cash basis accounting? a. ¥94,000. b. ¥22,000. c. ¥90,000. d. ¥18,000. Ans: d, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
93.
Under International Financial Reporting Standards (IFRS) a. the cash-basis method of accounting is acceptable. b. events are recorded in the period in which the event occurs. c. interim period financial statements are either a calendar year or a fiscal year. d. a fiscal year is an accounting time period encompassing less than 12 months.
Ans: b, LO 1, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
94.
The expense recognition principle refers to a. recognizing revenue in the period when it is earned. b. matching the revenue reported on the income statement with the receivable reported on the statement of financial position. c. letting expenses follow revenues. d. dividing the life of the business into artificial time periods.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
95.
When companies record transactions in the period in which the events occur, ______ is being applied. a. accrual-basis accounting. b. the time period assumption. c. the matching of the income statement with the statement of financial position. d. the expense recognition principle.
Ans: a, LO 1, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
96.
A small company may be able to justify using a cash basis of accounting if they have a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.
Ans: c, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
97.
Which of the following adjustments would require decreasing the liabilities reported on the statement of financial position? a. A company uses $400 worth of supplies during the year. b. A company records $400 worth of depreciation on equipment. c. A company has earned $400 of revenue collected at the beginning of the year. d. A company records $400 of wages earned by employees that will be paid next year.
Ans: c, LO 1, BT: K, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
98.
Adjusting entries a. ensure that the revenue recognition and expense recognition principles are followed. b. are necessary to enable the financial statements to conform to International Financial Reporting Standards (IFRS). c. include both accruals and deferrals d. all of these answer choices are correct.
Ans: d, LO 1, BT: K, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
For Instructor Use Only
3 - 14 99.
Test Bank for Financial Accounting: IFRS Edition, 4e Adjusting entries are required a. because some costs expire with the passage of time and have not yet been journalized. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are incurred. d. when revenues are recorded in the period in which they are earned.
Ans: a, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
100. A company must make adjusting entries a. to ensure that the revenue recognition and expense recognition principles are followed. b. each time it prepares an income statement and a statement of financial position. c. to account for accruals or deferrals. d. all of these answer choices are correct. Ans: d, LO 1, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem solving
101.
Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that revenue recognition principles are followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. c. Adjusting entries are necessary to enable financial statements to be in conformity with IFRS. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.
Ans: d, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
102.
An adjusting entry a. affects two statement of financial position accounts. b. affects two income statement accounts. c. affects a statement of financial position account and an income statement account. d. is always a compound entry.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
103.
The preparation of adjusting entries is a. straight forward because the accounts that need adjustment will be out of balance. b. often an involved process requiring the skills of a professional. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.
Ans: b, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
104.
If a resource has been consumed but a bill has not been received at the end of the accounting period, then a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received.
Ans: c, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 105.
Accounts often need to be adjusted because a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.
Ans: b, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
106.
Adjusting entries are a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to statement of financial position accounts only.
Ans: b, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
107.
Expenses incurred but not yet paid or recorded are called a. prepaid expenses. b. accrued expenses. c. interim expenses. d. unearned expenses.
Ans: b, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
108.
An asset—expense relationship exists with a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
109.
Adjusting entries can be classified as a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.
Ans: b, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
110.
Accrued revenues are a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
111.
Prepaid expenses are a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
Ans: a, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 15
3 - 16 112.
Test Bank for Financial Accounting: IFRS Edition, 4e Accrued expenses are a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
113.
Unearned revenues are a. received and recorded as liabilities before they are earned. b. earned and recorded as liabilities before they are received. c. earned but not yet received or recorded. d. earned and already received and recorded.
Ans: a, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
114.
A liability—revenue relationship exists with a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries.
Ans: c, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
115.
Which of the following reflect the balances of prepayment accounts prior to adjustment? a. Statement of financial position accounts are understated and income statement accounts are understated. b. Statement of financial position accounts are overstated and income statement accounts are overstated. c. Statement of financial position accounts are overstated and income statement accounts are understated. d. Statement of financial position accounts are understated and income statement accounts are overstated.
Ans: c, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
116.
A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.
Ans: d, LO 2, BT:C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
117.
Bee-In-The-Bonnet Company purchased office supplies costing $8,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of supplies revealed $2,200 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be a. Debit Supplies Expense, $2,200; Credit Supplies, $2,200. b. Debit Supplies, $5,800; Credit Supplies Expense, $5,800. c. Debit Supplies Expense, $5,800; Credit Supplies, $5,800. d. Debit Supplies, $2,200; Credit Supplies Expense, $2,200.
Ans: c, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 118.
3 - 17
If an adjustment is needed for unearned revenues, the a. liability and related revenue are overstated before adjustment. b. liability and related revenue are understated before adjustment. c. liability is overstated and the related revenue is understated before adjustment. d. liability is understated and the related revenue is overstated before adjustment.
Ans: c, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
119.
The balance in the supplies account on June 1 was $5,200, supplies purchased during June were $3,500, and the supplies on hand at June 30 were $2,000. The amount to be used for the appropriate adjusting entry is a. $5,500. b. $3,500. c. $10,700. d. $6,700.
Ans: d, LO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
120.
Depreciation expense for a period is computed by taking the a. original cost of an asset – accumulated depreciation. b. depreciable cost ÷ depreciation rate. c. depreciable cost of the asset ÷ useful life. d. market value of the asset ÷ useful life.
Ans: c, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
121.
Accumulated Depreciation is a. an expense account. b. an equity account. c. a liability account. d. a contra asset account.
Ans: d, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
122.
Hercules Company purchased a computer for $4,500 on December 1. It is estimated that annual depreciation on the computer will be $900. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. Debit Depreciation Expense, $900; Credit Accumulated Depreciation, $900. b. Debit Depreciation Expense, $75; Credit Accumulated Depreciation, $75. c. Debit Depreciation Expense, $3,600; Credit Accumulated Depreciation, $3,600. d. Debit Office Equipment, $4,500; Credit Accumulated Depreciation, $4,500.
Ans: b, LO 2, BT: AN, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
123.
Action Real Estate received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a tenant. Unearned Rent Revenue was credited for the full $24,000. Financial statements will be prepared on July 31. Action Real Estate should make the following adjusting entry on July 31: a. Debit Unearned Rent Revenue, $4,000; Credit Rent Revenue, $4,000. b. Debit Rent Revenue, $4,000; Credit Unearned Rent Revenue, $4,000. c. Debit Unearned Rent Revenue, $24,000; Credit Rent Revenue, $24,000. d. Debit Cash, $24,000; Credit Rent Revenue, $24,000.
Ans: a, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 18 124.
Test Bank for Financial Accounting: IFRS Edition, 4e As prepaid expenses expire with the passage of time, the correct adjusting entry will be a a. debit to an asset account and a credit to an expense account. b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account. d. debit to an expense account and a credit to an expense account.
Ans: b, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
125.
A company usually determines the amount of supplies used during a period by a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.
Ans: d, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
126.
If a company fails to make an adjusting entry to record supplies expense, then a. equity will be understated. b. expenses will be understated. c. assets will be understated. d. net income will be understated.
Ans: b, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
127.
What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, € 41,000, and unexpired amounts per analysis of policies of € 8,000? a. Debit Insurance Expense, € 8,000; Credit Prepaid Insurance, € 8,000. b. Debit Insurance Expense, € 41,000; Credit Prepaid Insurance, € 41,000. c. Debit Prepaid Insurance, € 33,000; Credit Insurance Expense, € 33,000. d. Debit Insurance Expense, € 33,000; Credit Prepaid Insurance, € 33,000.
Ans: d, LO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
128.
At December 31, 2020, before any year-end adjustments, Cable Car Company's Insurance Expense account had a balance of £5,800 and its Prepaid Insurance account had a balance of £15,200. It was determined that £12,800 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a. £12,800. b. £5,800. c. £18,600. d. £8,200.
Ans: c, LO 2, BT: AN, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
129.
Depreciation is the process of a. valuing an asset at its fair value. b. increasing the value of an asset over its useful life in a rational and systematic manner. c. allocating the cost of an asset to expense over its useful life in a rational and systematic manner. d. writing down an asset to its real value each accounting period.
Ans: c, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 130.
3 - 19
A new accountant working for Unitas Company records $800 Depreciation Expense on store equipment as follows: Depreciation Expense ............................................. 800 Cash ............................................................... 800 The effect of this entry is to a. adjust the accounts to their proper amounts on December 31. b. understate total assets on the statement of financial position as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31.
Ans: c, LO 2, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
131.
From an accounting standpoint, the acquisition of productive facilities can be thought of as a long-term a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepayment for services.
Ans: d, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
132.
The balance in the Prepaid Rent account before adjustment at the end of the year is ¥15,000, which represents three months’ rent paid on December 1. The adjusting entry required on December 31 is to a. debit Rent Expense, ¥5,000; credit Prepaid Rent, ¥5,000. b. debit Rent Expense, ¥10,000; credit Prepaid Rent ¥10,000. c. debit Prepaid Rent, ¥5,000; credit Rent Expense, ¥5,000. d. debit Prepaid Rent, ¥10,000; credit Rent Expense, ¥10,000.
Ans: a, LO 2, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
133.
An accumulated depreciation account a. is a contra-liability account. b. increases on the debit side. c. is offset against total assets on the statement of financial position. d. has a normal credit balance.
Ans: d, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
134.
The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the a. fair value of the asset. b. blue book value of the asset. c. book value of the asset. d. depreciated difference of the asset.
Ans: c, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
135.
If a business has several types of non-current assets such as equipment, buildings, and trucks, a. there should be only one accumulated depreciation account. b. there should be a separate accumulated depreciation account for each type of asset. c. all the long-term asset accounts will be recorded in one general ledger account. d. there won't be a need for an accumulated depreciation account.
Ans: b, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 20
Test Bank for Financial Accounting: IFRS Edition, 4e
136.
Which of the following would not result in unearned revenue? a. Rent collected in advance from tenants b. Services performed on account c. Sale of season tickets to football games d. Sale of two-year magazine subscriptions
Ans: b, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
137.
If business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue.
Ans: c, LO 2, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
138.
Unearned revenue is classified as a. an asset account. b. a revenue account. c. a contra-revenue account. d. a liability account.
Ans: d, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
139.
If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be a. debit Unearned Service Revenue and credit Cash. b. debit Unearned Service Revenue and credit Service Revenue. c. debit Unearned Service Revenue and credit Prepaid Expense. d. debit Unearned Service Revenue and credit Accounts Receivable.
Ans: b, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
140.
Speedy Clean Laundry purchased € 6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only € 1,000 on hand. The adjusting entry that should be made by the company on June 30 is a. Debit Supplies Expense, €1,000; Credit Supplies, €1,000. b. Debit Supplies, €1,000; Credit Supplies Expense, €1,000. c. Debit Supplies, € 5,500; Credit Supplies Expense, € 5,500. d. Debit Supplies Expense, € 5,500; Credit Supplies, € 5,500.
Ans: d, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
141.
On July 1, Runner’s Sports Store paid $12,000 to Acme Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Runner’s Sports Store is a. Debit Rent Expense, $12,000; Credit Prepaid Rent, $3,000. b. Debit Prepaid Rent, $3,000; Credit Rent Expense, $3,000. c. Debit Rent Expense, $3,000; Credit Prepaid Rent, $3,000. d. Debit Rent Expense, $12,000; Credit Prepaid Rent, $12,000.
Ans: c, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 142.
3 - 21
Middle City College sold season tickets for the 2020 football season for $400,000. A total of 8 games will be played during September, October and November. In September, three games were played. The adjusting journal entry at September 30 a. is not required. No adjusting entries will be made until the end of the season in November. b. will include a debit to Cash and a credit to Ticket Revenue for $100,000. c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $150,000. d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $133,333.
Ans: c, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
143.
Middle City College sold season tickets for the 2020 football season for $400,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Ticket Revenue at October 31 is a. $0. b. $100,000. c. $150,000. d. $250,000.
Ans: c, LO 2, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
144.
Middle City College sold season tickets for the 2020 football season for $400,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Ticket Revenue balance that will be reported on the December 31 statement of financial position will be a. $0. b. $150,000. c. $250,000. d. $400,000.
Ans: a, LO 2, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
145.
At March 1, 2020, Jupiter Corp. had supplies on hand of £1,000. During the month, Jupiter purchased supplies of £2,400 and used supplies of £2,000. The March 31 adjusting journal entry should include a a. debit to the supplies account for £2,000. b. credit to the supplies account for £1,000. c. debit to the supplies account for £2,400. d. credit to the supplies account for £2,000.
Ans: d, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
146.
Henry-K Company purchased a computer system for €5,400 on January 1, 2020. The company expects to use the computer system for 3 years. It has no residual value. Monthly depreciation expense on the asset is a. €0. b. €150. c. €1,800. d. €5,400.
Ans: b, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 22 147.
Test Bank for Financial Accounting: IFRS Edition, 4e Hardwood Supplies Inc. purchased a 12-month insurance policy on March 1, 2020 for ₤ 3,000. At March 31, 2020, the adjusting journal entry to record expiration of this asset will include a a. debit to Prepaid Insurance and a credit to Cash for ₤ 3,000. b. debit to Prepaid Insurance and a credit to Insurance Expense for ₤ 300. c. debit to Insurance Expense and a credit to Prepaid Insurance for ₤ 250 d. debit to Insurance Expense and a credit to Cash for ₤ 250.
Ans: c, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
148.
Daly Investments purchased an 18-month insurance policy on May 31, 2020 for ₤12,600. The December 31, 2020 statement of financial position would report Prepaid Insurance of a. ₤0 because Prepaid Insurance is reported on the Income Statement. b. ₤4,900. c. ₤7,700. d. ₤12,600.
Ans: c, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
149.
At March 1, Progressive Auto Inc. reported a balance in Supplies of €600. During March, the company purchased supplies for €2,250 and consumed supplies of €1,800. If no adjusting entry is made for supplies a. equity will be overstated by €1,800. b. expenses will be understated by €2,250. c. assets will be understated by €1,050 d. net income will be understated by €1,800.
Ans: a, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
150.
Y-B-2 Inc. pays its rent of €90,000 annually on January 1. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following will be true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by €7,500 and net income and equity will be understated by €7,500. c. Assets will be overstated by €15,000 and net income and equity will be understated by €15,000. d. Assets will be overstated by €7,500 and net income and equity will be overstated by €7,500.
Ans: d, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
151.
On January 1, 2019, P.T. Scope Company purchased a computer system for $8,100. The company expects to use the system for 3 years. The asset has no residual value. The book value of the system at December 31, 2020 is a. $0. b. $2,700. c. $5,400. d. $8,100.
Ans: b, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 152.
3 - 23
On January 1, 2019, Grills and Grates Inc. purchased equipment for £90,000. The company is depreciating the equipment at the rate of £1,200 per month. At January 31, 2020, the balance in Accumulated Depreciation is a. £1,200. b. £14,400. c. £15,600. d. £74,400.
Ans: c, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
153.
On January 1, 2019, Masters and Masters Company purchased equipment for € 60,000. The company is depreciating the equipment at the rate of € 1,400 per month. The book value of the equipment at December 31, 2019 is a. € 0. b. €16,800. c. € 43,200. d. € 60,000.
Ans: c, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
154.
O.K.C. Company collected $21,000 in September of 2019 for 4 months of service which would take place from October of 2019 through January of 2020. The revenue reported from this transaction during 2019 would be a. 0. b. $15,750. c. $21,000. d. $5,025.
Ans: b, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
155.
Turner Company collected $26,000 in September of 2019 for 5 months of service which would take place from October of 2019 through February of 2020. The revenue reported from this transaction during 2019 would be a. $0. b. $15,600. c. $26,000. d. $10,400.
Ans: b, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
156.
Niagara Corporation purchased a one-year insurance policy in January 2019 for €24,000. The insurance policy is in effect from March 2019 through February 2020. If the company neglects to make the proper year-end adjustment for the expired insurance a. Net income and assets will be understated by €20,000. b. Net income and assets will be overstated by €20,000. c. Net income and assets will be understated by €4,000. d. Net income and assets will be overstated by €4,000.
Ans: b, LO 2, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 24 157.
Test Bank for Financial Accounting: IFRS Edition, 4e James Corporation purchased a one-year insurance policy in January 2019 for € 24,000. The insurance policy is in effect from May 1, 2019 through April 30, 2020. If the company neglects to make the proper year-end adjustment for the expired insurance a. Net income and assets will be understated by € 16,000. b. Net income and assets will be overstated by € 16,000. c. Net income and assets will be understated by € 8,000. d. Net income and assets will be overstated by € 8,000.
Ans: b, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
158.
Sele, Inc. purchased supplies costing ₤7,000 on January 1, 2020 and recorded the transaction by increasing assets. At the end of the year ₤2,600 of the supplies are still on hand. How will the adjusting entry impact Sele, Inc.’s statement of financial position at December 31, 2020? a. Decreased Assets ₤2,600. b. Increased Equity ₤2,600. c. Increased Liabilities ₤4,400. d. Decreased Assets ₤4,400.
Ans: d, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
159.
Sele, Inc. purchased supplies costing ₤7,000 on January 1, 2020 and recorded the transaction by increasing assets. At the end of the year ₤2,600 of the supplies are still on hand. If Sele, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2020? a. Assets overstated by ₤ 4,400. b. Equity understated by ₤ 4,400. c. Equity overstated by ₤ 2,600. d. Assets overstated by ₤ 2,600.
Ans: a, LO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
160.
Sele, Inc. purchased a building on January 1, 2020 for ₤ 1,200,000. The useful life of the building is 10 years with no salvage value. What impact will the appropriate adjusting entry at December 31, 2020 have on its statement of financial position at December 31, 2020? a. Increased Equity ₤ 120,000. b. Increased Liabilities ₤ 120,000. c. Decreased Assets ₤ 120,000. d. Since the adjusting entry has offsetting debits and credits, there is no impact on the statement of financial position.
Ans: c, LO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
161.
Sele, Inc. purchased a building on January 1, 2020 for ₤ 1,200,000. The useful life of the building is 10 years with no salvage value. The asset is reported on the December 31, 2020 statement of financial position at ₤ 1,080,000. What was the impact of the adjusting entry recorded by Sele, Inc.? a. Decreased Equity ₤ 120,000. b. Increased Liabilities ₤ 120,000. c. Increased Assets ₤ 120,000. d. All of these answer choices are correct.
Ans: a, LO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 162.
3 - 25
Iron Inn is a resort located in Canada. Iron Inn collects cash when guests make a reservation. During December 2019, Iron Inn collected €150,000 of cash and recorded the receipt by recognizing unearned revenue. By the end of the month Iron Inn had earned one third of this amount, the other two thirds will be earned during January 2020. The adjusting entry required at December 31, 2019 would impact the statement of financial position by a. Increased Equity €100,000. b. Decreased Liabilities €50,000. c. Increased Assets €150,000. d. Decreased Equity €50,000.
Ans: b, LO 2, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
163.
Iron Inn is a resort located in Canada. During December 2019 Iron Inn collects €200,000 cash related to a conference booked by the Spin Jammers. The conference is scheduled for February 12 and 13, 2020. Which of the following is true regarding how this transaction is reported on the December 31, 2019 statement of financial position? a. Spin Jammers reports unearned revenue of €200,000. b. Iron Inn reports a prepaid asset of €200,000. c. Iron Inn reports unearned revenue of €200,000. d. All of these answer choices are correct.
Ans: c, LO 2, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
164.
Bread Basket provides baking supplies to restaurants and grocery stores. During December 2020, Bread Basket’s employees worked 2,400 hours at an average rate of €15 per hour. At December 31, 2020, Bread Basket has paid €21,000 of salary expense. If Bread Basket fails to make the appropriate adjusting entry, which of the following is true regarding its December 31, 2020 statement of financial position? a. Equity is overstated by € 21,000. b. Equity is understated by € 15,000. c. Liabilities are understated by € 15,000. d. Liabilities are overstated by € 21,000.
Ans: c, LO 3, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
165.
Bread Basket provides baking supplies to restaurants and grocery stores. On November 1, 2020, Bread Basket signed a €600,000, 6-month note payable. The note requires Bread Basket to pay interest at an annual rate of 6%. Assuming Bread Basket makes the appropriate adjusting entry, what is the impact on its December 31, 2020 statement of financial position? a. An expense of € 18,000. b. An expense of €12,000. c. A liability of € 6,000. d. An expense of €18,000 and a liability of.€18,000.
Ans: c, LO 3, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 26 166.
Test Bank for Financial Accounting: IFRS Edition, 4e Bread Basket provides baking supplies to restaurants and grocery stores. On November 1, 2020, Bread Basket signed a €700,000, 6-month note payable. The note requires Bread Basket to pay interest at an annual rate of 6%. Bread Basket’s accountant is a recent college graduate who lacks practical experience. Therefore, the appropriate adjusting entry is not made. What is the impact on its December 31, 2020 statement of financial position? a. Assets are overstated by € 21,000. b. Equity is overstated by € 21,000. c. Liabilities are understated by € 21,000. d. Liabilities are understated by € 7,000.
Ans: d, LO 3, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
167.
Iron Inn is a resort located in Canada. During December 2020 Spin Jammers held its annual conference at the resort. The charges related to the conference total € 400,000, of which 25% has been paid by Spin Jammers. When Iron Inn makes the appropriate adjusting entry, which of the following is a part of the adjustment made to its December 31, 2020 statement of financial position? a. Debit Cash € 300,000. b. Credit Revenue € 300,000. c. Credit Cash € 300,000. d. Debit Cash and credit Revenue € 300,000.
Ans: b, LO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
168.
Which of the following statements is false regarding adjusting entries? a. Cash is neither debited nor credited as a result of adjusting entries. b. Each adjusting entry affects one statement of financial position account and one income statement account. c. Each adjusting entry affects one revenue account and one expense account. d. Adjusting entries involve accruals or deferrals.
Ans: c, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
169.
If an adjusting entry is not made for an accrued revenue, a. assets will be overstated. b. expenses will be understated. c. equity will be understated. d. revenues will be overstated.
Ans: c, LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
170.
If an adjusting entry is not made for an accrued expense, a. expenses will be overstated. b. liabilities will be understated. c. net income will be understated. d. equity will be understated.
Ans: b, LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 171.
3 - 27
Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities.
Ans: c, LO 3, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
172.
Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.
Ans: b, LO 3, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
173.
Betty Carson has performed $500 of accounting services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Betty make? a. Debit Cash and credit Unearned Service Revenue b. Debit Accounts Receivable and credit Unearned Service Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Service Revenue and credit Service Revenue
Ans: c, LO 3, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
174.
Betty Carson, an accountant, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will Betty make upon receipt of the payments? a. Debit Unearned Service Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue
Ans: b, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
175.
Sherman Air Charter signed a four-month note payable in the amount of $12,000 on September 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of September is a. $240. b. $60. c. $720. d. $180.
Ans: b, LO 3, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 28 176.
Test Bank for Financial Accounting: IFRS Edition, 4e Joyce’s Gifts signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $50,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense................................................................... 500 Interest Payable ........................................................... 500 b. Interest Expense................................................................... 7,500 Interest Payable ........................................................... 7,500 c. Interest Expense................................................................... 500 Cash ............................................................................ 500 d. Interest Expense................................................................... 500 Note Payable ............................................................... 500
Ans: a, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
177.
Cindi’s Candies paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $900 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense .............................................. 900 Salaries and Wages Payable ...................................... 900 b. Salaries and Wages Expense .............................................. 4,500 Salaries and Wages Payable ...................................... 4,500 c. Salaries and Wages Expense .............................................. 2,700 Salaries and Wages Payable ...................................... 2,700 d. No adjusting entry is required.
Ans: c, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
178.
A company shows a balance in Salaries and Wages Payable of ¥48,000 at the end of the month. The next payroll amounting to ¥54,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a. Salaries and Wages Expense .............................................. 54,000 Salaries and Wages Payable ...................................... 54,000 b. Salaries and Wages Expense .............................................. 54,000 Cash ............................................................................ 54,000 c. Salaries and Wages Expense .............................................. 6,000 Cash ............................................................................ 6,000 d. Salaries and Wages Expense .............................................. 6,000 Salaries and Wages Payable ............................................... 48,000 Cash ............................................................................ 54,000
Ans: d, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
179.
A business pays weekly salaries of $30,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on a Thursday is a. debit Salaries and Wages Payable, $24,000; credit Cash, $24,000. b. debit Salaries and Wages Expense, $24,000; credit Cash, $24,000. c. debit Salaries and Wages Expense, $24,000; credit Salaries and Wages Payable, $24,000. d. debit Salaries and Wages Expense, $6,000; credit Salaries and Wages Payable, $6,000.
Ans: c, LO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 180.
3 - 29
Jenni’s Music Store borrowed $60,000 from the bank signing a 7%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be a. b. c. d.
Debit Interest Expense, $4,200; Credit Interest Payable, $4200. Debit Interest Expense, $350; Credit Interest Payable, $350. Debit Note Payable, $4,200; Credit Cash, $4,200 Debit Cash, $1,050; Credit Interest Payable, $1,050.
Ans: b, LO 3, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
181.
Becki Jean Corporation issued a one-year, 6%, £500,000 note on April 30, 2020. Interest expense for the year ended December 31, 2020 was a. £30,000. b. £22,500. c. £20,000. d. £17,500.
Ans: c, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
182.
RAS Corporation issued a one-year, 6%, €400,000 note on August 31, 2020. Interest expense for the year ended December 31, 2020 was a. € 24,000. b. € 10,000. c. € 8,000. d. € 6,000.
Ans: c, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
183.
Employees at Julian Corporation are paid € 20,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salary expense should be recorded two days later on January 2? a. € 20,000 b. € 12,000 c. None, matching requires the weekly salary to be accrued on December 31. d. € 8,000
Ans: d, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
184.
Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used. b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts. c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose. d. They can because that is the only reason that an adjusted trial balance is prepared.
Ans: b, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
185.
The adjusted trial balance is prepared a. after financial statements are prepared. b. before the trial balance. c. to prove the equality of total assets and total liabilities. d. after adjusting entries have been journalized and posted.
Ans: d, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 30 186.
Test Bank for Financial Accounting: IFRS Edition, 4e An adjusted trial balance a. is prepared after the financial statements are completed. b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c. is a required financial statement under IFRS. d. cannot be used to prepare financial statements.
Ans: b, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
187.
Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. b. An adjusted trial balance can be used to prepare financial statements. c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d. An adjusted trial balance is prepared before all transactions have been journalized.
Ans: d, LO 4, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
188.
A document prepared to prove the equality of debits and credits after all adjustments have been prepared is the a. adjusted statement of financial position. b. adjusted trial balance. c. adjusted financial statements. d. post-closing trial balance.
Ans: b, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
189.
Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP include all of the following except a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP. b. Both IFRS and U.S. GAAP allow revaluation of items such as land and building to fair value. c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time periods. d. The form and content of financial statements are very similar under IFRS and U.S. GAAP.
Ans: b, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
190.
Cara, Inc. purchased supplies costing €7,500 on January 1, 2020 and recorded the transaction by debiting an expense. At the end of the year €3,000 of the supplies are still on hand. If Cara, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2020? a. Assets understated by €4,500. b. Equity understated by €4,500. c. Equity overstated by €3,000. d. Assets understated by €3,000.
Ans: d, LO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 191.
3 - 31
Wave Inn is a resort located in Canada. Wave Inn collects cash when guests make a reservation. During December 2019, Wave Inn collected $90,000 of cash and recorded the receipt by recognizing revenue. By the end of the month Wave Inn had earned one third of this amount, the other two thirds will be earned during January 2020. The adjusting entry required at December 31, 2019 would impact the statement of financial position by a. Decreased Equity $60,000. b. Decreased Liabilities $60,000. c. Increased Assets $90,000. d. Increased Equity $30,000.
Ans: a, LO 5, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
192. Myron is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Myron purchased €3,000 of supplies in January and his inventory at the end of January shows €800 of supplies remaining. What adjusting entry should Myron make on January 31? a. Supplies Expense ................................................................ 800 Supplies....................................................................... 800 b. Supplies Expense ................................................................ 3,000 Cash ............................................................................ 3,000 c. Supplies ............................................................................... 800 Supplies Expense........................................................ 800 d. Supplies Expense ................................................................ 2,200 Supplies....................................................................... 2.200
Ans: c, LO 5, BT: C, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a
193. Alternative adjusting entries do not apply to a. accrued revenues and accrued expenses. b. prepaid expenses. c. unearned revenues. d. prepaid expenses and unearned revenues.
Ans: a, LO 5, BT:C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a
194. Mike Conway is a lawyer who requires that his clients pay him in advance of legal services rendered. Mike routinely credits Service Revenue when his clients pay him in advance. In June Mike collected €20,000 in advance fees and completed 75% of the work related to these fees. What adjusting entry is required by Mike's firm at the end of June? a. Unearned Service Revenue ................................................ 15,000 Service Revenue ........................................................ 15,000 b. Unearned Service Revenue ................................................ 5,000 Service Revenue ........................................................ 5,000 c. Cash .................................................................................... 20,000 Service Revenue ........................................................ 20,000 d. Service Revenue ................................................................. 5,000 Unearned Service Revenue ....................................... 5,000
Ans: d, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 32 a
Test Bank for Financial Accounting: IFRS Edition, 4e
195. If prepaid expenses are initially recorded in expense accounts and have not all been used at the end of the accounting period, then failure to make an adjusting entry will cause a. assets to be understated. b. assets to be overstated. c. expenses to be understated. d. contra-expenses to be overstated.
Ans: a, LO 5, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
196. If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause a. liabilities to be overstated. b. revenues to be understated. c. revenues to be overstated. d. accounts receivable to be overstated.
Ans: c, LO 5, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
197. On January 2, 2020, National Credit and Cash purchased a general liability insurance policy for ₤6,000 for coverage for the calendar year. The entire ₤6,000 was charged to Insurance Expense on January 2, 2020. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2020, will be: a. Insurance Expense ............................................................... 5,500 Prepaid Insurance ....................................................... 5,500 b. Prepaid Insurance ................................................................ 5,500 Insurance Expense ...................................................... 5,500 c. Insurance Expense ............................................................... 500 Prepaid Insurance ....................................................... 500 d. Prepaid Insurance ................................................................ 500 Insurance Expense ...................................................... 500
Ans: b, LO 5, BT: AN, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving a
198. Information that is presented in a clear fashion, so that reasonably informed users of that information can interpret it is an example of a. relevance. b. faithful representation. c. understandability. d. comparability.
Ans: c, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
199. Accounting information should be verifiable in order to enhance a. comparability. b. faithful representation. c. consistency. d. relevance.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Adjusting the Accounts a
3 - 33
200. If accounting information has relevance, it is useful in making predictions about a. future tax audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company.
Ans: d, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
201. Which one of the following is not an enhancing quality of useful information? a. Timelines b. Understandability c. Monetary Unit d. Comparability
Ans: c, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
202. All of the following are characteristics of accounting information except a. faithful representation. b. comparability. c. relevance. d. flexibility.
Ans: d, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
203. The two fundamental qualities of useful information are a. verifiability and timeliness. b. relevance and faithful representation. c. comparability and flexibility. d. understandability and consistency.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
204. Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision.
Ans: d, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
205. Characteristics associated with relevant accounting information are a. comparability and timeliness. b. predictive value and confirmatory value. c. neutral and verifiable. d. consistency and understandability.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
3 - 34 a
Test Bank for Financial Accounting: IFRS Edition, 4e
206. Characteristics associated with faithfully representative accounting information are a. verifiable and timely. b. neutral and verifiable. c. complete and neutral. d. relevance and verifiable.
Ans: c, LO6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
207. Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Faithful representation is the quality of information that gives assurance that it is free from error. c. Relevant accounting information must be capable of making a difference in the decision. d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
208. An item is considered material if a. it doesn't cost a lot of money. b. it is of a tangible good. c. its size or nature is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits.
Ans: c, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
209.
A company using the same accounting principles from year to year is an application of a. timelines. b. consistency. c. full disclosure. d. materiality.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
210. Which of the following is a constraint in accounting? a. Comparability. b. Cost. c. Consistency. d. Relevance.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
211. The periodicity assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods.
Ans: c, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Adjusting the Accounts a
3 - 35
212. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitment? a. Monetary unit assumption. b. Economic entity assumption. c. Periodicity assumption. d. Going concern assumption.
Ans: d, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
213. The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the IASB. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for.
Ans: d, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
214. Which of the following is not an accounting assumption? a. Integrity. b. Going concern. c. Periodicity. d. Economic entity.
Ans: a, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
215. The periodicity assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
216. Valuing assets at their fair value rather than at their cost is inconsistent with the: a. economic entity assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principles.
Ans: b, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
217. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency
Ans: c, LO 6, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
3 - 36 218.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following statements concerning accrual-basis accounting is incorrect? a. Accrual-basis accounting follows the revenue recognition principle. b. Accrual-basis accounting is the method required by IFRS. c. Accrual-basis accounting recognizes expenses when they are paid. d. Accrual-basis accounting follows the expense recognition principle.
Ans: c, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
219.
The revenue recognition principle dictates that revenue be recognized in the accounting period a. before it is earned. b. after it is earned. c. in which the performance obligation is satisfied. d. in which it is collected.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
220.
An expense is recorded under the cash basis only when a. services are performed. b. it is earned. c. cash is paid. d. it is incurred.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
221.
For prepaid expense adjusting entries a. an expense—liability account relationship exists. b. prior to adjustment, expenses are overstated and assets are understated. c. the adjusting entry results in a debit to an expense account and a credit to an asset account. d. none of these.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
222.
Expenses paid and recorded as assets before they are used are called a. accrued expenses. b. interim expenses. c. prepaid expenses. d. unearned expenses.
Ans: c, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
223.
Sail & Surf Cruises purchased a five-year insurance policy for its ships on April 1, 2020 for €120,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2020 is a. Prepaid Insurance ................................................................ 18,000 Insurance Expense ....................................................... 18,000 b. Insurance Expense ............................................................... 18,000 Prepaid Insurance ......................................................... 18,000 c. Insurance Expense ............................................................... 24,000 Prepaid Insurance ......................................................... 24,000 d. Insurance Expense ............................................................... 6,000 Prepaid Insurance ......................................................... 6,000
Ans: b, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 224.
3 - 37
CHS Company purchased a truck from JLS Corp. by issuing a 6-month, 8% note payable for $45,000 on November 1. On December 31, the accrued expense adjusting entry is a. No entry is required. b. Interest Expense .................................................................. 3,600 Interest Payable ............................................................ 3,600 c. Interest Expense .................................................................. 7,200 Interest Payable ............................................................ 7,200 d. Interest Expense .................................................................. 600 Interest Payable ............................................................ 600
Ans: d, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
225.
If the adjusting entry for depreciation is not made, a. assets will be understated. b. equity will be understated. c. net income will be understated. d. expenses will be understated.
Ans: d, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
226.
BJ, an employee of Walker Corp., will not receive her paycheck until April 2. Based on services performed from March 16 to March 31, her salary was $800. The adjusting entry for Walker Corp. on March 31 is a. Salaries and Wages Expense ................................................ 800 Salaries and Wages Payable.......................................... 800 b. No entry is required. c. Salaries and Wages Expense ................................................ 800 Cash ............................................................................... 800 d. Salaries and Wages Payable ................................................. 800 Cash ............................................................................... 800
Ans: a, LO 3, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
227.
Which of the following statements related to the adjusted trial balance is incorrect? a. It shows the balances of all accounts at the end of the accounting period. b. It is prepared before adjusting entries have been made. c. It proves the equality of the total debit balances and the total credit balances in the ledger. d. Financial statements can be prepared directly from the adjusted trial balance.
Ans: b, LO 4, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
228.
Financial statements are prepared directly from the a. general journal. b. ledger. c. trial balance. d. adjusted trial balance.
Ans: d, LO 4, BT: AP, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 38
Test Bank for Financial Accounting: IFRS Edition, 4e
BRIEF EXERCISES BE 229 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. Unrecorded interest on savings bonds is $245. 2. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. 3. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. 4. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired. Solution 229 1. 2. 3. 4.
(3 min.)
AR AE UR PE
LO 1, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 39
BE 230 Prepare adjusting entries for the following transactions. Omit explanations. 1. Depreciation on equipment is €800 for the accounting period. 2. There was no beginning balance of supplies and purchased €700 of office supplies during the period. At the end of the period €100 of supplies were on hand. 3. Prepaid rent had a €1,000 normal balance prior to adjustment. By year end €800 was unexpired. Solution 230
(6 min.)
1. Depreciation Expense ...................................................................... Accumulated Depreciation—Equipment .................................
800
2. Supplies Expense ............................................................................ Supplies .................................................................................. (€700 – €100)
600
3. Rent Expense .................................................................................. Prepaid Rent ........................................................................... (€1,000 – €800)
200
800 600
200
LO 2, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 231 On June 1, during its first month of operations, Soufflé Masters purchased supplies for $3,500 and debited the supplies account for that amount. At June 30, an inventory of supplies showed $1,000 of supplies on hand. What adjusting journal entry should be made for June? Solution 231
(3 min.)
Supplies Expense ........................................................................ Supplies ...........................................................................
2,500 2,500
LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 232 On January 1, Bit & Bridle, CPAs received an $18,000 cash retainer for services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is earned equally over the 3-month period, what adjusting journal entry should be made at January 31? Solution 232
(3 min.)
Unearned Service Revenue......................................................... Service Revenue.................................................................
6,000 6,000
LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 40
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 233 On February 1, Results Income Tax Service received a ₤4,000 cash retainer for tax preparation services to be rendered equally over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is earned equally over the 4-month period, what balance would be reported on the February 28 statement of financial position for Unearned Revenue? Solution 233
(5 min.)
Revenue earned monthly = ₤4,000/ 4 months = ₤1,000 per month Feb 28 balance in Unearned Service Revenue = ₤4,000 - ₤1,000 revenue earned in February = ₤3,000 LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 234 Jeff Anderer Enterprises purchased computer equipment on May 1, 2020 for $5,400. The company expects to use the equipment for 3 years. It has no residual value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (annual depreciation is $1,800)? 2. What is the book value of the equipment at May 31, 2020? Solution 234
(5 min.)
1. Depreciation Expense ................................................................. Accumulated Depreciation ................................................. 2. Cost Accumulated Depreciation Book value
150 150
$5,400 – 150 $5,250
LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 235 Rhodes National purchased software on October 1, 2020 for ₤18,000. The company expects to use the software for 3 years. It has no residual value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? (annual depreciation is ₤6,000) 2. What balance will be reported on the December 31, 2020 statement of financial position for Accumulated Depreciation? Solution 235
(5 min.)
1. Depreciation Expense ................................................................. Accumulated Depreciation .................................................
500
2. Balance in Accumulated Depreciation at December 31, 2020: 3 months × ₤500 per month = ₤1,500 LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
500
Adjusting the Accounts
3 - 41
BE 236 Daily Printings sold annual subscriptions to their magazine for $30,000 in December, 2019. The magazine is published monthly. The new subscribers received their first magazine in January, 2020. 1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? 2. What amount will be reported on the January 2020 statement of financial position for Unearned Subscription Revenue? Solution 236
(5 min.)
1. Unearned Subscription Revenue ............................................... Subscription Revenue .....................................................
2,500 2,500
2. Unearned Subscription Revenue at January 31: $30,000 – $2,500 = $27,500 LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 237 On January 1, 2020, Dimes and Quarters Corp. purchased a general liability insurance policy for $9,000 to provide coverage for the calendar year. 1. If the company recorded the policy as an asset when purchased, what is the adjusting journal entry that should be recorded at January 31, 2020? *2. If the company expensed the cost of the policy on January 1, 2020, what is the adjusting entry that should be recorded at January 31, 2020? Solution 237
(5 min.)
1. Insurance Expense .................................................................... Prepaid Insurance ..............................................................
750
*2. Prepaid Insurance ...................................................................... Insurance Expense .............................................................
8,250
750 8,250
LO 2 and 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 238 Identify the impact on the statement of financial position if the following information is not used to adjust the accounts. 1. Supplies consumed totaled ¥3,000. 2. Interest accrues on notes payable at the rate of ¥200 per month. 3. Insurance of ¥450 expired during the month. 4. Plant and equipment are depreciated at the rate of ¥1,200 per month.
For Instructor Use Only
3 - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 238 1. 2. 3. 4.
(5 min.)
Assets overstated and equity overstated by ¥3,000. Liabilities understated and equity overstated by ¥200. Assets overstated and equity overstated by ¥450. Assets overstated and equity overstated by ¥1,200.
LO 3, BT: AN, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 239 Determine the impact on the statement of financial position accounts if the following information is not used to adjust the accounts of Fortress Company for the month of January, 2020. Round answers to the nearest dollar. 1. The company rents extra office space to B & J, CPAs. B & J pays the $24,000 rent annually on January 1. 2. The company has an outstanding loan to its President in the amount of $120,000. The loan accrues interest at the annual rate of 6%. Principal and interest are due January 1, 2023. 3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $2,500. Solution 239
(5 min.)
1. Liabilities overstated and equity understated by $2,000. 2. Assets understated and equity understated by $600. 3. Assets understated and equity understated by $2,500. LO 3, BT: AN, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 240 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA). _____
1.
Failure to record revenue earned but not yet received.
_____
2.
Failure to record expired prepaid rent.
_____
3.
Failure to record accrued interest on the bank savings account.
_____
4.
Failure to record depreciation.
_____
5.
Failure to record accrued wages.
_____
6.
Failure to recognize the earned portion of unearned revenues.
Solution 240 1. 2. 3. 4. 5. 6.
(5 min.)
U O U O NA NA
LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 43
BE 241 Ramona’s Music School borrowed $30,000 from the bank signing a 6%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)? Solution 241
(3 min.)
Interest Expense ($30,000 × 6% × 1/12) ......................................... Interest Payable.....................................................................
150 150
LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
BE 242 The adjusted trial balance of Rocky Acre Spread Inc. on December 31, 2020 includes the following accounts: Accumulated Depreciation, ₤6,000; Depreciation Expense, ₤2,000; Note Payable ₤7,500; Interest Expense ₤150; Utilities Expense, ₤300; Rent Expense, ₤500; Service Revenue, ₤16,600; Salaries and Wages Expense, ₤4,000; Supplies, ₤200; Supplies Expense, ₤1,200; Salaries and Wages Payable, ₤600. Prepare an income statement for the month of December. Solution 242
(10 min.) Rocky Acre Spread Inc. Income Statement For the Month Ended December 31, 2020
Service Revenue Expenses: Salaries and Wages expense Depreciation expense Supplies expense Rent expense Utilities expense Interest expense Net Income
₤16,600 ₤4,000 2,000 1,200 500 300 150
8,150 ₤8,450
LO 4, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 243 The adjusted trial balance of Allen’s Automotive Service Company on June 30, 2020 includes the following accounts: Supplies, $300; Accumulated Depreciation, $8,500; Salaries and Wages Payable, $550, Note Payable $5,000; Service Revenue, $24,100; Salaries and Wages Expense, $12,750; Depreciation Expense, $2,250; Supplies Expense, $1,000; Rent Expense, $400; Utilities Expense, $350; and Interest Expense $250. Prepare an income statement for the month of June.
For Instructor Use Only
3 - 44
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 243
(10 min.) Allen’s Automotive Service Company Income Statement For the Month Ended June 30, 2020
Service revenue Expenses: Salaries and wages expense Depreciation expense Supplies expense Rent expense Utilities expense Interest expense Net Income
$24,100 $12,750 2,250 1,000 400 350 250
17,000 $7,100
LO 4, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 244 The adjusted trial balance of Wilcox Company at December 31, 2020 includes the following accounts: Retained Earnings $12,600; Dividends $6,000; Service Revenue $35,000; Salaries and Wages Expense $16,000; Insurance Expense $2,000; Rent Expense $3,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year. Solution 244
(5 min.)
WILCOX COMPANY Retained Earnings Statement For the Year Ended December 31, 2020 ——————————————————————————————————————————— Retained earnings, January 1 $12,600 Plus: Net Income 12,000* 24,600 Less: Dividends 6,000 Retained earnings, December 31 $18,600 *$35,000 − $16,000 − $2,000 − $3,500 − $500 − $1,000 LO 4, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
BE 245 The adjusted trial balance of Hanson Hawk Corporation at September 30, 2020 includes the following accounts: Retained Earnings €27,700; Dividends €9,750; Sales Revenue €44,800; Insurance Expense €1,950; Salaries and Wages Expense €18,000; Rent Expense €3,000; Supplies Expense €650; and Depreciation Expense €1,100. Prepare a retained earnings statement for the year.
For Instructor Use Only
Adjusting the Accounts Solution 245
3 - 45
(10 min.)
HANSON HAWK CORPORATION Retained Earnings Statement For the Year Ended September 30, 2020 ——————————————————————————————————————————— Retained earnings, January 1 €27,700 Plus: Net Income 20,100* 47,800 Less: Dividends 9,750 Retained earnings, December 31 €38,050 *€44,800 − €1,950 − €18,000 − €3,000 − €650 − €1,100 LO 4, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
a
BE 246
The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below. a. b. c. d.
Confirmatory value Neutral Predictive value Relevant
e. f. g.
Faithful representation Timely Verifiable
_____ 1. Accounting information that is not biased toward one position or another. _____ 2. Providing information before it loses its capacity to influence decision. _____ 3. Independent measures, using the same methods, obtain similar results. _____ 4. Providing information that would make a difference in a business decision. _____ 5. Provide information that accurately depicts what really happened. _____ 6. Confirms or corrects prior decisions. LO 6, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 246
(5 min.)
1. b
3. g
5. e
2. f
4. d
6. a
For Instructor Use Only
3 - 46 a
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 247
Each of the following statements is justified by a fundamental quality or an enhancing quality of useful information. Write the letter in the blank next to each statement corresponding to the quality involved. a. b. c.
Comparability Understandability Verifiable
d. e. f.
Consistency Relevance Faithful representation
_____ 1. A company uses the same accounting principles from year to year. _____ 2. Information where independent measures, using the same methods, obtain similar results. _____ 3. Information presented in a clear and concise fashion. _____ 4. Information that makes a difference in a decision. _____ 5. Information accurately depicts what really happened. LO 6, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 247 1. d a
2. c
(5 min.) 3. b
4. e
5. f
BE 248
Presented below are the basic assumptions and principles underlying financial statements. a. b. c.
Historical cost principle Economic entity assumption Full disclosure principle
d. e. f.
Going concern assumption Monetary unit assumption Periodicity assumption
Identify the basic assumption or principle that is described below. _____ 1. The economic life of a business can be divided into artificial time periods. _____ 2. The business will continue in operation long enough to carry out its existing objectives. _____ 3. Assets should be recorded at their cost. _____ 4. Economic events can be identified with a particular unit of accountability. _____ 5. Circumstances and events that make a difference to financial statement users should be disclosed. _____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. LO 6, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 248 1. f
2. d
(5 min.) 3. a
4. b
5. c
6. e
For Instructor Use Only
Adjusting the Accounts
EXERCISES Ex. 249 The statements of financial position of Claude Company include the following: 12/31/20 12/31/19 Interest Receivable €4,300 € -0Supplies 5,000 3,000 Salaries and Wages Payable 4,100 3,800 Unearned Service Revenue -04,000 The income statement for 2020 shows the following: Interest Revenue Service Revenue Supplies Expense Salaries and Wages Expense
€16,400 75,700 10,700 41,000
Instructions Calculate the following for 2020: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for Salaries and wages. 4. Cash received for revenue. Solution 249
(15 min.)
1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received
€12,100 €16,400 4,300 €12,100
2. Cash paid for supplies = Supplies Expense Less: Supplies (2019)
€12,700 €10,700 3,000 7,700 5,000 €12,700
Add: Supplies (2020) Cash Paid 3. Cash paid for wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2019)
€40,700
Less: Salaries and Wages Payable (2020) Cash Paid
€41,000 3,800 44,800 4,100 €40,700
4. Cash received for revenue = Service Revenue Less: Unearned Service Revenue (2020) Cash Received
€75,700 4,000 €71,700
€71,700
LO 1, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 47
3 - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 250 Hal Corp. prepared the following income statement using the cash basis of accounting: HAL CORP. Income Statement, Cash Basis For the Year Ended December 31, 2019 Service revenue (does not include $25,000 of services rendered on account because the collection will not be until 2020) .................................................... Expenses (does not include $20,000 of expenses on account because payment will not be made until 2020) ................................................................ Net income ..............................................................................................................
$370,000 220,000 $150,000
Additional data: 1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above. 2. On January 1, 2019, paid for a two-year insurance policy on the automobile amounting to $2,400. This amount is included in the expenses above. Instructions (a) Recast the above income statement on the accrual basis in conformity with IFRS. Show computations and explain each change. (b)
Explain which basis (cash or accrual) provides a better measure of income.
Solution 250 (a)
(15 min.)
HAL CORP. Income Statement For the Year Ended December 31, 2019 Service revenue ............................................................................................... Expenses ......................................................................................................... Net income .......................................................................................................
$395,000 244,800 $150,200
Service revenue should include the $25,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($370,000 + $25,000 = $395,000). Expenses should include the $20,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $2,400 insurance premium since $1,200 applies to 2019. The other $1,200 is an asset and should be reflected on the statement of financial position as prepaid insurance. The $6,000 of depreciation for the automobile is included as an expense in 2019. ($220,000 + $20,000 – $1,200 + $6,000 = $244,800). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under IFRS and recognizes revenues when earned and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when earned and expenses when incurred. Additionally, expenses are not matched with revenues when earned; therefore, the expense recognition principle is violated. LO 1, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 49
Ex. 251 Before month-end adjustments are made, the February 28 trial balance of Alice’s Adventures contains revenue of $7,000 and expenses of $3,900. Adjustments are necessary for the following items: • Depreciation for February is $1,500. • Revenue earned but not yet billed is $2,300. • Accrued interest expense is $700. • Revenue collected in advance that is now earned is $3,500. • Portion of prepaid insurance expired during February is $600. Instructions Calculate the correct net income for Alice’s Income Statement for February. Solution 251
(5 min.)
Net Income before Adjustments ($7,000 – $3,900)
$ 3,100
Add: Unearned Service Revenues Accrued Revenues
$3,500 2,300
Subtract: Depreciation Expense Interest Expense Insurance Expense
1,500 700 600
Net Income after Adjustments
5,800 8,900
2,800 $ 6,100
LO 1, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 252 On December 31, 2020, Speedy Company prepared an income statement and a statement of financial position which failed to take into account three adjusting entries. The incorrect income statement showed net income of ¥40,000. The statement of financial position showed total assets, ¥140,000; total liabilities, ¥45,000; and equity, ¥95,000. The data for the three adjusting entries were: (1) Depreciation of ¥9,000 was not recorded on equipment. (2) Salaries and Wages amounting to ¥6,000 for the last two days in December were not paid and not recorded. The next payroll will be in January. (3) Rent of ¥10,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid. Instructions Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item Net Income Total Assets Total Liabilities Equity Incorrect balances Effects of: Depreciation
¥ 40,000
¥140,000
Salaries and Wages Rent Correct Balances For Instructor Use Only
¥ 45,000
¥ 95,000
3 - 50
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 252 Item
(5 min.) Net Income
Incorrect balances Effects of: Depreciation Salaries and Wages Rent Correct Balances
Total Assets
Total Liabilities
Equity
¥40,000
¥140,000
¥45,000
¥95,000
(9,000) (6,000) 5,000 ¥30,000
(9,000) 6,000 5,000 ¥136,000
¥51,000
(9,000) (6,000) 5,000 ¥85,000
LO 1, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 253 Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following: 1. 2. 3. 4.
Supplies of $200 have been used. Salaries of $600 are unpaid. Rent received in advance totaling $300 has been earned. Services provided but not recorded total $500.
Solution 253 (7 min.) (a) Type of Adjustment 1. Prepaid Expense
(b) Accounts before Adjustment Assets Overstated Expenses Understated
2.
Accrued Expense
Expenses Understated Liabilities Understated
3.
Unearned Revenue
Liabilities Overstated Revenues Understated
4.
Accrued Revenue
Assets Understated Revenues Understated
LO 1, BT: AP, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 254 Wham Company accumulates the following adjustment data at December 31. 1. Revenue of $800 collected in advance has been earned. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $450 has expired. 4. Supplies of $550 have been used. 5. Revenue earned but unbilled totals $750. 6. Utility expenses of $400 are unpaid. 7. Interest of $150 has accrued on a note payable.
For Instructor Use Only
Adjusting the Accounts Ex. 254
3 - 51
(cont.)
Instructions (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (expense/asset, liability/revenue, etc.). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $12,500. What is the adjusted net income? Prepare your answer in the tabular form presented below.
Type of Adjustment Solution 254
Account Relationship
Account Balances Before Adjustment (Understatement or Overstatement)
Adjusting Entry
(20 min.)
(a) Type of Account Adjustment Relationship 1. Unearned revenue. L/R
Account Balances Before Adjustment (Understatement or Overstatement) Liab. O Rev. U
Adjusting Entry Unearned Service Revenue Service Revenue
2. Accrued expense.
E/L
Exp. U Liab. U
Salary and Wages Expense Salaries and Wages Payable
3. Prepaid expense.
E/A
Exp. U Asset O
Rent Expense Prepaid Rent
4. Prepaid expense.
E/A
Exp. U Asset O
Supplies Expense Supplies
5. Accrued revenue.
A/R
Asset U Rev. U
Accounts Receivable Service Revenue
6. Accrued expense.
E/L
Exp. U Liab. U
Utilities Expense Accounts Payable
7. Accrued expense.
E/L
Exp. U Liab. U
Interest Expense Interest Payable
Codes: A = L = E =
Asset Liability Expense
R = O = U =
Revenue Overstatement Understatement
For Instructor Use Only
3 - 52
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 254
(cont.)
(b) Net income before adjustments..................................................... Add: Unearned service revenue (1) ........................................... Accrued revenue (5) ..........................................................
$12,500 $800 750
Less: Accrued salaries (2)........................................................... Prepaid rent expired (3) ..................................................... Supplies used (4)............................................................... Accrued utilities (6) ............................................................ Accrued interest (7) ........................................................... Adjusted net income ......................................................................
600 450 550 400 150
1,550 14,050
2,150 $11,900
LO 1, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 255 The adjusted trial balance of the Neighborly Lane Paving Company includes the following statement of financial position accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Statement of Financial Position Accounts Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries and Wages Payable 7. Unearned Service Revenue Solution 255
(15 min.) (a)
Statement of Financial Position Accounts
(b)
Type of Adjusting Entry
Related Account
1. Supplies
Prepaid Expense
Supplies Expense
2. Accounts Receivable
Accrued Revenue
Service Revenue
3. Prepaid Insurance
Prepaid Expense
Insurance Expense
4. Accumulated Depreciation— Equipment
Prepaid Expense
Depreciation Expense
5. Interest Payable
Accrued Expense
Interest Expense
6. Salaries and Wages Payable
Accrued Expense
Salaries and Wages Expense
7. Unearned Service Revenue
Unearned Revenues
Service Revenue
LO 1, BT: C, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 53
Ex. 256 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ____ 1. A revenue not yet earned; collected in advance. ____ 2. Office supplies on hand that will be used in the next period. ____ 3. Interest revenue collected; not yet earned. ____ 4. Rent not yet collected; already earned. ____ 5. An expense incurred; not yet paid or recorded. ____ 6. A revenue earned; not yet collected or recorded. ____ 7. An expense not yet incurred; paid in advance. ____ 8. Interest expense incurred; not yet paid. Solution 256 1. 2. 3. 4.
B A B C
(5 min.) 5. 6. 7. 8.
D C A D
LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 257 The Aces, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a)
Paid $120,000 to Kansas City as advance rent for use of Kansas City Stadium for the six month period April 1 through September 30.
(b)
Collected $240,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.
During the month of April, the Aces played four home games and five road games. Instructions Prepare the adjusting entries required at April 30 for the transactions above.
For Instructor Use Only
3 - 54
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 257
(5 min.)
(a) Rent Expense ................................................................................. Prepaid Rent......................................................................... ($120,000 ÷ 6 = $20,000)
20,000
(b) Unearned Ticket Revenue .............................................................. Ticket Revenue..................................................................... ($240,000 ÷ 20 = $12,000; $12,000 × 4 = $48,000)
48,000
20,000
48,000
LO 1 and 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 258 On July 1, 2020, Patrick Company pays ₤12,000 to its insurance company for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Patrick on July 1 and December 31. Solution 258 July 1 Dec. 31
(5 min.)
Prepaid Insurance ................................................................ Cash .................................................................................
12,000
Insurance Expense ............................................................... Prepaid Insurance (₤12,000 × 6/24) ................................
3,000
12,000 3,000
LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 259 On July 1, 2020, Jeffrey Underwriters Associates received $16,000 from a client for a 2-year insurance policy. Instructions Prepare the necessary journal entries for Jeffrey Underwriters Associates on July 1 and December 31. Solution 259 July 1 Dec. 31
(5 min.)
Cash ..................................................................................... Unearned Service Revenue ...........................................
16,000
Unearned Service Revenue ................................................. Service Revenue ($16,000 × 6/24) ................................
4,000
16,000
LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
4,000
Adjusting the Accounts
3 - 55
Ex. 260 Trench and Fog Garment Company purchased equipment on June 1 for $108,000, paying $24,000 cash and signing a 6%, 2-month note for the remaining balance. The equipment is depreciated $24,000 each year. Trench and Fog Garment Company prepares monthly financial statements. Instructions (a) Prepare the general journal entry to record the acquisition of the equipment on June 1st. (b) Prepare any adjusting journal entries that should be made on June 30th. (c) Show how the equipment will be reported on Trench and Fog Garment Company’s statement of financial position on June 30th. Solution 260
(10 min.)
(a) June 1 Equipment ...................................................................... Cash ...................................................................... Notes Payable ....................................................... (To record acquisition of equipment and signing of a 2-month, 6% note)
108,000
(b) June 30 Depreciation Expense .................................................... Accumulated Depreciation—Equipment................ (To record monthly depreciation) $24,000 ÷ 12 = $2,000/month
2,000
30 Interest Expense ............................................................ Interest Payable .................................................... (To accrue interest on notes payable) $84,000 × 6% × 1/12 = $420
420
(c) Assets Equipment Less: Accumulated Depreciation—Equipment
24,000 84,000
2,000
420
$108,000 2,000
$106,000
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 56
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 261 Scotsman Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September. SCOTSMAN COMPANY Trial Balance (Selected Accounts) September 30, 2020 ——————————————————————————————————————————— Debit Credit Supplies ................................................................................................. ₤ 2,700 Prepaid Insurance .................................................................................. 3,150 Office Equipment.................................................................................... 16,200 Accumulated Depreciation—Equipment ................................................ ₤1,000 Unearned Rent Revenue ....................................................................... 1,200 (Note: Debit column does not equal credit column because this is a partial listing of selected account balances) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of office supplies revealed ₤800 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for ₤3,600. 3. Office equipment depreciated ₤3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is ₤400. Instructions Using the above additional information, prepare the adjusting entries that should be made by Scotsman Company on September 30. Solution 261
(10 min.)
1. Supplies Expense ............................................................................ Supplies ................................................................................... (To record the amount of office supplies used)
1,900
2. Insurance Expense .......................................................................... Prepaid Insurance ................................................................... (To record insurance expired ₤3,600 ÷ 24)
150
3. Depreciation Expense ...................................................................... Accumulated Depreciation—Equipment .................................. (To record monthly depreciation ₤3,000 ÷ 12)
250
4. Unearned Rent Revenue ................................................................. Rent Revenue ......................................................................... (To record rent revenue earned)
800
1,900
150
250
LO 2, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
800
Adjusting the Accounts
3 - 57
Ex. 262 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 Moonbeam Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 worth of additional office supplies were purchased. A physical count of office supplies on hand at the end of the year revealed that $4,400 worth of office supplies had been used during the year. No adjusting entry has been made until year end. Case 2 Western Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $500 each month. No adjusting entry has been made until year end. Case 3 Ranch Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $800 per month apartments and one tenant in the $1,000 per month apartment had not paid their August rent as of August 31st. Solution 262
(10 min.)
Case 1—December 31 Supplies Expense ............................................................... Supplies .................................................................. (To record office supplies used during the year) Case 2—December 31 Depreciation Expense ........................................................ Accumulated Depreciation—Equipment ................. (To record depreciation expense for six months) $500 × 6 months = $3,000 Depreciation Case 3—August 31 Accounts Receivable .......................................................... Rent Revenue ......................................................... (To accrue rent earned but not yet received)
4,400 4,400
3,000 3,000
3,400 3,400
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 58
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 263 Angus Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. ANGUS INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Service Revenue ........................................................................... €35,000 Expenses Salaries and wages expense ........................................................ €6,000 Rent expense ................................................................................ 4,200 Depreciation expense.................................................................... 2,800 Advertising expense ...................................................................... 800 Total expenses .............................................................................. 13,800 Net income ............................................................................................. €21,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for €2,000 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of €20,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were €4,000. The agency purchased additional supplies during the month for €3,500 in cash and €1,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for €24,000 cash. The car will depreciate €6,000 per year. 5. Salaries owed to employees at the end of the month total €5,300. The salaries will be paid on July 5. Instructions Prepare a correct income statement. Solution 263
(15 min.)
ANGUS INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Service Revenue (€35,000 + €4,000) ........................................... €39,000 Expenses Salaries and wages expense (€6,000 + €5,300) ........................... €11,300 Supplies expense (€0 + €6,300) ................................................... 6,300 Rent expense ................................................................................ 4,200 Depreciation expense (€2,800 + €500) ......................................... 3,300 Utilities expense (€0 + €2,000) ...................................................... 2,000 Advertising expense ...................................................................... 800 Total expenses ..................................................................... 27,900 Net income ............................................................................................. €11,100 LO 2 and 3, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 59
Ex. 264 One part of eight adjusting entries is given below. Instructions Indicate the account title for the other part of each entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Solution 264 1. 2. 3. 4.
(5 min.)
Service Revenue Rent Expense Service Revenue Accumulated Depreciation
5. Utilities Payable 6. Interest Expense 7. Accounts Receivable or Unearned Service Revenue 8. Interest Revenue
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 265 For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry. 1. Depreciation Expense 2. Salaries and Wages Payable 3. Accounts Receivable 4. Supplies 5. Unearned Service Revenue Solution 265
(5 min.)
Account 1. Depreciation Expense 2. Salaries and Wages Payable 3. Accounts Receivable 4. Supplies 5. Unearned Service Revenue
Type of Entry Prepaid expense Accrued expense Accrued revenue Prepaid expense Unearned revenue
Related Account Accum. Depreciation Salaries and Wages Expense Service Revenue Supplies Expense Service Revenue
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
3 - 60
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 266 Prepare the necessary adjusting entry for each of the following: 1. Services provided but unrecorded totaled $900. 2. Accrued salaries at year-end are $1,000. 3. Depreciation for the year is $600. Solution 266
(5 min.)
1. Accounts Receivable ........................................................................ Service Revenue .....................................................................
900
2. Salaries and Wages Expense .......................................................... Salaries and Wages Payable ..................................................
1,000
3. Depreciation Expense ...................................................................... Accumulated Depreciation ......................................................
600
900 1,000 600
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 267 The following ledger accounts are used by the Chicago Heights Dog Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Ticket Revenue Advertising Expense Rent Expense Ticket Revenue Sales Revenue Instructions For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year. (a) On September 1, paid rent on the track facility for three months, $210,000. (b) On September 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $840,000. (c) On September 1, borrowed $300,000 from First National Bank by issuing a 9% note payable due in three months. (d) On September 5, schedules for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,000. (e) The accountant for the concessions company reported that gross receipts for September were $160,000. Ten percent is due to the track and will be remitted by October 10.
For Instructor Use Only
Adjusting the Accounts Solution 267
3 - 61
(15 min.)
(a) Journal Entry Prepaid Rent ........................................................................... Cash ...............................................................................
210,000
Adjusting Entry Rent Expense ......................................................................... Prepaid Rent ..................................................................
70,000
(b) Journal Entry Cash ....................................................................................... Unearned Ticket Revenue .............................................
840,000
Adjusting Entry Unearned Ticket Revenue ...................................................... Ticket Revenue .............................................................. ($840,000 ÷ 12 = $70,000) (c) Journal Entry Cash ....................................................................................... Note Payable .................................................................. Adjusting Entry Interest Expense ..................................................................... Interest Payable ............................................................. ($300,000 × .09 × 1 ÷ 12 = $2,250) (d) Journal Entry Prepaid Advertising ................................................................. Cash ............................................................................... Adjusting Entry Advertising Expense ............................................................... Prepaid Advertising ........................................................ ($3,000 × 20 ÷ 60 = $1,000)
210,000
70,000
840,000 70,000 70,000
300,000 300,000 2,250 2,250
3,000 3,000 1,000 1,000
(e) Journal Entry None Adjusting Entry Accounts Receivable .............................................................. Sales Revenue ...............................................................
16,000 16,000
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
3 - 62
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 268 Gwynn Company has an accounting fiscal year which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred. Date Amount Monday June 28 $3,000 Tuesday June 29 3,800 Wednesday June 30 3,500 Thursday July 1 3,000 Friday July 2 2,400 Instructions (a) Prepare any necessary adjusting journal entries that should be made at year end on June 30. (b) Prepare the journal entry to record the payment of the weekly payroll on July 2. Solution 268
(10 min.)
(a) June 30 Salaries and Wages Expense ........................................ Salaries and Wages Payable................................. (To accrue salaries incurred but not yet paid)
10,300
(b) July 2
10,300 5,400
Salaries and Wages Payable ......................................... Salaries and Wages Expense ........................................ Cash ...................................................................... (To record payment of July 2 payroll)
10,300
15,700
LO 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 269 On Friday of each week, Earle Company pays its factory personnel weekly wages amounting to ₤60,000 for a five-day work week. Instructions (a) Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday. (b) Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year. Solution 269 (a) Dec. 31 (b) Jan. 2
(5 min.) Salaries and Wages Expense ........................................ Salaries and Wages Payable.................................
36,000
Salaries and Wages Payable ......................................... Salaries and Wages Expense ........................................ Cash ......................................................................
36,000 24,000
36,000
60,000
LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 63
Ex. 270 Presented below is the Trial Balance and Adjusted Trial Balance for Matsui Company on December 31. MATSUI COMPANY Trial Balance(in 000) December 31 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash ¥ 2,000 ¥ 2,000 Accounts Receivable 2,800 3,900 Prepaid Rent 2,100 1,300 Supplies 1,200 700 Equipment 18,000 18,000 Accumulated Depreciation— Equipment ¥ 1,300 ¥ 1,500 Accounts Payable 2,700 3,200 Notes Payable 10,000 10,000 Interest Payable 120 Salaries and Wages Payable 600 Unearned Service Revenue 4,460 4,060 Share Capital-Ordinary 7,200 7,200 Dividends 3,200 3,200 Service Revenue 8,000 9,500 Salaries and Wages Expense 2,060 2,660 Utilities Expense 1,800 2,300 Rent Expense 500 1,300 Supplies Expense 500 Depreciation Expense 200 Interest Expense 120 Totals ¥33,660 ¥33,660 ¥36,180 ¥36,180 Instructions Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance. Solution 270
(15 min.)
Accounts Receivable ............................................................................. Service Revenue........................................................................... (To record revenue earned but not yet received)
1,100
Rent Expense ........................................................................................ Prepaid Rent ................................................................................. (To record expiration of prepaid rent)
800
Supplies Expense .................................................................................. Supplies ........................................................................................ (To record supplies used)
500
For Instructor Use Only
1,100
800
500
3 - 64
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 270
(cont.)
Depreciation Expense ............................................................................ Accumulated Depreciation—Equipment........................................ (To record depreciation expense)
200
Salaries and Wages Expense ................................................................ Salaries and Wages Payable ........................................................ (To record salaries owed, not yet paid)
600
Interest Expense .................................................................................... Interest Payable ............................................................................ (To record accrued interest payable)
120
Unearned Service Revenue ................................................................... Service Revenue ........................................................................... (To record revenue earned)
400
Utilities Expense..................................................................................... Accounts Payable.......................................................................... (To record receipt of utility bill)
500
200
600
120
400
500
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 271 Compute the net income for 2020 based on the following amounts presented on the adjusted trial balance of D-Lay Company. Accumulated Depreciation Depreciation Expense Salaries and Wages Expense Service Revenue Unearned Service Revenue Solution 271
$25,000 10,000 20,000 45,000 8,000
(5 min.)
Service Revenue Depreciation Expense Salaries and Wages Expense Net Income
$45,000 $10,000 20,000
30,000 $15,000
LO 7, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 65
Ex. 272 Ben Cartwright Pest Control has the following balances in selected accounts on December 31, 2020. Accounts Receivable € 0 Accumulated Depreciation – Equipment 0 Equipment 6,650 Interest Payable 0 Notes Payable 20,000 Prepaid Insurance 3,000 Salaries and Wages Payable 0 Supplies 2,940 Unearned Service Revenue 36,000 All of the accounts have normal balances. The information below has been gathered at December 31, 2020. 1. Depreciation on the equipment for 2020 is €1,250. 2. Ben Cartwright Pest Control borrowed €20,000 by signing a 6%, one-year note on July 1, 2020. 3. Ben Cartwright Pest Control paid €3,000 for 12 months of insurance coverage on October 1, 2020. 4. Ben Cartwright Pest Control pays its employees total salaries of €10,000 every Monday for the preceding 5-day week (Monday-Friday). On Monday, December 27, 2020, employees were paid for the week ending December 24, 2020. All employees worked the five days ending December 31, 2020. 5. Ben Cartwright Pest Control performed disinfecting services for a client in December 2020. The client will be billed €3,000. 6. On December 1, 2020, Ben Cartwright Pest Control collected €36,000 for disinfecting processes to be performed from December 1, 2020, through May 31, 2021. 7. A count of supplies on December 31, 2020, indicates that supplies of €750 are on hand. Instructions Prepare in journal form with explanations, the adjusting entries for the seven items listed for Ben Cartwright Pest Control. Solution 272 (1)
(2)
(3)
(15 min.)
Depreciation Expense ................................................................... Accumulated Depreciation - Equipment .................................. (To record depreciation for the period)
1,250
Interest Expense ........................................................................... Interest Payable ...................................................................... (To record accrued interest on note payable) [€20,000 ´ 6% ´ (6/12) = €600]
600
Insurance Expense ....................................................................... Prepaid Insurance ................................................................... (To recognize period insurance expense) [(€3000 / 12) ´ 3 = €750]
750
For Instructor Use Only
1,250
600
750
3 - 66
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 272 (4)
(5)
(6)
(7)
(cont.)
Salaries and Wages Expense ....................................................... Salaries and Wages Payable .................................................. (To record wages for the week)
10,000
Accounts Receivable ..................................................................... Service Revenue ..................................................................... (To record revenue earned but not yet received)
3,000
Unearned Service Revenue .......................................................... Service Revenue ..................................................................... (To record revenue earned with prior payment)
6,000
Supplies Expense.......................................................................... Supplies ................................................................................... (To record supplies expense) [€2,940 - €750 = €2,190]
2,190
10,000
3,000
6,000
2.190
LO 2 and 3, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 273 The trial balances before and after adjustments for Old Julian Company at the end of its fiscal year are presented below. Old Julian Company Trial Balance September 30, 2020 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 15,080 $ 15,080 Accounts Receivable 14,960 16,110 Supplies 2,760 885 Prepaid Insurance 5,800 1,450 Equipment 13,300 13,300 Accumulated Depreciation – Equip $ 5,220 $ 6,960 Accounts Payable 9,860 9,860 Salaries and Wages Payable 2,750 Unearned Service Revenue 2,175 1,150 Unearned Rent Revenue 2,100 525 Share Capital-Ordinary 18,395 18,395 Service Revenue 48,800 50,975 Rent Revenue 1,575 3,150 Salaries and Wages Expense 36,225 38,975 Supplies Expense 1,875 Insurance Expense 4,350 Depreciation Expense 1,740 $ 88,125 $ 88,125 $ 93,765 $ 93,765 0
Instructions Prepare the adjusting entries that were made.
For Instructor Use Only
0
Adjusting the Accounts Solution 273 (1)
(2)
(3)
(4)
(5)
(6)
(7)
3 - 67
(20 min.)
Accounts Receivable .................................................................... Service Revenue ..................................................................... (To record services not yet billed to customers)
1,150
Supplies Expense ......................................................................... Supplies .................................................................................. (To record supplies expense)
1,875
Insurance Expense ....................................................................... Prepaid Insurance ................................................................... (To recognize period insurance expense)
4,350
Depreciation Expense .................................................................. Accumulated Depreciation - Equipment .................................. (To record depreciation for the period)
1,740
Salaries and Wages Expense ....................................................... Salaries and Wages Payable .................................................. (To record salaries payable)
2,750
Unearned Service Revenue .......................................................... Service Revenue ..................................................................... (To record revenue earned with prior payment)
1,025
Unearned Rent Revenue .............................................................. Rent Revenue ......................................................................... (To record revenue earned with prior payment)
1,575
1,150
1,875
4,350
1,740
2,750
1,025
1,575
LO 4, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
Ex. 274 The Poway Animal Encounters operates a drive through tourist attraction. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following: Prepaid Rent Equipment Accumulated Depreciation—Equipment Unearned Ticket Revenue
$18,000 30,000 5,500 400
Other data: 1. Three months' rent had been prepaid on April 1. 2. The equipment is being depreciated at $6,000 per year. 3. The unearned ticket revenue represents tickets sold for future visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers.
For Instructor Use Only
3 - 68 Ex. 274
Test Bank for Financial Accounting: IFRS Edition, 4e (cont.)
Instructions (a) Calculate the following: 1. Monthly rent expense. 2. The age of the equipment in months. 3. The number of tickets sold on April 1. (b) Prepare the adjusting entries that were made by the Poway Animal Encounters on April 30. Solution 274 (a)
(15 min.)
1. $9,000. The $18,000 balance on the adjusted trial balance reflects two months remaining on the prepaid lease. This indicates that the monthly lease is $9,000. 2. The equipment is 11 months old. By dividing annual depreciation ($6,000) by 12, the monthly depreciation expense is $500. The accumulated depreciation account shows $5,500 which means that depreciation has been taken for 11 months. 3. 120 tickets were originally sold. Twenty tickets were used in April at $4.00 each. The adjusted trial balance shows a balance of $400 indicating that 100 tickets are still outstanding. By adding the 20 used in April to the 100 still remaining to be used, 120 tickets must have been sold on April 1.
(b)
1. Rent Expense .......................................................................... Prepaid Rent...................................................................
9,000
2. Depreciation Expense ............................................................. Accumulated Depreciation—Fencing .............................
500
3. Unearned Ticket Revenue ....................................................... Ticket Revenue............................................................... (20 × $4 = $80)
80
9,000 500
LO 2, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
80
Adjusting the Accounts
3 - 69
Ex. 275 The adjusted trial balance of C.S. Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31, 2020: 1. an income statement. 2. a retained earnings statement. 3. a statement of financial position. C.S. Financial Planners Adjusted Trial Balance (in 000) December 31, 2020 ——————————————————————————————————————————— Debit Credit Cash ...................................................................................................... ¥ 5,000 Accounts Receivable ............................................................................. 2,200 Supplies ................................................................................................. 2,800 Equipment .............................................................................................. 15,000 Accumulated Depreciation—Equipment ................................................ ¥ 4,500 Accounts Payable .................................................................................. 3,300 Unearned Service Revenue................................................................... 6,000 Share Capital-Ordinary .......................................................................... 10,000 Retained Earnings ................................................................................. 4,400 Dividends ............................................................................................... 2,500 Service Revenue ................................................................................... 4,300 Supplies Expense .................................................................................. 600 Depreciation Expense............................................................................ 2,500 Rent Expense ........................................................................................ 1,900 ¥32,500 ¥32,500 Solution 275
(20 min.)
1.
C.S. Financial Planners Income Statement (in 000) For the Month Ended December 31, 2020 ——————————————————————————————————————————— Revenues Service revenue ............................................................................ ¥ 4,300 Expenses Depreciation expense ................................................................... ¥2,500 Rent expense ................................................................................ 1,900 Supplies expense.......................................................................... 600 Total expenses ........................................................................ 5,000 Net loss .................................................................................................. ¥ (700) 2.
C.S. Financial Planners Retained Earnings Statement (in 000) For the Month Ended December 31, 2020 ——————————————————————————————————————————— Retained earnings, December 1 ............................................................ ¥4,400 Less: Net loss ...................................................................................... ¥ 700 Dividends ................................................................................... 2,500 3,200 Retained earnings, December 31 .......................................................... ¥1,200
For Instructor Use Only
3 - 70
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 275
(Cont.)
3.
C.S. Financial Planners Statement of Financial Position (in 000) December 31, 2020 ——————————————————————————————————————————— Assets Equipment .............................................................................................. ¥15,000 Less: Accumulated depreciation—equipment...................................... 4,500 ¥10,500 Supplies ................................................................................................ 2,800 Accounts receivable ............................................................................... 2,200 Cash ...................................................................................................... 5,000 Total assets ................................................................................... ¥20,500 Equity and Liabilities Equity Share capital-ordinary ................................................................... Retained earnings ........................................................................ Liabilities Accounts payable .......................................................................... Unearned service revenue ............................................................ Total equity and liabilities ..............................................................
¥10,000 1,200 3,300 6,000
¥11,200 9,300 ¥20,500
LO 4, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
Ex. 276 Wild Animal Presentations initiated operations on July 1, 2020. To manage the company, officers and managers have requested monthly financial statements starting July 31, 2020. The adjusted trial balance amounts at July 31 are shown below. Debits Credits Cash $ 8,180 Accumulated Depreciation – Equipment $ 1,340 Accounts Receivable 810 Notes Payable 6,300 Prepaid Rent 865 Accounts Payable 1,140 Supplies 1,660 Salaries and Wages Payable 360 Equipment 11,400 Interest Payable 40 Dividends 600 Unearned Ticket Revenue 580 Salaries and Wages Expense 7,145 Share Capital-Ordinary 5,000 Rent Expense 1,740 Retained Earnings 5,640 Depreciation Expense 665 Ticket Revenue 12,635 Supplies Expense 190 Sales Revenue 655 Utilities Expense 390 Total credits $ 33,690 Interest Expense 45 Total debits $ 33,690 (a) Determine the net income for the month of July. (b) Determine the total assets and total liabilities at July 31, 2020 for Wild Animal Presentations. (c) Determine the amount that appears for Retained earnings at July 31, 2020.
For Instructor Use Only
Adjusting the Accounts Solution 276 (a)
(b)
3 - 71
(15 min.) Revenues Ticket Revenue $ 12,635 Sales Revenue 655 Expenses Salaries and Wages Expense 7,145 Rent Expense 1,740 Depreciation Expense 665 Utilities Expense 390 Supplies Expense 190 Interest Expense 45 Net income
Assets Equipment $11,400 Accum. Deprec. – Equip 1,340 Supplies Prepaid Rent Accounts Receivable Cash Total assets
$ 10,060 1,660 865 810 8,180 $ 21,575
$ 13,290
10,175 $ 3,115
Liabilities Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Unearned Ticket Revenue Total liabilities
$ 6,300 1,140 360 40 580 $ 8,420
(c) Retained earnings, July 1, 2020 Plus: Net Income Less: Dividends Retained earnings, July 31, 2020
$ 5,640 3,115 8,755 600 $ 8,155
LO 4, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving a
Ex. 277
1. Arrow Company prepares monthly financial statements. On July 1, the Supplies account had a balance of $3,000. During July, additional office supplies were purchased for $3,800 and that amount was debited to Supplies Expense. On July 31, a physical count of office supplies revealed that there was $1,800 on hand. Prepare the adjusting journal entry that Arrow Company should make on July 31. 2. Fletching Rental Agency prepares monthly financial statements. On September 1, a check for $8,400 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30. a
Solution 277
1. July 31
2. Sept. 30
(5 min.) Supplies Expense .......................................................... Supplies ................................................................. (To record supplies used)
1,200
Rent Revenue ................................................................ Unearned Rent Revenue ...................................... (To record unearned rent)
7,000
1,200
LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
For Instructor Use Only
7,000
3 - 72
Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 278.
The ______________ assumption divides the economic life of a business into artificial time periods.
Ans: time period, LO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
279.
An accounting period that is one year in length is referred to as a ______________ year.
Ans: fiscal, LO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
280.
The ______________ principle gives accountants guidance as to when revenue is to be recorded.
Ans: revenue recognition, LO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
281.
In a service company, revenue is recognized when the service is ______________.
Ans: performed, LO 1, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
282.
The expense recognition ______________.
principle
attempts
to
match
______________
with
Ans: expenses, revenues, LO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
283.
Expenses paid and recorded in an asset account before they are used or consumed are called ______________. Revenue received and recorded as a liability before it is recognized is referred to as ______________.
Ans: prepaid expenses, unearned revenue, LO 2, BT: K, Difficulty: Easy, TOT: 0.5 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
284.
Failure to adjust a prepaid expense account for the amount expired will cause ______________ to be understated and ________________ to be overstated.
Ans: expenses, assets, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
285.
Depreciation is a ______________ allocation process rather than a process of ______________.
Ans: cost, valuation, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
286.
Depreciation expense for a period is an ______________ rather than a factual measurement of cost that has expired.
Ans: estimate, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
287.
An adjusting entry recording accrued salaries for a period indicates that Salaries Expense has been ________________ but has not yet been ________________ or recorded.
Ans: incurred, paid, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts 288.
3 - 73
An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.
Ans: equality, adjusting, LO 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective AICPA FN: Reporting, AICPA PC: Problem solving
289.
In accounting, _________________ results when different companies use the same accounting principles.
Ans: comparability, LO 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective AICPA FN: Reporting, AICPA PC: Problem solving
290.
______________ is a company-specific aspect of relevance where size is likely to influence the decision of an investor or creditor.
Ans: Materiality, LO 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective AICPA FN: Reporting, AICPA PC: Problem solving
Answers to Completion Statements 278. 279. 280. 281. 282. 283.
time period fiscal revenue recognition performed expenses, revenues prepaid expenses, unearned revenue
284. 285. 286. 287. 288. 289. 290.
expenses, assets cost, valuation estimate incurred, paid equality, adjusting comparability Materiality
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
MATCHING 291. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Time period assumption Fiscal year Revenue recognition principle Prepaid expenses Expense recognition principle
F. G. H. I. J.
Accrued revenues Depreciation Accumulated depreciation Accrued expenses Book value
____
1. A twelve month accounting period
____
2. Expenses paid before they are incurred
____
3. Cost less accumulated depreciation
____
4. Divides the economic life of a business into artificial time periods
____
5. Efforts are related to accomplishments
____
6. A contra asset account
____
7. Recognition of revenue when the performance obligation is satisfied
____
8. Revenues earned but not yet received
____
9. Expenses incurred but not yet paid
____ 10. A cost allocation process
Answers to Matching 1. 2. 3. 4. 5.
B D J A E
6. 7. 8. 9. 10.
H C F I G
LO 1, BT: C, Difficulty: Medium, TOT: 8 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem solving
For Instructor Use Only
Adjusting the Accounts
3 - 75
SHORT-ANSWER ESSAY QUESTIONS S-A E 292 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. Solution 292 The time period assumption divides the economic life of an accounting entity, such as a business enterprise, into arbitrary time periods. The revenue recognition and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under accrual- basis accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized; that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses; that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. LO 1, BT: C, Difficulty: Medium, TOT: 6 min., AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication
S-A E 293 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 293 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some of the recorded transactions have been recognized prematurely and (2) some effects on components of the accounting equation have not been recorded. Prepayments and deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are: prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are: salaries and wages payable, interest payable, and interest receivable. LO 1, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Measuring, AICPA PC: Problem solving
S-A E 294 You are visiting with a friend, Jim Bede, who wants to start a new business. During discussions on forming the business, Jim makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting? Prepare a response for Jim.
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 294 Considering the proper basis of accounting to use is an important decision that should be addressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recorded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when service are performed and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the statement of financial position. The business has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were earned. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the statement of financial position. Thus, the user can see that these assets are available for future use. Also, IFRS require the use of the accrual basis of accounting. It will be better to use the accrual basis of accounting. LO 1, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Communication, AICPA BB: None, AICPA FN: Decision modeling, AICPA PC: Communication
S-A E 295 The non-current liability section of Gamma Company’s statement of financial position includes the following accounts: Notes Payable Mortgage Payable Salaries and Wages Payable Accumulated Depreciation Total
$100,000 250,000 75,000 125,000 $550,000
Gamma Company is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as non-current liabilities.
For Instructor Use Only
Adjusting the Accounts
3 - 77
Solution 295 Salaries Payable should not be reported as a non-current liability. This represents the amounts owed to employees. If the company does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the statement of financial position. Are all of the notes payable actually non-current (due after one year)? If not, the portion due within one year should be reported as a current liability instead. LO 4, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication a
S-A E 296
You and the CEO of your company are waiting on an elevator. You are going to the 25th floor and the CEO is going to the 35th The CEO says "What is the difference between consistency and comparability?" You have two minutes to respond. What will you say? Solution 296 You have asked an excellent question and I am glad to respond. Consistency means that a company uses the same accounting principles and method each year. Decision makers can work accounting information, knowing that the company is consistently applying with the principles and method it has chosen. This is why it is so important that we carefully make these choices. There are procedures for making changes and communicating those changes to financial statement users. Comparability allows users to compare accounting information of different companies. The financial statement footnotes identify many of the principles and procedures that companies use. Comparisons can be made for companies within certain industries or other groupings. Ans: N/A, LO 6, Bloom: C, Difficulty: Medium, Min; 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting a
S-A E 297
Comparability and consistency are qualitative characteristics that make accounting information useful for decision-making purposes. Briefly explain the difference between these two characteristics and explain how they are related to each other. Solution 297 Comparability results when different companies use the same accounting principles and method, while consistency results when one company uses the same principles and methods from year to year. The two characteristics are related because information must possess relevance, faithful representation, comparability, and consistency to achieve the highest level of decision usefulness. In addition, accounting information for two entities cannot be comparable unless both companies practice consistency in their choice of principles and methods. Ans: N/A, LO 6, Bloom: C, Difficulty: Medium, Min; 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
S-A E 298 (Ethics) Pen & Stamp is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Pen & Stamp introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success. The success of the product has Fran Henley, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Ms. Henley then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best. Solution 298 The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. LO 5, BT: AP, Difficulty: Medium, TOT: 6 min., AACSB: Ethics, AICPA BB: None, AICPA FN: Decision modeling, AICPA PC: Professional demeanor
S-A E 299 (Communication) A new sales representative, Bill Godfrey, has just received his copy of the month-end financial reports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's bulletin board system: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't ... Right??! Is this how you guys lower our commissions? Reply to w.godfrey@sbd Required: Write a response to send to Bill. For Instructor Use Only
Adjusting the Accounts
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Solution 299 Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows: Bill—What a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Bill—unearned revenue is the result of your getting customers of the kind we like—they pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a liability—an obligation to make and ship products. So that's how we (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. You will receive your commissions the same month the company records the revenue as “earned.” (Take heart—It'll seem like Christmas all over again.) Thanks again for actually using the system. Talk to me again sometime. . . Reply to mking@sbd LO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Communication, AICPA BB: N, AICPA FN: Decision modeling, AICPA PC: Communication
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP Question 1. GAAP (a) requires that revenue not be recognized until cash is received. (b) allows revenue to be recognized when a customer makes an order. (c) provides only general guidance on revenue recognition, compared to the detailed guidance provided by IFRS. (d) provides the same type of guidance as IFRS for revenue recognition. Ans: d, LO 7, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics
2. Which of the following statements is false? (a) GAAP uses the cash basis of accounting. (b) GAAP requires that revenue and costs must be capable of being measured reliably. (c) GAAP employs accrual accounting. (d) GAAP employs the time period assumption. Ans: a, LO 7, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics
3. As a result of the revenue recognition project by the FASB and IASB: (a) revenue is no longer recorded unless cash has been received. (b) revenue recognition places more emphasis on when changes occur in related expenses. (c) revenue recognition places more emphasis on when revenue is realized. (d) revenue recognition places more emphasis on when the performance obligation is satisfied. Ans: d, LO 7, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics
4. Which of the following is false? (a) IFRS has fewer standards which address revenue recognition than GAAP. (b) Under IFRS, firms do not engage in the closing process. (c) Under IFRS, the term expense includes losses. (d) Under IFRS, the term income describes both revenues and gains. Ans: b, LO 7, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics
5. Accrual-basis accounting: (a) is not consistent with the GAAP conceptual frame work. (b) has been eliminated as a result of the IASB/FASB joint project on revenue recognition. (c) results in companies recording transactions that change a company’s financial statements. (d) is optional under GAAP. Ans: c, LO 7, Bloom: K, Difficulty: Easy, Min; 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE CHAPTER LEARNING OBJECTIVES 1. Prepare a worksheet. The steps in preparing a worksheet are as follows: (a) Prepare a trial balance on the worksheet. (b) Enter the adjustments in the adjustments columns. (c) Enter adjusted balances in the adjusted trial balance columns. (d) Extend adjusted trial balance amounts to appropriate financial statement columns. (e) Total the statement columns, compute net income (or net loss), and complete the worksheet. 2. Prepare closing entries and a post-closing trial balance. Closing the books occurs at the end of an accounting period. The process is to journalize and post closing entries and then underline and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed. A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances. 3. Explain the steps in the accounting cycle and how to prepare correcting entries. The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance. One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry. 4. Identify the sections of a classified statement of financial position. A classified statement of financial position categorizes assets as intangibles; property, plant, and equipment; long-term investments; and current assets. Liabilities are classified as either non-current or current. There is also an equity section, which varies with the form of business organization. a
5. Prepare reversing entries. Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.
4-2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
A worksheet is a mandatory form that must be prepared along with an income statement and statement of financial position.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
2.
If a worksheet is used, financial statements can be prepared before adjusting entries are journalized.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
3.
If total credits in the income statement columns of a worksheet exceed total debits, the enterprise has net income.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
4.
It is not necessary to prepare formal financial statements if a worksheet has been prepared because financial position and net income are shown on the worksheet.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
The adjustments on a worksheet can be posted directly to the accounts in the ledger from the worksheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
6.
The adjusted trial balance columns amounts of a worksheet are obtained by subtracting the adjustment columns amounts from the trial balance columns amounts.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
7.
The balance of the depreciation expense account will appear in the income statement debit column of a worksheet.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
8.
The procedures used to prepare the worksheet are the same under both IFRS and GAAP.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
9.
The last 2 columns on a worksheet contains data for the Retained Earnings Statements.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
10.
The format of the data in the Statement of Financial Position columns of the worksheet is the same as the format of the Statement of Financial Position.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
11.
No permanent account balances are changed in the closing process.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12.
Closing entries are unnecessary if the business plans to continue operating in the future and issue financial statements each year.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle 13.
4-3
The Dividends account is closed to the Income Summary account in order to properly determine net income (or loss) for the period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
14.
After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
15.
Closing revenue and expense accounts to the Income Summary account is an optional bookkeeping procedure.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
16.
Closing the Dividends account to Retained Earnings is not necessary if net income is greater than dividends paid during the period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
17.
The Dividends account is a permanent account whose balance is carried forward to the next accounting period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
18.
Closing entries are journalized after adjusting entries have been journalized.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
19.
The amounts appearing on an income statement should agree with the amounts appearing on the post-closing trial balance.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
20.
The post-closing trial balance is entered in the first two columns of a worksheet.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
21.
The post-closing trial balance only contains Statement of Financial Position account balances.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
22.
The purpose of the post-closing trial balances is to prove the equality of the Statement of Financial Position.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
23.
The order of the accounts in the post-closing trial balance is the same order as the accounts appearing in the Statement of Financial Position.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
24.
The preparation of a Statement of Financial Position is a required step in the accounting cycle.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4-4 25.
Test Bank for Financial Accounting: IFRS Edition, 4e Step number 6 in the accounting cycle includes preparation of the Statement of Financial Position.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
26.
A business entity has only one accounting cycle over its economic existence.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27.
Both correcting entries and adjusting entries always affect at least one statement of financial position account and one income statement account.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
28.
Correcting entries are made any time an error is discovered even though it may not be at the end of an accounting period.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
29.
An incorrect debit to Accounts Receivable instead of the correct account Notes Receivable does not require a correcting entry because total assets will not be misstated.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
30.
Correcting entries will never affect statement of financial position accounts.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
31.
Current assets are the first category of assets reported on the Statement of Financial Position.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
32.
IFRS permits the noncurrent classifications to be reported before the current classifications on the statement of financial position
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
33.
IFRS requires that current assets be reported on the statement of financial position in the order of their liquidity.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
34.
A company's operating cycle and fiscal year are usually the same length of time.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
35.
Cash and office supplies are both classified as current assets.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
36.
Long-term investments would appear in the property, plant, and equipment section of the statement of financial position.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 37.
4-5
A liability is classified as a current liability if the company is to pay it within the forthcoming year.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
38.
A company's liquidity is concerned with the relationship between long-term investments and long-term debt.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
39.
Intangible assets are customarily the first items listed on a classified statement of financial position.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
40.
The operating cycle of a company is determined by the number of years the company has been operating.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
41.
Reversing entries are an optional bookkeeping procedure.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
42.
Reversing entries will always affect statement of financial position accounts.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
43.
The use of reversing entries will change the amounts reported in the statement of financial position.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
44.
After a worksheet has been completed, the statement columns contain all data that are required for the preparation of financial statements.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
45.
To close net income to Retained Earnings Income Summary is debited and Retained Earnings is credited.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
46.
In one closing entry, the Dividends account is credited and Income Summary is debited.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
47.
The post-closing trial balance will contain only statement of equity accounts and statement of financial position accounts.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
48.
The operating cycle of a company is the average time required to collect the receivables resulting from producing revenues.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
4-6 49.
Test Bank for Financial Accounting: IFRS Edition, 4e Current assets are listed in the reverse order of liquidity on the statement of financial position.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
50.
Current liabilities are generally obligations that the company expects to pay within the coming year.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
MULTIPLE CHOICE QUESTIONS 51.
Preparing a worksheet involves a. two steps. b. three steps. c. four steps. d. five steps.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
52.
The adjustments entered in the adjustments columns of a worksheet are a. not journalized. b. posted to the ledger but not journalized. c. not journalized until after the financial statements are prepared. d. journalized before the worksheet is completed.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
53.
The information for preparing a trial balance on a worksheet is obtained from a. financial statements. b. general ledger accounts. c. general journal entries. d. business documents.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
54.
After the adjusting entries are journalized and posted to the accounts in the general ledger, the balance of each account should agree with the balance shown on the a. adjusted trial balance. b. post-closing trial balance. c. the general journal. d. adjustments columns of the worksheet.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
55.
If the total debit column exceeds the total credit column of the income statement columns on a worksheet, then the company has a. earned net income for the period. b. an error because debits do not equal credits. c. suffered a net loss for the period. d. to make an adjusting entry.
For Instructor Use Only
Completing the Accounting Cycle
4-7
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4-8 56.
Test Bank for Financial Accounting: IFRS Edition, 4e A worksheet is a multiple column form that facilitates the a. identification of events. b. measurement process. c. preparation of financial statements. d. analysis process.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
Computing net income on the worksheet occurs in step a. two. b. three. c. four. d. five.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
58.
A worksheet can be thought of as a(n) a. permanent accounting record. b. optional device used by accountants. c. part of the general ledger. d. part of the journal.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
The Supplies account appears in which of the following debit columns of the worksheet? a. Trial balance b. Adjusted trial balance c. Statement of financial position d. All of these answer choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
60.
When constructing a worksheet, accounts are often needed that are not listed in the trial balance already entered on the worksheet from the ledger. Where should these additional accounts be shown on the worksheet? a. They should be inserted in alphabetical order into the trial balance accounts already given. b. They should be inserted in the chart of account order into the trial balance already given. c. They should be inserted on the lines immediately below the trial balance totals. d. They should not be inserted on the trial balance until the next accounting period.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
When using a worksheet, adjusting entries are journalized a. after the worksheet is completed and before financial statements are prepared. b. before the adjustments are entered on to the worksheet. c. after the worksheet is completed and after financial statements are prepared. d. before the adjusted trial balance is extended to the proper financial statement columns.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle 62.
4-9
Assuming that there is a net loss for the period, debits equal credits in all but which sections of the worksheet? a. Income statement columns b. Adjustments columns c. Trial balance columns d. Adjusted trial balance columns
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
63.
Adjusting entries are prepared from a. source documents. b. the adjustments columns of the worksheet. c. the general ledger. d. last year's worksheet.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
64.
The net income (or loss) for the period a. is found by computing the difference between the income statement credit column and the statement of financial position credit column on the worksheet. b. cannot be found on the worksheet. c. is found by computing the difference between the income statement columns of the worksheet. d. is found by computing the difference between the trial balance totals and the adjusted trial balance totals.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
65.
The worksheet does not show a. net income or loss for the period. b. revenue and expense account balances. c. the ending balance in Retained Earnings . d. the trial balance before adjustments.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
66.
If the total debits exceed total credits in the statement of financial position columns of the worksheet, equity a. will increase because net income has occurred. b. will decrease because a net loss has occurred. c. is in error because a mistake has occurred. d. will not be affected.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 10 67.
Test Bank for Financial Accounting: IFRS Edition, 4e The income statement and statement of financial position columns of Reed Company's worksheet reflect the following totals:
Totals
Income Statement Dr. Cr. $58,000 $45,000
Statement of Financial Position Dr. Cr. $34,000 $47,000
The net income (or loss) for the period is a. $45,000 income. b. $13,000 income. c. $13,000 loss. d. not determinable. Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
68.
The income statement and statement of financial position columns of Reed Company's worksheet reflect the following totals:
Totals
Income Statement Dr. Cr. $58,000 $45,000
Statement of Financial Position Dr. Cr. $34,000 $47,000
To enter the net income (or loss) for the period into the above worksheet requires an entry to the a. income statement debit column and the statement of financial position credit column. b. income statement credit column and the statement of financial position debit column. c. income statement debit column and the income statement credit column. d. statement of financial position debit column and the statement of financial position credit column. Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
69.
The Statement of Financial Position columns of the worksheet contain data for what financial statement? a. Income Statement. b. Retained Earnings Statement. c. Statement of Cash Flows. d. None of these answer choices are correct.
Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle
4 - 11
Use the following data, taken from the adjusted trial balance, for 70 and 71.
Cash Accounts Receivable Supplies Accounts Payable Unearned Service Revenue Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Miscellaneous Expense Supplies Expense Salaries and Wages Payable Total 70.
Debit € 5,712 3,904 480
Credit
€ 2,792 160 5,000 1,760 300 4,064 1,344 256 2,228 €14,224
448 €14,224
What amount will be reflected for Retained Earnings in the Statement of Financial Position columns of the worksheet? a. €1,996 b. €1,760 c. €1,696 d. €2,060
Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
71.
What will be the total of the Statement of Financial Position credit column? a. €14,224 b. €10,160 c. €13,988 d. €10,396
Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
72.
Which of the following accounts is least likely to have its balance change on the worksheet? a. Salaries and Wages Payable. b. Supplies. c. Accumulated Depreciation. d. Share Capital-Ordinary.
Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 12 73.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following permanent account is changed during the closing process? a. Share Capital-Ordinary. b. Retained Earnings. c. Unearned Service Revenue. d. None of these answer choices are correct.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
The temporary account balances ultimately wind up in what account? a. Income Summary. b. Retained Earnings. c. Share Capital-Ordinary. d. Comprehensive Income.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
The permanent accounts appear on which financial statement? a. Statement of Financial Position. b. Income Statement. c. Retained Earnings Statement. d. Statement of Cash Flows.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
76.
Closing entries are necessary for a. permanent accounts only. b. temporary accounts only. c. both permanent and temporary accounts. d. permanent or real accounts only.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
77.
Each of the following accounts is closed to Income Summary except a. Expenses. b. Dividends. c. Revenues. d. All of these answer choices are correct.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
78.
Closing entries are made a. in order to terminate the business as an operating entity. b. so that all assets, liabilities, and equity accounts will have zero balances when the next accounting period starts. c. in order to transfer net income (or loss) and dividends to Retained Earnings. d. so that financial statements can be prepared.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle 79.
4 - 13
Closing entries are a. an optional step in the accounting cycle. b. posted to the ledger accounts from the worksheet. c. made to close permanent or real accounts. d. journalized in the general journal.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
80.
The Income Summary account a. is a permanent account. b. appears on the statement of financial position. c. appears on the income statement. d. is a temporary account.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
81.
If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a a. debit to Retained Earnings. b. debit to Dividends. c. credit to Retained Earnings. d. credit to Dividends.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
82.
Closing entries are journalized and posted a. before the financial statements are prepared. b. after the financial statements are prepared. c. at management's discretion. d. at the end of each interim accounting period.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
83.
Closing entries a. are prepared before the financial statements. b. reduce the number of permanent accounts. c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
84.
Which of the following is a true statement about closing the books of a corporation? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 14 85.
Test Bank for Financial Accounting: IFRS Edition, 4e Closing entries may be prepared from all but which one of the following sources? a. Adjusted balances in the ledger b. Income statement and statement of financial position columns of the worksheet c. Statement of financial position d. Income and retained earnings statements
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
86.
In order to close the Dividends account, the a. income summary account should be debited. b. income summary account should be credited. c. retained earnings account should be credited. d. retained earnings account should be debited.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
87.
In preparing closing entries a. each revenue account will be credited. b. each expense account will be credited. c. the retained earnings account will be debited if there is net income for the period. d. the dividends account will be debited.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
88.
The most efficient way to accomplish closing entries is to a. credit the income summary account for each revenue account balance. b. debit the income summary account for each expense account balance. c. credit the dividends account balance directly to the income summary account. d. credit the income summary account for total revenues and debit the income summary account for total expenses.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
89.
The closing entry process consists of closing a. all asset and liability accounts. b. out the retained earnings account. c. all permanent accounts. d. all temporary accounts.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
90.
The final closing entry to be journalized is typically the entry that closes the a. revenue accounts. b. dividends account. c. retained earnings account. d. expense accounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle 91.
4 - 15
An error has occurred in the closing entry process if a. revenue and expense accounts have zero balances. b. the retained earnings account is credited for the amount of net income. c. the dividends account is closed to the retained earnings account. d. the statement of financial position accounts have zero balances.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
The Income Summary account is an important account that is used a. during interim periods. b. in preparing adjusting entries. c. annually in preparing closing entries. d. annually in preparing correcting entries.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
93.
The balance in the income summary account before it is closed will be equal to a. the net income or loss on the income statement. b. the beginning balance in the retained earnings account. c. the ending balance in the retained earnings account. d. zero.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
94.
After closing entries are posted, the balance in the retained earnings account in the ledger will be equal to a. the beginning retained earnings reported on the retained earnings statement. b. the amount of the retained earnings reported on the statement of financial position. c. zero. d. the net income for the period.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
95.
The income statement for the month of June, 2020 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income
₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800
The entry to close the revenue account includes a a. debit to Income Summary for ₤7,800. b. credit to Income Summary for ₤7,800. c. debit to Income Summary for ₤16,000. d. credit to Income Summary for ₤16,000. Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 16 96.
Test Bank for Financial Accounting: IFRS Edition, 4e The income statement for the month of June, 2020 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income
₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800
The entry to close the expense accounts includes a a. debit to Income Summary for ₤7,800. b. credit to Rent Expense for ₤3,000. c. credit to Income Summary for ₤8,200. d. debit to Salaries and Wages Expense for ₤2,000. Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
97.
The income statement for the month of June, 2020 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income
₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800
After the revenue and expense accounts have been closed, the balance in Income Summary will be a. ₤0. b. a debit balance of ₤7,800. c. a credit balance of ₤7,800. d. a credit balance of ₤16,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 98.
4 - 17
The income statement for the month of June, 2020 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income
₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800
The entry to close Income Summary to Retained Earnings includes a. a debit to Revenue for ₤16,000. b. credits to Expenses totalling ₤8,200. c. a credit to Income Summary for ₤7,800 d. a credit to Retained Earnings for ₤7,800. Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
99.
The income statement for the month of June, 2020 of Taylor Enterprises contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Supplies Expense Advertising Expense Insurance Expense Total expenses Net income
₤16,000 ₤4,000 3,000 600 400 200 8,200 ₤7,800
At June 1, 2020, Taylor reported Retained Earnings of ₤70,000. The company paid no dividends during June. At June 30, 2020, the company will report Retained Earnings of a. ₤70,000. b. ₤86,000. c. ₤77,800. d. ₤62,200. Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 18 100.
Test Bank for Financial Accounting: IFRS Edition, 4e The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)
The entry to close the revenue account includes a a. debit to Income Summary for $5,000. b. credit to Income Summary for $5,000. c. debit to Revenues for $150,000. d. credit to Revenues for $150,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
101.
The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)
The entry to close the expense accounts includes a a. debit to Income Summary for $5,000. b. credit to Income Summary for $5,000. c. debit to Income Summary for $155,000. d. debit to Salaries and Wages Expense for $90,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 102.
4 - 19
The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)
After the revenue and expense accounts have been closed, the balance in Income Summary will be a. $0. b. a debit balance of $5,000. c. a credit balance of $5,000. d. a credit balance of $150,000. Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
103.
The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)
The entry to close Income Summary to Retained Earnings includes a. a debit to Revenue for $150,000. b. credits to Expenses totalling $155,000. c. a credit to Income Summary for $5,000. d. a credit to Retained Earnings for $5,000. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 20 104.
Test Bank for Financial Accounting: IFRS Edition, 4e The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)
At January 1, 2020, Poole reported Retained Earnings of $100,000. Dividends for the year totalled $20,000. At December 31, 2020, the company will report Retained Earnings of a. $35,000. b. $75,000. c. $80,000. d. $85,000. Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
105.
The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 155,000 $ (5,000)
After all closing entries have been posted, the Income Summary account will have a balance of a. $0. b. $5,000 debit. c. $5,000 credit. d. $75,000 credit. Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 106.
4 - 21
The income statement for the year 2020 of Poole Co. contains the following information: Revenues Expenses: Salaries and Wages Expense Rent Expense Advertising Expense Supplies Expense Utilities Expense Insurance Expense Total expenses Net income (loss)
$150,000 $90,000 32,000 12,000 12,000 5,000 4,000 145,000 $ (5,000)
After all closing entries have been posted, the revenue account will have a balance of a. $0. b. $150,000 credit. c. $150,000 debit. d. $5,000 credit.222 Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
A post-closing trial balance is prepared a. after closing entries have been journalized and posted. b. before closing entries have been journalized and posted. c. after closing entries have been journalized but before the entries are posted. d. before closing entries have been journalized but after the entries are posted.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
All of the following statements about the post-closing trial balance are correct except it a. shows that the accounting equation is in balance. b. provides evidence that the journalizing and posting of closing entries have been properly completed. c. contains only permanent accounts. d. proves that all transactions have been recorded.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
109.
A post-closing trial balance will show a. only permanent account balances. b. only temporary account balances. c. zero balances for all accounts. d. the amount of net income (or loss) for the period.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
A post-closing trial balance should be prepared a. before closing entries are posted to the ledger accounts. b. after closing entries are posted to the ledger accounts. c. before adjusting entries are posted to the ledger accounts. d. only if an error in the accounts is detected.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 22
Test Bank for Financial Accounting: IFRS Edition, 4e
111.
A post-closing trial balance will show a. zero balances for all accounts. b. zero balances for statement of financial position accounts. c. only statement of financial position accounts. d. only income statement accounts.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
The purpose of the post-closing trial balance is to a. prove that no mistakes were made. b. prove the equality of the statement of financial position account balances that are carried forward into the next accounting period. c. prove the equality of the income statement account balances that are carried forward into the next accounting period. d. list all the statement of financial position accounts in alphabetical order for easy reference.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
The balances that appear on the post-closing trial balance will match the a. income statement account balances after adjustments. b. statement of financial position account balances after closing entries. c. income statement account balances after closing entries. d. statement of financial position account balances after adjustments.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
114.
Which account listed below would be double ruled in the ledger as part of the closing process? a. Cash b. Retained Earnings c. Dividends d. Accumulated Depreciation
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
A double rule applied to accounts in the ledger during the closing process implies that a. the account is an income statement account. b. the account is a statement of financial position account. c. the account balance is not zero. d. a mistake has been made, since double ruling is prescribed.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116.
The heading for a post-closing trial balance has a date line that is similar to the one found on a. a statement of financial position. b. an income statement. c. a retained earnings statement. d. a worksheet.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 117.
4 - 23
Which account balance will change between the adjusted trial balance and the postclosing trial balance? a. Retained Earnings b. Share Capital-Ordinary c. Interest Payable d. Accumulated Depreciation
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
118.
Which one of the following is usually prepared only at the end of a company's annual accounting period? a. Preparing financial statements b. Journalizing and posting adjusting entries c. Journalizing and posting closing entries d. Preparing an adjusted trial balance
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
The step in the accounting cycle that is performed on a periodic basis (i.e., monthly, quarterly) is a. analyzing transactions. b. journalizing and posting adjusting entries. c. preparing a post-closing trial balance. d. posting to ledger accounts.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
120.
Which one of the following is an optional step in the accounting cycle of a business enterprise? a. Analyze business transactions b. Prepare a worksheet c. Prepare a trial balance d. Post to the ledger accounts
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
121.
The final step in the accounting cycle is to prepare a. closing entries. b. financial statements. c. a post-closing trial balance. d. adjusting entries.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
122.
Which of the following steps in the accounting cycle would not generally be performed daily? a. Journalize transactions b. Post to ledger accounts c. Prepare adjusting entries d. Analyze business transactions
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 24 123.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following steps in the accounting cycle may be performed most frequently? a. Prepare a post-closing trial balance b. Journalize closing entries c. Post closing entries d. Prepare a trial balance
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
124.
Which of the following depicts the proper sequence of steps in the accounting cycle? a. Journalize the transactions, analyze business transactions, prepare a trial balance b. Prepare a trial balance, prepare financial statements, prepare adjusting entries c. Prepare a trial balance, prepare adjusting entries, prepare financial statements d. Prepare a trial balance, post to ledger accounts, post adjusting entries
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
125.
The two optional steps in the accounting cycle are preparing a. a post-closing trial balance and reversing entries. b. a worksheet and post-closing trial balances. c. reversing entries and a worksheet. d. an adjusted trial balance and a post-closing trial balance.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
126.
The first required step in the accounting cycle is a. reversing entries. b. journalizing transactions in the book of original entry. c. analyzing transactions. d. posting transactions.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
127.
Correcting entries a. always affect at least one balance sheet account and one income statement account. b. affect income statement accounts only. c. affect statement of financial position accounts only. d. may involve any combination of accounts in need of correction.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
128.
Topeka Bike Company received a $920 check from a customer for the balance due. The transaction was erroneously recorded as a debit to Cash $290 and a credit to Service Revenue $290. The correcting entry is a. debit Cash, $920; credit Accounts Receivable, $920. b. debit Cash, $630 and Accounts Receivable, $290; credit Service Revenue, $920. c. debit Cash, $630 and Service Revenue, $290; credit Accounts Receivable, $920. d. debit Accounts Receivable, $920; credit Cash, $630 and Service Revenue, $290.
Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 129.
4 - 25
If errors occur in the recording process, they a. should be corrected as adjustments at the end of the period. b. should be corrected as soon as they are discovered. c. should be corrected when preparing closing entries. d. cannot be corrected until the next accounting period.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
130.
A correcting entry a. must involve one statement of financial position account and one income statement account. b. is another name for a closing entry. c. may involve any combination of accounts. d. is a required step in the accounting cycle.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
An unacceptable way to make a correcting entry is to a. reverse the incorrect entry. b. erase the incorrect entry. c. compare the incorrect entry with the correct entry and make a correcting entry to correct the accounts. d. correct it immediately upon discovery.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Farr Company paid the weekly payroll on January 2 by debiting Salaries and Wages Expense for $75,000. The accountant preparing the payroll entry overlooked the fact that Salaries and Wages Expense of $45,000 had been accrued at year end on December 31. The correcting entry is a. Salaries and Wages Payable ............................................... 45,000 Cash ......................................................................... 45,000 b. Cash ..................................................................................... 30,000 Salaries and Wages Expense .................................. 30,000 c. Salaries and Wages Payable ............................................... 45,000 Salaries and Wages Expense .................................. 45,000 d. Cash ..................................................................................... 45,000 Salaries and Wages Expense .................................. 45,000
Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 26 133.
Test Bank for Financial Accounting: IFRS Edition, 4e Stine Company paid €850 on account to a creditor. The transaction was erroneously recorded as a debit to Cash of €580 and a credit to Accounts Receivable, €580. The correcting entry is a. Accounts Payable ................................................................. 850 Cash ......................................................................... 850 b. Accounts Receivable ............................................................ 580 Cash ......................................................................... 580 c. Accounts Receivable ............................................................ 580 Accounts Payable ..................................................... 580 d. Accounts Receivable ............................................................ 580 Accounts Payable ................................................................. 850 Cash ......................................................................... 1,430
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
134.
A lawyer collected $620 of legal fees in advance. He erroneously debited Cash for $260 and credited Accounts Receivable for $260. The correcting entry is a. Cash ..................................................................................... 260 Accounts Receivable ............................................................ 360 Unearned Service Revenue...................................... 620 b. Cash ..................................................................................... 620 Service Revenue ...................................................... 620 c. Cash ..................................................................................... 360 Accounts Receivable ............................................................ 260 Unearned Service Revenue...................................... 620 d. Cash ..................................................................................... 360 Accounts Receivable ................................................ 360
Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
135.
On May 25, Carlin Company received a $550 check from Andy Jeter for services to be performed in the future. The bookkeeper for Carlin Company incorrectly debited Cash for $550 and credited Accounts Receivable for $550. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should: a. debit Cash $550 and credit Unearned Service Revenue $550. b. debit Accounts Receivable $550 and credit Service Revenue $550. c. debit Accounts Receivable $550 and credit Cash $550. d. debit Accounts Receivable $550 and credit Unearned Service Revenue $550.
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle 136.
4 - 27
On March 8, Fernetti Company bought office supplies on account from the Flint Company for $550. Fernetti Company incorrectly debited Equipment for $500 and credited Accounts Payable for $500. The entries have been posted to the ledger. the correcting entry should be: a. Supplies ............................................................................... 550 Accounts Payable .......................................................... 550 b. Supplies ............................................................................... 550 Accounts Payable .......................................................... 500 Equipment ...................................................................... 50 c. Supplies ............................................................................... 550 Equipment ...................................................................... 550 d. Supplies ............................................................................... 550 Equipment ...................................................................... 500 Accounts Payable .......................................................... 50
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
137.
The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2020
Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets
¥360,000
¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000
¥400,000 80,000
¥1,480,000 320,000
680,000 Accounts 300,000 Payable Salaries Wages 120,000 Payable Mortgage 280,000 Payable
240,000 40,000 360,000
640,000
200,000 260,000 Total Equity ¥2,120,000 and Liabilities
¥ 2,120,000
The total amount of assets to be classified as current assets is a. ¥1,160,000. b. ¥860,000. c. ¥720,000. d. ¥580,000. Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 28 138.
Test Bank for Financial Accounting: IFRS Edition, 4e The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2017
Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets
¥360,000
¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000
¥400,000 80,000
¥1,480,000 320,000
680,000 Accounts 300,000 Payable Salaries Wages 120,000 Payable Mortgage 280,000 Payable
240,000 40,000 360,000
640,000
200,000 260,000 Total Equity ¥2,120,000 and Liabilities
¥ 2,120,000
The total amount of assets to be classified as property, plant, and equipment is a. ¥1,280,000. b. ¥680,000. c. ¥980,000. d. ¥760,000. Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 139.
4 - 29
The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2020
Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets
¥360,000
¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000
¥400,000 80,000
¥1,480,000 320,000
680,000 300,000 Accounts Payable 120,000 Salaries Wages Payable 280,000 Mortgage Payable 200,000
240,000 40,000 360,000
640,000
260,000 ¥2,120,000 Total Equity and Liabilities
¥ 2,120,000
The total amount of assets to be classified as investments is a. ¥0. b. ¥600,000. c. ¥300,000. d. ¥720,000. Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 30 140.
Test Bank for Financial Accounting: IFRS Edition, 4e The following information (in thousands) is for Zháng Office Supplies: Zháng Office Supplies Statement of Financial Position December 31, 2020
Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance Inventory Accounts Receivable Cash Total Assets
¥360,000
¥280,000 Share Capital ¥480,000 Retained Earnings 1,000,000
¥400,000 80,000
¥1,480,000 320,000
680,000 300,000 Accounts Payable 120,000 Salaries Wages Payable 280,000 Mortgage Payable 200,000
240,000 40,000 360,000
640,000
260,000 ¥2,120,000 Total Equity and Liabilities
¥ 2,120,000
The total amount of liabilities to be classified as current liabilities is a. ¥280,000. b. ¥240,000. c. ¥600,000. d. ¥640,000. Ans: A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 141.
4 - 31
The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2020
Trademark Land Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance
$ $570,000
420,000 Share Capital Retained Earnings
420,000
990,000
$720,000 1,500,000 $ 2,220,000
$600,000 180,000
480,000 Accounts 240,000 Payable
390,000
Inventory
Salaries/Wages 420,000 Payable
60,000
Accounts Receivable Cash Total Assets
Mortgage 300,000 Payable
540,000
990,000
360,000 Total Equity $ 3,210,000 and Liabilities
$ 3,210,000
The total dollar amount of assets to be classified as current assets is a. $1,320,000. b. $900,000. c. $1,800,000. d. $1,080,000. Ans: A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 32
Test Bank for Financial Accounting: IFRS Edition, 4e
142.
The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2020
Trademark
$
Land
420,000 Share Capital
$570,000
Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance
Retained Earnings
180,000 420,000
990,000 480,000
Accounts Receivable Cash
360,000
Total Assets
1,500,000 $ 2,220,000
$600,000
240,000 Accounts Payable 420,000 Salaries/Wages Payable 300,000 Mortgage Payable
Inventory
$720,000
$ 3,210,000 Total Equity and Liabilities
390,000 60,000
540,000
990,000 $ 3,210,000
The total dollar amount of assets to be classified as property, plant, and equipment is a. $1,890,000. b. $1,470,000. c. $990,000. d. $1,170,000. Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 143.
4 - 33
The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2020
Trademark
$
Land
420,000 Share Capital
$570,000
Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance
Retained Earnings
180,000 420,000
990,000 480,000
Accounts Receivable Cash
360,000
Total Assets
1,500,000
$600,000
240,000 Accounts Payable 420,000 Salaries/Wages Payable 300,000 Mortgage Payable
Inventory
$720,000
$ 3,210,000 Total Equity and Liabilities
390,000 60,000
540,000
990,000 $ 2,220,000 $ 3,210,000
The total dollar amount of assets to be classified as investments is a. $0. b. $900,000. c. $480,000. d. $1,080,000. Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 34 144.
Test Bank for Financial Accounting: IFRS Edition, 4e The following information is for Acme Auto Supplies: Acme Auto Supplies Statement of Financial Position December 31, 2020
Trademark
$
Land
420,000 Share Capital
$570,000
Buildings Less:Accum. Depreciation Land Held for Investment Prepaid Insurance
Retained Earnings
180,000 420,000
990,000 480,000
Accounts Receivable Cash
360,000
Total Assets
1,500,000
$600,000
240,000 Accounts Payable 420,000 Salaries/Wages Payable 300,000 Mortgage Payable
Inventory
$720,000
390,000 60,000
540,000
$ 3,210,000 Total Equity and Liabilities
990,000 $ 2,220,000 $ 3,210,000
The total dollar amount of liabilities to be classified as current liabilities is a. $390,000. b. $450,000. c. $930,000. d. $990,000. Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
145.
All of the following are property, plant, and equipment except a. supplies. b. machinery. c. land. d. buildings.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
146.
The first item listed under current liabilities is usually a. accounts payable. b. notes payable. c. salaries and wages payable. d. taxes payable.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 147.
4 - 35
Equipment is classified in the statement of financial position as a. a current asset. b. property, plant, and equipment. c. an intangible asset. d. a long-term investment.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
148.
A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. an asset that a company expects to convert to cash or use up within one year.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
149.
An intangible asset a. does not have physical substance, yet often is very valuable. b. is worthless because it has no physical substance. c. is converted into a tangible asset during the operating cycle. d. cannot be classified on the statement of financial position because it lacks physical substance.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
150.
Liabilities are generally classified on a statement of financial position as a. small liabilities and large liabilities. b. present liabilities and future liabilities. c. tangible liabilities and intangible liabilities. d. current liabilities and non-current liabilities.
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
151.
Which of the following would not be classified as a non-current liability? a. Current maturities of long-term debt b. Bonds payable c. Mortgage payable d. Lease liabilities
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
152.
Which of the following liabilities are not related to the operating cycle? a. Salaries and wages payable b. Accounts payable c. Utilities payable d. Bonds payable
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 36 153.
Test Bank for Financial Accounting: IFRS Edition, 4e Intangible assets include each of the following except a. copyrights. b. goodwill. c. land improvements. d. patents.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
154.
It is not true that current assets are assets that a company expects to a. realize in cash within one year. b. sell within one year. c. use up within one year. d. acquire within one year.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
155.
The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues. b. cash in producing revenues. c. inventory in producing revenues. d. accounts receivable in producing revenues.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
On a classified statement of financial position, current assets are customarily listed a. in alphabetical order. b. with the largest dollar amounts first. c. in the reverse order of liquidity. d. in the order of acquisition.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
157.
Intangible assets are a. listed under current assets on the statement of financial position. b. not listed on the statement of financial position because they do not have physical substance. c. non-current resources. d. listed as a long-term investment on the statement of financial position.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
158.
The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. accounting cycle.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Completing the Accounting Cycle 159.
4 - 37
The most important information needed to determine if companies can pay their current obligations is the a. net income for this year. b. projected net income for next year. c. relationship between current assets and current liabilities. d. relationship between short-term and non-current liabilities.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
160.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
What is the company’s net income for the year ending December 31, 2020? a. ¥532,000 b. ¥168,000 c. ¥112,000 d. ¥48,000 Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 38 161.
Test Bank for Financial Accounting: IFRS Edition, 4e The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
What is the balance that would be reported for equity at December 31, 2020? a. ¥408,000 b. ¥520,000 c. ¥576,000 d. ¥632,000 Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
162.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation – equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
For Instructor Use Only
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
Completing the Accounting Cycle
4 - 39
Multiple Choice 162. (Cont.) What are total current assets at December 31, 2020? a. ¥104,000 b. ¥128,000 c. ¥144,000 d. ¥872,000 Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
163.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
What is the book value of the equipment at December 31, 2020? a. ¥952,000 b. ¥840,000 c. ¥728,000 d. ¥680,000 Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
164.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) For Instructor Use Only
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000
4 - 40
Test Bank for Financial Accounting: IFRS Edition, 4e
Multiple Choice 164.
(Cont.)
Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
68,000 240,000 128,000 532,000 16,000 24,000
What are total current liabilities at December 31, 2020? a. ¥72,000 b. ¥280,000 c. ¥352,000 d. ¥0 Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
165.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
What are total non-current liabilities at December 31, 2020? a. ¥0 b. ¥280,000 c. ¥352,000 d. ¥360,000 Ans: A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 166.
4 - 41
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
What is total equity and liabilities at December 31, 2020? a. ¥704,000 b. ¥760,000 c. ¥872,000 d. ¥928,000 Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
167.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
For Instructor Use Only
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
4 - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Multiple Choice 167.
(Cont.)
The sub-classifications for assets on the company’s classified statement of financial position would include all of the following except a. Current Assets. b. Property, Plant, and Equipment. c. Intangible Assets. d. Long-term Assets. Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
168.
The following items (in thousands) are taken from the financial statements of Huang Company for the year ending December 31, 2020: Accounts payable Accounts receivable Accumulated depreciation–equipment Advertising expense Cash Share capital-ordinary Dividends Depreciation expense Equipment Insurance expense Note payable, due 6/30/21 Prepaid insurance (12-month policy) Rent expense Retained earnings (1/1/20) Salaries and wages expense Service revenue Supplies Supplies expense
¥ 72,000 44,000 112,000 84,000 60,000 168,000 56,000 48,000 840,000 12,000 280,000 24,000 68,000 240,000 128,000 532,000 16,000 24,000
The current assets should be listed on Huang’s statement of financial position in the following order a. accounts receivable, prepaid insurance, equipment, cash. b. accounts receivable, prepaid insurance, supplies, cash. c. prepaid insurance, supplies, accounts receivable, cash. d. equipment, supplies, prepaid insurance, accounts receivable, cash. Ans: C, LO: 4, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
169.
Which statement about long-term investments is not true? a. They will be held for more than one year. b. They are not currently used in the operation of the business. c. They include investments in shares of other companies and land held for future use. d. They can never include cash accounts.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle 170.
4 - 43
What is the order in which assets are generally listed on a classified statement of financial position? a. Current and long-term. b. Intangible assets; long-term investments; property, plant, and equipment; current. c. Long-term investments; property, plant, and equipment; intangible assets; current d. Intangible assets; property, plant, and equipment; long-term investments; current.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
171. These are selected account balances on December 31, 2020. Land (location of the corporation’s office building) Land (held for future use) Office Building Inventory Equipment Office Furniture Accumulated Depreciation
$400,000 600,000 2,900,000 800,000 1,800,000 400,000 1,200,000
What is the total amount of property, plant, and equipment that will appear on the statement of financial position? a. $5,700,000 b. $4,900,000 c. $6,900,000 d. $4,300,000 Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
172.
The following selected account balances appear on the December 31, 2020 statement of financial position of Chen Co. Land (location of the corporation’s office building) Land (held for future use) Office Building Inventory Equipment Office Furniture Accumulated Depreciation
$300,000 450,000 2,400,000 600,000 1,350,000 300,000 900,000
What is the total amount of property, plant, and equipment that will be reported on the statement of financial position? a. $4,500,000 b. $3,900,000 c. $5,400,000 d. $3,450,000 Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
173.
Which classification of assets will appear first in the Statement of Financial Position? a. Current Assets. b. Long-term investments. c. Property,Plant and Equipment. d. Intangible Assets.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 44 174.
Test Bank for Financial Accounting: IFRS Edition, 4e Which classification of assets will appear last in the Statement of Financial Position? a. Intangible Assets. b. Current Assets. c. Long-term investments. d. Property,Plant and Equipment.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
175.
Which account will appear last under the current assets classification on the Statement of Financial Position? a. Accounts Receivable. b. Prepaid Expenses. c. Short-term investments. d. Cash.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
176.
Which of the following classification appears last in the Statement of Financial Position? a. Non-current Liabilities. b. Equity. c. Current Liabilities. d. Reserves.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
177.
Which of the following is in the proper position? a. Equity;Current Liabilities;Non-current Liabilities. b. Equity;Non-current Liabilities;Current Liabilities. c. Current Liabilities;Non-current Liabilities;Equity. d. Non-Current Liabilities; Current Liabilities;Equity.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
178.
The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable ¥ 2,829 Prepaid expenses ¥ 2,640 Equipment 34,500 Patents 792 Short-term investments 11,070 Notes payable in 2021 1,443 Cash 8,004 Accumulated depreciation 16,965 Accounts payable 4,332 Notes payable after 2021 1,104 Share capital-ordinary 30,000 Retained earnings 9,189 Accounts receivable 5,088 Inventories 3,768 Total ¥ 65,862 ¥ 65,862
For Instructor Use Only
Completing the Accounting Cycle Multiple Choice 178.
4 - 45
(Cont.)
Total assets on the Statement of Financial Position for 2020 are: a. ¥65,862. b. ¥48,897. c. ¥82,827. d. ¥46,257. Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
179.
The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable ¥ 2,829 Prepaid expenses ¥ 2,640 Equipment 34,500 Patents 792 Short-term investments 11,070 Notes payable in 2021 1,443 Cash 8,004 Accumulated depreciation 16,965 Accounts payable 4,332 Notes payable after 2021 1,104 Share capital-ordinary 30,000 Retained earnings 9,189 Accounts receivable 5,088 Inventories 3,768 Total ¥ 65,862 ¥ 65,862 The subtotal of the last asset classification on the 2020 Statement of Financial Position is: a. ¥17,535. b. ¥27,930. c. ¥34,500. d. ¥30,570.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
180.
The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable Prepaid expenses Equipment Patents Short-term investments Notes payable in 2021 Cash Accumulated depreciation Accounts payable Notes payable after 2021 Share capital-ordinary
¥ 2,829 ¥ 2,640 34,500 792 11,070 1,443 8,004 16,965 4,332 1,104 30,000
For Instructor Use Only
4 - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
Multiple Choice 180.
(Cont.)
Retained earnings Accounts receivable Inventories Total
9,189 5,088 3,768 ¥ 65,862
¥ 65,862
The subtotal of the first asset classification on the 2020 Statement of Financial Position is: a. ¥30,570 b. ¥27,930 c. ¥792 d. ¥11,070 Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
181.
The following data (in thousands) is available for Chang Company. Debit Credit Mortgage payable ¥ 2,829 Prepaid expenses ¥ 2,640 Equipment 34,500 Patents 792 Short-term investments 11,070 Notes payable in 2021 1,443 Cash 8,004 Accumulated depreciation 16,965 Accounts payable 4,332 Notes payable after 2021 1,104 Share capital-ordinary 30,000 Retained earnings 9,189 Accounts receivable 5,088 Inventories 3,768 Total ¥ 65,862 ¥ 65,862 The subtotal of the last equity and liabilities classification on the 2020 Statement of Financial Position is: a. ¥5,775. b. ¥3,933. c. ¥39,189. d. ¥4,332.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
182.
Which of the following is in the proper order? a. Cash; Short-term Investments; Accounts Receivable; Inventories; Supplies. b. Cash; Short-term Investments; Inventories; Accounts Receivable; Supplies. c. Supplies; Inventories; Accounts Receivables; Short-term Investments; Cash. d. Supplies; Accounts Receivables; Inventories; Short-term Investments; Cash.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 183.
4 - 47
Which of the following accounts does not appear in the Statement of Financial Position? a. Retained Earnings b. Unearned Revenues c. Dividends d. Share Capital-Ordinary
Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
184. A reversing entry a. reverses entries that were made in error. b. is the exact opposite of an adjusting entry made in a previous period. c. is made when a business disposes of an asset it previously purchased. d. is made when a company sustains a loss in one period and reverses the effect with a profit in the next period.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
185. If a company utilizes reversing entries, they will a. be made at the beginning of the next accounting period. b. not actually be posted to the general ledger accounts. c. be made before the post-closing trial balance. d. be part of the adjusting entry process.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
186.
The steps in the preparation of a worksheet do not include a. analyzing documentary evidence. b. preparing a trial balance on the worksheet. c. entering the adjustments in the adjustment columns. d. entering adjusted balances in the adjusted trial balance columns.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
187.
Statement of financial position accounts are considered to be a. temporary owner's equity accounts. b. permanent accounts. c. capital accounts. d. nominal accounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
188.
Income Summary has a credit balance of $12,000 in J. Wenger Co. after closing revenues and expenses. The entry to close Income Summary is a. credit Income Summary $12,000, debit Retained Earnings $12,000. b. credit Income Summary $12,000, debit Dividends $12,000. c. debit Income Summary $12,000, credit Dividends $12,000. d. debit Income Summary $12,000, credit Retained Earnings $12,000.
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 48 189.
Test Bank for Financial Accounting: IFRS Edition, 4e The post-closing trial balance contains only a. income statement accounts. b. statement of financial position accounts. c. statement of financial position and income statement accounts. d. income statement, statement of financial position, and equity statement accounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
190.
Which of the following is an optional step in the accounting cycle? a. Adjusting entries b. Closing entries c. Correcting entries d. Reversing entries
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
191.
Which one of the following statements concerning the accounting cycle is incorrect? a. The accounting cycle includes journalizing transactions and posting to ledger accounts. b. The accounting cycle includes only one optional step. c. The steps in the accounting cycle are performed in sequence. d. The steps in the accounting cycle are repeated in each accounting period.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
192.
Correcting entries are made a. at the beginning of an accounting period. b. at the end of an accounting period. c. whenever an error is discovered. d. after closing entries.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
193.
On September 23, Riley Company received a $350 check from Jack Colaw for services to be performed in the future. The bookkeeper for Riley Company incorrectly debited Cash for $350 and credited Accounts Receivable for $350. The amounts have been posted to the ledger. To correct this entry, the bookkeeper should a. debit Cash $350 and credit Unearned Service Revenue $350. b. debit Accounts Receivable $350 and credit Unearned Service Revenue $350. c. debit Accounts Receivable $350 and credit Cash $350. d. debit Accounts Receivable $350 and credit Service Revenue $350.
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
194.
All of the following are equity accounts except a. Retained Earnings. b. Share Capital. c. Investment in Share. d. Dividends.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle 195.
4 - 49
Current liabilities a. are obligations that the company is to pay within the forthcoming year. b. are listed in the statement of financial position in order of their expected maturity. c. are listed in the statement of financial position starting with accounts payable. d. should not include long-term debt that is expected to be paid within the next year.
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
196. The use of reversing entries a. is a required step in the accounting cycle. b. changes the amounts reported in the financial statements. c. simplifies the recording of subsequent transactions. d. is required for all adjusting entries.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
BRIEF EXERCISES BE 197 Use the following income statement for the year 2020 for Melges Company to prepare entries to close the revenue and expense accounts for the company. Service revenue Expenses: Salaries and wages expense Rent expense Insurance expense Total expenses Net income (loss)
€85,300 €40,000 25,000 6,500 71,500 €13,800
Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 197
(5 min.)
Service Revenue ................................................................................... Income Summary .......................................................................
85,300
Income Summary ................................................................................... Salaries and Wages Expense .................................................... Rent Expense ............................................................................ Insurance Expense ....................................................................
71,500
85,300 40,000 25,000 6,500
BE 198 The ledger of Hunter Company contains the following balances: Retained Earnings $60,000; Dividends $4,000; Service Revenue $95,000; Salaries and Wages Expense $59,000; and Rent Expense $18,000. Prepare the closing entries at December 31. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 50
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 198
(3 min.)
Service Revenue .................................................................................... Income Summary .......................................................................
95,000
Income Summary ................................................................................... Salaries and Wages Expense .................................................... Rent Expense .............................................................................
77,000
Income Summary ................................................................................... Retained Earnings ......................................................................
18,000
Retained Earnings.................................................................................. Dividends....................................................................................
4,000
95,000 59,000 18,000 18,000 4,000
BE 199 At April 1, 2020, Rhodes Company reported a balance of $22,000 in the Retained Earnings account. Rhodes Company earned revenues of $50,000 and incurred expenses of $35,000 during April 2020. The company paid dividends of $10,000 during the month. (a) Prepare the entries to close Income Summary and the Dividends account at April 30, 2020. (b) What is the balance in Retained Earnings on the April 30, 2020 post-closing trial balance? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 199
(3 min.)
(a) Income Summary ............................................................................ Retained Earnings .............................................................
15,000
Retained Earnings .......................................................................... Dividends ...........................................................................
10,000
15,000 10,000
(b) $22,000 + $15,000 – $10,000 = $27,000 BE 200 Identify which of the following are temporary accounts of San Juan Company. (1) Retained Earnings (2) Dividends (3) Equipment (4) Accumulated Depreciation-Equipment (5) Depreciation Expense Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 200
(3 min.)
(2) Dividends, (5) Depreciation Expense
For Instructor Use Only
Completing the Accounting Cycle
4 - 51
BE 201 Identify which of the following accounts would have balances on a post-closing trial balance. (1) Service Revenue (2) Income Summary (3) Notes Payable (4) Interest Expense (5) Cash Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 201
(3 min.)
(3) Notes Payable, (5) Cash BE 202 At Westglow Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the necessary correcting entry for each of the following. a. A collection on account of ₤500 was debited to Cash €500 and credited to Service Revenue ₤500. b. The purchase of supplies on account for ₤1,270 was recorded as a debit to Supplies for ₤1,720 and a credit to Accounts Payable for ₤1,720. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 202
(4 min.)
a. Service Revenue.............................................................................. Accounts Receivable............................................................ b Accounts Payable ............................................................................ Supplies ..............................................................................
500 500 450 450
BE 203 At Outersanctum Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the necessary correcting entry for each of the following. a. A payment of $5,000 for salaries was recorded as a debit to Supplies Expense and a credit to Cash. b. A purchase of supplies on account for $1,000 was recorded as a debit to Equipment and a credit to Accounts Payable. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 203
(4 min.)
a. Salaries and Wages Expense .......................................................... Supplies Expense ................................................................... b. Supplies ........................................................................................... Equipment ...............................................................................
For Instructor Use Only
5,000 5,000 1,000 1,000
4 - 52
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 204 The following accounts were included on Haircut 101’s adjusted trial balance at December 31, 2020: Accounts payable Accounts receivable Cash Share capital-ordinary Retained earnings Dividends Interest expense Note payable, due 8/31/23 Supplies Service revenue Equipment
$ 2,000 7,500 11,000 15,000 25,000 10,000 3,000 60,000 1,000 39,000 5,000
(a) What are total current assets? (b) What are total current liabilities? Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 204
(4 min.)
(a) $7,500 + $11,000 + $1,000 = $19,500 (b) $2,000 BE 205 The following items are taken from the adjusted trial balance of Highlander Company for the month ending July 31, 2020: Accounts payable $ 2,000 Accounts receivable 5,000 Accumulated depreciation – equipment 8,000 Cash 2,200 Share capital-ordinary 22,000 Depreciation expense 2,000 Equipment 54,000 Retained earnings, 7/1/20 30,000 Service revenue 33,000 Supplies 1,200 Prepare the current assets section of Highlander’s classified statement of financial position. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 205
(4 min.)
Current assets: Supplies Accounts receivable Cash Total
$1,200 5,000 2,200 $8,400
For Instructor Use Only
Completing the Accounting Cycle
4 - 53
BE 206 The following information (in thousands) is available for Wang Company for the year ended December 31, 2020: Accounts payable ¥2,700 Accumulated depreciation-equipment 4,000 Share capital-ordinary 5,800 Retained earnings 4,000 Copyrights 4,500 Notes payable (due in 5 years) 7,500 Accounts receivable 1,500 Cash 2,600 Short-term investments 1,000 Equipment 7,500 Investment in long-term bonds 6,900 Instructions Use the above information to prepare a classified statement of financial position for the year ended December 31, 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 206
(10 min.) WANG COMPANY Statement of Financial Position December 31, 2020 Assets
Intangible assets Copyrights Property, plant, and equipment Equipment Less:Accumulated depreciation–equipment Investments Investment in long-term bonds Current assets Accounts receivable Short-term investments Cash Total assets Equity and Liabilities Equity Share capital-ordinary Retained earnings Non-current liabilities Notes payable Current liabilities Accounts payable Total equity and liabilities
For Instructor Use Only
¥ 4,500 ¥ 7,500 4,000
3,500 6,900
1,500 1,000 2,600
¥ 5,800 4,000
5,100 ¥20,000
¥ 9,800
7,500 2,700
10,200 ¥20,000
4 - 54
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 207 The following lettered items represent a classification scheme for a statement of financial position and the numbered items represent accounts found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. Intangible assets B. Property, plant, and equipment C. Long-term investments D. Current assets
E. Equity F. Non-current liabilities G. Current liabilities H. Not on the statement of financial position
_____ 1.
Accumulated Depreciation
_____ 6.
Inventory
_____ 2.
Retained Earnings
_____ 7.
Patent
_____ 3.
Interest Expense
_____ 8.
Prepaid Insurance
_____ 4.
Income Taxes Payable
_____ 9.
Mortgage Payable
_____ 5.
Dividends
_____ 10.
Investment in long-term bonds
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 207 1. 2. 3. 4. 5. a
B. E. H. G. H.
(5 min.) 6. 7. 8. 9. 10.
D. A. D. F. C.
BE 208
F. Scot Company prepared the following adjusting entries at year end on December 31, 2019: (a) Interest Expense ........................................................................... 100 Interest Payable.................................................................... 100 (b) (c)
Interest Receivable........................................................................ Interest Revenue ..................................................................
150
Salaries and Wages Expense ....................................................... Salaries and Wages Payable ...............................................
4,000
150 4,000
In an effort to minimize errors in recording transactions, F. Scot Company utilizes reversing entries. Prepare reversing entries on January 1, 2020. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle a
Solution 208
(a)
(b)
(c)
4 - 55
(5 min.)
Reverse the entry to accrue interest expense. Interest Payable ............................................................................ Interest Expense ..................................................................
100
Reverse the entry to accrue interest revenue. Interest Revenue........................................................................... Interest Receivable ..............................................................
150
Reverse the entry to accrue salaries and wages expense. Salaries and Wages Payable ........................................................ Salaries and Wages Expense ..............................................
4,000
For Instructor Use Only
100
150
4,000
4 - 56
Test Bank for Financial Accounting: IFRS Edition, 4e
EXERCISES Ex. 209 The worksheet for Norman Company has been completed through the adjusted trial balance. You are ready to extend each amount to the appropriate financial statement column. Indicate for each account, the financial statement column to which the account should be extended by placing a check mark (Ö) in the appropriate column. ——————————————————————————————————————————— Statement of Income Statement Financial Position Account Title Dr. Cr. Dr. Cr. ——————————————————————————————————————————— (1) Cash ——————————————————————————————————————————— (2) Retained Earnings ——————————————————————————————————————————— (3) Income Taxes Payable ——————————————————————————————————————————— (4) Interest Receivable ——————————————————————————————————————————— (5) Supplies ——————————————————————————————————————————— (6) Accounts Payable ——————————————————————————————————————————— (7) Short-term Investments ——————————————————————————————————————————— (8) Supplies Expense ——————————————————————————————————————————— (9) Unearned Service Revenue ——————————————————————————————————————————— (10) Equipment ——————————————————————————————————————————— (11) Depreciation Expense ——————————————————————————————————————————— (12) Interest Revenue ——————————————————————————————————————————— (13) Salaries and Wages Expense ——————————————————————————————————————————— (14) Dividends ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment ——————————————————————————————————————————— (16) Utilities Expense ——————————————————————————————————————————— (17) Salaries and Wages Payable ——————————————————————————————————————————— (18) Accounts Receivable ——————————————————————————————————————————— (19) Notes Payable ——————————————————————————————————————————— (20) Service Revenue ——————————————————————————————————————————— Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle Solution 209
4 - 57
(10 min.)
Statement of Income Statement Financial Position Account Title Dr. Cr. Dr. Cr. ——————————————————————————————————————————— (1) Cash Ö ——————————————————————————————————————————— (2) Retained Earnings Ö ——————————————————————————————————————————— (3) Income Taxes Payable Ö ——————————————————————————————————————————— (4) Interest Receivable Ö ——————————————————————————————————————————— (5) Supplies Ö ——————————————————————————————————————————— (6) Accounts Payable Ö ——————————————————————————————————————————— (7) Short-term Investments Ö ——————————————————————————————————————————— (8) Supplies Expense Ö ——————————————————————————————————————————— (9) Unearned Service Revenue Ö ——————————————————————————————————————————— (10) Equipment Ö ——————————————————————————————————————————— (11) Depreciation Expense Ö ——————————————————————————————————————————— (12) Interest Revenue Ö ——————————————————————————————————————————— (13) Salaries and Wages Expense Ö ——————————————————————————————————————————— (14) Dividends Ö ——————————————————————————————————————————— (15) Accum. Deprec.—Equipment Ö ——————————————————————————————————————————— (16) Utilities Expense Ö ——————————————————————————————————————————— (17) Salaries and Wages Payable Ö ——————————————————————————————————————————— (18) Accounts Receivable Ö ——————————————————————————————————————————— (19) Notes Payable Ö ——————————————————————————————————————————— (20) Service Revenue Ö ———————————————————————————————————————————
For Instructor Use Only
4 - 58
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 210 Indicate the worksheet column (income statement Dr., statement of financial position Cr., etc.) to which each of the following accounts would be extended. Account Worksheet Column a. Accounts Receivable ________________ b. Accumulated Depreciation ________________ c. Service Revenue ________________ d. Utilities Expense ________________ e. Dividends ________________ f. Retained Earnings ________________ Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 210 a. b. c. d. e. f.
(5 min.)
Statement of financial position Statement of financial position Income statement Income statement Statement of financial position Statement of financial position
Dr. Cr. Cr. Dr. Dr. Cr.
Ex. 211 The worksheet for Boone Mailing Center appears below. Using the adjustment data below, complete the worksheet. Add any accounts that are necessary. Adjustment data: (a) (b) (c) (d)
Prepaid rent expired during August, $2. Depreciation expense on equipment for the month of August, $8. Supplies on hand on August 31 amounted to $4. Salaries and wages expense incurred at August 31 but not yet paid amounted to $12.
For Instructor Use Only
Completing the Accounting Cycle Ex. 211
4 - 59
(Cont.) BOONE MAILING CENTER Worksheet For the Month Ended August 31, 2020
Account Titles
Trial Balance
Adjustments
Adjusted Trial Balance
Debit
Debit
Debit
Cash
20
Accounts Receivable
12
Prepaid Rent
8
Supplies
10
Equipment
50
Accum. Depreciation— Equipment Accounts Payable
Credit
Credit
Debit
Credit
Statement of Financial Position Debit
Credit
10 20
Share Capital-Ordinary Dividends
Credit
Income Statement
15 2
Service Revenue
77
Depreciation Expense
6
Rent Expense Retained Earnings Salaries/Wages Expense
4 20
Totals
132
10 132
Supplies Expense Salaries/Wages Payable Totals Net Income Totals Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 60
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 211
(15 min.) BOONE MAILING CENTER Worksheet For the Month Ended August 31, 2020
Account Titles
Trial Balance
Adjustments
Adjusted Trial Balance
Debit
Debit
Debit
Credit
Credit
Credit
Income Statement Debit
Credit
Statement of Financial Position Debit
Cash
20
20
20
Accounts Receivable
12
12
12
Prepaid Rent
8
(a) 2
6
6
Supplies
10
(c) 6
Equipment
50
Accum. Depreciation— Equipment Accounts Payable
10
(b) 8
15
6
Rent Expense Retained Earnings Salaries/Wages Expense
4 20
Totals
132
20
20 15 2
77 (b) 8
14
(a) 2
6
10
77 14 6
10
10
(d) 12
32
32
(c) 6
6
6
132
Salaries/Wages Payable Totals
18
2 77
Depreciation Expense
18 15
2
Service Revenue
Supplies Expense
4 50
20
Share Capital-Ordinary Dividends
4 50
Credit
(d) 12 28
28
12 152
152
12 58
Net Income
19
Totals
77
For Instructor Use Only
77
94
75 19
77
94
94
Completing the Accounting Cycle
4 - 61
Ex. 212 The account balances (in thousands) appearing on the trial balance (below) were taken from the general ledger of Yang Bakery at October 31. Additional information (in thousands) for the month of October which has not yet been recorded in the accounts is as follows: (a) A physical count of supplies indicates ¥500 on hand at October 31. (b) The amount of insurance that expired in the month of October was ¥200. (c) Depreciation on equipment for October was ¥400. (d) Salaries owed for the month of October was ¥1,100 but will not be paid until November. Instructions Using the above information, complete the worksheet on the following page for Yang Bakery for the month of October. YANG BAKERY Worksheet For the Month Ended October 31, 2020 Trial Balance
Adjustments
Adjusted Trial Balance
Account Titles
Debit
Debit
Debit
Cash
1,000
Supplies
1,100
Prepaid Insurance
2,200
Equipment
24,000
Credit
Accum. Depreciation— Equipment Accounts Payable
4,500
Notes Payable
4,000
Share Capital-Ordinary
5,300
Credit
Debit
Credit
Statement of Financial Position Debit Credit
2,400
Retained Earnings Dividends Service Revenue
2,400
Utilities Expense
400
Totals
Credit
Income Statement
10,000 4,900 31,100
31,100
Supplies Expense Insurance Expense Depreciation Expense Salaries/Wages Expense Salaries/Wages Payable Totals Net Income Totals Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 62
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 212 (15 min.) YANG BAKERY Worksheet For the Month Ended October 31, 2020 Trial Balance Account Titles
Debit
Cash
1,000
Supplies
1,100
Prepaid Insurance
2,200
Equipment
24,000
Adjustments
Credit
Debit
Credit
Adjusted Trial Balance Debit Credit
Income Statement Debit
Credit
Statement of Financial Position Debit
1,000
1,000
(a) 600
500
500
(b) 200
2,000
2,000
24,000
24,000
Credit
Accum. Depreciation— Equipment Accounts Payable
4,500
4,900
4,900
2,400
2,400
2,400
Notes Payable
4,000
4,000
4,000
Share Capital-Ordinary
5,300
5,300
5,300
Retained Earnings Dividends Revenue
2,400
Utilities Expense
400
Totals
(c) 400
10,000
10,000
4,900 31,100
10,000
2,400
2,400 4,900
4,900
400
400
31,100
Supplies Expense
(a) 600
600
600
Insurance Expense
(b) 200
200
200
Depreciation Expense
(c) 400
400
400
Salaries / Wages Expense
(d) 1,100
1,100
1,100
Salaries / Wages Payable Totals
(d) 1,100 2,300
2,300
1,100 32,600
32,600
1,100 2,700
Net Income
2,200
Totals
4,900
4,900 4,900
The adjustments columns of the worksheet for Leonardo Company are shown below. Adjustments Debit Credit 800 600 700 500 800 500 600 700 2,600 2,600
For Instructor Use Only
27,700 2,200
Ex. 213
Account Titles Accounts Receivable Prepaid Insurance Accumulated Depreciation Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense
29,900 29,900
29,900
Completing the Accounting Cycle Ex. 213
4 - 63
(Cont.)
Instructions (a) Prepare the adjusting entries. (b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 213
(10 min.)
(a) Accounts Receivable ................................................................. Service Revenue ..................................................................
800
Insurance Expense .................................................................... Prepaid Insurance ................................................................
600
Depreciation Expense ................................................................ Accumulated Depreciation ...................................................
700
Salaries and Wages Expense .................................................... Salaries and Wages Payable ...............................................
500
800 600 700
(b) Statement of Financial Position Dr. Cr. X X X X
Income Statement Dr. Cr. Accounts Receivable Prepaid Insurance Accum. Depreciation Salaries and Wages Payable Service Revenue Salaries and Wages Expense Insurance Expense Depreciation Expense
X X X X
Ex. 214 Selected worksheet data for East Carolina Company are presented below. Account Titles Accounts Receivable Prepaid Rent Supplies Accumulated Depreciation Salaries and Wages Payable Service Revenue Rent Expense Depreciation Expense Supplies Expense Salaries and Wages Expense
Trial Balance Dr. Cr. ? 24,000 7,000 12,000 ? 86,000
?
Adjusted Trial Balance Dr. Cr. 31,000 20,000 ? ? 6,000 99,000 ? 9,000 5,000 49,000
For Instructor Use Only
500
4 - 64
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 214
(Cont.)
Instructions (a) Fill in the missing amounts. (b) Prepare the adjusting entries that were made. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 214 (a)
(10 min.)
Accounts Receivable—$18,000 ($31,000 – $13,000). Supplies—$2,000 ($7,000 – $5,000). Accumulated Depreciation—$21,000 ($12,000 + $9,000). Salaries and Wages Payable—$0 No liability recorded until adjustments are made. Rent Expense—$4,000 ($24,000 – $20,000). Salaries and Wages Expense—$43,000 ($49,000 – $6,000).
(b) Accounts Receivable .................................................................. Service Revenue ..................................................................
13,000
Rent Expense ............................................................................. Prepaid Rent.........................................................................
4,000
Supplies Expense....................................................................... Supplies ................................................................................
5,000
Depreciation Expense ................................................................ Accumulated Depreciation-Equipment ................................
9,000
Salaries and Wages Expense .................................................... Salaries and Wages Payable ...............................................
6,000
13,000 4,000 5,000 9,000 6,000
Ex. 215 These financial statement items (in thousands) are for Chen Company at year-end, July 31, 2020. Salaries and wages payable Salaries and wages expense Utilities expense Equipment Accounts payable Service revenue Rent revenue Share capital-ordinary
¥ 4,580 45,700 19,100 24,000 4,100 58,100 6,500 16,200
Note payable (Non-Current) Cash Accounts receivable Accumulated depreciation-equip. Dividends Depreciation expense Retained earnings (8/1/2016)
¥ 3,300 22,200 9,780 6,000 4,000 4,000 30,000
Instructions (a) Prepare an income statement and a retained earnings statement for the year. (b) Prepare a classified statement of financial position at July 31, 2020. Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle Solution 215
4 - 65
(15 min.)
(a)
CHEN COMPANY Income Statement For the Year Ended July 31, 2020 ——————————————————————————————————————————— Revenues Service revenue ............................................................................ ¥58,100 Rent revenue ................................................................................ 6,500 Total revenues ....................................................................... ¥64,600 Expenses Salaries and wages expense ........................................................ 45,700 Utilities expense ............................................................................ 19,100 Depreciation expense ................................................................... 4,000 Total expense ........................................................................ 68,800 Net loss .................................................................................................. ¥ (4,200) CHEN COMPANY Retained Earnings Statement For the Year Ended July 31, 2020 ——————————————————————————————————————————— Retained Earnings, August 1, 2019 ....................................................... ¥30,000 Less: Net loss ....................................................................................... ¥4,200 Dividends ...................................................................................... 4,000 8,200 Retained Earnings, July 31, 2020 .......................................................... ¥21,800 (b)
CHEN COMPANY Statement of Financial Position July 31, 2020 ——————————————————————————————————————————— Assets Property, plant, and equipment Equipment ..................................................................................... ¥24,000 Less: Accumulated depreciation-equip. ....................................... 6,000 ¥18,000 Current assets Accounts receivable ...................................................................... 9,780 Cash .............................................................................................. 22,200 31,980 Total assets ............................................................................ ¥49,980 Equity and Liabilities Equity Share capital-ordinary………………………………………………… Retained earnings ......................................................................... Non-current liabilities Note payable ................................................................................. Current liabilities Accounts payable.......................................................................... Salaries and wages payable ........................................................... Total equity and liabilities .........................................................
For Instructor Use Only
¥16,200 21,800
¥38,000 3,300
¥4,100 4,580
8,680 ¥49,980
4 - 66
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 216 Latitudes Company had the following adjusted trial balance. LATITUDES COMPANY Adjusted Trial Balance For the Month Ended June 30, 2020 Account Titles Cash Accounts Receivable Supplies Accounts Payable Unearned Service Revenue Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Miscellaneous Expense Supplies Expense Salaries and Wages Payable
Debits $ 3,200 3,900 500
Credits
$ 1,800 200 4,000 800 300 5,100 1,800 300 2,300 $12,300
400 $12,300
(a) Prepare closing entries at June 30, 2020. (b) Prepare a post-closing trial balance. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 216
(8–10 min.)
(a) Service Revenue .................................................................................... Income Summary .......................................................................
5,100 5,100
Income Summary ................................................................................... Supplies Expense....................................................................... Miscellaneous Expense.............................................................. Salaries and Wages Expense ....................................................
4,400
Income Summary ................................................................................... Retained Earnings ......................................................................
700
Retained Earnings.................................................................................. Dividends....................................................................................
300
For Instructor Use Only
2,300 300 1,800 700 300
Completing the Accounting Cycle Solution 216
(Cont.)
(b) LATITUDES COMPANY Post-closing Trial Balance For the Month Ended June 30, 2020 Account Titles Cash Accounts Receivable Supplies Accounts Payable Unearned Service Revenue Salaries and Wages Payable Share Capital-Ordinary Retained Earnings
Debits $ 3,200 3,900 500
$7,600
Credits
$ 1,800 200 400 4,000 1,200 $7,600
Ex. 217 Vanguard Company had the following adjusted trial balance at December 31, 2020. VANGUARD COMPANY Adjusted Trial Balance For the Year Ended December 31, 2020 Account Titles Cash Accounts Receivable Equipment Accounts Payable Accumulated Depreciation-Equip. Share Capital - Ordinary Retained Earnings Dividends Service Revenue Unearned Rent Revenue Rent Revenue Salaries and Wages Expense Depreciation Expense Supplies Expense Utilities Expense
Debits ₤ 12,800 8,800 15,900
Credits
₤ 4,100 7,400 17,000 25,500 16,000 68,000 1,800 6,500 55,700 6,000 200 14,900 ₤130,300
For Instructor Use Only
₤130,300
4 - 67
4 - 68
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 217
(Cont.)
Instructions (a) Journalize the entries required to close the accounts. (b) Prepare a retained earnings statement for the year ended December 31, 2020. Ans: N/A, LO: 2,4 Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 217
(b)
(10 min.)
(a) Service Revenue ........................................................................ Rent Revenue ............................................................................ Income Summary ...........................................................
68,000 6,500
Income Summary ....................................................................... Supplies Expense ........................................................... Depreciation Expense .................................................... Salaries and Wages Expense ........................................ Utilities Expense .............................................................
76,800
Retained Earnings ...................................................................... Income Summary ...........................................................
2,300
Retained Earnings ...................................................................... Dividends ........................................................................
16,000
74,500 200 6,000 55,700 14,900 2,300 16,000
VANGUARD COMPANY Retained Earnings Statement For the Year Ended December 31, 2020 Retained Earnings, January 1 Less: Net loss Less: Dividends Retained Earnings, December 31
For Instructor Use Only
₤25,500 2,300 23,200 16,000 ₤ 7,200
Completing the Accounting Cycle
4 - 69
Ex. 218 At March 31, account balances after adjustments for Blowing Rock Stage Theatre are as follows: Accounts Cash Supplies Equipment Accumulated Depreciation—Equipment Accounts Payable Share Capital-Ordinary Retained Earnings Dividends Ticket Revenue Service Revenue Advertising Expense Supplies Expense Depreciation Expense Miscellaneous Expense Rent Expense Salaries and Wages Expense Utilities Expense
Account Balances (After Adjustment) $ 6,000 4,000 50,000 12,000 5,000 4,000 16,000 12,000 65,000 51,000 12,000 19,000 4,000 16,000 12,000 20,000 5,000
Instructions Prepare the closing journal entries for Blowing Rock Stage Theatre. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 218
(10 min.)
Mar. 31 Ticket Revenue...................................................................... Service Revenue ................................................................... Income Summary .................................................... (To close revenue accounts)
65,000 51,000
31 Income Summary .................................................................. Advertising Expense.................................................... Supplies Expense........................................................ Depreciation Expense ................................................. Miscellaneous Expense............................................... Rent Expense .............................................................. Salaries and Wages Expense ..................................... Utilities Expense .......................................................... (To close expense accounts)
88,000
31 Income Summary .................................................................. Retained Earnings ....................................................... (To transfer net income to retained earnings)
28,000
For Instructor Use Only
116,000
12,000 19,000 4,000 16,000 12,000 20,000 5,000
28,000
4 - 70
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 218
(Cont.)
31 Retained Earnings ................................................................. Dividends ..................................................................... (To close dividends to retained earnings)
12,000 12,000
Ex. 219 Presented below is an adjusted trial balance for Cowell Company, at December 31, 2020. Cash Accounts receivable Prepaid insurance Equipment Depreciation expense Dividends Advertising expense Rent expense Salaries and wages expense Insurance expense
€10,700 20,000 15,000 35,000 7,000 1,500 1,400 800 5,000 1,600 €98,000
Accounts payable Notes payable Accumulated depreciation— equipment Service revenue Retained earnings Unearned service revenue Share capital-ordinary
€10,000 9,000 14,000 30,000 12,000 11,000 12,000 €98,000
Instructions (a) Prepare closing entries for December 31, 2020. (b) Determine the balance in the retained earnings account after the entries have been posted. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 219
(10 min.)
(a) Dec. 31 Service Revenue .................................................................. Income Summary ........................................................ (To close revenue account)
30,000
31 Income Summary ................................................................. Depreciation Expense ................................................. Advertising Expense .................................................... Rent Expense .............................................................. Salaries and Wages Expense ..................................... Insurance Expense ...................................................... (To close expense accounts)
15,800
For Instructor Use Only
30,000
7,000 1,400 800 5,000 1,600
Completing the Accounting Cycle Solution 219
4 - 71
(Cont.)
31 Income Summary ................................................................. Retained Earnings ....................................................... (To close net income to retained earnings)
14,200
31 Retained Earnings................................................................ Dividends..................................................................... (To close dividends to retained earnings)
1,500
(b)
14,200
1,500
Retained Earnings 1,500 Bal.
12,000 14,200 24,700
Ex. 220 The adjusted account balances of the Quick-E Delivery Service at October 31 are as follows: Accounts Account Balances Cash $16,000 Accounts Receivable 15,000 Supplies 4,000 Prepaid Insurance 8,000 Equipment 300,000 Accumulated Depreciation— Equipment 120,000 Accounts Payable 19,000 Retained Earnings 105,000 Share Capital-Ordinary 100,000
Accounts Account Balances Service Revenue $90,000 Interest Revenue 8,000 Depreciation Expense 27,000 Insurance Expense 6,000 Salaries and Wages Expense 30,000 Supplies Expense 9,000 Utilities Expense 12,000 Dividends 15,000
Instructions Prepare the end of the period closing entries for the Quick-E Delivery Service. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 220 Oct 31
(10 min.)
Service Revenue .................................................................. Interest Revenue .................................................................. Income Summary ........................................................ (To close revenue accounts)
For Instructor Use Only
90,000 8,000 98,000
4 - 72
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 220 31
31
31
(Cont.)
Income Summary ................................................................. Depreciation Expense ................................................. Insurance Expense ...................................................... Salaries and Wages Expense ..................................... Supplies Expense ........................................................ Utilities Expense .......................................................... (To close expense accounts)
84,000
Income Summary ................................................................. Retained Earnings ....................................................... (To close net income to retained earnings)
14,000
Retained Earnings ................................................................ Dividends ..................................................................... (To close dividends to retained earnings)
15,000
27,000 6,000 30,000 9,000 12,000
14,000
15,000
Ex. 221 The income statement of Hall Marine Repairs is as follows: HALL MARINE REPAIRS Income Statement For the Month Ended April 30, 2020 Revenue Service Revenue ........................................................................... Expenses Salaries and Wages Expense ....................................................... Supplies Expense.......................................................................... Insurance Expense........................................................................ Utilities Expense ............................................................................ Depreciation Expense ................................................................... Total Expenses ...................................................................... Net Income .............................................................................................
₤8,500 ₤3,900 1,050 600 400 350 6,300 ₤2,200
On April 1, the retained earnings account had a balance of ₤12,900. During April, the company paid ₤3,000 in dividends. Instructions (a) Prepare closing entries at April 30. (b) Prepare a retained earnings statement for the month of April. Ans: N/A, LO: 2,4 Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Completing the Accounting Cycle Solution 221
4 - 73
(10 min.)
(a) Service Revenue ............................................................................ Income Summary ..................................................................
8,500
Income Summary ........................................................................... Salaries and Wages Expense ............................................... Depreciation Expense ........................................................... Utilities Expense .................................................................... Insurance Expense ................................................................ Supplies Expense ..................................................................
6,300
Income Summary ........................................................................... Retained Earnings .................................................................
2,200
Retained Earnings .......................................................................... Dividends ...............................................................................
3,000
(b)
8,500 3,900 350 400 600 1,050 2,200 3,000
HALL MARINE REPAIRS Retained Earnings Statement For the Month Ended April 30, 2020 Retained Earnings, April 1 Add: Net Income
₤12,900 2,200 15,100 3,000 ₤12,100
Less: Dividends Retained Earnings, April 30 Ex. 222
Identify which of the following accounts would appear in a post-closing trial balance. Accumulated Depreciation-Equip. Dividends Depreciation Expense Service Revenue Interest Payable Equipment Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 222
(3 min.)
The following accounts would appear in a post-closing trial balance: Accumulated Depreciation-Equip. Interest Payable Equipment
For Instructor Use Only
4 - 74
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 223 The trial balances of Barola Company follow with the accounts arranged in alphabetic order. Analyze the data and prepare (a) the adjusting entries and (b) the closing entries made by Barola Company. Trial Balances Unadjusted Adjusted Post-Closing Accounts Payable $10,000 $10,000 $10,000 Accounts Receivable 2,200 3,200 3,200 Accumulated Depreciation-Equip. 13,000 17,000 17,000 Cash 60,000 60,000 60,000 Depreciation Expense 0 4,000 0 Dividends 11,000 11,000 0 Equipment 75,000 75,000 75,000 Insurance Expense 0 16,300 0 Prepaid Insurance 17,800 1,500 1,500 Prepaid Rent 15,000 11,000 11,000 Retained Earnings 52,200 52,200 72,400 Rent Expense 0 4,000 0 Salaries and Wages Expense 38,000 45,000 0 Salaries and Wages Payable 0 7,000 7,000 Service Revenue 96,000 105,000 0 Share Capital-Ordinary 30,000 30,000 30,000 Supplies 3,200 700 700 Supplies Expense 2,000 4,500 0 Unearned Service Revenue 23,000 15,000 15,000 Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 223 (a)
(20 min.)
Adjusting Entries Depreciation Expense ................................................................... Accumulated Depreciation-Equip. .......................................
4,000 4,000
Insurance Expense........................................................................ Prepaid Insurance ................................................................
16,300
Unearned Service Revenue .......................................................... Service Revenue ..................................................................
8,000
Accounts Receivable ..................................................................... Service Revenue ..................................................................
1,000
Rent Expense ................................................................................ Prepaid Rent.........................................................................
4,000
Supplies Expense.......................................................................... Supplies ................................................................................
2,500
Salaries and Wages Expense ....................................................... Salaries and Wages Payable ...............................................
7,000
For Instructor Use Only
16,300 8,000 1,000 4,000 2,500 7,000
Completing the Accounting Cycle Solution 223 (b)
4 - 75
(Cont.)
Closing Entries Service Revenue........................................................................... Income Summary .................................................................
105,000 105,000
Income Summary .......................................................................... Insurance Expense .............................................................. Depreciation Expense .......................................................... Rent Expense....................................................................... Supplies Expense ................................................................ Salaries and Wages Expense ..............................................
73,800
Income Summary .......................................................................... Retained Earnings................................................................
31,200
Retained Earnings ........................................................................ Dividends ............................................................................
11,000
16,300 4,000 4,000 4,500 45,000 31,200 11,000
Ex. 224 Indicate the proper sequence of the steps in the accounting cycle by placing numbers 1-8 in the blank spaces. ____
a.
Analyze business transactions.
____
b.
Journalize and post adjusting entries.
____
c.
Journalize and post closing entries.
____
d.
Journalize the transactions
____
e.
Prepare a post-closing trial balance.
____
f.
Prepare a worksheet.
____
g.
Prepare financial statements.
____
h.
Post to ledger accounts.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 224 a. b. c. d.
1 6 7 2
(4 min.) e. f. g. h.
8 4 5 3
For Instructor Use Only
4 - 76
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 225 Ridge Properties discovered the following errors made in January 2020. Prepare the necessary correcting entry for each of the following. a. A collection on account of €570 from a customer was credited to Accounts Receivable €750 and debited to Cash €750. b. The purchase of supplies on account for €250 was recorded as a debit to Equipment €250 and a credit to Accounts Payable €250. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 225
(5 min.)
a. Accounts Receivable ........................................................................ Cash ........................................................................................
180
b. Supplies ........................................................................................... Equipment ...............................................................................
250
180 250
Ex. 226 An examination of the accounts of Zin Company for the month of June revealed the following errors after the transactions were journalized and posted. Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. 1. A collection of $750 from R. Joseph, a customer on account, was debited to Cash $750 and credited to Service Revenue, $750. 2. A payment for Advertising Expense costing $620 was debited to Utilities Expense, $260 and credited to Cash $260. 3. A bill for $710 for Supplies purchased on account was debited to Equipment, $170 and credited to Accounts Payable $170. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 226
(10 min.)
1. Service Revenue .................................................................................... Accounts Receivable ..................................................................... (To correct error in recording collection of accounts receivable)
750
2. Advertising Expense .............................................................................. Utilities Expense ............................................................................ Cash .............................................................................................. (To correct errors in recording advertising expense)
620
3. Supplies ................................................................................................. Equipment ..................................................................................... Accounts Payable .......................................................................... (To correct error in recording supplies)
710
For Instructor Use Only
750
260 360
170 540
Completing the Accounting Cycle
4 - 77
Ex. 227 An examination of the accounts of Freeman Company for the month of October revealed the following errors after the transactions were journalized and posted. Prepare correcting entries for each of the above assuming the erroneous entries are not reversed. (a) (b) (c) (d)
A check for $700 was issued for goods previously purchased on account. The bookkeeper debited Accounts Receivable and credited Cash for $700. A check for $580 was received as payment on account. The bookkeeper debited Accounts Payable for $850 and credited Accounts Receivable for $850. When making the entry to record the year's depreciation expense, the bookkeeper debited Accumulated Depreciation for $1,500 and credited Cash for $1,500. When accruing interest on a note payable, the bookkeeper debited Interest Receivable for $200 and credited Interest Payable for $200.
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227 (a) (b)
(c)
(d)
(5 min.)
Accounts Payable ......................................................................... Accounts Receivable............................................................
700
Cash ............................................................................................. Accounts Receivable .................................................................... Accounts Payable ................................................................
580 270
Cash ............................................................................................. Depreciation Expense ................................................................... Accumulated Depreciation ...................................................
1,500 1,500
Interest Expense ........................................................................... Interest Receivable ..............................................................
200
700
850
3,000 200
Ex. 228 Betty Wright, CPA, was asked by the controller of Gore Company to review the accounting records before financial statements are prepared. Betty reviewed the records and found three errors. 1. Cash paid on accounts payable for $910 was recorded as a debit to Accounts Payable $190 and a credit to Cash $190. 2. The purchase of supplies on account for $500 was debited to Equipment $500 and credited to Accounts Payable $500. 3. The company paid dividends $1,500. The bookkeeper debited Accounts Receivable for $150 and credited Cash $150.
For Instructor Use Only
4 - 78
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 228
(Cont.)
Instructions Prepare an analysis of each error showing the (a) incorrect entry. (b) correct entry. (c) correcting entry. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 228 1. (a)
(b)
(c)
2. (a)
(b)
(c)
3. (a)
(b)
(c)
(15 min.)
Incorrect Entry Accounts Payable .............................................................. Cash .........................................................................
190
Correct Entry Accounts Payable .............................................................. Cash .........................................................................
910
Correcting Entry Accounts Payable .............................................................. Cash .........................................................................
720
Incorrect Entry Equipment ......................................................................... Accounts Payable .....................................................
500
Correct Entry Supplies ............................................................................. Accounts Payable .....................................................
500
Correcting Entry Supplies ............................................................................. Equipment.................................................................
500
Incorrect Entry Accounts Receivable ......................................................... Cash .........................................................................
150
Correct Entry Dividends ........................................................................... Cash .........................................................................
1,500
Correcting Entry Dividends ........................................................................... Accounts Receivable ................................................ Cash .........................................................................
For Instructor Use Only
190
910
720
500
500
500
150
1,500 1,500 150 1,350
Completing the Accounting Cycle
4 - 79
Ex. 229 Harken Company discovered the following errors made in January 2020. 1. A payment of Salaries and Wages Expense of $600 was debited to Equipment and credited to Cash, both for $600. 2. A collection of $2,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200. 3. The purchase of equipment on account for $680 was debited to Equipment $860 and credited to Accounts Payable $860. Instructions Correct the errors by reversing the incorrect entry and preparing the correct entry. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 229 1.
2.
3.
(10 min.)
Cash ....................................................................................... Equipment ..........................................................................
600
Salaries and Wages Expense ................................................ Cash ..................................................................................
600
Service Revenue ..................................................................... Cash ...................................................................................
200
Cash ....................................................................................... Accounts Receivable .........................................................
2,000
Accounts Payable ................................................................... Equipment ..........................................................................
860
Equipment ............................................................................... Accounts Payable ..............................................................
680
600 600 200 2,000 860 680
Ex. 230 The following items (in thousands) were taken from the financial statements of Zhao Company. (All dollars are in thousands.) Mortgage payable Prepaid insurance Equipment Long-term investments Short-term investments Notes payable (due in 2020) Cash
¥2,443 880 13,500 764 3,690 981 3,168
Accumulated depreciation-equip. 3,655 Accounts payable 1,444 Notes payable (due after 2020) 368 Share capital—ordinary 6,000 Accounts receivable 1,696 Inventories 1,756 Retained earnings 10,563
For Instructor Use Only
4 - 80 Ex. 230
Test Bank for Financial Accounting: IFRS Edition, 4e (Cont.)
Instructions Prepare a classified statement of financial position in good form as of December 31, 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 230
(10 min.)
ZHAO COMPANY Statement of Financial Position December 31, 2020 (in thousands) ——————————————————————————————————————————— Assets Property, plant, and equipment Equipment ..................................................................................... ¥13,500 Less: Accumulated depreciation-equip......................................... (3,655) ¥ 9,845 Long-term investments........................................................................... 764 Current assets Prepaid insurance ......................................................................... 880 Inventories ..................................................................................... 1,756 Accounts receivable ...................................................................... 1,696 Short-term investments ................................................................. 3,690 Cash .............................................................................................. 3,168 11,190 Total assets ............................................................................ ¥21,799 Equity and Liabilities Equity Share capital-ordinary ................................................................... ¥6,000 Retained earnings ......................................................................... 10,563 ¥16,563 Non-current liabilities Mortgage payable.......................................................................... 2,443 Notes payable (due after 2021) ..................................................... 368 2,811 Current liabilities Notes payable (due in 2021) ......................................................... 981 Accounts payable .......................................................................... 1,444 2,425 Total equity and liabilities ...................................................... ¥21,799 Ex. 231 Compute the dollar amount of current assets based on the following account balances. Accounts Payable Accounts Receivable Equipment Short-term Investments
$11,000 16,000 93,000 20,000
Accumulated Depreciation-Equip. Cash Prepaid Rent
27,000 24,000 7,000
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle Solution 231
4 - 81
(4 min.)
Current assets amount = $67,000 ($16,000 + $24,000 + $7,000 + $20,000) Ex. 232 The financial statement columns of the worksheet for The Coffee Pot at December 31, 2020, are as follows: THE COFFEE POT Worksheet For the Year Ended December 31, 2020 Statement of Income Statement Financial Position Accounts Debit Credit Debit Credit Cash 10,000 Accounts Receivable 7,000 Supplies 4,000 Prepaid Insurance 6,000 Equipment 219,000 Accumulated Depreciation—Equipment 29,000 Accounts Payable 19,000 Note Payable 60,000 Salaries and Wages Payable 13,000 Share Capital-Ordinary 50,000 Retained Earnings 62,000 Dividends 9,000 Service Revenue 123,000 Advertising Expense 21,000 Depreciation Expense 12,000 Insurance Expense 3,000 Rent Expense 17,000 Salaries and Wages Expense 42,000 Supplies Expense 6,000 Totals 101,000 123,000 255,000 233,000 Net Income 22,000 22,000 123,000 123,000 255,000 255,000 Instructions (a) Calculate the retained earnings balance that would appear on a Statement of financial position at December 31, 2020. (b) Prepare a classified statement of financial position for The Coffee Pot at December 31, 2020 assuming the note payable is a long-term liability. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 232 (a)
(15 min.)
Retained Earnings, January 1 Add: Net Income Less: Dividends Retained Earnings, December 31
€62,000 22,000 84,000 9,000 €75,000
For Instructor Use Only
4 - 82
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 232
(Cont.)
(b)
THE COFFEE POT Statement of Financial Position December 31, 2020 ——————————————————————————————————————————— Assets Property, plant, and equipment Equipment .............................................................................. €219,000 Less: Accumulated depreciation—equipment........................ 29,000 Current assets Prepaid insurance .................................................................. 6,000 Supplies ................................................................................. 4,000 Accounts receivable ............................................................... 7,000 Cash....................................................................................... 10,000 Total assets .................................................................... Equity and Liabilities Equity Share capital-ordinary ............................................................ Retained earnings .................................................................. Non-current liabilities Note payable .......................................................................... Current liabilities Accounts payable................................................................... Salaries and wages payable .................................................. Total equity and liabilities ...............................................
For Instructor Use Only
€50,000 75,000
€190,000
27,000 €217,000
€125,000 60,000
19,000 13,000
32,000 €217,000
Completing the Accounting Cycle
4 - 83
Ex. 233 The financial statement columns of the worksheet for Dr. Gumbo’s Catering Company as of December 31, 2020 are as follows: DR. GUMBO’S CATERING COMPANY Worksheet For the Year Ended December 31, 2020 Accounts Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation-Equip. Copyrights Accounts Payable Bonds Payable (due 2021) Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Depreciation Expense Insurance Expense Income Tax Expense Totals Net Income
Income Statement Debit Credit
Statement of Financial Position Debit Credit 15,000 6,000 4,500 7,000 60,000 4,800 7,500 23,500 18,000 25,000 26,000 4,200
25,400 5,200 4,800 5,000 3,500 18,500 6,900 25,400
25,400
104,200
25,400
104,200
97,300 6,900 104,200
Instructions Prepare a classified statement of financial position for Dr. Gumbo’s Catering Company. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 84
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 233
(15 min.) DR. GUMBO’S CATERING COMPANY Statement of Financial Position December 31, 2020
Assets Intangible assets Copyrights ..................................................................................... Property, Plant, and Equipment Equipment ..................................................................................... Less: Accumulated depreciation—equipment ............................... Current assets Prepaid insurance ......................................................................... Supplies......................................................................................... Accounts receivable ...................................................................... Cash ..............................................................................................
$ 7,500 $60,000 4,800 7,000 4,500 6,000 15,000 32,500 $95,200
Total assets .......................................................................... Equity and Liabilities Equity Share capital—ordinary ................................................................. Retained earnings ......................................................................... Non-current liabilities Bonds payable............................................................................... Current liabilities Accounts payable .......................................................................... Total equity and liabilities .....................................................
55,200
$25,000 28,700*
$53,700 18,000 23,500 $95,200
* Retained earnings = $28,700 ($26,000 + $6,900 – $4,200). Ex.234 The following are the major statement of financial position classification. Intangible assets (IA) Property, plant, and equipment (PPE) Long-term investments (LTI) Current assets (CA)
Equity (E) Non-current liabilities (NCL) Current liabilities (CL)
Instructions Classify each of the following accounts taken from Rivera Company's statement of financial position. _____ Accounts receivable _____ Building _____ Copyrights _____ Accounts payable _____ Interest payable _____ Retained earnings
_____ Mortgage payable _____ Share capital—ordinary _____ Accumulated depreciation _____ Land held for investment _____ Bonds payable _____ Inventory
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Completing the Accounting Cycle Solution 234 CA PPE IA CL CL E
4 - 85
(5 min.)
Accounts receivable Building Copyrights Accounts payable Interest Payable Retained earnings
NCL E PPE LTI NCL CA
Mortgage payable Share capital-ordinary Accumulated depreciation Land held for investment Bonds payable Inventory
Ex. 235 The following account balances appeared in the adjusted trial balance for Nguyen Inc.: Supplies ¥2,500; Inventories ¥3,000; Accounts Receivable ¥13,200; Cash ¥11,500; Prepaid Insurance ¥6,300; and Short-term Investments ¥7,600. Prepare the current assets section of the 2020 statement of financial position in proper format. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 235 (5 min.) Nguyen Inc. Partial Statement of Financial Position December 31, 2020 Current Assets Prepaid insurance Supplies Inventories Accounts receivable Short-term investments Cash Total current assets
¥ 6,300 2,500 3,000 13,200 7,600 11,500 ¥44,100
Ex. 236 The following items were taken from the post-closing trial balance of Aloma Macarty Company (All pounds are in thousands): Accumulated depreciation-equip. Accounts payable Notes payable due after 2021 Share capital-ordinary Retained earnings Accounts receivable Cash
£5,455 2,244 168 9,800 5,263 1,496 2,868
Mortgage payable Patent Equipment Land held for investment Short-term investments Notes payable due in 2021 Inventories
£ 743 680 14,300 464 3,490 681 1,056
Prepare a classified statement of financial position in good form as of December 31, 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 236
(15 min.) Aloma Macarty Company Statement of Financial Position December 31, 2020 Assets
Intangible assets Patent ............................................................................................ Property, plant and equipment Equipment ..................................................................................... Less: Accumulated depreciation-equip......................................... Long-term investments........................................................................... Land held for investment ............................................................... Current assets ........................................................................................ Inventories ..................................................................................... Accounts receivable ...................................................................... Short-term investments ................................................................. Cash .............................................................................................. Total assets .......................................................................... Equity and Liabilities Equity Share capital-ordinary ................................................................... Retained earnings ......................................................................... Non-current liabilities Mortgage payable.......................................................................... Notes payable due after 2021 ....................................................... Current liabilities Notes payable due in 2021............................................................ Accounts payable .......................................................................... Total equity and liabilities ..................................................... a
£ 680 £14,300 5,455
8,845 464
1,056 1,496 3,490 2,868
8,910 £18,899
£ 9,800 5,263
£15,063
743 168
911
681 2,244
2,925 £18,899
Ex. 237
North Company prepared the following adjusting entries at year end on December 31, 2020: (a) Interest Expense ........................................................................... 300 Interest Payable.................................................................... 300 (b) (c) (d) (e) (f)
Unearned Service Revenue .......................................................... Service Revenue ..................................................................
1,500
Insurance Expense........................................................................ Prepaid Insurance ................................................................
1,200
Interest Receivable........................................................................ Interest Revenue ..................................................................
100
Supplies Expense.......................................................................... Supplies ................................................................................
250
Salaries and Wages Expense ....................................................... Salaries and Wages Payable ...............................................
3,000
For Instructor Use Only
1,500 1,200 100 250 3,000
Completing the Accounting Cycle
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Ex. 237 (Cont.) In an effort to minimize errors in recording transactions, North Company utilizes reversing entries. Instructions Prepare reversing entries on January 1, 2020, for the adjusting entries given where appropriate. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 237
(15 min.)
Reversing entries are appropriate for adjusting entries related to accrued revenues and accrued expenses. Three of the entries given are accruals and need to be reversed. (a)
(d)
(f)
a
Reverse the entry to accrue interest expense. Interest Payable ............................................................................ Interest Expense ..................................................................
300
Reverse the entry to accrue interest revenue. Interest Revenue........................................................................... Interest Receivable ..............................................................
100
Reverse the entry to accrue wages expense. Salaries and Wages Payable ........................................................ Salaries and Wages Expense ..............................................
3,000
300
100
3,000
Ex. 238
On December 31, 2019 the adjusted trial balance of the High Country Match Service shows the following selected data: Accounts Receivable, $7,000 Service Revenue, $60,000 Salaries and Wages Expense, $10,500 Salaries and Wages Payable, $2,500 Insurance Expense, $4,800 Income Tax Expense, $6,400 Income Taxes Payable, $2,400 Analysis indicates that adjusting entries were made for (a) $7,000 of commission revenue earned but not billed, (b) $2,500 of accrued but unpaid salaries and wages, and (c) $2,400 of income tax expense accrued but not paid. Instructions (a) Prepare the closing entries at December 31, 2019. (b) Prepare the reversing entries on January 1, 2020. (c) Enter the adjusted trial balance data in T-accounts. Post the entries in (a) and (b) and rule and balance the accounts. (d) Prepare the entries to record (1) the collection of the accrued service revenue on January 8, (2) payment of the income taxes on January 10, and (3) payment of all the salaries due ($3,000) on January 15. (e) Post the entries in (d) to the temporary accounts. (f) What is the salaries and wages expense for the month of January 2020? Ans: N/A, LO: 2,3,5, Bloom: AN, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
4 - 88 a
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 238
(25 min.)
(a) (1) Service Revenue ..................................................................... Income Summary ...........................................................
60,000
(2) Income Summary .................................................................... Salaries and Wages Expense ........................................ Insurance Expense ......................................................... Income Tax Expense ......................................................
21,700
(3) Income Summary .................................................................... Retained Earnings ..........................................................
38,300
(b) (1) Service Revenue ..................................................................... Accounts Receivable ......................................................
7,000
(2) Salaries and Wages Payable .................................................. Salaries and Wages Expense ........................................
2,500
(3) Income Taxes Payable ............................................................ Income Tax Expense ......................................................
2,400
60,000 10,500 4,800 6,400 38,300 7,000 2,500 2,400
(c) and (e) Accounts Receivable (A)
7,000
(R)
Service Revenue 7,000
(C) (R)
Salaries and Wages Expense (A) (D)
10,500 3,000
(C) (R)
10,500 2,500
60,000 7,000
6,400 2,400
(C) (R)
(R)
4,800
(C)
2,500
(A)
2,500
Income Taxes Payable 6,400 2,400
(R)
Insurance Expense (A)
60,000 7,000
Salaries and Wages Payable
Income Tax Expense (A) (D)
(A) (D)
4,800
Legend A = Adjusted trial balance amount C = Closing R = Reversing D = January Transaction entries
For Instructor Use Only
2,400
(A)
2,400
Completing the Accounting Cycle a
Solution 238
(Cont.)
(d)
Cash ...................................................................... Service Revenue ..........................................
7,000
Income Tax Expense ............................................. Cash .............................................................
2,400
Salaries and Wages Expense ............................... Cash .............................................................
3,000
(1) Jan. 8 (2) Jan. 10 (3) Jan. 15
(f) a
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7,000 2,400 3,000
Salaries and wages expense for January is $500 ($3,000 – $2,500).
Ex. 239
Transaction and adjustment data for Alcortt Company for the calendar year end is as follows: 1. December 24 (initial salary entry): ₤18,000 of salaries and wages earned between December 1 and December 24 are paid. 2. December 31 (adjusting entry): Salaries and wages earned between December 25 and December 31 are ₤3,000. These will be paid in the January 8 payroll. 3. January 8 (subsequent salary entry): Total salary payroll amounting to ₤11,000 was paid. Instructions Prepare two sets of journal entries as specified below. The first set of journal entries should assume that the company does not use reversing entries, and the second set should assume that reversing entries are utilized by the company. Assume no reversing entries (a)
Assume reversing entries
Initial Salary Entry
Dec. 24
(b)
Adjusting Entry
Dec. 31
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 239
(c)
(Cont.)
Closing Entry
Dec. 31
(d)
Reversing Entry
Jan. 1
(e)
Subsequent Salary Entry
Jan. 8 Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 239
(20 min.)
Assume no reversing entries (a)
Assume reversing entries
Initial Salary Entry
Dec. 24 Salaries and Wages Expense 18,000 Salaries and Wages Expense 18,000 Cash 18,000 Cash 18,000 (b)
Adjusting Entry
Dec. 31 Salaries and Wages Expense 3,000 Salaries and Wages Payable 3,000 (c)
Salaries and Wages Expense 3,000 Salaries and Wages Payable 3,000
Closing Entry
Dec. 31 Income Summary 21,000 Income Summary 21,000 Salaries and Wages Expense 21,000 Salaries and Wages Expense 21,000 (d)
Reversing Entry
Jan. 1 None
Salaries and Wages Payable 3,000 Salaries and Wages Expense
For Instructor Use Only
3,000
Completing the Accounting Cycle Solution 239
4 - 91
(Cont.)
(e) Subsequent Salary Entry Jan. 8 Salaries and Wages Payable Salaries and Wages Expense Cash
3,000 8,000
Salaries and Wages Expense 11,000 Cash 11,000 11,000
COMPLETION STATEMENTS 240.
The first step in preparing a worksheet is to prepare a ______________ from the general ledger accounts.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
241.
The account balances appearing in the adjusted trial balance columns are extended to the ______________ columns and the ______________ columns.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
242.
The process of transferring net income (or loss) for the period to Retained Earnings is accomplished by making ______________ entries.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
243.
At the end of an accounting period, all revenue and expense accounts are closed to a temporary account called ______________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
244.
The Dividends account is closed to the ______________ account at the end of the accounting period.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
245.
After all closing entries have been journalized and posted, the final step in the accounting cycle is to prepare a ______________ trial balance.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
246.
The preparation of a ______________ and ______________ entries are two optional steps in the accounting cycle.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
247.
Two permanent accounts that are part of the equity are ______________ and ______________.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
248.
The four major classifications of assets in a classified statement of financial position are: ________________, ________________, ________________ and ________________.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
4 - 92 249.
Test Bank for Financial Accounting: IFRS Edition, 4e The ______________ of a company is the average time that it takes to purchase inventory, selll it on account, and then collect cash from customers.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
250.
Assets that do not have a physical substance yet often are very valuable are called ______________ assets.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
251.
Liabilities are generally classified as either ______________ or ______________ on a classified statement of financial position.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Completion Statements 240. trial balance 241. income statement, statement of financial position 242. closing 243. Income Summary 244. Retained Earnings 245. post-closing 246. worksheet, reversing
247. Share Capital-Ordinary, Retained Earnings 248. Intangible Assets, Property, Plant, and Equipment; Long-Term Investments; Current Assets 249. operating cycle 250. intangible 251. current, non-current
For Instructor Use Only
Completing the Accounting Cycle
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MATCHING 252. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Worksheet Permanent accounts Closing entries Income Summary Reversing entry
F. G. H. I. J.
Share Capital-Ordinary Current assets Operating cycle Non-current liabilities Correcting entries
____
1. Obligations that a company expects to pay after one year.
____
2. A part of equity in a corporation.
____
3. An optional tool which facilitates the preparation of financial statements.
____
4. A temporary account used in the closing process.
____
5. Statement of financial position accounts whose balances are carried forward to the next period.
____
6. The average time that it takes to go from cash to cash in producing revenues.
____
7. Entries to correct errors made in recording transactions.
____
8. The exact opposite of an adjusting entry made in a previous period.
____
9. Entries at the end of an accounting period to transfer the balances of temporary accounts to Retained Earnings.
____ 10. Assets that a company expects to pay or convert to cash or use up within one year. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
I F A D B
6. 7. 8. 9. 10.
H J E C G
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
SHORT-ANSWER ESSAY QUESTIONS S-A E 253 A worksheet is an optional working tool used by accountants to facilitate the preparation of financial statements. Consider the steps followed in preparing a worksheet. How does the use of a worksheet assist the accountant. Could financial statements be prepared without a worksheet? Evaluate how the process would differ. Consider factors such as timeliness, accuracy, and efficiency in your evaluation. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 253 The worksheet organizes the accountant's work in preparing the income statement and the statement of financial position. The worksheet contains the general ledger trial balance, the adjusting entries, and an adjusted trial balance (if 10-column). The columns for these trial balances and entries allow the accountant to prove the equality of the debits and credits at each step of the process. From the adjusted trial balance the statement of financial position and income statement amounts are obtained and entered in the appropriate columns. Preparing financial statements without the use of a worksheet would be less organized and probably more prone to errors. And, if errors are made, they will probably be less easy to detect and locate, and, therefore, less efficient and more time consuming. S-A E 254 Journalizing and posting closing entries is a required step in the accounting cycle. Discuss why it is necessary to close the books at the end of an accounting period. If closing entries were not made, how would the preparation of financial statements be affected? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 254 Closing entries are prepared to close the income statement accounts (the temporary accounts) of the current year in order to start the next year. Income statement (temporary) accounts are cumulative in nature but only for a year. The closing entries are what separate the accounting periods. The next year's accumulation of income statement data can begin once the accounts are cleared and the balances transferred through the closing entries to equity. S-A E 255 Give the definition of current assets and current liabilities and provide two examples of each. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 255 Current assets are assets that a company expects to convert to cash or use up within one year. Examples of current assets include cash, supplies, short-term investments, accounts receivable, and inventory. Current liabilities are obligations that the company is to pay within the current year. Examples of current liabilities are accounts payable, salaries and wages payable, and income taxes payable. For Instructor Use Only
Completing the Accounting Cycle
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S-A E 256 Identify the two equity accounts in a corporation and indicate the purpose of each. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 256 The two accounts and the purpose of each are: (1) Share capital-ordinary is used to record investments of assets in the business by the owners (shareholders). (2) Retained earnings is used to record net income retained in the business. S-A E 257 Distinguish between a reversing entry and an adjusting entry. Are reversing entries required? Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 257 A reversing entry is the exact opposite, both in amount and in account titles, of an adjusting entry and is made at the beginning of the new accounting period. Reversing entries are an optional step in the accounting cycle. S-A E 258
(Ethics)
Under Protection provides underground storage facilities for companies desiring off-site storage of sensitive documents, computer records, and other items. They have developed a sophisticated surveillance and security system which they initially used in their own facilities, and have recently started to market elsewhere as well. The underground storage facilities are made from natural caves in some instances (reinforced and modified as appropriate) and from excavations of natural rock formations in others. The land was purchased over ten years ago for a total of $2.5 million. The modifications have cost approximately $15 million more. The company has never depreciated its storage facilities because the market value of the property has continued to rise. Presently, the market price is between $30 and $40 million. Joe Goll, a new accounting manager, questioned this depreciation policy. Tim North, the controller, has told him that he needn't worry about it. For one thing, he says, this is really a special form of Land account, which should not be depreciated at all. For another, this is a privately held company, and so they don't need to worry about misleading investors. All the owners know about and approve the depreciation policy. Required: What are the ethical issues in this situation? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 258 The ethical issue is one of integrity. Even though the storage facilities are underground, that does not mean that they can be accounted for simply as land. The structural improvements and surveillance mechanisms will not last forever, and therefore their cost should be allocated over the periods that are benefited. Net income is being overstated because the depreciation expense, at zero, is being understated. A second issue is the harm that may be incurred by outside parties because of the misrepresentation in the financial statements. Even though the owners know about the (lack of) depreciation, they may still use their financial statements to obtain loans. Private investors and bankers should be able to rely on the financial statements. A third issue is that of the integrity of the accountants themselves. If they are being asked to ignore a basic principle of accounting so openly now, they should certainly ask themselves what lies ahead. S-A E 259 (Ethics) You are the controller for WNC Home Media. During the beginning of January 2020, when the company was adjusting and closing the accounting records for the calendar year, you were home sick with the flu. You, therefore, relied on your assistant to complete much of the work. The company reported net income for 2020 of $125,000, down from $140,000 in 2019. In February, after the financial statements have been issued and distributed to the company’s investors and creditors, you discover that your assistant overlooked adjustments to insurance expense, depreciation expense and utilties expense resulting in an overstatement of net income by $12,500. You immediately inform the company president of the overstatement and suggest correcting the errors and re-issuing the financial statements.The company president is concerned that investors were not happy about the lower profits reported in 2020. He feels that 2021 is going to be a better year for the company. Therefore he prefers to keep quiet about the financial statement errors in 2020 and adjust the accounting records for the errors in 2021. Required: (a) Who are the stakeholders in this situation? (b) What are the ethical issues in this situation? (c) What would you do as controller in this situation? Ans: N/A, LO: 4, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 259 (a) The stakeholders in this situation are the company investors and creditors as well as anyone else who might rely on the 2020 financial statements to make an investing or credit decision. The company president, controller and assistant controller are also stakeholders. (b) The ethical issue in this situation concerns misleading financial statement users. If the errors are not corrected for the 2020 financial statements, investors and creditors will think the company is more profitable that it actually is. Assets are likely overstated and liabilities understated on the statement of financial position so that the company’s financial position appears better than it actually is. The financial statement users, including investors and banks from which the company may obtain additional financing, may be harmed by reliance on the misleading financial statements. The integrity of the company, its President and the controller are all at stake in this situation, (c) The controller should insist that the President of the company allow the errors to be corrected and revised financial statements issued. If the President refuses, the controller should be prepared to resign. For Instructor Use Only
Completing the Accounting Cycle S-A E 260
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(Communication)
You have recently started to work for Payne Holmes, manufacturers of cemetery markers and monuments. During your first month at work, you inadvertently recorded as revenue, about $3,000 of prepayments from Tang Company. The financial statements had been released internally when you discovered your error. The month-end closing had not been completed, however, and you were able to correct the accounts without incident. Required: Prepare a short note to accompany the re-released financial statements explaining the mistake. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 260 MEMO TO:
Department Managers
FROM: Lisa Cross, Accounting RE:
Month-End Reports
****ATTACHED FINANCIAL STATEMENTS REPLACE THOSE ISSUED JULY 5**** *****DESTROY ALL EARLIER COPIES OF JUNE 30 FINANCIAL STATEMENTS**** An error was made in the recording of Tang Company's prepayment. The entire $3,000 was recorded as revenue. Since Tang's order had not been completed or shipped, it should have been recorded as unearned revenue, which is a liability. If you have sent any of your summary reports to corporate headquarters, please contact the Accounting Department immediately for correction codes. I am sincerely sorry for any inconvenience or delays caused by this error.
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP QUESTIONS 1. Which of the following statements is false? a. Under GAAP, the statement of financial position is usually referred to as the statement of assets and equity. b. The FASB and IASB are working on a joint conceptual framework project. c. Under IFRS, companies sometimes net liabilities against assets to report "net assets". d. Assets equals liabilities plus stockholders' equity. Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
2. A company has purchased a trust of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under GAAP, the land should be reported as a. a long-term investment. b. an intangible asset. c. property, plant, and equipment. d. land expense. Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
3. Current assets under GAAP are listed generally a. alphabetically. b. by order of liquidity. c. in the reverse order of their expected conversion to cash. d. by importance. Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
4. Companies that use GAAP a. do not have any guidelines as to what should be reported on their balance sheet. b. generally reported current assets before non-current assets on their balance sheet. c. often offset assets against liabilities and shown net assets and net liabilities on their balance sheet rather than the underlying detailed line items. d. may report all their assets on their balance sheet at fair value. Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS CHAPTER LEARNING OBJECTIVES 1. Describe merchandising operations and inventory systems. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system. 2. Record purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise and, freight-in, and credits it for purchase discounts and purchase returns and allowances. 3. Record sales under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales Returns and Allowances and Sales Discounts are debited and are contra revenue accounts. 4. Apply the steps in the accounting cycle to a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count. 5. Prepare financial statements for a merchandising company. The income statement has the following components: sales revenues, cost of goods sold, gross profit, operating expenses, other income and expense, and interest expense. A comprehensive income statement adds or subtracts any items of other comprehensive income to net income to arrive at other comprehensive income. a
6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.
a
7. Record purchases and sales under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.
5-2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
Retailers and wholesalers are both considered merchandisers.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
The steps in the accounting cycle are different for a merchandising company than for a service company.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
Companies using International Financial Reporting Standards (IFRS) use a perpetual inventory system, while companies using U.S. GAAP use a periodic inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
Companies using a perpetual inventory system report credit purchases of inventory on the statement of financial position by increasing inventory and decreasing liabilities.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Companies using a perpetual inventory system record all credit purchases by increasing inventory and increasing liabilities.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
Global Care uses a perpetual inventory system and purchased wheelchairs under terms FOB destination. The freight charges associated with the wheelchairs will be added to the inventory account.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
When the buyer pays an invoice within the discount period, the amount of the discount increases the inventory account.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
Inventory purchased for $2,500 subject to terms 2/10, net 30 could end up being reported on the statement of financial position at an amount greater than $2,500 if the discount isn’t taken by the buyer.
Ans: F, LO: 2, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
Purchase returns are recorded by the buyer as a decrease to inventory.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
11.
A periodic inventory system requires a detailed inventory record of inventory items.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations 12.
5-3
Freight terms of FOB Destination means that the seller pays the freight costs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
13.
Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14.
Sales revenues are earned during the period cash is collected from the buyer.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
The Sales Returns and Allowances account and the Sales Discounts account are both classified as expense accounts.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
16.
The revenue recognition principle applies to merchandisers by recognizing sales revenues when the performance obligation is satisfied.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
Sales allowances and sales discounts are both designed to encourage customers to pay their accounts promptly.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
18.
To grant a customer a sales return, the seller credits Sales Returns and Allowances.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
19.
Sales returns and allowances is reported on the statement of financial position as a contra account to cost of goods sold.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
20.
Sales of $2,500 subject to terms 2/10, net 30 could end up being recorded as an account receivable at an amount greater than $2,500 if the discount isn’t taken by the buyer.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
21.
When goods are returned, the seller reduces the account receivable and increases the merchandise inventory accounts.
Ans: T, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
22.
When goods are returned, the seller records the returned merchandise at its market value.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
23.
Closing entries impact the income statement but do not have an impact on the statement of financial position.
Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
24.
Under International Financial Reporting Standards (IFRS) use of a worksheet by a merchandising company is strictly optional.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
5-4 25.
Test Bank for Financial Accounting: IFRS Edition, 4e A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
26.
For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
27.
A merchandising company has different types of adjusting entries than a service company.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
28.
Net sales is sales revenue less sales returns and allowances and sales discounts.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Other income and expense excludes revenues and expenses that are unrelated to the company’s main line of operations.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
30.
Operating expenses are different for merchandising and service companies.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
31.
Merchandise inventory is classified as a current asset in a classified statement of financial position.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
Gain on sale of equipment and interest expense are reported under other income and expense in a merchandiser income statement.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33.
If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
34.
Gross profit represents the merchandising profit of a company.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
Gross profit rate is computed by dividing cost of goods sold by net sales.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
36.
Under International Financial Reporting Standards (IFRS) operating expenses may be presented by nature or by function.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
37.
Under International Financial Reporting Standards (IFRS) when operating expenses are presented by nature additional disclosures are required regarding the function of certain expenses.
Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Merchandising Operations 38.
5-5
International Financial Reporting Standards allow different presentation formats for operating expenses including by magnitude.
Ans: F, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
39.
IFRS requires companies to mark the recorded values of certain types of assets and liabilities to their historical cost at the end of each reporting period.
Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
40.
IFRS requires a single-step income statement, but U.S GAAP allows either the single-step or the multiple-step income statement.
Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
41.
IFRS requires 3 years of income statements, U.S. GAAP requires 2 years of income statements.
Ans: F, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
42.
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are undertaking a project to rework the structure of financial statements. The proposed structure will adopt the major groupings used on the statement of financial position: current and non-current assets and liabilities, followed by equity.
Ans: F, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
43.
In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
44.
Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
45.
Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
46.
Under a periodic inventory system, freight-in on merchandise purchases should be debited to the Inventory account.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
47.
Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Merchandise inventory is reported as a long-term asset on the statement of financial position.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
5-6 49.
Test Bank for Financial Accounting: IFRS Edition, 4e Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
50.
The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
51.
Sales should be recorded in accordance with the expense recognition principle.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52.
Sales returns and allowances and sales discounts are subtracted from sales revenue in reporting net sales in the income statement.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
54.
If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
The major difference between the statement of financial position of a service company and a merchandising company is inventory.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
MULTIPLE CHOICE QUESTIONS 56.
Net income from operations is gross profit less a. financing expenses. b. operating expenses. c. other income and expense. d. other expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
Which of the following would not be considered a merchandising company? a. Retailer b. Wholesaler c. Service firm d. Dot Com firm
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Merchandising Operations 58.
5-7
A merchandising company that sells directly to consumers is a a. retailer. b. wholesaler. c. broker. d. service company.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
59.
Two categories of expenses for merchandising companies are a. cost of goods sold and financing expenses. b. operating expenses and financing expenses. c. cost of goods sold and operating expenses. d. sales and cost of goods sold.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
60.
The primary source of revenue for merchandising companies is a. investment income. b. service fees. c. the sale of merchandise. d. the sale of fixed assets the company owns.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
61.
Sales revenue less cost of goods sold is called a. gross profit. b. net profit. c. net income. d. marginal income.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
62.
After gross profit is calculated, operating expenses are deducted to determine a. gross margin. b. net income. c. gross profit on sales. d. net margin.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Cost of goods sold is determined only at the end of the accounting period in a. a perpetual inventory system. b. a periodic inventory system. c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
64.
Which of the following expressions is incorrect? a. Gross profit – operating expenses = net income b. Sales – cost of goods sold – operating expenses = net income c. Net income + operating expenses = gross profit d. Operating expenses – cost of goods sold = gross profit
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
5-8 65.
Test Bank for Financial Accounting: IFRS Edition, 4e Detailed records of the cost of each inventory purchase and sale are not maintained under a a. perpetual inventory system. b. periodic inventory system. c. double entry accounting system. d. single entry accounting system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
Which of the following is a true statement about inventory systems? a. Periodic inventory systems require more detailed inventory records. b. Perpetual inventory systems require more detailed inventory records. c. A periodic system requires cost of goods sold be determined after each sale. d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
67.
In a perpetual inventory system, cost of goods sold is recorded a. on a daily basis. b. on a monthly basis. c. on an annual basis. d. with each sale.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
68.
If a company determines cost of goods sold each time a sale occurs, it a. must have a computerized accounting system. b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system. d. uses a perpetual inventory system.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
69.
Under a perpetual inventory system, acquisition of merchandise for resale is debited to the a. Inventory account. b. Purchases account. c. Supplies account. d. Cost of Goods Sold account.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
70.
The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a. Accounts Payable. b. Purchase Returns and Allowances. c. Sales. d. Inventory.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations 71.
5-9
The Inventory account is used in each of the following except the entry to record a. goods purchased on account. b. the return of goods purchased. c. payment of freight on goods sold. d. payment within the discount period.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
72.
A buyer would record a payment within the discount period under a perpetual inventory system by crediting a. Accounts Payable. b. Inventory. c. Purchase Discounts. d. Sales Discounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
73.
If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the a. Inventory account will be increased. b. Inventory account will not be affected. c. seller will bear the freight cost. d. carrier will bear the freight cost.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
74.
Freight costs paid by a seller on merchandise sold to customers will cause an increase a. in the selling expense of the buyer. b. in operating expenses for the seller. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
75.
Hicks Company purchased merchandise from Beyer Company with freight terms of FOB shipping point. The freight costs will be paid by the a. seller. b. buyer. c. transportation company. d. buyer and the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
76.
Geran Company purchased merchandise inventory with an invoice price of $15,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Geran Company pays within the discount period? a. $15,000 b. $14,700 c. $13,500 d. $13,800
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
5 - 10 77.
Test Bank for Financial Accounting: IFRS Edition, 4e Reese Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 10% b. 12% c. 18% d. 36%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
78.
If a company is given credit terms of 2/10, n/30, it should a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time. b. pay within the discount period and recognize a savings. c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill. d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
79.
In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited by the buyer to a. Inventory. b. Purchase Discounts. c. Purchase Allowance. d. Sales Discounts.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
80.
Tony’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $90,000, terms 2/10, n/30. Returned $1,800 of the shipment for credit. Paid $450 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $86,436. b. increased by $88,650. c. increased by $86,877. d. increased by $86,886.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations 81.
5 - 11
Stan’s Market recorded the following events involving a recent purchase of merchandise: Received goods for $50,000, terms 2/10, n/30. Returned $1,000 of the shipment for credit. Paid $250 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $48,020. b. increased by $49,250. c. increased by $48,265. d. increased by $48,270.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
82.
Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods are recorded in a. Freight Expense. b. Freight-In. c. Inventory. d Freight-Out.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
83.
Rasner Co. returned defective goods costing $9,000 to Markum Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Rasner Co. on April 19, in receiving full credit is: a. Accounts Payable ................................................................ Inventory......................................................................
9,000
b. Accounts Payable ................................................................ Inventory .............................................................................. Cash ............................................................................
9,000 270
c. Accounts Payable ................................................................ Purchase Discounts .................................................... Inventory......................................................................
9,000
d. Accounts Payable ................................................................ Inventory...................................................................... Cash ............................................................................
9,000
9,000
9,270 270 8,730 270 8,730
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
5 - 12 84.
Test Bank for Financial Accounting: IFRS Edition, 4e Mather Company made a purchase of merchandise on credit from Underwood Company on August 8, for $8,000, terms 3/10, n/30. On August 17, Mather makes the appropriate payment to Underwood. The entry on August 17 for Mather Company is: a. Accounts Payable ................................................................. Cash ............................................................................
8,000
b. Accounts Payable ................................................................. Cash ............................................................................
7,760
c. Accounts Payable ................................................................. Purchase Returns and Allowances .............................. Cash ............................................................................
8,000
d. Accounts Payable ................................................................. Inventory ...................................................................... Cash ............................................................................
8,000
8,000 7,760 240 7,760 240 7,760
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
Computers For You is a retailer specializing in selling computers and related equipment. Which of the following would not be reported in the merchandise inventory account reported on the statement of the financial position for Computers For You at December 31, 2020? a. Computers purchased for resale during November 2020. b. Shelving materials purchased during December 2020. c. Freight costs related to the computers purchased in November. d All of these answer choices are correct.
Ans: B, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
86.
Computers For You is a retailer specializing in selling computers and related equipment. During 2020, Computers For You sells $200,000 of merchandise to Sandcastles, Inc. Computers For You incurs $24,000 of freight costs associated with these sales. Which of the following is true regarding how this $24,000 is treated on the financial statements? a. Computers For You will report the $24,000 as part of inventory on the statement of financial position. b. Sandcastles, Inc. will report the $24,000 as part of inventory on the statement of financial position. c. Computers For You will report the $24,000 as part of operating expenses on the income statement. d. Sandcastles, Inc. will report the $24,000 as an accounts receivable on the statement of financial position.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations 87.
5 - 13
Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. During December 2020, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Advanced Communications, Inc. was dissatisfied with 25% of the merchandise it received due to inferior quality. On December 21, 2020, Advanced Communications, Inc. returns the goods to Touch Tronix, Inc. for credit. Which of the following is true regarding the return of the merchandise? a. Assets will increase by €425,000 and liabilities will increase by €425,000. b. Assets will decrease by €425,000 and liabilities will decrease by €425,000. c. Assets will decrease by €550,000 and liabilities will decrease by €550,000. d Assets will increase by €550,000 and liabilities will increase by €550,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
88.
Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. On December 18, 2020, Advanced Communications, Inc. paid the account in full. Advanced Communications, Inc. uses a perpetual inventory system. Which of the following is true regarding the impact on the statement of financial position for Advanced Communications, Inc. when the payment is made on December 18, 2020? a. Cash decreased by €1,666,000. b. Inventory decreased by €34,000. c. Accounts payable decreases by €1,700,000. d Inventory decreased by €44,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
89.
Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. On December 18, 2020, Advanced Communications, Inc. paid the account in full. Advanced Communications, Inc. uses a perpetual inventory system. Which of the following is true regarding the impact on the statement of financial position for Advanced Communications, Inc. when the payment is made on December 18, 2020? a. Liabilities decreased by €2,200,000. b. Assets increased by €44,400. c. Liabilities decreased by €2,156,000. d Liabilities decreased by €1,700,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
5 - 14 90.
Test Bank for Financial Accounting: IFRS Edition, 4e Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. Advanced Communications, Inc. paid €32,500 in freight charges. On December 13, 2020, Advanced Communications, Inc. returned 5% of the goods due to inferior quality. On December 18, 2020, Advanced Communications, Inc. paid the account in full. Advanced Communications, Inc. uses a perpetual inventory system. If Advanced Communications, Inc. has not yet sold any of these goods, what is the ending balance in the inventory account after the payment is made? a. €0 b. €1,615,200. c. €2,080,700. d €2,164,300.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91.
Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. During December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Advanced Communications, Inc. was dissatisfied with 25% of the merchandise it receives due to inferior quality. On December 21, 2020, Advanced Communications, Inc. returns the goods to Touch Tronix, Inc. for credit. Which of the following is true regarding the statement of financial position and the income statement for Touch Tronix, Inc. at December 31, 2020? a. Assets will decrease by €125,000 and income will decrease by €125,000. b. Assets will decrease by €425,000 and income will decrease by €425,000. c. Assets will increase by €425,000 and income will decrease by €425,000. d Assets will increase by €550,000 and income will decrease by €550,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
92.
Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10, net 30. On December 18, 2020, Advanced Communications, Inc. paid the account in full. Which of the following is true regarding the impact on the statement of financial position for Touch Tronix, Inc. when the payment is made on December 18, 2020? a. Assets decreased by €2,200,000. b. Assets decreased by €44,000. c. Assets increased by €2,156,000. d Assets decreased by €32,500.
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations 93.
5 - 15
On July 9, Neal Company sells goods on credit to Al Dolan for $9,000, terms 1/10, n/60. Neal receives payment on July 18. The entry by Neal on July 18 is: a. Cash ..................................................................................... Accounts Receivable ...................................................
9,000
b. Cash ..................................................................................... Sales Discounts........................................................... Accounts Receivable ...................................................
9,000
c. Cash ..................................................................................... Sales Discounts ................................................................... Accounts Receivable ...................................................
8,910 90
d. Cash ..................................................................................... Sales Discounts........................................................... Accounts Receivable ...................................................
9,090
9,000 90 8,910
9,000 90 9,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
94.
On November 2, 2020, Griffey Company has cash sales of €7,000 from merchandise having a cost of €5,000. The entries to record the day's cash sales will include: a. a €5,000 credit to Cost of Goods Sold. b. a €7,000 credit to Cash. c. a €5,000 credit to Inventory. d a €7,000 debit to Accounts Receivable.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
95.
A credit sale of ₤6,400 is made on April 25, terms 2/10, n/30, on which a return of ₤400 is granted on April 28. What amount is received as payment in full on May 4? a. ₤5,880 b. ₤6,272 c. ₤6,400 d ₤6,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
96.
The entry to record the receipt of payment within the discount period on a sale of ¥17,500 with terms of 2/10, n/30 will include a credit to a. Sales Discounts for ¥350. b. Cash for ¥1,715. c. Accounts Receivable for ¥17,500. d. Sales Revenue for ¥17,500.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
97.
The collection of a ¥12,000 account within the 2 percent discount period will result in a a. debit to Sales Discounts for ¥240. b. debit to Accounts Receivable for ¥11,760. c. credit to Cash for ¥11,760. d. credit to Accounts Receivable for ¥11,760.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
5 - 16 98.
Test Bank for Financial Accounting: IFRS Edition, 4e Company X sells $1,000 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check? a. $700 b. $980 c. $900 d. $800
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
99.
Birk Company sells merchandise on account for $8,000 to Kiner Company with credit terms of 2/10, n/30. Kiner Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $7,840 b. $7,872 c. $6,400 d. $6,272
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
100.
The collection of a $1,500 account after the 2 percent discount period will result in a a. debit to Cash for $1,470. b. debit to Accounts Receivable for $1,500. c. debit to Cash for $1,500. d. debit to Sales Discounts for $30.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
101.
The collection of a ¥12,000 account after the 2 percent discount period will result in a a. debit to Cash for ¥11,760. b. credit to Accounts Receivable for ¥12,000. c. credit to Cash for ¥12,000. d. debit to Sales Discounts for ¥240.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
102.
In a perpetual inventory system, the Cost of Goods Sold account is used a. only when a cash sale of merchandise occurs. b. only when a credit sale of merchandise occurs. c. only when a sale of merchandise occurs. d. whenever there is a sale of merchandise or a return of merchandise sold.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
103.
Sales revenues are usually considered earned when a. cash is received from credit sales. b. an order is received. c. goods have been transferred from the seller to the buyer. d. adjusting entries are made.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations 104.
5 - 17
A sales invoice is a source document that a. provides support for goods purchased for resale. b. provides evidence of incurred operating expenses. c. provides support for credit sales. d. serves only as a customer receipt.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
105.
Sales revenue a. may be recorded before cash is collected. b. will always equal cash collections in a month. c. only results from credit sales. d. is only recorded after cash is collected.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
106.
The journal entry to record a credit sale is a. Cash Sales Revenue b. Cash Service Revenue c. Accounts Receivable Service Revenue d. Accounts Receivable Sales Revenue
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
107.
The Sales Returns and Allowances account is classified as a(n) a. asset account. b. contra-asset account. c. expense account. d. contra-revenue account.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
108.
A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24? a. $3,600 b. $3,332 c. $3,400 d $3,528
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
109.
When goods are returned that relate to a prior cash sale, a. the Sales Returns and Allowances account should not be used. b. the Cash account will be credited. c. Sales Returns and Allowances will be credited. d. Accounts Receivable will be credited.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
5 - 18 110.
Test Bank for Financial Accounting: IFRS Edition, 4e The Sales Returns and Allowances account does not provide information to management about a. inferior merchandise. b. the percentage of credit sales versus cash sales. c. inefficiencies in filling orders. d. errors in billing customers.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
111.
As an incentive for customers to pay their accounts promptly, a business may offer its customers a. a sales discount. b. free delivery. c. a sales allowance. d. a sales return.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
112.
The credit terms offered to a customer by a business firm are 2/10, n/30, which means that a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
Company A sells ¥9,000 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B's check? a. ¥6,300 b. ¥8,820 c. ¥8,100 d. ¥7,200
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
114.
Ball Company sells merchandise on account for ₤5,000 to Edds Company with credit terms of 2/10, n/30. Edds Company returns ₤1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. ₤4,900 b. ₤4,920 c. ₤4,000 d. ₤3,920
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Accounting for Merchandising Operations 115.
5 - 19
Moses Company sells merchandise on account for $8,000 to Lane Company with credit terms of 2/10, n/30. Lane Company returns $1,200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Moses Company make upon receipt of the check? a. Cash ..................................................................................... 6,800 Accounts Receivable ................................................... 6,800 b. Cash ..................................................................................... Sales Returns and Allowances ............................................ Accounts Receivable ...................................................
6,664 1,336
c. Cash ..................................................................................... Sales Returns and Allowances ............................................ Sales Discounts ................................................................... Accounts Receivable ...................................................
6,664 1,200 136
d. Cash ..................................................................................... Sales Discounts ................................................................... Sales Returns and Allowances.................................... Accounts Receivable ...................................................
7,840 160
8,000
8,000
1,200 6,800
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
116.
Which of the following would not be classified as a contra account? a. Sales Revenue b. Sales Returns and Allowances c. Accumulated Depreciation d. Sales Discounts
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
117.
Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales Discounts c. Sales d. Freight-Out
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
118.
When a seller grants credit for returned goods, the account that is credited is a. Sales Revenue. b. Sales Returns and Allowances. c. Inventory. d. Accounts Receivable.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
119.
The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
5 - 20 120.
Test Bank for Financial Accounting: IFRS Edition, 4e A merchandising company using a perpetual system will make a. the same number of adjusting entries as a service company does. b. one more adjusting entry than a service company does. c. one less adjusting entry than a service company does. d. different types of adjusting entries compared to a service company.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
121.
In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of a. sales revenue. b. inventory. c. sales discounts. d. freight-out.
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
122.
A merchandising company using a perpetual system may record an adjusting entry by a. debiting Income Summary. b. crediting Income Summary. c. debiting Cost of Goods Sold. d. debiting Sales Revenue.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
123.
When the physical count of RNA Company inventory had a cost of $3,500 at year end and the unadjusted balance in Inventory was $3,600, RNA will have to make the following entry: a. Cost of Goods Sold .............................................................. Inventory ......................................................................
100
b. Inventory ............................................................................... Cost of Goods Sold .....................................................
100
c. Income Summary ................................................................. Inventory ......................................................................
100
d. Cost of Goods Sold .............................................................. Inventory ......................................................................
3,600
100 100 100 3,600
Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
124.
Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At December 31, 2020 the unadjusted balance in the Inventory account is $64,000. Through a physical count on December 31, 2020, MM determines that its actual inventory at yearend is $62,500. Which of the following is true regarding the statement of financial position and the income statement of MM at December 31, 2020? a. Inventory is increased and cost of goods sold is decreased by $1,500. b. Inventory is decreased and cost of goods sold is increased by $1,500. c. Inventory is increased and cost of goods sold is increased by $1,500. d. Inventory is decreased and cost of goods sold is decreased by $1,500.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations 125.
5 - 21
The sales revenue section of an income statement for a retailer would not include a. Sales discounts. b. Sales revenue. c. Net sales. d. Gross profit.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
126.
Rowland Company reported the following balances at June 30, 2020: Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold
$32,000 1,000 500 15,500
Net sales for the month is a. $32,000. b. $31,000. c. $30,500. d. $16,500. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
127.
Maxwell Company's financial information is presented below. Sales Revenue Sales Returns and Allowances Net Sales
€
???? 50,000 780,000
Cost of Goods Sold Gross Profit
€450,000 ????
The missing amounts above are: Sales Revenue Gross Profit a. €830,000 €330,000 b. €730,000 €330,000 c. €830,000 €380,000 d. €730,000 €380,000 Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
128.
The operating expense section of an income statement for a wholesaler would not include a. freight-out. b. utilities expense. c. cost of goods sold. d. insurance expense.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
Income from operations will always result if a. the cost of goods sold exceeds operating expenses. b. revenues exceed cost of goods sold. c. revenues exceed operating expenses. d. gross profit exceeds operating expenses.
Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
5 - 22 130.
Test Bank for Financial Accounting: IFRS Edition, 4e All of the following items would be reported as other income and expense except a. interest expense. b. casualty losses. c. dividend revenue. d. loss from employees' strikes.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
131.
If a company has net sales of $800,000 and cost of goods sold of $520,000, the gross profit rate is a. 65%. b. 35%. c. 46%. d. 54%.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
A company shows the following balances: Sales Revenue Sales Returns and Allowances Sales Discounts Cost of Goods Sold
¥1,500,000 270,000 30,000 900,000
What is the gross profit rate? a. 60% b. 75% c. 40% d. 25% Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
133.
The gross profit rate is computed by dividing gross profit by a. cost of goods sold. b. net income. c. net sales. d. sales revenue.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
134.
In terms of liquidity, inventory is a. more liquid than cash. b. more liquid than accounts receivable. c. more liquid than prepaid expenses. d. less liquid than store equipment.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
135.
On a classified statement of financial position, inventory is classified as a. an intangible asset. b. property, plant, and equipment. c. a current asset. d. a long-term investment.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations 136.
5 - 23
Gross profit for a merchandiser is net sales minus a. operating expenses. b. cost of goods sold. c. sales discounts. d. cost of goods available for sale.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
137.
During 2020, Yoder Enterprises generated revenues of $180,000. The company’s expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000 and a loss on the sale of equipment of $6,000. Yoder’s gross profit is a. $180,000. b. $90,000. c. $54,000. d. $48,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
During 2020, Yoder Enterprises generated revenues of $180,000. The company’s expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000 and a loss on the sale of equipment of $6,000. Yoder’s income from operations is a. $180,000. b. $90,000. c. $54,000. d. $36,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
139.
During 2020, Yoder Enterprises generated revenues of $180,000. The company’s expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000 and a loss on the sale of equipment of $6,000. Yoder’s net income is a. $180,000. b. $90,000. c. $54,000. d. $48,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
5 - 24 140.
Test Bank for Financial Accounting: IFRS Edition, 4e Financial information is presented below: Operating Expenses € 90,000 Net Sales 300,000 Cost of Goods Sold 165,000 Gross profit would be a. €210,000. b. €45,000. c. €135,000. d. €300,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
Financial information is presented below: Operating Expenses € 90,000 Net Sales 300,000 Cost of Goods Sold 165,000 The gross profit rate would be a. .70. b. .15. c. .30. d. .45.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
142.
Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 900,000 Cost of Goods Sold 402,000 Gross profit would be a. €462,000. b. €384,000. c. €420,000. d. €498,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations 143.
5 - 25
Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 900,000 Cost of Goods Sold 402,000 The gross profit rate would be a. .535. b. .489. c. .511. d. .553.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
144.
Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 960,000 Cost of Goods Sold 462,000 The amount of net sales on the income statement would be a. €924,000. b. €846,000. c. €960,000. d. €996,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
145.
Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 960,000 Cost of Goods Sold 462,000 Gross profit would be a. €462,000. b. €420,000. c. €384,000. d. €498,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
5 - 26 146.
Test Bank for Financial Accounting: IFRS Edition, 4e Financial information is presented below: Operating Expenses € 270,000 Sales Returns and Allowances 78,000 Sales Discounts 36,000 Sales Revenue 960,000 Cost of Goods Sold 462,000 The gross profit rate would be a. .454. b. .546. c. .500. d. .538.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
147.
If a company has sales of $630,000, net sales of $600,000, and cost of goods sold of $450,000, the gross profit rate is a. 71%. b. 75% c. 25%. d. 29%.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
148.
Murray’s Fashions sold merchandise for $152,000 cash during the month of July. Returns that month totaled $3,200. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of a. $152,000 and $60,800. b. $148,800 and $59,520. c. $148,800 and $89,280. d. $152,000 and $89,280.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
149.
During August, 2020, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s gross profit for August, 2020 is a. $150,000. b. $95,000. c. $90,000. d. $80,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations 150.
5 - 27
During August, 2020, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s other income and expense (loss) for the month of August, 2020 is a. $0. b. $2,500. c. $5,000. d. $7,500.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
151.
During August, 2020, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s income from operations for the month of August, 2020 is a. $150,000. b. $97,500. c. $92,500. d. $80,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
152.
During August, 2020, Joe’s Supply Store generated revenues of $150,000. The company’s expenses were as follows: cost of goods sold of $60,000 and operating expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the sale of a delivery truck of $5,000. Joe’s net income for August, 2020 is a. $90,000. b. $87,500. c. $82,500. d. $80,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
153.
Operating expenses include salaries, utilities, advertising, and depreciation. International Financial Reporting Standards allow different presentation formats including by a. magnitude. b. nature. c. position. d. classification.
Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
5 - 28 154.
Test Bank for Financial Accounting: IFRS Edition, 4e Operating expenditures include salaries, utilities, advertising, and depreciation. Presentation of operating expenses by nature a. provides very detailed information, with numerous line items. b. aggregates costs into groupings based on the primary functional activities in which the company engages. c. requires disclosures of additional details regarding the nature of certain expenses. d. All of these answer choices are correct.
Ans: A, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
155.
International Financial Reporting Standards call for companies to mark the recorded values of certain types of assets and liabilities to fair value each period. These unrealized gains and losses are excluded from net income but included in comprehensive income and include all of the following except a. adjustments to pension plan assets. b. gains from foreign currency translation. c. unrealized losses on certain types of investments. d. adjustment to fixed assets for depreciation.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
Which of the following statements is true regarding International Financial Reporting Standards (IFRS) and U.S. GAAP? a. IFRS allows both the perpetual and periodic systems, but U.S GAAP permits only the perpetual system. b. IFRS requires a single-step income statement, but U.S. GAAP allows either the single-step or the multiple-step income statement. c. U.S. GAAP allows operating expenses to be reported by either function or nature, IFRS requires reporting by function. d. IFRS requires 2 years of income statements, U.S. GAAP requires 3 years of income statements.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
157.
Which of the following statements is true regarding the project to rework the structure of financial statements undertaken by the International Accounting Standard Board (IASB) and the Financial Accounting Standards Board (FASB)? a. The proposed changes to the financial statements would result in considerably more detail than currently seen under IFRS and U.S. GAAP. b. The proposed structure is meant to draw attention away from net income. c. The proposed structure will adopt major groupings similar to those currently used by the statement of cash flows (operating, investing, and financial). d. All of these answer choices are correct.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations a
5 - 29
158. Sampson Company's accounting records show the following for the year ending December 31, 2020: Purchase Discounts Freight-In Purchases Beginning Inventory Ending Inventory Purchase Returns
₤
28,000 39,000 1,000,050 117,500 144,000 32,000
Using the periodic system, the cost of goods purchased is a. ₤901,050. b. ₤1,021,050. c. ₤1,043,050. d. ₤979,050. Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
159. Sampson Company's accounting records show the following for the year ending December 31, 2020: Purchase Discounts Freight-In Purchases Beginning Inventory Ending Inventory Purchase Returns
₤
28,000 39,000 1,000,050 117,500 144,000 32,000
Using the periodic system, the cost of goods sold is a. ₤1,005,550. b. ₤994,550. c. ₤952,550. d. ₤1,047,550. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
160. The following information is available for Norton Company: Sales Revenue Ending Inventory Purchases
$390,000 36,000 290,000
Freight-In $30,000 Purchase Returns and Allowances 15,000 Beginning Inventory 45,000
Norton's cost of goods sold is a. $365,000. b. $350,000. c. $314,000. d. $305,000. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
5 - 30 a
Test Bank for Financial Accounting: IFRS Edition, 4e
161. At the beginning of September, 2020, GLF Company reported Inventory of $8,000. During the month, the company made purchases of $28,400. At September 30, 2020, a physical count of inventory reported $9,600 on hand. Cost of goods sold for the month is a. $1,600. b. $28,400. c. $26,800. d. $36,400.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
162. At the beginning of the year, Meng Company had an inventory of ¥500,000. During the year, the company purchased goods costing ¥2,000,000. If Meng Company reported ending inventory of ¥600,000 and sales of ¥2,500,000, the company’s cost of goods sold and gross profit rate must be a. ¥1,250,000 and 50%. b. ¥1,900,000 and 24%. c. ¥1,250,000 and 24%. d. ¥1,900,000 and 76%.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
163. During the year, Carla’s Pet Shop’s merchandise inventory decreased by $40,000. If the company’s cost of goods sold for the year was $650,000, purchases must have been a. $690,000. b. $610,000. c. $570,000. d. Unable to determine.
Ans: B, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
164. Cost of goods available for sale is computed by adding a. beginning inventory to net purchases. b. beginning inventory to the cost of goods purchased. c. net purchases and freight-in. d. purchases to beginning inventory.
Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
165. The Freight-In account a. increases the cost of merchandise purchased. b. is contra to the Purchases account. c. is a permanent account. d. has a normal credit balance.
Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
166. Net purchases plus freight-in determines a. cost of goods sold. b. cost of goods available for sale. c. cost of goods purchased. d. total goods available for sale.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations a
5 - 31
167. Powers Company has the following account balances: Purchases $99,000 Sales Returns and Allowances 12,800 Purchase Discounts 8,000 Freight-In 6,000 Delivery Expense 8,000 The cost of goods purchased for the period is a. $107,000. b. $97,000. c. $105,000. d. $92,200.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
168. Gould Shoe Store has a beginning inventory of €45,000. During the period, purchases were €250,000; purchase returns, €6,000; and freight-in €15,000. A physical count of inventory at the end of the period revealed that €30,000 was still on hand. The cost of goods available for sale was a. €286,000. b. €274,000. c. €304,000. d. €316,000.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
169. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting a. Accounts Payable. b. Inventory. c. Purchases. d. Purchase Returns and Allowances.
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
170. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system? a. Cash received on account with a discount b. Payment of freight costs on a purchase c. Return of merchandise sold d. Sale of merchandise on credit
Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
5 - 32 a
Test Bank for Financial Accounting: IFRS Edition, 4e
171. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be a. Accounts Payable Purchase Returns and Allowances b. Purchase Returns and Allowances Accounts Payable c. Accounts Payable Inventory d. Inventory Accounts Payable
Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
172. Under a periodic inventory system, acquisition of merchandise is debited to the a. Inventory account. b. Cost of Goods Sold account. c. Purchases account. d. Accounts Payable account.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
173. Which of the following accounts has a normal credit balance? a. Purchases b. Sales Returns and Allowances c. Freight-In d. Purchase Discounts
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
174. The respective normal account balances of Purchases, Purchase Discounts, and FreightIn are a. credit, credit, debit. b. debit, credit, credit. c. debit, credit, debit. d. debit, debit, debit.
Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
175. In a worksheet for a merchandising company, Inventory would appear in the a. trial balance and adjusted trial balance columns only. b. trial balance and statement of financial position columns only. c. trial balance, adjusted trial balance, and statement of financial position columns. d. trial balance, adjusted trial balance, and income statement columns.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
176. The Inventory account balance appearing in a worksheet represents the a. ending inventory. b. beginning inventory. c. cost of merchandise purchased. d. cost of merchandise sold.
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations 177.
5 - 33
Cole Company has sales revenue of ₤24,000, cost of goods sold of ₤16,000 and operating expenses of ₤6,000 for the year ended December 31. Cole's gross profit is a. ₤18,000. b. ₤8,000. c. ₤2,000. d. ₤0.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
178.
Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3, for $7,500, terms 2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. The entry on August 10 for Logan Company is a. Accounts Payable ................................................................ 7,500 Cash ............................................................................. 7,500 b. Accounts Payable ................................................................ 7,350 Cash ............................................................................. 7,350 c. Accounts Payable ................................................................ 7,500 Purchase Returns and Allowances ............................... 150 Cash ............................................................................. 7,350 d. Accounts Payable ................................................................ 7,500 Inventory ....................................................................... 150 Cash ............................................................................. 7,350
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
179.
Cartier Company purchased inventory from Pissaro Company. The shipping costs were $400 and the terms of the shipment were FOB shipping point. Cartier would have the following entry regarding the shipping charges: a. There is no entry on Cartier's books for this transaction. b. Freight Expense ................................................................... 400 Cash ............................................................................ 400 c. Freight-Out ........................................................................... 400 Cash ............................................................................ 400 d. Inventory .............................................................................. 400 Cash ............................................................................ 400
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
180.
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting a. Purchases. b. Purchase Returns. c. Purchase Allowance. d. Inventory.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
For Instructor Use Only
5 - 34 181.
Test Bank for Financial Accounting: IFRS Edition, 4e On October 4, 2020, Terry Corporation had credit sales transactions of $2,800 from merchandise having cost $1,900. The entries to record the day's credit transactions include a a. debit of $2,800 to Inventory. b. credit of $2,800 to Sales Revenue. c. debit of $1,900 to Inventory. d. credit of $1,900 to Cost of Goods Sold.
Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
182.
Which of the following accounts is not closed to Income Summary? a. Cost of Goods Sold b. Inventory c. Sales Revenue d. Sales Discounts
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
183.
In the Clark Company, sales were $480,000, sales returns and allowances were $30,000, and cost of goods sold was $315,000. The gross profit rate was a. 70%. b. 30%. c. 34%. d. 66%.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
184.
Net sales is sales revenue less a. sales discounts. b. sales returns. c. sales returns and allowances. d. sales discounts and sales returns and allowances.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
185.
In the statement of financial position, ending inventory is reported a. in current assets immediately following prepaid expenses. b. in current assets immediately following accounts receivable. c. in current assets immediately following cash. d. under property, plant, and equipment.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
186. Cost of goods purchased is computed by adding a. beginning inventory to freight-in. b. beginning inventory to net purchases. c. beginning inventory to purchases and freight-in. d. freight-in to net purchases.
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations
5 - 35
BRIEF EXERCISES BE 187 Presented here are the components in Ferrell Company’s income statement. Determine the missing amounts. _Sales Revenue_ €75,000 (c)
Cost of Goods Sold (a) €56,000
Gross _Profit €40,000 €59,000
Operating Expenses (b) €48,000
Net Income €17,000 (d)
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 187 a. b. c. d.
(5 min.)
€35,000 €23,000 €115,000 €11,000
BE 188 Prepare the necessary journal entries on the books of Jayhawk Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations): (a) Jayhawk purchased $45,000 of merchandise on account, terms 2/10, n/30. (b) Returned $4,000 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 188 (5 min.) (a) Inventory ....................................................................................... Accounts Payable .............................................................
45,000
(b)
Accounts Payable ......................................................................... Inventory ...........................................................................
4,000
Accounts Payable ($45,000 – $4,000) .......................................... Inventory ($41,000 × .02) .................................................. Cash ($41,000 – $820) .....................................................
41,000
(c)
45,000 4,000 820 40,180
BE 189 Bryant Company sold goods on account to Kolmer Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $900. Both Bryant and Kolmer use a perpetual inventory system. Record the sale on the books of Bryant and the purchase on the books of Kolmer. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
5 - 36
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 189
(3 min.)
Journal entry on Bryant’s books: Accounts Receivable.... .................................................................. Sales Revenue.......................................................................
900
Cost of Goods Sold…... .................................................................. Inventory ................................................................................
600
900 600
Journal entry on Kolmer’s books: Inventory ......................................................................................... Accounts Payable ..................................................................
900 900
BE 190 Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 190
(3 min.)
Sales Returns and Allowances ....................................................... Sales Discounts ($2,300 × .03) ..................................................... Cash ($2,500 – $200 – $69)............................................................ Accounts Receivable ............................................................
200 69 2,231 2,500
BE 191 Nen Company uses a perpetual inventory system. During May, the following transactions and events occurred. May
13
Sold 12 motors at a cost of $40 each to Slater Brothers Supply Company, terms 1/10, n/30. The motors cost Nen $25 each.
May
16
Two defective motors were returned to Nen.
May
23
Received payment in full from Slater Brothers.
Instructions Journalize the May transactions for Nen Company (seller) assuming that Nen uses a perpetual inventory system. You may omit explanations. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations Solution 191 May
May
May
13
16
23
5 - 37
(8 min.)
Accounts Receivable......................................................... Sales Revenue .........................................................
480
Cost of Goods Sold ........................................................... Inventory...................................................................
300
Sales Returns and Allowances ......................................... Accounts Receivable ................................................
80
Inventory ........................................................................... Cost of Goods Sold ..................................................
50
Cash .................................................................................. Sales Discounts ($400 × .01) ............................................ Accounts Receivable ($480 – $80) ..........................
396 4
480 300 80 50
400
BE 192 The income statement for Guinn Company for the year ended December 31, 2020 is as follows: GUINN COMPANY Income Statement For the Year Ended December 31, 2020 Revenues Sales revenue ............................................................................ Interest revenue ......................................................................... Total revenues ..................................................................... Expenses Cost of goods sold ..................................................................... Operating expenses ................................................................... Interest expense ........................................................................ Total expenses .....................................................................
₤55,000 3,000 58,000 ₤36,000 16,000 1,000 53,000
Net income .............................................................................................
₤ 5,000
Prepare the entries to close the revenue and expense accounts at December 31, 2020. You may omit explanations for the transactions. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 192 Dec. 31
31
(5 min.)
Sales Revenue ..................................................................... Interest Revenue .................................................................. Income Summary ........................................................
55,000 3,000
Income Summary ................................................................. Cost of Goods Sold ..................................................... Operating Expenses .................................................... Interest Expense .........................................................
53,000
For Instructor Use Only
58,000 36,000 16,000 1,000
5 - 38
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 193 Rhodes Company provides this information for the month of November, 2020: sales on credit $140,000; cash sales $60,000; sales discounts $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193
(3 min.) RHODES COMPANY Income Statement (Partial) For the Month Ended November 30, 2020
Sales revenue ...................................................................... Less: Sales returns and allowances................................... Sales discounts ........................................................ Net sales ..............................................................................
$200,000 $8,000 2,000
10,000 $190,000
BE 194 During October, 2020, Carol’s Catering Company generated sales revenue of $13,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $8,000 and operating expenses of $2,000. Calculate (1) gross profit and (2) income from operations for the month. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 194
(4 min.)
(1) Gross profit: $4,800 ($13,000 - $200 - $8,000) (2) Income from operations: $2,800 ($4,800 - $2,000) a
BE 195
For each of the following, determine the missing amounts.
1. 2.
Beginning Inventory
Purchases
Goods Available for Sale
Cost of Goods Sold
Ending Inventory
$20,000 ______
________ $220,000
$ 60,000 $250,000
$25,000 _______
_______ $40,000
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 195
(4 min.)
1.
Purchases $40,000 ($60,000 – $20,000), Ending inventory $35,000 ($60,000 – $25,000)
2.
Beginning inventory $30,000 ($250,000 – $220,000), Cost of Goods Sold $210,000 ($250,000 – $40,000)
For Instructor Use Only
Accounting for Merchandising Operations a
5 - 39
BE 196
Assume that Vangundy Company uses a periodic inventory system and has these account balances: Purchases €490,000; Purchase Returns and Allowances €14,000; Purchase Discounts €12,000; and Freight-In €15,000. Determine net purchases and cost of goods purchased. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 196
(4 min.)
Calculation of Net Purchases and Cost of Goods Purchased Purchases ............................................................................ Less: Purchase returns and allowances ............................ Purchase discounts ................................................. Net purchases ...................................................................... Add: freight-in ...................................................................... Cost of goods purchased .....................................................
€490,000 €14,000 12,000
26,000 464,000 15,000 €479,000
a
BE 197 Assume that Vangundy Company uses a periodic inventory system and has these account balances: Purchases $600,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-In $15,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 197
(6 min.)
Inventory, beginning ............................................................ Purchases ............................................................................ Less: Purchase returns and allowances ............................ Purchase discounts .................................................. Net purchases ...................................................................... Add: Freight-in ..................................................................... Cost of goods purchased ..................................................... Cost of goods available for sale........................................... Inventory, ending ................................................................. Cost of goods sold ...............................................................
$ 45,000 $600,000 $25,000 11,000
36,000 564,000 15,000 579,000 624,000 55,000 $569,000
a
BE 198 Slater Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred. May
13
Purchased 12 motors at a cost of $40 each from Nen Company, terms 1/10, n/30. The motors cost Nen Company $25 each.
May
16
Returned 2 defective motors to Nen.
May
23
Paid Nen Company in full.
Instructions Journalize the May transactions for Slater Brothers. You may omit explanations. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
5 - 40 a
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 198
May May May
13 16 23
(6 min.)
Purchases.......................................................................... Accounts Payable .....................................................
480
Accounts Payable .............................................................. Purchase Returns and Allowances ...........................
80
Accounts Payable ($480 – $80) ........................................ Purchase Discounts ($400 × .01) ............................. Cash .........................................................................
400
480 80 4 396
EXERCISES Ex. 199 For each of the following, determine the missing amounts.
1.
Sales Revenue ¥1,000,000
Cost of Goods Sold ________
2.
________
¥950,000
Gross Profit _______
Operating Expenses ¥250,000
Net Income ¥100,000
¥1,000,000
_______
¥800,000
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 199
(5 min.)
1. Gross Profit = ¥350,000 (¥250,000 + ¥100,000) Cost of Goods Sold = ¥650,000 (¥1,000,000 – ¥350,000) 2. Sales Revenue = ¥1,950,000 (¥950,000 + ¥1,000,000) Operating Expenses = ¥200,000 (¥1,000,000 – ¥800,000) Ex. 200 On October 1, Belton Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred. Oct. 4
Purchased 25 bicycles at a cost of $200 each from Kuhn Bicycle Company, terms 2/10, n/30.
6
Sold 15 bicycles to Team America for $300 each, terms 2/10, n/30.
7
Received credit from Kuhn Bicycle Company for the return of 2 defective bicycles.
13
Issued a credit memo to Team America for the return of a defective bicycle.
14
Paid Kuhn Bicycle Company in full, less discount.
Instructions Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations Solution 200 Oct. 4 6
7 13
14
5 - 41
(20 min.)
Inventory .............................................................................. Accounts Payable........................................................
5,000
Accounts Receivable............................................................ Sales Revenue ............................................................
4,500
Cost of Goods Sold .............................................................. Inventory......................................................................
3,000
Accounts Payable ................................................................ Inventory......................................................................
400
Sales Returns and Allowances ............................................ Accounts Receivable ...................................................
300
Inventory .............................................................................. Cost of Goods Sold .....................................................
200
Accounts Payable ($5,000 – $400) ...................................... Cash ($4,600 × .98) .................................................... Inventory ($4,600 × .02) ..............................................
4,600
5,000 4,500 3,000 400 300 200 4,508 92
Ex. 201 On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred. Sept.
4 Purchased 80 backpacks at $20 each from Hunter, terms 2/10, n/30.
Sept.
6 Received credit of $120 for the return of 6 backpacks purchased on Sept. 4 that were defective.
Sept.
9 Sold 40 backpacks for $25 each to Oliver Books, terms 2/10, n/30.
Sept. 13 Sold 15 backpacks for $25 each to Heller Office Supply, terms n/30. Sept. 14 Paid Hunter in full, less discount. Instructions Journalize the September transactions for Reid Supply. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
5 - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 201 Sept.
4
Sept.
6
Sept.
9
Sept. 13
Sept. 14
(20 min.)
Inventory ............................................................................ Accounts Payable .....................................................
1,600
Accounts Payable .............................................................. Inventory ...................................................................
120
Accounts Receivable ......................................................... Sales Revenue .........................................................
1,000
Cost of Goods Sold ........................................................... Inventory ...................................................................
800
Accounts Receivable ......................................................... Sales Revenue .........................................................
375
Cost of Goods Sold ........................................................... Inventory ...................................................................
300
Accounts Payable ($1,600 – $120) ................................... Cash ($1,480 × .98) .................................................. Inventory ($1,480 × .02) ...........................................
1,480
1,600 120 1,000 800 375 300 1,450 30
Ex. 202 Dan Moran is a new accountant with Tabor Company. Tabor purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Dan has talked with the company's banker and knows that he could earn 6% on any money invested in the company's savings account. Instructions (a) Should Dan pay the invoice within the discount period or should he keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best. (b)
If Dan forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 202
(10 min.)
Dan should pay the invoice within the discount period to save $60: (a)
(b)
Discount of 1% on $9,000 Interest received on $9,000 (for 20 days at 6%) Savings by taking the discount
$90 30 $60
The equivalent annual interest rate is: 1% × 360 ÷ 20 = 18%.
For Instructor Use Only
($9,000 × 6% × 20 ÷ 360)
Accounting for Merchandising Operations
5 - 43
Ex. 203 (a)
Kelso Company purchased merchandise on account from Office Suppliers for $150,000, with terms of 2/10, n/30. During the discount period, Kelso returned some merchandise and paid $137,200 as payment in full. Kelso uses a perpetual inventory system. Prepare the journal entries that Kelso Company made to record: (1) the purchase of merchandise. (2) the return of merchandise. (3) the payment on account.
(b)
Noble Company sold merchandise to Fugate Company on account for $73,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $43,800. During the discount period, Fugate Company returned $3,000 of merchandise and paid its account in full (minus the discount) by remitting $69,300 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Noble Company made to record: (1) the sale of merchandise. (2) the return of merchandise. (3) the collection on account.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 203 (a)
To compute the amount due after returns but before the discount, divide $137,200 by .98 (100% – 2%). $137,200 ÷ .98 = $140,000. Subtract $140,000 from $150,000 to determine that $10,000 of merchandise was returned. (1) (2) (3)
(b)
(20 min.)
Inventory .............................................................................. Accounts Payable........................................................
150,000
Accounts Payable ................................................................ Inventory......................................................................
10,000
Accounts Payable ................................................................ Inventory...................................................................... Cash ............................................................................
140,000
150,000 10,000 2,800 137,200
Fugate Company returns $3,000 of merchandise and owes $70,000 to Noble Company. $69,300 ÷ $70,000 = .99 100% – 99% = 1% The missing discount percentage is 1%. $70,000 × 1% = $700 sales discount. $70,000 – $700 = $69,300 cash received on account. (1)
(2)
Accounts Receivable............................................................ Sales Revenue ............................................................
73,000
Cost of Goods Sold .............................................................. Inventory......................................................................
43,800
Sales Returns and Allowances ............................................ Accounts Receivable ...................................................
3,000
Inventory $3,000 × ($43,800 ÷ $73,000) ..............................
1,800
For Instructor Use Only
73,000 43,800 3,000
5 - 44
Test Bank for Financial Accounting: IFRS Edition, 4e Cost of Goods Sold .....................................................
Solution 203 (3)
1,800
(Cont.)
Cash ..................................................................................... Sales Discounts .................................................................... Accounts Receivable ...................................................
69,300 700 70,000
Ex. 204 An inexperienced accountant for Leyland Company made the following errors in recording merchandising transactions. 1. A ₤225 refund to a customer for faulty merchandise was debited to Sales Revenue ₤225 and credited to Cash $225. 2. A ₤480 credit purchase of supplies was debited to Inventory ₤480 and credited to Cash ₤480. 3. A ₤160 sales return was debited to Sales Revenue and credited to Accounts Receivable. 4. A cash payment of ₤50 for freight on merchandise purchases was debited to Freight-Out ₤500 and credited to Cash ₤500. Instructions Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.) Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 204 1. 2.
3.
4.
(6-8 min.)
Sales Returns and Allowances...................................................... Sales Revenue .....................................................................
225
Supplies ........................................................................................ Cash .............................................................................................. Accounts Payable ................................................................. Inventory ...............................................................................
480 480
Sales Returns and Allowances...................................................... Sales Revenue .....................................................................
160
Inventory ..................................................................................... Cash .............................................................................................. Freight-Out ...........................................................................
50 450
225
480 480 160
500
Ex. 205 Prepare the necessary journal entries to record the following transactions, assuming Hewitt Company uses a perpetual inventory system. (a) Purchased $25,000 of merchandise on account, terms 2/10, n/30. (b) Returned $500 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Merchandising Operations Solution 205 (a) (b) (c)
5 - 45
(6-8 min.)
Inventory .............................................................. Accounts Payable ..........................................
25,000
Accounts Payable ................................................ Inventory ........................................................
500
Accounts Payable ($25,000 – $500)…. Inventory ($24,500 × .02)……… Cash ($24,500 – $490)…………
25,000 500
24,500 490 24,010
Ex. 206 Prepare the necessary journal entries to record the following transactions, assuming Darby Company uses a perpetual inventory system. (a) Darby sells $55,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000. (b) The customer in (a) returned $5,000 of merchandise to Darby. The merchandise returned cost $3,000. (c) Darby received the balance due within the discount period. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 206 (a)
(b)
(c)
(7-9 min.)
Accounts Receivable .................................................................... Sales Revenue .....................................................................
55,000
Cost of Goods Sold ....................................................................... Inventory ..............................................................................
30,000
Sales Returns and Allowances ..................................................... Accounts Receivable............................................................
5,000
Inventory ....................................................................................... Cost of Goods Sold ..............................................................
3,000
Cash ($50,000 – $500) ................................................................. Sales Discounts ($50,000 × .01) ................................................... Accounts Receivable............................................................
49,500 500
55,000 30,000 5,000 3,000
50,000
Ex. 207 Newell Company completed the following transactions in October: Credit Sales Date Amount Oct. 3 $ 900 Oct. 11 1,200 Oct. 17 5,000 Oct. 21 1,700 Oct. 23 2,000
Terms 2/10, n/30 3/10, n/30 1/10, n/30 2/10, n/60 2/10, n/30
Sales Returns Date Amount Oct. 14 Oct. 20 Oct. 23 Oct. 27
For Instructor Use Only
$ 200 1,000 200 300
Date of Collection Oct. 8 Oct. 16 Oct. 29 Oct. 27 Oct. 28
5 - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 207 (Cont.) Instructions (a) Indicate the cash received for each collection. Show your calculations. (b) Prepare the journal entry for the (1) Oct. 17 sale. The merchandise sold had a cost of $3,500. (2) Oct. 23 sales return. The merchandise returned had a cost of $140. (3) Oct. 28 collection. Newell uses a perpetual inventory system. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 207
(20 min.)
(a) Oct. 8
$882
[Sales $900 – Sales discount $18 ($900 × .02)]
Oct. 16
$970
[Sales $1,200 – Sales return $200 = $1,000; $1,000 – Sales discount $30 ($1,000 × .03)]
Oct. 29
$4,000
[Sales $5,000 – Sales return $1,000 = $4,000; (Discount lapsed)]
Oct. 27
$1,470
[Sales $1,700 – Sales return $200 = $1,500; $1,500 – Sales discount $30 ($1,500 × .02)]
Oct. 28
$1,666
[Sales $2,000 – Sales return $300 = $1,700; $1,700 – Sales discount $34 ($1,700 × .02)]
(b) (1)
(2)
(3)
Oct. 17
Oct. 23
Oct. 28
Accounts Receivable .......................................... Sales Revenue...........................................
5,000
Cost of Goods Sold ............................................. Inventory ....................................................
3,500
Sales Returns and Allowances ........................... Accounts Receivable .................................
200
Inventory ............................................................. Cost of Goods Sold ....................................
140
Cash ................................................................... Sales Discounts .................................................. Accounts Receivable .................................
1,666 34
For Instructor Use Only
5,000 3,500 200 140
1,700
Accounting for Merchandising Operations
5 - 47
Ex. 208 The following information (in 000) is available for Ling Company: Debit Retained Earnings Dividends ¥ 35,000 Sales Revenue Sales Returns and Allowances 20,000 Sales Discounts 7,000 Cost of Goods Sold 357,000 Freight-Out 2,000 Advertising Expense 15,000 Interest Expense 19,000 Salaries and Wages Expense 45,000 Utilities Expense 18,000 Depreciation Expense 7,000 Interest Revenue
Credit ¥ 50,000 510,000
25,000
Instructions Using the above information, prepare the closing entries for Ling Company. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208
(10 min.)
Dec. 31 Interest Revenue .................................................................. Sales Revenue ..................................................................... Income Summary ........................................................
25,000 510,000
31 Income Summary ................................................................. Sales Returns and Allowances.................................... Sales Discounts........................................................... Cost of Goods Sold ..................................................... Freight-Out .................................................................. Advertising Expense.................................................... Interest Expense ......................................................... Salaries and Wages Expense ..................................... Utilities Expense .......................................................... Depreciation Expense .................................................
490,000
31 Income Summary ................................................................. Retained Earnings .......................................................
45,000
31 Retained Earnings................................................................ Dividends.....................................................................
35,000
For Instructor Use Only
535,000 20,000 7,000 357,000 2,000 15,000 19,000 45,000 18,000 7,000 45,000 35,000
5 - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 209 The adjusted trial balance of Werly Book Company appears below. WERLY BOOK COMPANY Adjusted Trial Balance December 31, 2020 Cash Accounts Receivable Inventory Buildings Accumulated Depreciation— Buildings Accounts Payable Share Capital-Ordinary Retained Earnings Dividends Sales Revenue Sales Discounts Sales Returns & Allowances Cost of Goods Sold Operating Expenses
Debit 32,000 25,000 35,000 140,000
Credit
20,000 12,000 100,000 49,000 20,000 325,000 6,000 8,000 203,000 37,000 506,000
506,000
Instructions Using the information given, prepare the year-end closing entries. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 209 Dec. 31
31
31
31
(10 min.)
Sales Revenue ..................................................................... Income Summary ........................................................ (To close credit balance accounts)
325,000
Income Summary ................................................................. Sales Discounts ........................................................... Sales Returns and Allowances .................................... Cost of Goods Sold ..................................................... Operating Expenses .................................................... (To close accounts with debit balances)
254,000
Income Summary ................................................................. Retained Earnings ....................................................... (To transfer net income to retained earnings)
71,000
Retained Earnings ................................................................ Dividends ..................................................................... (To close dividends account to retained earnings)
20,000
For Instructor Use Only
325,000
6,000 8,000 203,000 37,000
71,000
20,000
Accounting for Merchandising Operations
5 - 49
Ex. 210 Kennedy Company had the following account balances at year-end: cost of goods sold $85,000; inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that inventory on hand is $14,400. Instructions (a) Prepare the adjusting entry necessary as a result of the physical count. (b) Prepare closing entries. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 210 (a) (b)
(10 min.)
Cost of Goods Sold ....................................................................... Inventory ..............................................................................
600
Sales Revenue.............................................................................. Income Summary ................................................................
144,000
Income Summary .......................................................................... Cost of Goods Sold ($85,000 + $600) ................................. Operating Expenses............................................................. Sales Returns and Allowances ............................................ Sales Discounts ...................................................................
128,500
Income Summary ($144,000 – $128,500) .................................... Retained Earnings................................................................
15,500
600 144,000 85,600 39,000 2,300 1,600 15,500
Ex. 211 Presented below is information for Pryor Company for the month of March 2020. Cost of goods sold Freight-out Insurance expense Salaries and wages expense
€242,000 7,000 17,000 63,000
Rent expense € 30,000 Sales discounts 8,000 Sales returns and allowances 13,000 Sales revenue 410,000
Instructions (a) Prepare an income statement. (b) Compute the gross profit rate. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
5 - 50
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 211
(10 min.)
(a) PRYOR COMPANY Income Statement For the Month Ended March 31, 2020 __________________________________________________________________________________________________________
Sales revenues Sales revenue ...................................................................... Less: Sales returns and allowances................................... Sales discounts ........................................................ Net sales .............................................................................. Cost of goods sold................................................................ Gross profit .......................................................................... Operating expenses Salaries and wages expense.................................... Rent expense ........................................................... Insurance expense ................................................... Freight-out ................................................................ Total operating expenses ......................................... Net income .......................................................................... (b)
€410,000 €13,000 8,000
21,000 389,000 242,000 147,000
63,000 30,000 17,000 7,000 117,000 € 30,000
Gross profit rate = €147,000 ÷ €389,000 = 37.79%.
Ex. 212 Instructions State the missing items identified by ?. 1. Gross profit – Operating expenses = ? 2. Cost of goods sold + Gross profit on sales = ? 3. Sales revenue – (? + ?) = Net sales 4. Income from operations + ? – ? = Net income 5. Net sales – Cost of goods sold = ? Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 212
(5 min.)
1. Income from operations (or Net income) 2. Net sales 3. Sales discounts, Sales returns and allowances 4. Other income and expense, interest expense 5. Gross profit
For Instructor Use Only
Accounting for Merchandising Operations
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Ex. 213 The adjusted trial balance of Kasten Company contained the following information: Debit Credit Sales Revenue $660,000 Sales Returns and Allowances $ 20,000 Sales Discounts 7,000 Cost of Goods Sold 456,000 Freight-Out 2,000 Advertising Expense 25,000 Interest Expense 18,000 Salaries and Wages Expense 55,000 Utilities Expense 28,000 Depreciation Expense 7,000 Interest Revenue 30,000 Instructions Use the above information to prepare an income statement for the year ended December 31, 2020. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 213
(15 min.) KASTEN COMPANY Income Statement For the Year Ended December 31, 2020
Sales Sales revenue .......................................................... Less: Sales returns and allowances ...................... Sales discounts ............................................ Net sales .................................................................. Cost of goods sold ................................................... Gross profit .............................................................. Operating expenses Salaries and wages expense ....................... Utilities expense ........................................... Advertising expense ..................................... Depreciation expense .................................. Freight-out .................................................... Total operating expenses ................. Income from operations ........................................... Other income and expense Interest revenue ................................................. Interest expense ...................................................... Net income ..............................................................
For Instructor Use Only
$660,000 $ 20,000 7,000
27,000 633,000 456,000 177,000
$55,000 28,000 25,000 7,000 2,000 117,000 60,000 30,000 18,000 $ 72,000
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 214 The following information is available for Sager Company: Operating expenses Cost of goods sold Sales revenue Sales returns and allowances
₤ 80,000 245,000 370,000 15,000
Instructions Compute each of the following: (a) Net sales (b) Gross profit (c) Income from operations Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 214 (a) (b) (c)
(6 min.)
Net sales = ₤355,000 (₤370,000 – ₤15,000) Gross profit = ₤110,000 (₤355,000 – ₤245,000) Income from operations = ₤30,000 (₤110,000 – ₤80,000)
Ex. 215 Financial information is presented below for two different companies. Elliott Cosmetics Sales revenue Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Income from operations Other income and expense Net income
$90,000 (a) 85,000 56,000 (b) 17,000 (c) (4,000) (d)
Stever Grocery $
(e) 4,000 93,000 (f) 32,000 (g) (h) (7,000) 9,000
Instructions Determine the missing amounts. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations Solution 215
5 - 53
(15 min.)
(*Missing amount) (a)
Sales revenue ............................................................................... Less: Sales returns and allowances ............................................. Net sales .......................................................................................
$ 90,000 5,000* $ 85,000
(b)
Net sales ....................................................................................... Cost of goods sold ........................................................................ Gross profit ...................................................................................
$ 85,000 56,000 $ 29,000*
(c) and (d) Gross profit ................................................................................... Operating expenses ...................................................................... Income from operations (c) ........................................................... Other income and expense ........................................................... Net income (d) ..............................................................................
$ 29,000 17,000 $ 12,000* 4,000 $ 8,000*
(e)
Sales revenue ............................................................................... Less: Sales returns and allowances ............................................. Net sales .......................................................................................
$ 97,000* 4,000 $ 93,000
(f)
Net sales ....................................................................................... Cost of goods sold ........................................................................ Gross profit ...................................................................................
$ 93,000 61,000* $ 32,000
(g) and (h) Gross profit ................................................................................... Operating expenses (g) ................................................................ Income from operations (h) ........................................................... Other income and expense ........................................................... Net income ...................................................................................
$ 32,000 16,000* $ 16,000* 7,000 $ 9,000
Ex. 216 In 2020, Rooney Company had net sales of $600,000 and cost of goods sold of $360,000. Operating expenses were $150,000, and interest expense was $15,000. Instructions (a) Compute Rooney's gross profit. (b) Compute the gross profit rate. (c) What is Rooney's income from operations and net income? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216 (a) (b) (c)
(10 min.)
$600,000 – $360,000 = $240,000. $240,000/$600,000 = 40%. Income from operations is $90,000 ($240,000 – $150,000), and net income is $75,000 ($90,000 – $15,000).
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 217 Hoyle Company gathered the following condensed data for the year ended December 31, 2020: Cost of goods sold Net sales Operating expenses Interest expense Dividend revenue Loss from employee strike
$ 760,000 1,350,000 279,000 63,000 38,000 233,000
Instructions Prepare an income statement for the year ended December 31, 2020. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217 .
(15 min.) HOYLE COMPANY Income Statement For the Year Ended December 31, 2020
Net sales .................................................................... Cost of goods sold ..................................................... Gross profit................................................................. Operating expenses ................................................... Income from operations ............................................. Other income and expense Loss from employee strike ................................ Dividend revenue .............................................. Interest expense......................................................... Net income ................................................................. a
$1,350,000 760,000 590,000 279,000 311,000 $233,000 38,000
(195,000) 63,000 $ 53,000
Ex. 218
The income statement of Wilcox, Inc. includes the items listed below: Net sales Gross profit Beginning inventory Purchase discounts Purchase returns and allowances Freight-in Operating expenses Purchases
$900,000 340,000 80,000 15,000 8,000 10,000 300,000 560,000
Instructions Use the appropriate items listed above as a basis for determining: (a) Cost of goods sold. (b) Cost of goods available for sale. (c) Ending inventory. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations a
Solution 218
(15 min.)
(a)
Net sales – Cost of goods sold = Gross profit $900,000 – Cost of goods sold = $340,000 Cost of goods sold = $560,000
(b)
Beginning inventory Purchases Less: Purchase discounts Purchase returns and allowances Net Purchases Add: Freight-in Cost of goods purchased Cost of goods available for sale
(c)
a
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$ 80,000 $560,000 $15,000 8,000
23,000 537,000 10,000 547,000 $627,000
Cost of goods available for sale – Ending inventory = Cost of goods sold $627,000 – Ending inventory = $560,000 Ending inventory = $67,000
Ex. 219
Three items are missing in each of the following columns and are identified by letter. Sales revenue Sales returns and allowances Sales discounts Net sales Beginning inventory Cost of goods purchased Ending inventory Cost of goods sold Gross profit
¥
(a) 25,000 10,000 440,000 (b) 220,000 170,000 290,000 (c)
¥820,000 20,000 15,000 (d) 300,000 (e) 303,000 555,000 (f)
Instructions Calculate the missing amounts and identify them by letter. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 219
(a) (b) (c)
¥475,000 ¥240,000 ¥150,000
(15 min.) (d) (e) (f)
¥785,000 ¥558,000 ¥230,000
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 220
Paxson Supply Company uses a periodic inventory system. During September, the following transactions and events occurred. Sept.
3
Purchased 90 backpacks at $30 each from Barnes Company, terms 2/10, n/30.
Sept.
6
Received credit of $150 for the return of 5 backpacks purchased on Sept. 3 that were defective.
Sept.
9
Sold 15 backpacks for $40 each to Starr Books, terms 2/10, n/30.
Sept. 13
Paid Barnes Company in full.
Instructions Journalize the September transactions for Paxson Supply Company. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 220
Sept. Sept. Sept.
3 6 9
Sept. 13
a
(12 min.)
Purchases.......................................................................... Accounts Payable .....................................................
2,700
Accounts Payable .............................................................. Purchase Returns and Allowances ...........................
150
Accounts Receivable ......................................................... Sales Revenue .........................................................
600
Accounts Payable ($2,700 – $150) ................................... Purchase Discounts ($2,550 × .02) .......................... Cash .........................................................................
2,550
2,700 150 600 51 2,499
Ex. 221
The following information is available for Hopkins Company: Beginning inventory Ending inventory Freight-in Purchases Purchase returns and allowances
$ 45,000 70,000 10,000 290,000 8,000
Instructions Compute each of the following: (a) Net purchases (b) Cost of goods purchased (c) Cost of goods sold Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 221
(6 min.)
(a) Net purchases = $282,000 ($290,000 – $8,000) (b) Cost of goods purchased = $292,000 ($282,000 + $10,000) (c) Cost of goods sold = $267,000 ($45,000 + $292,000 – $70,000) For Instructor Use Only
Accounting for Merchandising Operations a
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Ex. 222
The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method. Instructions Complete the worksheet below. DAILEY MUSIC COMPANY Worksheet For the Month Ended April 30, 2020 Adjusted Trial Balance Income Statement Statement of Financial Position Debit Credit Debit Credit Debit Credit Cash 12,000 Inventory 21,000 Supplies 3,500 Equipment 80,000 Accum. Depreciation— Equipment 15,000 Accounts Payable 20,000 Share Capital-Ordinary 50,000 Retained Earnings 42,000 Dividends 7,000 Sales Revenue 44,000 Sales Discounts 2,000 Cost of Goods Sold 28,000 Advertising Expense 7,000 Supplies Expense 6,000 Depreciation Expense 1,000 Rent Expense 2,500 Utilities Expense 1,000 171,000 171,000
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
5 - 58 a
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 222
(15 min.) DAILEY MUSIC COMPANY Worksheet For the Month Ended April 30, 2020
Adjusted Trial Balance Income Statement Statement of Financial Position Debit Credit Debit Credit Debit Credit Cash 12,000 12,000 Inventory 21,000 21,000 Supplies 3,500 3,500 Equipment 80,000 80,000 Accum. Depreciation— Equipment 15,000 15,000 Accounts Payable 20,000 20,000 Share Capital-Ordinary 50,000 50,000 Retained Earnings 42,000 42,000 Dividends 7,000 7,000 Sales Revenue 44,000 44,000 Sales Discounts 2,000 2,000 Cost of Goods Sold 28,000 28,000 Advertising Expense 7,000 7,000 Supplies Expense 6,000 6,000 Depreciation Expense 1,000 1,000 Rent Expense 2,500 2,500 Utilities Expense 1,000 1,000 171,000 171,000 47,500 44,000 123,500 127,000 Net Loss 3,500 3,500 47,500 47,500 127,000 127,000 a
Ex. 223
Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system: (a) Purchased $520,000 of merchandise on account, terms 2/10, n/30. (b) Returned $40,000 of damaged merchandise for credit. (c) Paid for the merchandise purchased within 10 days. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 223
(a) (b) (c)
(6 min.)
Purchases ..................................................................................... Accounts Payable ..............................................................
520,000
Accounts Payable.......................................................................... Purchase Returns and Allowances....................................
40,000
Accounts Payable ($520,000 – $40,000) ...................................... Purchase Discounts ($480,000 × .02) ............................... Cash ($480,000 – $9,600) .................................................
480,000
For Instructor Use Only
520,000 40,000 9,600 470,400
Accounting for Merchandising Operations
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COMPLETION STATEMENTS 224.
A ________________ buys and sells goods rather than performing services to earn a profit.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
225.
Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
226.
Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
227.
The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
228.
The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
229.
When a customer returns merchandise previously purchased on credit, the entry the seller makes to record the return requires a debit to the ________________ account and a credit to the ________________ account.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
230.
Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
231.
Every sales transaction should be supported by a ________________ that provides written evidence of the sale.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
232.
Gross profit is obtained by subtracting ________________ from ________________.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
233.
Income from operations is determined by subtracting total operating expenses from ________________.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Answers to Completion Statements 224. 225. 226. 227. 228. 229.
merchandising company gross profit perpetual Inventory freight-out Sales Returns and Allowances, Accounts Receivable
230. 231. 232. 233.
contra revenue, debit business document cost of goods sold, net sales gross profit
MATCHING 234. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Net sales Sales discounts Purchase invoice Periodic inventory system FOB destination
F. G. H. I. J.
FOB shipping point Freight-out Gross profit Operating expenses Income from operations
____
1. An incentive to encourage customers to pay their accounts early.
____
2. Expenses incurred in the process of earning sales revenue.
____
3. Freight terms that require the seller to pay the freight cost.
____
4. Sales less sales returns and allowances and sales discounts.
____
5. A document that supports each credit purchase.
____
6. Net sales less cost of goods sold.
____
7. Freight cost to deliver goods to customers reported as a selling expense.
____
8. Requires a physical count of goods on hand to compute cost of goods sold.
____
9. Gross profit less total operating expenses.
____ 10. Freight terms that require the buyer to pay the freight cost. Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Answers to Matching 1. 2. 3. 4. 5.
B I E A C
6. 7. 8. 9. 10.
H G D J F
For Instructor Use Only
Accounting for Merchandising Operations
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SHORT-ANSWER ESSAY QUESTIONS S-A E 235 You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 235 You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated. S-A E 236 Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-Out by the seller. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 236 The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer's place of business. Thus the seller pays the freight and debits Freight-Out. S-A E 237 A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 237 The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating expenses. They are an adjustment of the inflow from sale of goods, rather than a cost used to help earn revenue.
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
S-A E 238 Mary Bolton believes revenues from credit sales may be recognized before they are collected in cash. Do you agree? Explain. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 238 Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The recognition of revenue is not dependent on the collection of credit sales. S-A E 239 The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 239 The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold. S-A E 240 (Ethics) Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods. Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not. Ann Cook, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation "FOB shipper's dock" on the document. She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes's dock. She did not record the purchase until after month end. Required: 1. Why are accountants concerned with the timing in the recording of purchases? 2. Was there a violation of ethical standards here? Explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Merchandising Operations
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Solution 240 1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed. 2. The only ethical principle that may be involved is one of competence. Ann does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Holmes as soon as they left the shipper's dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Ann compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known better how to interpret the shipping documents. S-A E 241 (Communication) Lori Brown and Jill Kane, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Lori's sale was FOB shipping point, and Jill's was FOB destination. The company "counts" sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Lori's sale was therefore counted in her monthly total of sales, Jill's was not. Jill is quite upset. She has asked you to just include it, or to take Lori's off as well. She also has told you that you are being unethical for allowing Lori to get a bonus just for choosing a particular shipping method. Write a memo to Jill. Explain your position. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 241 MEMO TO:
Jill Kane
FROM: Martha King, Accounting RE:
Sales Bonuses
DATE:
June 15, 200x
As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $100,000. This total does not include the $20,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else's sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing. I do understand your disappointment, but this sale does count in June—and it just may make the difference in June's bonus. Please call me if I can be of further help.
For Instructor Use Only
5 - 64
Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP QUESTIONS 1. Which of the following would not be a line item of a company reporting costs by nature? a. Manufacturing expense. b. Interest expense. c. Salaries and wages expense. d. Depreciation expense. Ans: A, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
2. Which of the following would not be a line item of a company reporting costs by function? a. Distribution. b. Utilities expense. c. Manufacturing. d. Administration. Ans: B LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
3. Which of the following statements in false? a. The new income statement format will try to de-emphasize the focus on the “net income "line item. b. The proposed new format for financial statements was heavily influenced by suggestions of financial statement analysis. c. Under GAAP companies can use either a perpetual or periodic system. d. GAAP specifically requires use of multiple-step income statement. Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
4. Under the new format for financial statements being proposed under a joint IASB/FASB project a. the amount of detail shown in the income statement would decrease compared to current presentations. b. companies would be required to report income statement line items by function only. c. financial statements would be presented consistent with the way management usually run companies. d. all financial statements would adopt headings similar to the current format of the statement of financial position balance sheet. Ans: C, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
CHAPTER 6 INVENTORIES CHAPTER LEARNING OBJECTIVES 1. Discuss how to classify and determine inventory. Manufacturers usually classify inventory into three categories: finished goods, work in process, and raw materials. The steps in determining inventory quantities are (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment. 2. Apply the inventory cost flow methods and discuss their financial effects. The primary basis of accounting for inventories is cost. Cost of goods available for sale includes (a) cost of beginning inventory and (b) the cost of goods purchased. The inventory costing methods are: specific identification and two assumed cost flow methods—FIFO and average-cost. Companies may allocate the cost of goods available for sale to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than average-cost. The reverse is true when prices are falling. In the statement of financial position, FIFO results in an ending inventory that is closer to current value; inventory under average-cost is farther from current value. Average-cost results in the lower income taxes. 3. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (a) If beginning inventory is understated, net income is overstated. The reverse occurs if beginning inventory is overstated. (b) if ending inventory is overstated, net income is overstated. If ending inventory is understated, net income is understated. In the following period, its effect on net income for that period is reversed, and total net income for the two years will be correct. In the statement of financial position: Ending inventory errors will have the same effect on total assets and total equity and no effects on liabilities. 4. Explain the statement presentation and analysis of inventory. Inventory is classified in the statement of the financial position as a current asset and is shown immediately above receivables. There also should be disclosure of (1) the major inventory classifications, (2) the basis of accounting and (3) the cost method. Companies use the lower-of-cost-or-net realizable value (LCNRV) basis when the net realizable value is less than cost. Under LCNRV, companies recognize the loss in the period in which the price decline occurs. The inventory turnover is cost of goods sold divided by average inventory. To convert it to average days in inventory, divide 365 days by the inventory turnover. a
5. Apply the inventory cost flow methods to perpetual inventory records. Under FIFO and a perpetual inventory system, companies charge to cost of goods sold the cost of the earliest goods on hand prior to each sale. Under the moving-average (average-cost) method and a perpetual system, companies compute a new average cost after each purchase.
6-2
Test Bank for Financial Accounting: IFRS Edition, 4e
a
6. Describe the two methods of estimating inventories. The two methods of estimating inventories are the gross profit method and the retail inventory method. Under the gross profit method, companies apply a gross profit rate to net sales to determine estimated cost of goods sold. They then subtract estimated cost of goods sold from cost of goods available for sale to determine the estimated cost of the ending inventory. Under the retail inventory method, companies compute a cost-to-retail ratio by dividing the cost of goods available for sale by the retail value of the goods available for sale. They then apply this ratio to the ending inventory at retail to determine the estimated cost of the ending inventory.
a
7. Apply the LIFO inventory costing method. The LIFO (last-in, first-out) method assumes that the latest goods purchased are the first to be sold. LIFO seldom coincides with the actual physical flow of goods. This method matches costs of the most recently purchased items with revenues in the period. In periods of rising prices, use of the LIFO method results in lower income taxes and higher cash flow.
TRUE-FALSE STATEMENTS 1.
Transactions that affect inventories on hand have an effect on both the statement of financial position and the income statement.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
The more inventory a company has in stock, the greater the company's profit.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic
3.
Raw materials inventories are the goods that a manufacturer has completed and are ready to be sold to customers.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
4.
Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Goods out on consignment should be included in the inventory of the consignor.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
All inventories are reported as current assets on the statement of financial position.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
One reason a company using a perpetual inventory system must make a physical count of goods is to determine the amount of inventory on hand as of the statement of financial position date.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
IFRS allows companies to cost inventory using either the LIFO or the FIFO cost flow assumption.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 9.
6-3
The average cost method costs units using a weighted-average unit cost.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
11.
Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
12.
The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
13.
IFRS requires that the cost flow assumption be consistent with the physical movement of the goods.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
14.
The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
15.
If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under FIFO and average cost flow assumptions.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
16.
If the unit price of inventory is increasing during a period, a company using the averagecost inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the average-cost and FIFO inventory methods.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
Use of the FIFO inventory valuation method enables a company to report higher net income when in a period of falling prices.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
6-4 20.
Test Bank for Financial Accounting: IFRS Edition, 4e In a period of rising prices, if a company uses the FIFO cost flow assumption, income tax expense will be lower than if they used average-costing.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
In a period of rising prices, the statement of financial position will report a higher inventory amount if FIFO, rather than average-costing, is the cost flow assumption used.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
The accounting concept of prudence dictates that the accounting principle used should be the one least likely to overstate assets and income.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
Accountants believe that the write down from cost to net realizable value should not be made in the period in which the price decline occurs.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
24.
An error that overstates the ending inventory will also cause net income for the period to be overstated.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
25.
If an error understates the beginning inventory, net income will also be understated.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26.
If the inventory reported on the statement of financial position is understated, then net income reported on the income statement is understated.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
27.
Accounting for inventories under IFRS is similar to accounting under GAAP.
Ans: T, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
28.
A major difference between IFRS and GAAP is that GAAP specifically prohibits use of the FIFO cost flow assumption.
Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Inventory turnover is calculated as cost of goods sold divided by ending inventory.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
30.
If a company uses the FIFO cost flow assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
31.
In all cases when average-costing is used, the cost of goods sold would be the same whether a perpetual or periodic system is used.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
For Instructor Use Ony
Inventories a
32.
6-5
The moving-average cost flow assumption for a perpetual inventory system and the average-cost cost flow assumption for a periodic inventory system will allocate the same amounts to ending inventory and cost of goods sold.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
33.
Companies have the choice of physically counting inventory on hand at the end of the year or using the gross profit method to estimate the ending inventory.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
34.
The retail inventory method requires a company to value its inventory on the statement of financial position at retail prices.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
35.
In applying the LIFO assumption in a perpetual inventory system, the cost of the units most recently purchased prior to sale is allocated first to the units sold.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
36.
A major advantage of LIFO is that the inventory reported on the statement of financial position will approximate current cost.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
37.
The LIFO cost flow assumption can also be called the LISH assumption.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
38.
Finished goods are a classification of inventory for a manufacturer that are completed and ready for sale.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
Under the FIFO method, the costs of the earliest units purchased are the first charged to cost of goods sold.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
40.
The specific identification method of inventory costing is appropriate for costly, easily distinguishable items such as cars, pianos, and antiques.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
41.
In a period of falling prices, the average-cost method results in a lower cost of goods sold than the FIFO method.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
42.
The lower-of-cost-or-net realizable value basis is an example of the accounting concept of prudence.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43.
Inventories are reported in the current assets section of the statement of financial position immediately before receivables. For Instructor Use Only
6-6
Test Bank for Financial Accounting: IFRS Edition, 4e
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
44.
In a perpetual inventory system, the cost of goods sold under the FIFO method is based on the cost of the latest goods on hand during the period.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
45.
The gross profit method is based on the assumption that the rate of gross profit remains constant from one year to the next.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
MULTIPLE CHOICE QUESTIONS 46.
The purchase and sale of inventories affects a. only the statement of financial position. b. only the income statement. c. both the statement of financial position and the income statement. d. neither the statement of financial position nor the income statement.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
Merchandise inventory is a. reported under the classification of Property, Plant, and Equipment on the statement of financial position. b. often reported as a miscellaneous expense on the income statement. c. reported as a current asset on the statement of financial position. d. generally valued at the price for which the goods can be sold.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Items not yet placed into production are considered to be a. raw materials. b. work in process. c. finished goods. d. merchandise inventory.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
In a manufacturing business, inventory that is ready for sale is called a. raw materials inventory. b. work in process inventory. c. finished goods inventory. d. store supplies inventory.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
The factor which determines whether goods in transit should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. whether or not the purchase price has been paid.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 51.
6-7
If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
An auto manufacturer would classify vehicles in various stages of production as a. finished goods. b. merchandise inventory. c. raw materials. d. work in process.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
Which of the following should be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit to another company shipped FOB shipping point. c. Goods in transit from another company shipped FOB shipping point. d. Both goods in transit to and from another company shipped FOB shipping point.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
54.
Manufacturers usually classify inventory into all the following general categories except a. work in process b. finished goods c. merchandise inventory d. raw materials
Ans: C, LO: 1, Blooms Taxonomy: C, Difficulty: Easy, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
55.
Blosser Company's goods in transit at December 31 include: sales made (1) FOB destination (2) FOB shipping point
purchases made (3) FOB destination (4) FOB shipping point
Which items should be included in Blosser's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4) Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
56.
The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
For Instructor Use Only
6-8 57.
Test Bank for Financial Accounting: IFRS Edition, 4e As a result of a thorough physical inventory, Hastings Company determined that it had inventory worth $620,000 at December 31, 2020. This count did not take into consideration the following facts: Carlin Consignment store currently has goods worth $104,000 on its sales floor that belong to Hastings but are being sold on consignment by Carlin. The selling price of these goods is $150,000. Hastings purchased $40,000 of goods that were shipped on December 27 FOB destination, that will be received by Hastings on January 3. Determine the correct amount of inventory that Hastings should report. a. $660,000. b. $764,000. c. $724,000. d. $770,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
58.
Bellingham Inc. took a physical inventory at the end of the year and calculated that £1,750,000 of goods were on hand. Bellingham determined that £25,000 of goods were in transit. The goods were shipped f.o.b. shipping point and were received by Bellingham two days after the inventory count. The company also had £275,000 of goods out on consignment. What amount should Bellingham report for inventory on its statement of financial position? a. £1,450,000. b. £1,750,000. c. £2,025,000. d. £2,050,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
59.
Godchaux Inc. took a physical inventory at December 31, 2019 and determined that €395,000 of goods were on hand. In addition, the following items were not included in the physical count: (1) €60,000 of goods purchased were in transit, shipped f.o.b. destination (goods were received by Godchaux three days on January 3, 2020) and (2) the company shipped f.o.b. destination €25,000 worth of inventory on December 29. The goods arrived at the buyer’s place of business on January 2, 2020. What amount should Godchaux report as inventory at the end of 2019? a. €395,000. b. €455,000. c. €420,000. d. €480,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Ony
Inventories 60.
6-9
Ching Inc. took a physical inventory at December 31, 2019 and determined that ¥4,870,000 of goods were on hand. On December 29, the company had ordered ¥1,010,000 of goods which were in transit. The goods were shipped f.o.b. shipping point and arrived on January 2, 2020 The company had also sold and shipped f.o.b. destination ¥950,000 worth of inventory on December 28. The goods arrived at the buyer’s place of business on January 4, 2020. Ching’s December 31, 2019 statement of financial position will report inventory of a. ¥3,860,000. b. ¥4,870,000. c. ¥5,880,000. d. ¥6,830,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
61.
Keiko Company took a physical inventory at December 31, 2019 and determined that ¥3,730,000 of goods were on hand. In addition, the company had goods consigned with Chang Company that had a cost of ¥700,000. On December 29, Keiko sold and shipped f.o.b. shipping point ¥600,000 worth of inventory. These goods arrived at the buyer’s place of business on January 4, 2020. What amount should Keiko report as inventory on its December 31, 2019 statement of financial position? a. ¥3,730,000. b. ¥4,330,000. c. ¥4,430,000. d. ¥4,930,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
62.
Chang Company took a physical inventory at December 31, 2019 and determined that ¥3,990,000 of goods were on hand. Included in the count was inventory of ¥700,000 on consignment from Keiko Company. On December 30, Chang sold and shipped f.o.b. destination ¥820,000 worth of inventory. These goods arrived at the buyer’s place of business on January 2, 2020. What amount should Chang report for inventory on its December 31, 2019 statement of financial position? a. ¥3,990,000. b. ¥4,110,000. c. ¥3,410,000. d. ¥4,810,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
6 - 10 63.
Test Bank for Financial Accounting: IFRS Edition, 4e The following information was available from the inventory records of Queen Company for July: Balance at July 1 Purchases: July 6 July 26 Sales: July 7 July 31 Balance at July 31
Units 30,000
Unit Cost £ 2.25
Total Cost £67,500
20,000 27,000
2.55 2.60
51,000 70,200
(25,000) (40,000) 12,000
What is Queen’s cost of goods available for sale? a. £19,250. b. £71,200. c. £188,700. d. cannot be determined. Ans: C, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
64.
The following information was available from the inventory records of Queen Company for July: Balance at July 1 Purchases: July 6 July 26 Sales: July 7 July 31 Balance at July 31
Units 30,000
Unit Cost £ 2.25
Total Cost £67,500
20,000 27,000
2.55 2.60
51,000 70,200
(25,000) (40,000) 12,000
What should be the inventory reported on Queen’s July 31 statement of financial position using the average-cost inventory method (round per unit amounts to two decimal places)? a. £27,000. b. £29,400. c. £29,610. d. £31,500. Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
For Instructor Use Ony
Inventories 65.
6 - 11
The following information was available from the inventory records of Queen Company for July: Balance at July 1 Purchases: July 6 July 26 Sales: July 7 July 31 Balance at July 31
Units 30,000
Unit Cost £ 2.25
Total Cost £67,500
20,000 27,000
2.55 2.60
51,000 70,200
(25,000) (40,000) 12,000
What should be the inventory reported on Queen’s July 31 statement of financial position using the FIFO inventory method? a. £27,000. b. £29,400. c. £31,200. d. £31,500. Ans: C, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
66.
Brocken Co. has the following data related to an item of inventory: Inventory, May 1 Purchase, May 7 Purchase, May 16
3,000 units @ £4.20 10,500 units @ £4.40 2,100 units @ £4.50
Inventory, May 31
3,900 units
The value assigned to cost of goods sold if Brocken uses average-cost is a. £51,186. b. £50,700. c. £50,883. d. £52,560. Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
67.
Brocken Co. has the following data related to an item of inventory: Inventory, May 1 Purchase, May 7 Purchase, May 16
3,000 units @ £4.20 10,500 units @ £4.40 2,100 units @ £4.50
Inventory, May 31
3,900 units
The value assigned to cost of goods sold if Brocken uses FIFO is a. £50,700. b. £50,880. c. £51,207. d. £51,246. Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
For Instructor Use Only
6 - 12 68.
Test Bank for Financial Accounting: IFRS Edition, 4e Vestle Company uses the periodic inventory system. For January 2020, the beginning inventory consisted of 36,000 units that cost CHF12 each. During the month, the company made two purchases: 15,000 units at CHF13 each and 60,000 units at CHF13.50 each. Vestle sold 64,500 units during the month for CHF19.50 per unit. Using the average-cost method, what is the amount of cost of goods sold for the month of January 2020 (round per unit amount to two decimal places)? a. CHF835,275. b. CHF854,625. c. CHF827,535. d. CHF864,300.
Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
69.
Nolvo Company uses the periodic inventory system. For February 2020, the beginning inventory consisted of 2,000 units that cost CHF65 each. During the month, the company made two purchases: 8,000 units at CHF68 each and 3,000 units at CHF72 each. Nolvo sold 10,000 units during the month of February at CHF110 per unit. Using the average cost method, what is the amount of ending inventory at February 28, 2020? a. CHF207,270. b. CHF210,000. c. CHF205,380. d. CHF204,990.
Ans: C, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
70.
Kershaw Bookstore had 1,200 units on hand at January 1, costing €18 each. Purchases and sales during the month of January were as follows: Date Purchases Sales Jan. 14 900 @ €28 17 600 @ €20 25 600 @ €22 29 600 @ €32 Kershaw does not maintain perpetual inventory records. According to a physical count, 900 units were on hand at January 31. The cost of the inventory at January 31, under the FIFO method is: a. €2,400. b. €16,200. c. €18,600. d. €19,200.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Ony
Inventories 71.
6 - 13
Colletti Company recorded the following data: Date Received 1/1 Inventory 1/8 Purchased 900 1/12 Sold
Units Sold 1,200
On Hand 600 1,500 300
Unit Cost $4.00 4.40
The weighted average unit cost of the inventory at January 31 is: a. $4.00. b. $4.20. c. $4.24. d. $4.40. Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
72.
Beginning inventory plus the cost of goods purchased equals a. cost of goods sold. b. cost of goods available for sale. c. net purchases. d. total goods purchased.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
73.
A company just starting in business purchased three inventory items at the following prices. first purchase $80; second purchase $95; third purchase $85. If the company sold two units for a total of $290 and used FIFO costing, the gross profit for the period would be a. $115. b. $125. c. $110. d. $100.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
74.
A company just starting business made the following four inventory purchases in June: June 1 150 units ¥ 2,600 June 10 200 units 3,900 June 15 200 units 4,200 June 28 150 units 3,300 ¥14,000 A physical count of merchandise inventory on June 30 reveals that there are 100 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for June is a. ¥2,200. b. ¥12,000. c. ¥11,800. d. ¥12,266.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
6 - 14 75.
Test Bank for Financial Accounting: IFRS Edition, 4e A company just starting business made the following four inventory purchases in June: June 1 150 units ¥ 2,600 June 10 200 units 3,900 June 15 200 units 4,200 June 28 150 units 3,300 ¥14,000 A physical count of merchandise inventory on June 30 reveals that there are 100 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. ¥14,000. b. ¥12,000. c. ¥2,200. d. ¥2,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
76.
A company just starting business made the following four inventory purchases in June: June 1 150 units ¥ 2,600 June 10 200 units 3,900 June 15 200 units 4,200 June 28 150 units 3,300 ¥14,000 A physical count of merchandise inventory on June 30 reveals that there are 100 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the specific identification method. c. the average-cost method. d. not determinable.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
77.
A company purchased inventory as follows: 200 units at $2.50 300 units at $3.00 The average unit cost for inventory is a. $2.50. b. $2.75. c. $2.80. d. $3.00.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
78.
The cost of goods available for sale is allocated between a. beginning inventory and ending inventory. b. beginning inventory and cost of goods on hand. c. ending inventory and cost of goods sold. d. beginning inventory and cost of goods purchased.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 79.
6 - 15
Ted's Used Cars uses the specific identification method of costing inventory. During March, Ted purchased three cars for $8,000, $10,000, and $13,000, respectively. During March, two cars are sold for $11,000 each. Ted determines that at March 31, the $13,000 car is still on hand. What is Ted’s gross profit for March? a. $3,000. b. $4,000. c. $1,000. d. $9,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
80.
Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
81.
A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower-of-cost-or-net realizable value basis cannot be applied.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economic
82.
The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the IASB. c. the internal auditors. d. company management.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
83.
Which one of the following inventory methods is often impractical to use? a. Specific identification b. Average cost c. FIFO d. All of these answer choices are practical to use
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economic
84.
The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle. b. called the consistency principle. c. nonexistent; that is, there is no accounting requirement. d. called the physical flow assumption.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
6 - 16 85.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
86.
The cost of goods available for sale is allocated to the cost of goods sold and the a. beginning inventory. b. ending inventory. c. cost of goods purchased. d. gross profit.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
At May 1, 2020, Deitrich Company had beginning inventory consisting of 300 units with a unit cost of €3.50. During May, the company purchased inventory as follows: 600 units at €3.50 900 units at €4.00 The company sold 1,500 units during the month for €6 per unit. Deitrich uses the averagecost method. The average cost per unit for May is a. €3.50. b. €3.75. c. €3.80. d. €4.00.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
88.
At May 1, 2020, Deitrich Company had beginning inventory consisting of 300 units with a unit cost of €3.50. During May, the company purchased inventory as follows: 600 units at €3.50 900 units at €4.00 The company sold 1,500 units during the month for €6 per unit. Deitrich uses the average cost method. The value of Deitrich’s inventory at May 31, 2020 is a. €1,050. b. €1,125. c. €1,200. d. €6,750.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Ony
Inventories 89.
6 - 17
At May 1, 2020, Deitrich Company had beginning inventory consisting of 200 units with a unit cost of €3.50. During May, the company purchased inventory as follows: 400 units at €3.50 600 units at €4.00 The company sold 1,000 units during the month for €7 per unit. Deitrich uses the average cost method. Deitrich’s gross profit for the month of May is a. €3,250. b. €4,750. c. €5,500. d. €7,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
90.
Graham Company uses a periodic inventory system. Details for the inventory account for the month of January, 2020 are as follows: Balance, 1/1/20 Purchase, 1/15/20 Purchase, 1/28/20
Units 400 200 200
Per unit price $5.00 5.30 5.50
Total $2,000 1,060 1,100
An end of the month (1/31/20) inventory showed that 240 units were on hand. How many units did the company sell during January 2020? a. 160 b. 240 c. 400 d. 560 Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
91.
Graham Company uses a periodic inventory system. Details for the inventory account for the month of January, 2020 are as follows: Balance, 1/1/20 Purchase, 1/15/20 Purchase, 1/28/20
Units 400 200 200
Per unit price $5.00 5.30 5.50
Total $2,000 1,060 1,100
An end of the month (1/31/20) inventory showed that 240 units were on hand. If the company uses FIFO, what is the value of the ending inventory? a. $1,040 b. $1,200 c. $1,312 d. $2,848 Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
6 - 18 92.
Test Bank for Financial Accounting: IFRS Edition, 4e Graham Company uses a periodic inventory system. Details for the inventory account for the month of January 2020 are as follows:
Balance, 1/1/20 Purchase, 1/15/20 Purchase, 1/28/20
Units 400 200 200
Per unit price $5.00 5.30 5.50
Total $2,000 1,060 1,100
An end of the month (1/31/20) inventory showed that 240 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $2,752 b. $2,848 c. $5,600 d. $6,000 Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
93.
Holliday Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost ₤2.70 2.40 2.10
A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3.60 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. Under the FIFO method, the December 31 inventory is valued at a. ₤4,200. b. ₤4,350. c. ₤4,500. d. ₤5,400. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
94.
Holliday Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost ₤2.70 2.40 2.10
A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3.60 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. What is the cost of goods available for sale? a. ₤6,300 b. ₤10,800 c. ₤13,500 d. ₤30,600 Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Ony
Inventories 95.
6 - 19
Holliday Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost ₤2.70 2.40 2.10
A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3.60 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. The weighted-average cost per unit is a. ₤2.26. b. ₤2.40. c. ₤2.45. d. ₤2.63. Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
96.
Holliday Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost ₤2.70 2.40 2.10
A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3.60 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. If the company uses FIFO, what is the gross profit for the period? a. ₤600 b. ₤3,000 c. ₤6,300 d. ₤11,400 Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
97.
Unitech has the following inventory information. July 1 Beginning Inventory 60 units at $19 7 Purchases 210 units at $20 22 Purchases 30 units at $22
$ 1,140 4,200 660 $6,000
A physical count of merchandise inventory on July 31 reveals that there are 90 units on hand. Using the average-cost method, the value of ending inventory is a. $1,740. b. $1,800. c. $1,830. d. $1,860. Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
6 - 20 98.
Test Bank for Financial Accounting: IFRS Edition, 4e Unitech has the following inventory information. July 1 Beginning Inventory 60 units at $19 7 Purchases 210 units at $20 22 Purchases 30 units at $22
$ 1,140 4,200 660 $6,000
A physical count of merchandise inventory on July 31 reveals that there are 90 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,740. b. $1,860. c. $4,140. d. $4,260. Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
99.
Neighborly Industries has the following inventory information. July 1 Beginning Inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $57.50 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis? a. $5,496 b. $5,511 c. $11,544 d. $11,559
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
100.
Shandy Shutters has the following inventory information. Nov. 1 Inventory 45 units @ €6.00 8 Purchase 180 units @ €6.45 17 Purchase 90 units @ €6.30 25 Purchase 135 units @ €6.60 A physical count of merchandise inventory on November 30 reveals that there are 150 units on hand. Assume a periodic inventory system is used. Cost of goods sold under the average-cost method is a. €1,938. b. €1,926. c. €1,902. d. €1,800.
Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Ony
Inventories 101.
6 - 21
Shandy Shutters has the following inventory information. Nov. 1 Inventory 45 units @ €6.00 8 Purchase 180 units @ €6.45 17 Purchase 90 units @ €6.30 25 Purchase 135 units @ €6.60 A physical count of merchandise inventory on November 30 reveals that there are 150 units on hand. Assume a periodic inventory system is used. Ending inventory under FIFO is a. €986. b. €1,902. c. €948. d. €1,941.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
102.
Shandy Shutters has the following inventory information. Nov. 1 8 17 25
Inventory Purchase Purchase Purchase
45 units @ €6.00 180 units @ €6.45 90 units @ €6.30 135 units @ €6.60
A physical count of merchandise inventory on November 30 reveals that there are 150 units on hand. Assume a periodic inventory system is used. Assuming that the specific identification method is used and that ending inventory consists of 45 units from each of the three purchases and 15 units from the November 1 inventory, cost of goods sold is a. €960. b. €1,928. c. €1,920. d. €1,881. Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
103.
Lee Industries had the following inventory transactions occur during 2020: 2/1/20 3/14/20 5/1/20
Purchase Purchase Purchase
Units 90 155 110
Cost/unit $45 $47 $49
The company sold 255 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $12,205 b. $11,825 c. $4,240 d. $3,860 Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
For Instructor Use Only
6 - 22 104.
Test Bank for Financial Accounting: IFRS Edition, 4e Lee Industries had the following inventory transactions occur during 2020: 2/1/20 3/14/20 5/1/20
Purchase Purchase Purchase
Units 90 155 110
Cost/unit $45 $47 $49
The company sold 255 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $3,860 b. $4,240 c. $2,968 d. $2,700 Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
105.
Companies adopt different cost flow methods for each of the following reasons except a. statement of financial position effects. b. cash flow effects. c. income statements effects. d. tax effects.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
106.
In periods of rising prices, the inventory method which results in the inventory value on the statement of financial position that is closest to current cost is the a. FIFO method. b. specific identification method. c. average-cost method. d. tax method.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
107.
If companies have identical inventory costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical. b. cost of goods available for sale of the companies will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
108.
The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
For Instructor Use Ony
Inventories 109.
6 - 23
The accountant at Paige Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or average-cost as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $36,400. The average-cost method will result in income before taxes of $32,900. What is the difference in tax that would be paid between the two methods? a. $3,500. b. $1,500. c. $1,050. d. Cannot be determined from the information provided.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
110.
The accountant at Reber Company has determined that income before income taxes amounted to $9,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $420 greater if the average-cost assumption were used, what would be the amount of income before taxes under the average-cost assumption? a. $9,420 b. $10,400 c. $8,020 d. $8,580
Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods
111.
The manager of Yates Company is given a bonus based on income before income taxes. Net income, after taxes, is $17,500 for FIFO and $15,750 for average-cost. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of average-cost? a. $625 b. $938 c. $500 d. $1,750
Ans: C, LO: 2, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
112.
The consistent application of an inventory costing method is essential for a. prudence. b. accuracy. c. comparability. d. efficiency.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
Which inventory costing method most closely approximates current cost for each of the following? Ending Inventory Cost of Goods Sold a. FIFO FIFO b. FIFO Average-cost c. Average-cost FIFO d. Average-cost Average-cost
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
6 - 24 114.
Test Bank for Financial Accounting: IFRS Edition, 4e In a period of rising prices, the inventory method which tends to report the lowest inventory is a. FIFO. b. LISH. c. Specific identification. d. Average-cost.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
115.
In a period of rising prices which inventory method generally provides the greatest amount of net income? a. Average-cost. b. FIFO. c. LISH. d. Cannot be determined.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
In a period of falling prices, which inventory method would result in the lowest tax burden? a. Average-cost. b. FIFO. c. No difference. d. Cannot be determined.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
117.
Henri Company uses the average-cost inventory method. Its 2020 ending inventory was €40,000, but it would have been €65,000 if FIFO had been used. Thus, if FIFO had been used, Henri’s income before income taxes would have been a. €25,000 greater. b. €25,000 less. c. the same. d. not determinable without the tax rate.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
118.
Franco Company uses the FIFO inventory method. Its 2020, the company reported net income of €840,000. Had average-cost been used, the company would have reported net income of €760,000. Assuming a 40% tax rate, what is the impact of the inventory cost flow assumption on Franco's taxes for 2020? a. Franco would pay €32,000 more in taxes for 2020 as a result of using FIFO inventory method rather than average-cost. b. Franco would pay €48,000 less in taxes for 2020 as a result of using FIFO inventory method rather than average-cost. c. The inventory method does not impact the amount of income tax paid. d. Not determinable without income before taxes.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 119.
6 - 25
Breguet Company uses the FIFO inventory method. The company reported inventory of CHF4,540,000 on its December 31, 2020 statement of financial position. Had averagecost been used, the company would have reported inventory of CHF3,720,000. The company's tax rate is 30%. What is the impact of the inventory cost flow assumption on Breguet's 2020 financial statements? a. Income before taxes reported by Breguet would be CHF820,000 lower as a result of using the FIFO cost flow assumption. b. Breguet would pay CHF246,000 less in taxes for 2020 as a result of using the FIFO cost flow assumption. c. Income after taxes reported by Breguet would be CHF574,000 higher as a result of using the FIFO cost flow assumption. d. The only financial statement affected by the cost flow assumption is the statement of financial position, which would report CHF820,000 more in inventory as a result of using the FIFO cost flow assumption.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120.
Aiwa Inc. uses the FIFO inventory method. In 2020, the company reported net income of ¥59,600,000. Had average-cost been used, the company would have reported net income of ¥58,400,000. Assuming a 25% tax rate, what is the impact of the inventory cost flow assumption on Aiwa's taxes for 2020? a. Aiwa would pay ¥300,000 less in taxes for 2020 as a result of using the average-cost inventory method rather than FIFO. b. Aiwa would pay ¥900,000 less in taxes for 2020 as a result of using the average-cost inventory method rather than FIFO. c. The inventory method does not impact the amount of income tax paid. d. Not determinable without income before taxes.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
For the current month, the beginning inventory of Elipresse Inc. consisted of 3 units that cost CHF3,300 each. During the month, the company made two purchases: 4 units at CHF3,480 each and 1 units at CHF3,450. Elipresse sold 5 units during the month. If Elipresse uses specific identification and wishes to maximize net income, the unit costs allocated to cost of goods sold will be: a. 5 units@CHF3,300. b. 4 units@CHF3,480 and 1 unit @CHF3,450 c. 3 units@CHF3,300 and 1 unit @CHF3,480 d. 3 units@CHF3,300, 1 unit @CHF3,450 and 1 unit @CHF3,480
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
6 - 26 122.
Test Bank for Financial Accounting: IFRS Edition, 4e At year-end, Dana Corporation has 4,000 units of Lolland, 4,000 units of Falster, and 6,000 units of Jultand in its ending inventory. Specific data with respect to each product follows: Lolland Falster Jutland Historical cost €55 €70 €98 Net realizable value 48 77 94 What amount will Dana report for ending inventory using lower-of-cost-or-net realizable value? a. €1,036,000. b. €1,056,000. c. €1,088,000. d. €1,116,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
123.
Carlsberg Corporation has 3,000 units of product#1and 6,000 units of product#2 in its inventory at December 31, 2020. Specific data with respect to each product follows: Historical cost Net realizable value
Product#1 CHF40 45
Product#2 CHF70 54
What amount will be reported on the company statement of financial position at December 31, 2020 for ending inventory using lower-of-cost-or-net realizable value? a. CHF330,000. b. CHF432,000. c. CHF444,000. d. CHF459,000. Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
124.
At December 31, 2020, Bosan Corporation has 9,800 units of model 63 and 7,000 units of model 64 in its ending inventory. Specific data with respect to each product follows: Historical cost Net realizable value
Model 63 W7,800 7,700
Model 64 W8,700 8,800
What amount will be reported for inventory on Boson's statement of financial position after the company applies LCNRV? a. W151,900,000. b. W138,040,000. c. W137,060,000. d. W136,360,000. Ans: D, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Ony
Inventories 125.
6 - 27
Net realizable value is a. original cost plus costs to complete and sell. b. selling price. c. original cost less costs to complete and sell. d. selling cost less costs to complete and sell.
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
126.
Net realizable value refers to a. the net amount the company expects to realize from the sale. b. the selling price. c. the cost to replace the item. d. the gross profit realized from the sale.
Ans: A, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
127.
Which costing method cannot be used to determine the cost of inventory items before lower-of-cost-or-net realizable value market is applied? a. Specific identification b. FIFO c. Average-cost d. All of these methods can be used.
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
128.
Inventory is reported in the financial statements at a. cost. b. net realizable value. c. the higher-of-cost-or-net realizable value. d. the lower-of-cost-or-net realizable value.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
The lower-of-cost-or-net realizable value basis of valuing inventories is an example of a. comparability. b. the cost principle. c. prudence. d. consistency.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
130.
Never Company developed the following information about its inventories in applying the lower-of-cost-or-net realizable value (LCNRV) basis in valuing inventories: Product Cost NRV A $171,000 $180,000 B 120,000 114,000 C 240,000 243,000 If Never applies the LCNRV basis, the value of the inventory reported on the statement of financial position would be a. $531,000. b. $537,000. c. $525,000. d. $543,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
6 - 28 131.
Test Bank for Financial Accounting: IFRS Edition, 4e Paulson, Inc. has 10 computers which have been part of the inventory for over two years. Each computer cost ₤600 and originally retailed for ₤825. At the statement date, each computer has a net realizable value of ₤350. What value should Paulson, Inc., have for the computers at the end of the year? a. ₤2,500. b. ₤3,500. c. ₤6,000. d. ₤8,250.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Paulson, Inc. has 10 computers which have been part of the inventory for over two years. Each computer cost ₤600 and originally retailed for ₤825. At the statement date, each computer has a net realizable value of ₤350. How much loss should Paulson, Inc., record for the year? a. ₤2,250. b. ₤2,500. c. ₤3,000. d. ₤3,500.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
133.
Widner Company understated its inventory by $10,000 at December 31, 2019. It did not correct the error in 2019 or 2020. As a result, Widner's equity was: a. understated at December 31, 2019, and overstated at December 31, 2020. b. understated at December 31, 2019, and properly stated at December 31, 2020. c. overstated at December 31, 2019, and overstated at December 31, 2020. d. understated at December 31, 2019, and understated at December 31, 2020.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
134.
Understating beginning inventory will understate a. assets. b. cost of goods sold. c. net income. d. equity.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
135.
An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated
Ans: C, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 136.
6 - 29
If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated
Ans: C, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
137.
A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000. The amounts reflected in the current end of the period statement of financial position are Assets Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct
Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
Overstating ending inventory will overstate all of the following except a. assets. b. cost of goods sold. c. net income. d. equity.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
139.
The inventory reported on Lazzard Company’s statement of financial position is understated by £1,500,000. The company’s reported net income for the period will be a. understated by £1,500,000. b. overstated by £1,500,000. c. correct. d. need more information to determine.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
140.
If the inventory reported on a Gottleib Company’s statement of financial position at December 31, 2019 is overstated by €1,200,000, the company’s retained earnings balance at December 31, 2020 will be a. understated by €1,200,000. b. correct. c. overstated by €1,200,000. d. need more information to determine.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
6 - 30 141.
Test Bank for Financial Accounting: IFRS Edition, 4e At December 31, 2020, Daewoo Inc. reported total assets of W405,590,000, and net income of W100,670,000 for the current year. Daewoo determined that inventory was overstated by W3,200,000 at the beginning of 2021 (this was not corrected). What is Daewoo’s corrected amount for total assets for 2020? a. W304,938,000. b. W402,390,000. c. W408,790,000. d. W506,260,000
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
142.
Reinhoff Inc. reported total assets of €2,600,000, including €435,000 for inventory, and equity of €1,790,0000 on the December 31, 2020 statement of financial position. Reinhoff subsequently determined that the ending inventory was understated by €63,000. What is the corrected amount of equity for the year? a. €0. b. €1,727,000. c. €1,790,000. d. €1,853,000.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
143.
At December 31, 2020, Murchi Company reported total assets of Rs22,320,000, including inventory of Rs5,580,000 and net income of Rs7,365,600 for 2020. The reported inventory was overstated by Rs1,050,000. Which of the following is true with regard to Murchi’s 2020 financial statements (ignore income taxes)? a. Total assets are understated and total equity is overstated by Rs1,050,000. b. Cost of goods sold is understated and total equity is overstated by Rs1,050,000. c. Cost of goods sold and total equity are both understated by Rs1,050,000. d. Total assets and Net income are both overstated by Rs1,050,000.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
144.
Bosio Corporation’s computation of cost of goods sold is: Beginning inventory Add: Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
€160,000 505,000 665,000 200,000 €465,000
Bosio’s inventory turnover is a. 2.3 times. b. 2.6 times. c. 2.8 times. d. 2.9 times. Ans: B, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 145.
6 - 31
Bosio Corporation’s computation of cost of goods sold is: Beginning inventory Add: Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
€160,000 505,000 665,000 200,000 €465,000
The average days to sell inventory for Bosio is a. 157 days. b. 130 days. c. 141 days. d. 126 days. Ans: C, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
India Eastern Corporation’s computation of cost of goods sold is: Beginning inventory Add: Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
Rs10,960,000 48,614,000 59,574,000 9,040,000 Rs50,534,000
India East’s inventory turnover is a. 4.61 times. b. 4.86 times. c. 5.1 times. d. 5.59 times. Ans: C, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
147.
India Eastern Corporation’s computation of cost of goods sold is: Beginning inventory Add: Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
Rs10,960,000 48,614,000 59,574,000 9,040,000 Rs50,534,000
The average days to sell inventory for India East is a. 71.6 days. b. 75.1 days. c. 79.2 days. d. 65.3 days. Ans: A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
6 - 32 148.
Test Bank for Financial Accounting: IFRS Edition, 4e At January 1, 2020, Britannica Inc. reported inventory of £425,000. At December 31, 2020, the inventory on hand was £501,000. If cost of goods sold for 2020 was £4,164,062, What is the inventory turnover for the year? a. 4.5 times. b. 8.3 times. c. 9.0 times. d. 9.8 times.
Ans: C, LO: AP, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
149.
The 2020 financial statements of Vitturo Company reported beginning inventory of €973,000, ending inventory of €1,023,000, and cost of goods sold of €7,984,000 for the year. Vitturo’s inventory turnover for 2020 is a. 4.0 times. b. 7.8 times. c. 8.2 times. d. 8.0 times.
Ans: D, LO: AP, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
150.
The major difference between IFRS and GAAP in accounting for inventories is that a. GAAP prohibits the use of specific identification. b. IFRS does not require that a physical inventory be taken. c. GAAP allows the use of the LIFO cost flow assumption. d. GAAP requires that the LIFO cost flow assumption be used.
Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
One difference between IFRS and GAAP in valuing inventories is that a. Under IFRS, but not GAAP, inventories written down under LCNRV can be written back up to the original cost. b. GAAP defines market value as replacement cost where IFRS defines market as the selling price. c. GAAP strictly adheres to the historical cost concept and does not allow for writedowns of inventory values. d. IFRS, but not GAAP, requires that inventories be valued at the lower of cost or market.
Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
152.
Disclosures about inventory should include each of the following except the a. basis of accounting. b. cost method. c. quantity of inventory. d. major inventory classifications.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
Inventories 153.
6 - 33
The following information is available for Park Company at December 31, 2020: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $1,050,000; and sales $1,800,000. Park’s inventory turnover in 2020 is a. 18 times. b. 13.2 times. c. 10.5 times. d. 8.7 times.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
154.
The following information was available for Hoover Company at December 31, 2020: beginning inventory $110,000; ending inventory $70,000; cost of goods sold $1,100,000; and sales $1,600,000. Hoover’s inventory turnover in 2020 was a. 17.8 times. b. 12.2 times. c. 15.7 times. d. 10.0 times.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
155.
The following information was available for Hoover Company at December 31, 2020: beginning inventory $110,000; ending inventory $70,000; cost of goods sold $1,100,000; and sales $1,600,000. Hoover’s days in inventory in 2020 was a 20.5 days. b. 29.9 days. c. 23.2 days. d. 36.5 days.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
Jenner Company had beginning inventory of $90,000, ending inventory of $110,000, cost of goods sold of $600,000, and sales of $960,000. Jenner's days in inventory is: a 67.5 days. b. 60.8 days. c. 54.3 days. d. 38.0 days.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
157.
a
During July, the following purchases and sales were made by James Company. There was no beginning inventory. James Company uses a perpetual inventory system. July 3 11 20
Purchases 80 units @ €12 80 units @ €13 40 units @ €15
July 13 22
Sales 100 units 40 units
Under the FIFO method, the cost of goods sold for each sale is: July 13 a. €1,200 b. 1,300 c. 1,220 d. 1,500
July 22 €480 520 520 600
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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a
Test Bank for Financial Accounting: IFRS Edition, 4e During July, the following purchases and sales were made by James Company. There was no beginning inventory. James Company uses a perpetual inventory system. July 3 11 20
Purchases 80 units @ €12 80 units @ €13 40 units @ €15
July 13 22
Sales 100 units 40 units
Under the LIFO method, the cost of goods sold for each sale is: July 13 a. €1,280 b. 1,500 c. 1,200 d. 1,300
July 22 €600 520 480 600
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
159.
a
Julian Junkets has the following inventory information. July 1 Beginning Inventory 25 units at $90 5 Purchases 150 units at $84 14 Sale 100 units 21 Purchases 75 units at $87 30 Sale 70 units Assuming that a perpetual inventory system is used, what is the ending inventory on a FIFO basis? a. $6,870 b. $6,885 c. $6,945 d. $14,490
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
160. Julian Junkets has the following inventory information. July 1 Beginning Inventory 25 units at $90 5 Purchases 150 units at $84 14 Sale 100 units 21 Purchases 75 units at $87 30 Sale 70 units Assuming that a perpetual inventory system is used, what is the ending inventory (rounded) under the average-cost method? a. $6,875 b. $6,960 c. $6,015 d. $6,930
Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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161. A new average cost is computed each time a purchase is made in the a. average-cost method. b. moving-average cost method. c. weighted-average cost method. d. all of these methods.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
162. When valuing ending inventory under a perpetual inventory system, the a. valuation using the average-cost assumption is the same as the valuation using the average-cost assumption under the periodic inventory system. b. moving average requires that a new average be computed after every sale. c. valuation using the FIFO assumption is the same as under the periodic inventory system. d. last units purchased during the period using the FIFO assumption are allocated to the cost of goods sold when units are sold.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
163. Sawyer Company uses the perpetual inventory system and the moving-average method to value inventories. On August 1, there were 10,000 units valued at $60,000 in the beginning inventory. On August 10, 20,000 units were purchased for $12 per unit. On August 15, 24,000 units were sold for $24 per unit. The amount charged to cost of goods sold on August 15 was a. $60,000. b. $240,000. c. $288,000. d. $216,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
164. Tatsoi Company’s purchase and sales transactions for the month of May were as follows: Purchases May 1 (beg. balance) 2,000@ ¥300 7 6,000@ 320 22 2,000@ 330
May 2 14 28
Sales 1,200@ ¥600 4,800@ 600 2,000@ 650
Assuming that Tatsoi keeps perpetual inventory records, the ending inventory on a FIFO basis is a. ¥600,000. b. ¥624,000. c. ¥660,000. d. ¥2,520,000. Ans: C, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic
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Test Bank for Financial Accounting: IFRS Edition, 4e
165. Tatsoi Company’s purchase and sales transactions for the month of May were as follows: Purchases May 1 (beg. balance) 2,000@ ¥300 7 6,000@ 320 22 2,000@ 330
May 2 14 28
Sales 1,200@ ¥600 4,800@ 600 2,000@ 650
Assuming that the company keeps perpetual inventory records, Tatsoi’s cost of goods sold for the month of May on a LIFO basis is a. ¥624,000. b. ¥2,556,000. c. ¥3,180,000. d. ¥5,796,000. Ans: B, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
166. Bueno Company’s purchase and sales transactions for the month of July were as follows: Purchases July 3 (beg. balance) 8,000@ €4.00 16 24,000@ 4.40 30 6,000@ 4.75 The company sold 16,000 units on July 22. Assuming that the Bueno keeps perpetual inventory records, July’s cost of goods sold on a FIFO basis is a. €67,200. b. €68,800. c. €106,800. d. €108,400.
Ans: A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
167. Bueno Company’s purchase and sales transactions for the month of July were as follows: Purchases July 3 (beg. balance) 8,000@ €4.00 16 24,000@ 4.40 30 6,000@ 4.75 The company sold 16,000 units on July 22. Assuming that Bueno keeps perpetual inventory records, inventory at July 31 on a moving-average basis is a. €68,800. b. €70,600. c. €105,360. d. €97,300.
Ans: D, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic
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168. Bueno Company’s purchase and sales transactions for the month of July were as follows: Purchases July 3 (beg. balance) 8,000@ €4.00 16 24,000@ 4.40 30 6,000@ 4.75 The company sold 16,000 units on July 22. Assuming that the company keeps perpetual inventory records, Bueno’s ending inventory on a LIFO basis is a. €67,200. b. €70,240. c. €95,700. d. €108,400.
Ans: C, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
169. Swiss-Mart Company’s beginning inventory balance and purchase and sales transactions for the month of June were as follows: June 1 7 22
Purchases 4,000@CHF3.00 12,000@ 3.20 7,000@ 3.30
Sales June 8 24
9,000 12,000
Assuming that Swiss-Mart keeps perpetual inventory records, the inventory at June 30 on a FIFO basis is a. CHF6,000. b. CHF6,600. c. CHF10,500. d. CHF11,500. Ans: B, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
170. Swiss-Mart Company’s beginning inventory balance and purchase and sales transactions for the month of June were as follows: June 1 7 22
Purchases 4,000@CHF3.00 12,000@ 3.20 7,000@ 3.30
Sales June 8 24
9,000 12,000
Assuming that the company keeps perpetual inventory records, Swiss-Mart’s inventory at June 30 on a LIFO basis is a. CHF6,000. b. CHF6,400. c. CHF6,600. d. CHF7,000. Ans: A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic
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6 - 38 171.
Test Bank for Financial Accounting: IFRS Edition, 4e The following information is available through June 2020 for Kimchee Company: Beginning inventory Purchases Sales Markup on sales
W 90,000,000 270,000,000 540,000,000 40%
On June 29, a fire completely destroyed Kimchee’s inventory. Using the gross profit method, the estimated value of the inventory destroyed is a. W180,000,000. b. W144,000,000. c. W72,000,000. d. W36,000,000. Ans: D, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic
172.
Major Grey Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year: Beginning inventory Purchases Freight-in Sales
Cost Rs 40,000,000 152,000,000 2,500,000
Retail Rs 60,000,000 210,000,000 205,000,000
What cost to retail ratio should be used to estimate ending inventory? a. Rs194,500,000 ÷ Rs270,000,000 b. Rs194,500,000 ÷ Rs475,000,000 c. Rs192,000,000 ÷ Rs270,000,000 d. Rs192,000,000 ÷ Rs265,000,000 Ans: A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic
173.
Neiderhoff Inc. uses the retail inventory method to value its merchandise inventory. The following information is available for 2020: Inventory, 1/1/2020 Purchases Freight-in Sales
Cost € 2,335,000 10,598,000 1,356,000
Retail € 4,670,000 22,802,000 24,351,000
What is Neiderhoff’s estimated ending inventory at cost? a. €1,466,870 b. €1,435,660 c. €1,622,920 d. €3,121,000 Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic
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174. The following information is available for 2020 for Greenwich Company: Beginning inventory Purchases Sales Markup on sales
£ 2,816,000 7,999,000 15,000,000 35%
In May 2020, a flood washed away Greenwich’s inventory. Using the gross profit method, the estimated value of the inventory destroyed is: a. £3,785,250 b. £2,799,650 c. £1,065,000 d. £525,000 Ans: C, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
175. Mishu Inc. uses the retail inventory method to value its merchandise inventory. The following information is available for 2020: Beginning inventory Purchases Freight-in Sales
Cost ¥ 202,000,000 1,882,000,000 6,000,000
Retail ¥ 606,000,000 5,664,000,000 5,670,000,000
What is Mishu’s estimated ending inventory at cost? a. ¥101,970,000 b. ¥198,000,000 c. ¥402,000,000 d. ¥600,000,000 Ans: B, LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economic a
176. Under the gross profit method, each of the following items are estimated except for the a. cost of ending inventory. b. cost of goods sold. c. cost of goods purchased. d. gross profit.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
177. Under the retail inventory method, the estimated cost of ending inventory is computed by multiplying the cost-to-retail ratio by a. net sales. b. goods available for sale at retail. c. goods purchased at retail. d. ending inventory at retail.
Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
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Test Bank for Financial Accounting: IFRS Edition, 4e
178. Stark Department Store estimates inventory by using the retail inventory method. The following information was developed: Beginning inventory Goods purchased Net sales
At Cost € 424,000 1,200,000
At Retail €1,000,000 1,800,000 1,900,000
The estimated cost of the ending inventory is a. €696,000. b. €522,000. c. €882,000. d. €900,000. Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
179. Tucker Department Store utilizes the retail inventory method to estimate its inventories. It calculated its cost to retail ratio during the period at 75%. Goods available for sale at retail amounted to $960,000 and goods were sold during the period for $600,000. The estimated cost of the ending inventory is a. $360,000. b. $720,000. c. $270,000. d. $480,000.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
180. Wade Company prepares monthly financial statements and uses the gross profit method to estimate ending inventories. Historically, the company has had a 40% gross profit rate. During June, net sales amounted to $160,000; the beginning inventory on June 1 was $48,000; and the cost of goods purchased during June amounted to $72,000. The estimated cost of Wade Company's inventory on June 30 is a. $24,000. b. $96,000. c. $40,000. d. $64,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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181. Kershaw Bookstore had 800 units on hand at January 1, costing €27 each. Purchases and sales during the month of January were as follows: Date Purchases Sales Jan. 14 600 @ €42 17 400 @ €30 25 400 @ €33 29 400 @ €48 Kershaw does not maintain perpetual inventory records. According to a physical count, 600 units were on hand at January 31. The cost of the inventory at January 31, under the LIFO method is: a. €2,400. b. €16,200. c. €18,600. d. €19,200.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
182. The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
183. A company just starting business made the following four inventory purchases in June: June 1 150 units ¥ 2,600 June 10 200 units 3,900 June 15 200 units 4,200 June 28 150 units 3,300 ¥14,000 A physical count of merchandise inventory on June 30 reveals that there are 100 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. ¥1,733. b. ¥2,200. c. ¥11,800. d. ¥12,266.
Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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Test Bank for Financial Accounting: IFRS Edition, 4e
184. Graham Company uses a periodic inventory system. Details for the inventory account for the month of January 2020 are as follows: Balance, 1/1/20 Purchase, 1/15/20 Purchase, 1/28/20
Units 400 200 200
Per unit price $5.00 5.30 5.50
Total $2,000 1,060 1,100
An end of the month (1/31/20) inventory showed that 240 units were on hand. If the company uses LIFO, what is the value of the ending inventory? a. $1,040 b. $1,200 c. $1,312 d. $2,960 Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods a
185. Holliday Company's inventory records show the following data: Inventory, January 1 Purchases: June 18 November 8
Units 5,000 4,500 3,000
Unit Cost ₤2.70 2.40 2.10
A physical inventory on December 31 shows 2,000 units on hand. Holliday sells the units for ₤3.60 each. The company has an effective tax rate of 20%. Holliday uses the periodic inventory method. Under the LIFO method, cost of goods sold is a. ₤3,150. b. ₤5,400. c. ₤25,200. d. ₤26,400. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods a
186. Unitech has the following inventory information. July 1 Beginning Inventory 60 units at $19 7 Purchases 210 units at $20 22 Purchases 30 units at $22
$ 1,140 4,200 660 $6,000
A physical count of merchandise inventory on July 31 reveals that there are 90 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $1,740. b. $1,860. c. $4,140. d. $4,260. Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
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187. Neighborly Industries has the following inventory information. July 1 Beginning Inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $57.50 30 Sale 84 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis? a. $5,496 b. $5,511 c. $11,544 d. $11,559
Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods a
188. Shandy Shutters has the following inventory information. Nov. 1 Inventory 45 units @ €6.00 8 Purchase 80 units @ €6.45 17 Purchase 90 units @ €6.30 25 Purchase 135 units @ €6.60 A physical count of merchandise inventory on November 30 reveals that there are 150 units on hand. Assume a periodic inventory system is used. Ending inventory under LIFO is a. €987. b. €947. c. €1,902. d. €1,941.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods a
189. Lee Industries had the following inventory transactions occur during 2020: 2/1/20 3/14/20 5/1/20
Purchase Purchase Purchase
Units 90 155 110
Cost/unit $45 $47 $49
The company sold 255 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $12,205 b. $11,825 c. $4,240 d. $3,860 Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
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Test Bank for Financial Accounting: IFRS Edition, 4e
190. In a period of rising prices, the costs allocated to ending inventory may be understated in the a. average-cost method. b. FIFO method. c. gross profit method. d. LIFO method.
Ans: D, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
191. Versace Company, an Italian subsidiary of a US company, uses the periodic inventory system. At November 1, the beginning inventory consisted of 3,600 units that cost €120 each. During the month, the company made two purchases: 1,500 units at €130 each and 6,000 units at €135 each. Versace sold 6,450 units during November. Using the LIFO cost flow assumption, what is the ending inventory? a. €558,000. b. €568,500. c. €602,190. d. €627,750.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
192. East Asia Inc., Hong Kong subsidiary of a US company, uses the periodic inventory system. At April 1, the inventory consisted of 800 units that cost HK$650 each. During the month, the company made two purchases: 1,200 units at HK$680 each and 600 units at HK$700 each. East Asia also sold 2,000 units during the month. Using the LIFO cost flow assumption, what is the amount of cost of goods sold for the month? a. HK$1,300,000. b. HK$1,336,000. c. HK$1,350,800. d. HK$1,366,000.
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
193. Bordeaux Corp., a French subsidiary of a US company, sells one product and uses a perpetual inventory system. The beginning inventory consisted of 40 units that cost €2,000 per unit. During the current month, the company purchased: 240 units at €2,100 each. Sales during the month totaled 180 units for €4,350 each. What is the cost of goods sold using the LIFO cost flow assumption? a. €360,000. b. €374,000. c. €378,000. d. €383,000.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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194. Taj Mahal Inc. uses the periodic inventory system and FIFO costing. For the year ending December 31, 2020, the company’s cost of goods sold was Rs31,005,000. Had the LIFO cost flow assumption been used, cost of goods sold would have been Rs31,866,000. Assuming a 25% tax rate, what would be the tax savings if Taj Mahal were allowed to use LIFO? a. Rs0. b. Rs215,250. c. Rs861,000. d. cannot be determined from the information given.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
195.
Goods in transit should be included in the inventory of the buyer when the a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are FOB destination. d. terms of sale are FOB shipping point.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
196.
Inventory items on an assembly line in various stages of production are classified as a. finished goods. b. work in process. c. raw materials. d. merchandise inventory.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
197. The cost flow method that often parallels the actual physical flow of merchandise is the a. FIFO method. b. specific identification method. c. average-cost method. d. gross profit method. Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
198.
Rudolf Diesel Company's inventory records show the following data: Units Unit Cost Inventory, January 1 15,000 $4.50 Purchases: June 18 13,500 4.00 November 8 9,000 3.50 A physical inventory on December 31 shows 12,000 units on hand. Under the FIFO method, the December 31 inventory is a. $43,500. b. $42,000. c. $48,000. d. $54,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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Test Bank for Financial Accounting: IFRS Edition, 4e
199. In a period of falling prices, the cost flow method that results in the lowest income taxes is the a. FIFO method. b. specific identification method. c. average-cost method. d. gross profit method. Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
200.
In a period of rising prices, FIFO will have a. lower net income than average-cost. b. lower cost of goods sold than average-cost. c. lower income tax expense than average-cost. d. lower net purchases than average-cost.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
201. Under the LCNRV approach, the net realizable value is defined as a. FIFO cost. b. LIFO cost. c. the net amount that a company expects to realize from a sale. d. selling price. Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
202. Euler Company made an inventory count on December 31, 2020. During the count, one of the clerks made the error of counting an inventory item twice. For the statement of financial position at December 31, 2020, the effects of this error are Assets Liabilities Equity a. overstated understated overstated b. understated no effect understated c. overstated no effect overstated d. overstated overstated understated Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
203. The inventory turnover is computed by dividing cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. 365 days. Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
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204. Quigley Company's records indicate the following information for the year: Inventory, 1/1 Purchases Net sales
₤ 660,000 2,700,000 3,600,000
On December 31, a physical inventory determined that ending inventory of ₤720,000 was in the warehouse. Quigley's gross profit on sales has remained constant at 30%. Quigley suspects some of the inventory may have been taken by some new employees. At December 31, what is the estimated cost of missing inventory? a. ₤120,000 b. ₤240,000 c. ₤360,000 d. ₤840,000 Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
BRIEF EXERCISES BE 205 Whitmore Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Whitmore to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 205 1. 2. 3. 4.
(3 min.)
Included Excluded Excluded Excluded
BE 206 In the first month of operations, Santos Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 300 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the average-cost method. Santos uses a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 206
(5 min.)
1. FIFO 300 × $8 = $2,400 2. Average-cost 200 × $6 = $1,200 300 × $7 = 2,100 400 × $8 = 3,200
Average-cost / unit: $6,500 ÷ 900 = $7.22 $7.22 × 300 = $2,166
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
900
$6,500
BE 207 Linville Company had beginning inventory on May 1 of €12,000. During the month, the company made purchases of €30,000 but returned €2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at €10,500. Calculate cost of goods available for sale and cost of goods sold for the month. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 207
(4 min.)
Beginning inventory Net purchases (€30,000 – €2,000) Goods available for sale Ending inventory Cost of goods sold
€12,000 +28,000 €40,000 –10,500 €29,500
BE 208 Hoyt Company's inventory records show the following data for the month of September: Inventory, September 1 Purchases: September 8 September 18
Units 100 450 300
Unit Cost $3.00 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 208
(4 min.)
Ending inventory of 200 units: 200 x $3.70 = $740 Cost of goods sold: Units available for sale (100 + 450 + 300) = 850 Units sold 850 – 200 = 650 100 × $3 = 450 × $3.50 = 100 × $3.70 = Cost of goods sold
$ 300 1,575 370 $2,245
For Instructor Use Ony
Inventories
6 - 49
BE 209 Hoyt Company's inventory records show the following data for the month of September: Units 100 450 300
Inventory, September 1 Purchases: September 8 September 18
Unit Cost $3.00 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of the ending inventory and cost of goods sold if the company uses weighted average inventory costing and a periodic inventory system. Round cost per unit to 2 decimal places and ending inventory and cost of goods sold to the nearest dollar. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 209
(4 min.)
Weighted average cost per unit: Cost of goods available for sale = $2,985 Units available for sale 850 $2,985 ÷ 850 = $3.51(rounded) Ending inventory: 200 × $3.51 = $702 Cost of goods sold: 650 × $3.51 = $2,282 BE 210 The following accounts are included in the ledger of Dean Company: Advertising expense Freight-in Inventory Purchases Purchase returns and allowances Sales revenue Sales returns and allowances Which of the accounts would be included in calculating cost of goods sold? Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 210
(3 min.)
Freight-in Inventory Purchases Purchase returns and allowances
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
BE 211 The Entertainment Center accumulates the following cost and market data (in 000) at December 31. Inventory Categories Camera Camcorders DVDs
Cost Data ¥11,000 8,000 14,000
Market Data ¥10,200 8,500 12,000
What is the lower-of-cost-or-net realizable value of the inventory? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 211
(5 min.)
Inventory Categories Camera Camcorders DVDs
Cost Data ¥11,000 8,000 14,000
Market Data ¥10,200 8,500 12,000
Lower-of-costor-net realizable value ¥10,200 8,000 12,000 ¥30,200
BE 212 Oakley Supply Company reports net income of $120,000 in 2020. The ending inventory did not include goods valued at $7,000 that Oakley had consigned to Roberta’s Gift Shop. (1) What is the correct net income for 2020? (2) What impact will this error have on the statement of financial position at 12/31/20? Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 212
(4 min.)
(1) If ending inventory is understated by $7,000, cost of goods sold will be overstated and net income will be understated by $7,000. The correct net income is $127,000. (2) On the statement of financial position, both inventory and equity will be understated by $7,000. BE 213 At December 31, 2020, the following information was available for Fife Company: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales revenue $330,000. Calculate the inventory turnover ratio and days in inventory for Fife. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 213
(4 min.)
Inventory Turnover Ratio = $198,000 ÷ [($21,400 + $22,600) ÷ 2] = 9 times Days in Inventory = 365 ÷ 9 = 40.6 days
For Instructor Use Ony
Inventories a
6 - 51
BE 214
Hoyt Company's inventory records show the following data for the month of September: Units 100 450 300
Inventory, September 1 Purchases: September 8 September 18
Unit Cost $3.00 3.50 3.70
A physical inventory on September 30 shows 200 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 214
(4 min.)
Ending inventory: Cost of goods sold:
(100 units × $3.00) + (100 units × $3.50) = $650 (300 units × $3.70) + (350 units × $3.50) = $2,335
EXERCISES Ex. 215 The following information is available for Massey Company: Beginning inventory First purchase Second purchase
600 units at €5 900 units at €6 500 units at €7
Assume that Massey uses a periodic inventory system and that there are 700 units left at the end of the month. Instructions Compute the cost of ending inventory under the (a) FIFO method. (b) Average-cost method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 215
(7 min.)
(a) FIFO Ending Inventory Cost: 500 × €7 = €3,500 200 × €6 = 1,200 €4,700 2. Average-cost Ending Inventory Cost: 600 × €5 = € 3,000 900 × €6 = 5,400 500 × €7 = 3,500 2,000 €11,900
Average-cost/unit: €11,900 ÷ 2,000 = €5.95 €5.95 × 700 = €4,165
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 216 The following information is available for Massey Company: Beginning inventory First purchase Second purchase
600 units at €5 900 units at €6 500 units at €7
Assume that Massey uses a periodic inventory system and that there are 700 units left at the end of the month. Instructions Compute each of the following under the average-cost method: (a) Cost of ending inventory. (b) Cost of goods sold. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216
(7 min.)
Average cost/unit = €5.95 (€11,900 ÷ 2,000) 600 × €5 = 900 × €6 = 500 × €7 = 2,000
€ 3,000 5,400 3,500 €11,900
(a) Cost of ending inventory = €4,165 (700 × €5.95) (b) Cost of goods sold = €7,735 (1,300 × €5.95) or €11,900 – €4,165 Ex. 217 Clarke Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $4 $ 400 1/20 Purchase 400 $5 2,000 7/25 Purchase 200 $7 1,400 10/20 Purchase 300 $8 2,400 1,000 $6,200 A physical count of inventory on December 31 revealed that there were 350 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the Average-Cost method. The value of the ending inventory on December 31 is $__________.
For Instructor Use Ony
Inventories Ex. 217 a
6 - 53
(Cont.)
3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________.
Ans: N/A, LO: 2,7, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217
(20 min.)
1. FIFO: Ending inventory $3,100 300 units @ $8 = $2,400 50 units @ $7 = 350 350 units $2,750 2. Average Cost: Ending inventory $2,480 $6,200 ÷ 1,000 = $6.20 per unit × 350 units = $2,170 a
3. LIFO: Ending Inventory $1,900 100 units @ $4 = $ 400 250 units @ $5 = 1,250 350 units $1,650
Ex. 218 Kegin Company sells many products. Whamo is one of its popular items. Below is an analysis of the inventory purchases and sales of Whamo for the month of March. Kegin Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 70 $80 3/10 Purchase 200 $55 3/16 Sales 80 $90 3/19 Sales 60 $90 3/25 Sales 70 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) a (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) Ans: N/A, LO: 2,7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 218
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
(20 min.)
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
Units 100 60 200
40 400
Purchases Unit Cost $40 $50
Units
Sales Selling Price/Unit
70
$80
80 60 70
$90 $90 $90
$55
$60 280
(a)
Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = the cost of goods sold
(b)
Calculate the weighted average unit cost: $20,400 ÷ 400 = $51 $51 × units in ending inventory (400 available less 280 sold = 120) $51 × 120 = $6,120
a
(c) There are 120 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 3/3 20 @ $50 = 1,000 120 units $5,000 = ending inventory
Ex. 219 Toso Company uses the periodic inventory system to account for inventories. Information related to Toso Company's inventory at October 31 is given below: October
1 8 16 24
Beginning inventory Purchase Purchase Purchase Total units and cost
400 800 600 200 2,000
units @ ₤10.00 = units @ ₤10.40 = units @ ₤10.80 = units @ ₤11.60 = units
₤ 4,000 8,320 6,480 2,320 ₤21,120
Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 550 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 550 units remain on hand at October 31. a
3. Show computations to value the ending inventory using the LIFO cost assumption if 550 units remain on hand at October 31.
Ans: N/A, LO: 2,7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Ony
Inventories Solution 219
6 - 55
(20 min.)
1. 550 units in ending inventory. Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ ₤11.60 = ₤2,320 10/16 350 units @ 10.80 = 3,780 550 units ₤6,100 2. 550 units in ending inventory. Under average cost method, the weighted average cost per unit must be computed. ₤21,120 ÷ 2,000 units = ₤10.56 550 units × ₤10.56 = ₤5,808 a
3. 550 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ ₤10.00 = ₤4,000 10/8 150 units @ 10.40 = 1,560 550 units ₤5,560
Ex. 220 London Co. uses a periodic inventory system. Its records show the following for the month of May, in which 80 units were sold. May 1 Inventory 15 Purchases 24 Purchases Totals
Units 35 30 40 105
Unit Cost $ 8 11 12
Total Cost $ 280 330 480 $1,090
Instructions Compute the ending inventory at May 31 and cost of goods sold using the (1) FIFO and a (2) LIFO methods. Prove the amount allocated to cost of goods sold under each method. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220
(20 min.)
(1) FIFO Beginning inventory (35 X $8) ................................................................... Purchases May 15 (30 X $11) .............................................................................. May 24 (40 X $12) ............................................................................... Cost of goods available for sale................................................................ Less: Ending inventory (25 X $12)............................................................ Cost of goods sold .................................................................................... Date 5/1 5/15 5/24
Units 35 30 15
Proof Unit Cost $ 8 11 12
For Instructor Use Only
Total Cost $280 330 180 $ 790
$280 $330 480
810 1,090 300 $790
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 220
(Cont.) a
(2) LIFO Cost of goods available for sale ................................................................. Less: Ending inventory (25 X $8) ............................................................... Cost of goods sold ..................................................................................... Date 5/24 5/15 5/1
Units 40 30 10
Proof Unit Cost $12 11 8
$1,090 200 $ 890
Total Cost $480 330 80 $890
Ex. 221 Wang Company reports the following for the month of June. June 1 Inventory 12 Purchase 23 Purchase 30 Inventory
Units 300 450 750 240
Unit Cost ¥500 600 700
Total Cost ¥150,000 270,000 525,000
Instructions (a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and a(2) LIFO. (b) Compute the cost of the ending inventory and the cost of goods sold using the average-cost method. Ans: N/A, LO: 2, 7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 221 (a)
(20 min.)
(1) FIFO Beginning inventory (300 X ¥500) ............................................... Purchases June 12 (450 X ¥600) ........................................................... June 23 (750 X ¥700) ........................................................... Cost of goods available for sale .................................................. Less: Ending inventory (240 X ¥700) .......................................... Cost of goods sold ......................................................................
¥150,000 ¥270,000 525,000
795,000 945,000 168,000 $777,000
a
(2) LIFO Cost of goods available for sale .................................................. Less: Ending inventory (240 X ¥500) .......................................... Cost of goods sold ......................................................................
For Instructor Use Ony
$945,000 120,000 $825,000
Inventories Solution 221 (b)
6 - 57
(Cont.)
Cost of Goods Available for Sale ÷ ¥945,000
Total Units Available for Sale 1,500
Ending inventory (240 X ¥630) Cost of goods sold (1,260 X ¥630)
=
Weighted Average Unit Cost ¥630
$151,200 793,800
Ex. 222 Purdy Company is in the electronics industry and the price it pays for inventory is decreasing. Instructions Indicate which inventory method will: a. provide the lowest ending inventory. b. provide the highest cost of goods sold. c. result in the highest net income. d. result in the lowest income tax expense. e. produce the most stable earnings over several years. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Quantitative Methods
Solution 222 a. b. c. d. e.
(4 min.)
FIFO FIFO Average-cost FIFO Average-cost
Ex. 223 Eckert Company reported the following summarized annual data at the end of 2020: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes
$1,000,000 600,000 400,000 270,000 $ 130,000
*Based on an ending FIFO inventory of $250,000. The income tax rate is 30%. The controller of the company is considering a switch from FIFO to average-cost. He has determined that on an average-cost basis, the ending inventory would have been $220,000. Instructions (a) Restate the summary information on an average-cost basis. (b)
What effect, if any, would the proposed change have on Eckert's income tax expense, net income, and cash flows?
(c)
If you were an owner of this business, what would your reaction be to this proposed change?
Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 223 (a)
(25 min.)
Restate to an average-cost basis: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes
$1,000,000 630,000 370,000 270,000 $ 100,000
*Ending inventory would be $30,000 less ($250,000 – $220,000 = $30,000) under averagecost, thereby increasing cost of goods by $30,000. (b)
The taxes on the FIFO basis would be: $130,000 × .30 = $39,000 Leaving net Income of $91,000 ($130,000 – $39,000 = $91,000). The taxes on the average-cost basis would be: $100,000 × .30 = $30,000 Leaving net Income of $70,000 ($100,000 – $30,000 = $70,000). Switching to the average-cost basis will result in $9,000 less income tax expense and less net income of $21,000. The cash effect is $9,000 ($39,000 – $30,000 = $9,000) saved in taxes if average-cost were used.
(c)
Owners of the business may favor the average-cost basis since more cash will be available for use in the business. Average-cost results in more cash being retained in the business since less is paid out for income taxes.
Ex. 224 Compute the lower-of-cost-or-net realizable value valuation for Aber Company's total inventory based on the following: Inventory Categories Cost Data Net Realizable Value Data A $18,000 $17,600 B 14,000 14,600 C 21,000 20,500 Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 224
(5 min.)
Inventory Categories Cost Data A $18,000 B 14,000 C 21,000 Total Valuation
Net Realizable Value Data $17,600 14,600 20,500
For Instructor Use Ony
LCNRV $17,600 14,000 20,500 $52,100
Inventories
6 - 59
Ex. 225 The controller of Scheller Company is applying the lower-of-cost-or-net realizable value basis of valuing its ending inventory. The following information is available: Cost Net Realizable Value Lawnmowers: Self-propelled $15,000 $17,000 Push type 19,000 16,000 Total 34,000 33,000 Snowblowers: Manual Self-start Total Total inventory
30,000 20,000 50,000 $84,000
31,000 21,000 52,000 $85,000
Instructions Compute the value of the ending inventory by applying the lower-of-cost-or-net realizable value basis. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
Solution 225
(15 min.) Lower-of-cost-or- Net realizable value
Lawnmowers: Self-propelled Push type
$15,000 16,000
Snowblowers: Manual Self-start Total inventory
30,000 20,000 $81,000
Ex. 226 Finch Company is preparing the annual financial statements dated December 31, 2020. Information about inventory stocked for regular sale follows: Item A B C D
Quantity on Hand 50 100 20 40
Unit Cost When Acquired €20 45 60 40
Net Realizable Value at year end €19 46 62 38
Instructions Compute the valuation for the December 31, 2020, inventory using the lower-of-cost-or-net realizable value basis. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 226
(10 min.)
Item A B C D
Units 50 100 20 40
Lower of Cost or Net Realizable Value €19 45 60 38
Extension € 950 4,500 1,200 1,520 €8,170
Ex. 227 Boyer Company applied FIFO to its inventory and got the following results for its ending inventory. VCRs 140 units at a cost per unit of $65 DVD players 210 units at a cost per unit of $75 iPods 175 units at a cost per unit of $80 The cost of purchasing units at year-end was VCRs $71, DVD players $72, and iPods $78. Instructions Determine the amount of ending inventory at lower-of-cost-or-net realizable value. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 227
(10 min.)
VCRs DVD players Ipods Total inventory
Cost $ 9,100 15,750 14,000 $38,850
Net Realizable Value $ 9,940 15,120 13,650 $38,710
Lower of Cost or Net Realizable Value: $ 9,100 15,120 13,650 $37,870
Ex. 228 Linden Watch Company reported the following income statement data for a 2-year period. Sales Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold Gross profit
2019 $280,000
2020 $320,000
32,000 193,000 225,000 44,000 181,000 $ 99,000
44,000 225,000 269,000 52,000 217,000 $103,000
Linden uses a periodic inventory system. The inventories at January 1, 2019, and December 31, 2020, are correct. However, the ending inventory at December 31, 2019, was overstated $5,000.
For Instructor Use Ony
Inventories Ex. 228
6 - 61
(Cont.)
Instructions (a) Prepare correct income statement data for the 2 years. (b) What is the cumulative effect of the inventory error on total gross profit for the 2 years? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 228
(15 min.)
(a) Sales ............................................................. Cost of goods sold Beginning inventory ................................ Cost of goods purchased ....................... Cost of goods available for sale ............. Ending inventory ($44,000 – $5,000) ..... Cost of goods sold.................................. Gross profit .....................................
2019 $280,000
2020 $320,000
32,000 193,000 225,000 39,000 186,000 $ 94,000
39,000 225,000 264,000 52,000 212,000 $108,000
(b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference
$99,000 + $103,000 = $202,000 $94,000 + $108,000 = 202,000 $ 0
Ex. 229 Moore Company reported net income of $60,000 in 2019 and $80,000 in 2020. However, ending inventory was overstated by $8,000 in 2019. Instructions Compute the correct net income for Moore Company for 2019 and 2020. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 229
(6 min.)
2019 correct net income = $52,000 ($60,000 – $8,000) 2020 correct net income = $88,000 ($80,000 + $8,000)
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 230 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected
Events 1. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. 2. The ending inventory in the previous period was overstated. 3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. 5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.
Assets
Items Cost of Equity Goods Sold
Net Income
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 230
(20 min.)
Events 1. 2. 3. 4. 5.
Assets O NA U NA O
Items Cost of Equity Goods Sold O U NA O U O U O O U
For Instructor Use Ony
Net Income O U U U O
Inventories
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Ex. 231 Speer's Hardware Store prepared the following analysis of cost of goods sold for the previous three years: 2019 2020 2021 Beginning inventory 1/1 €40,000 €18,000 €25,000 Cost of goods purchased 50,000 55,000 70,000 Cost of goods available for sale 90,000 73,000 95,000 Ending inventory 12/31 18,000 25,000 40,000 Cost of goods sold £72,000 £48,000 £55,000 Net income for the years 2019, 2020, and 2021 was €70,000, €60,000, and €65,000, respectively. Since net income was consistently declining, Mr. Speer hired a new accountant to investigate the cause(s) for the declines. The accountant determined the following: 1. Purchases of €20,000 were not recorded in 2019. 2. The 2019 December 31 inventory should have been €21,000. 3. The 2020 ending inventory included inventory costing €8,000 that was purchased FOB destination and in transit at year end. 4. The 2021 ending inventory did not include goods costing €4,000 that were shipped on December 29 to Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year. Instructions Determine the correct net income for each year. (Show all computations.) Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 231
(25 min.)
Beginning inventory 1/1 Cost of goods purchased Cost of goods available for sale Ending inventory 12/31 Cost of goods sold
2019 € 40,000 (1) 70,000 110,000 (2) 21,000 € 89,000
2020 €21,000 55,000 76,000 (3) 17,000 €59,000
2021 €17,000 70,000 87,000 40,000 €47,000
Net Income previously reported Add: Prior cost of goods sold Less: Revised cost of goods sold Corrected Net Income
2019 €70,000 72,000 (89,000) €53,000
2020 €60,000 48,000 (59,000) €49,000
2021 €65,000 55,000 (47,000) €73,000
(1) (2) (3)
€20,000 €3,000 €8,000
Additional purchases Additional ending inventory Less ending inventory
For Instructor Use Only
6 - 64
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 232 Graves Pharmacy reported cost of goods sold as follows: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
2019 $ 54,000 847,000 901,000 64,000 $837,000
2020 $ 64,000 891,000 955,000 55,000 $900,000
Hill, the bookkeeper, made two errors: (1) 2019 ending inventory was overstated by $4,000. (2) 2020 ending inventory was understated by $10,000. Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2019 2020 Overstated/ Overstated/ Amount Understated Amount Understated Total assets
$_________
_______
$_________
_______
Equity
$_________
_______
$_________
_______
Cost of goods sold
$_________
_______
$_________
_______
Net income
$_________
_______
$_________
_______
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 232
(20 min.)
Total assets Equity Cost of goods sold Net income
2019 Overstated/ Amount Understated $4,000 O $4,000 O $4,000 U $4,000 O
2020 Overstated/ Amount Understated $10,000 U $10,000 U $14,000 O $14,000 U
Correct cost of goods sold: Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
2019 $ 54,000 847,000 901,000 60,000 $841,000
For Instructor Use Ony
2020 $ 60,000 891,000 951,000 65,000 $886,000
Inventories
6 - 65
Ex. 233 This information is available for Grant's Photo Corporation for 2019 and 2020. 2019 2020 Beginning inventory $ 200,000 $ 300,000 Ending inventory 300,000 380,000 Cost of goods sold 1,200,000 1,368,000 Sales 1,600,000 1,900,000 Instructions Calculate inventory turnover, days in inventory, and gross profit rate for Grant's Photo Corporation for 2019 and 2020. Comment on any trends. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 233
(20 min.)
Inventory turnover
2019 $1,200,000 ($200,000 + $300,000) ÷ 2
2020 $1,368,000 ($300,000 + $380,000) ÷ 2
$1,200,000 = 4.8 $250,000 Days in inventory Gross profit rate
365 4.8
$1,368,000 $340,000
= 76.0 days
365 4.0
= 4.0 = 91.3 days
$1,600,000 – $1,200,000 = .25 $1,900,000 – $1,368,000 = .28 $1,600,000 $1,900,000
The inventory turnover decreased by approximately 17% from 2019 to 2020 while the days in inventory increased by 20% over the same time period. Both of these changes would be considered negative since it's better to have a higher inventory turnover and lower days in inventory. However, Grant's Photo gross profit rate increased by 12% from 2019 to 2020, which is a positive sign. Ex. 234 The following information is available for Witten Company: Beginning inventory Cost of goods sold Ending inventory Sales
$ 60,000 600,000 100,000 750,000
Instructions Compute each of the following: (a) Inventory turnover. (b) Days in inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
6 - 66
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 234
(5 min.)
(a) Inventory turnover:
$600,000 $600,000 ———————————— = ———— = 7.5 ($60,000 + $100,000) ÷ 2 $80,000
(b) Days in inventory:
365 —— = 48.7 days 7.5
a
Ex. 235
Zimmer Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of May: May 1 10 15 18 21 30
Beginning inventory Purchase Sales Purchase Sales Purchase
20 units @ ₤5 20 units @ ₤8 15 units 10 units @ ₤9 25 units 10 units @ ₤10
Instructions Prepare a schedule to show cost of goods sold and the value of the ending inventory for the month of May. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 235
(10 min.)
Cost of goods sold: May 15 sale May 21 sale
Ending inventory: May 1 May 30 a
15 units × ₤8 10 units × ₤9 5 units × ₤8 10 units × ₤5 40 units
= ₤120 = 90 = 40 = 50 ₤300 Cost of goods sold
10 units × ₤5 = ₤50 10 units × ₤10 = 100 20 units ₤150 Ending inventory
Ex. 236
Lumley Company uses the perpetual inventory system and had the following purchases and sales during March.
3/1 3/3 3/4 3/10 3/16 3/19 3/25
Beginning inventory Purchase Sales Purchase Sales Purchase Sales
Purchases Units Unit Cost 100 $40 60 $50 200
$55
40
$60
For Instructor Use Ony
Units
Sales Selling Price/Unit
70
$80
80
$90
150
$90
Inventories Ex. 236
6 - 67
(Cont.)
Instructions Using the inventory and sales data above, calculate the value assigned to cost of goods sold in March and to the ending inventory at March 31 using (a) FIFO and (b) LIFO. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 236
a) Date 3/1 3/3
(20 min.)
FIFO Purchases (60 @ $50)
$3,000
3/4 3/10
(70 @ $40)
$2,800
(30 @ $40) (50 @ $50)
$3,700
(200 @ $55) $11,000
3/16 3/19
Sales
(40 @ $60)
$2,400
3/25
(10 @ $50) (140 @ $55) $8,200 March cost of goods sold = $14,700 ($2,800 + $3,700 + $8,200) March 31 inventory = $5,700 b) Date 3/1 3/3
LIFO Purchases (60 @ $50)
3/25
Balance (100 @ $40) $4,000 (100 @ $40) (60 @ $50) $7,000
(60 @ $50) (10 @ $40)
$3,400
(80 @ $55)
$4,400
(200 @ $55) $11,000
3/16 3/19
Sales
$3,000
3/4 3/10
Balance (100 @ $40) $4,000 (100 @ $40) (60 @ $50) $7,000 (30 @ $40) (60 @ $50) $4,200 (30 @ $40) (60 @ $50) (200 @ $55) $15,200 (10 @ $50) (200 @ $55) $11,500 (10 @ $50) (200 @ $55) (40 @ $60) $13,900 (60 @ $55) (40 @ $60) $5,700
(40 @ $60)
$2,400 (40 @ $60) (110 @ $55) $8,450
March cost of goods sold = $16,250 ($3,400 + $4,400 + $8,450) March 31 inventory = $4,150 For Instructor Use Only
(90 @ $40) (90 @ $40) (200 @ $55) (90 @ $40) (120 @ $55) (90 @ $40) (120 @ $55) (40 @ $60) (90 @ $40) (10 @ $55)
$3,600 $14,600 $10,200 $12,600 $4,150
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Test Bank for Financial Accounting: IFRS Edition, 4e
a
Ex. 237 Flott Department Store prepares monthly financial statements but only takes a physical count of merchandise inventory at the end of the year. The following information has been developed for the month of July: At Cost At Retail Beginning inventory $ 30,000 $ 50,000 Merchandise purchases 110,000 150,000 The net sales for July amounted to $140,000. Instructions Use the retail inventory method to estimate the ending inventory at cost for July. Show all computations to support your answer. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 237
(10 min.)
Beginning inventory Merchandise purchases Goods available for sale Net sales (1) Ending inventory at retail
At Cost $ 30,000 110,000 $140,000
At Retail $ 50,000 150,000 200,000 140,000 $ 60,000
(2)
Cost to retail ratio = 70% ($140,000 ÷ $200,000).
(3)
Ending inventory at cost = ($60,000 × 70%) = $42,000.
a
Ex. 238
Kirby Company suffered a loss of its inventory on March 28 due to a fire in its warehouse. As a basis for filing a claim with its insurance company, Kirby Company developed the following information: March net sales through March 28 Beginning Inventory, March 1 Merchandise purchases through March 28
€340,000 150,000 180,000
The company has experienced an average gross profit rate of 35% in the past and this rate appears to be appropriate in the current period. Instructions Using the gross profit method, prepare an estimate of the cost of the inventory destroyed by fire on March 28. Show all computations in good form. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Ony
Inventories a
Solution 238
(10 min.)
Net sales Less: Estimated gross profit (€340,000 × 35%) Estimated cost of goods sold
€340,000 119,000 €221,000
Beginning inventory Merchandise purchases Goods available for sale Less: Estimated cost of goods sold Estimated cost of ending inventory destroyed by fire
€150,000 180,000 330,000 221,000 €109,000
a
6 - 69
Ex. 239
The inventory of Pedigo Company was destroyed by fire on April 1. From an examination of the accounting records, the following data for the first three months of the year are obtained: Sales Revenue Sales Returns and Allowances Purchases Freight-In Purchase Returns and Allowances
$185,000 5,000 90,000 3,500 4,000
Instructions Determine the merchandise lost by fire, assuming a beginning inventory of $60,000 and a gross profit rate of 40% on net sales. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
a
Solution 239
(10 min.)
Net sales ($185,000 – $5,000) Less: Estimated gross profit (40% × $180,000) Estimated cost of goods sold
$180,000 72,000 $108,000
Beginning inventory Cost of goods purchased ($90,000 – $4,000 + $3,500) Cost of goods available for sale Less: Estimated cost of good sold Estimated cost of merchandise lost
$ 60,000 89,500 149,500 108,000 $ 41,500
Ex. 240
Sauder Company reports goods available for sale at cost, $90,000. Beginning inventory at retail is $40,000 and goods purchased during the period at retail were $80,000. Sales for the period amounted to $96,000. Instructions Determine the estimated cost of the ending inventory using the retail inventory method. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
6 - 70 a
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 240
(10 min.) At Cost
Beginning inventory Goods purchased Goods available for sale Net sales Ending inventory
$90,000
At Retail $ 40,000 80,000 120,000 96,000 $ 24,000
First calculate the cost to retail ratio. $90,000 ÷ $120,000 = 75% Apply this ratio to the ending inventory at retail. $24,000 × .75 = $18,000 $18,000 is the estimated cost of the ending inventory.
COMPLETION STATEMENTS 241. Accounting for inventories is important because inventories affect the ______________ section of the statement of financial position and the ______________ section on the income statement. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
242. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
243. The cost of goods purchased during a period plus the beginning inventory is the amount of goods ________________ during the period. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
244. Inventory costs are allocated to ______________ and cost of goods ____________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
245. It is generally recognized that a major objective of accounting for inventory is the proper determination of ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
246. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
For Instructor Use Ony
Inventories
6 - 71
247. If the unit cost of inventory has continuously increased, the ______________ inventory valuation method will result in a higher valued ending inventory than if the ______________ method had been used. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
248. The lower-of-cost-or-net realizable value basis of accounting for inventories should be applied when the ______________ cost of the goods is lower than its cost. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
249. ______________ is calculated as cost of goods sold divided by average inventory. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic a
250. Two widely used methods of estimating inventories are the ______________ method and the _____________ method.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economic
ANSWERS TO COMPLETION STATEMENTS 241. 242. 243 244. 245.
current assets, cost of goods sold finished goods, merchandise inventory available for sale ending inventory, sold net income
246. 247. 248. 249. a 250.
specific identification, income FIFO, average cost replacement Inventory turnover gross profit, retail inventory
MATCHING 251. Match the items below by entering the appropriate code letter in the space provided. A. Merchandise Inventory B. Work in process C. FOB shipping point D. FOB destination E. Specific identification method
F. G. H. I. J.
First-in, first-out (FIFO) method Last-in, first-out (LIFO) method Average-cost method Inventory turnover Current replacement cost
____
1. Measures the number of times the inventory sold during the period.
____
2. Tracks the actual physical flow for each inventory item available for sale.
____
3. Goods that are only partially completed in a manufacturing company.
____
4. Cost of goods sold consists of the most recent inventory purchases.
____
5. Goods ready for sale to customers by retailers.
____
6. Title to the goods transfers when the public carrier accepts the goods from the seller.
____
7. Ending inventory valuation consists of the most recent inventory purchases.
____
8. The same unit cost is used to value ending inventory and cost of goods sold.
____
9. Title to goods transfers when the goods are delivered to the buyer. For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Matching 251. (Cont.) ____ 10. The amount that would be paid at the present time to acquire an identical item. Ans: N/A, LO: 1,2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
I E B G A
6. 7. 8. 9. 10.
C F H D J
SHORT-ANSWER ESSAY QUESTIONS S-A E 252 FIFO and average-cost are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and average-cost cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 252 The FIFO method determines the ending inventory by the cost of the most recent purchase. The average-cost method determines the ending inventory by applying the average unit cost to the units on hand. Therefore, if the FIFO method is used and the prices during the period are increasing, the ending inventory under FIFO will be greater than under average-cost. Likewise, if the FIFO method is used and the prices during the period are decreasing, the ending inventory under FIFO will be less than under average-cost. If prices remain constant and the company has no beginning inventory, then there will be no difference in ending inventory. S-A E 253 In a period of rising prices, the inventory reported in Leary Company's statement of financial position is close to the current cost of the inventory. Maris Company's inventory is below its current cost. Identify the inventory cost flow method being used by each company. Which company has probably been reporting the higher gross profit? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 253 Leary Company is using the FIFO method of inventory costing, and Maris Company is using the average-cost method. Under FIFO, the latest goods purchased remain in inventory. Thus, the inventory on the statement of financial position should be close to current costs. This is usually not true of the average-cost method. Leary Company will have the higher gross profit because cost of goods sold will include a higher proportion of goods purchased at earlier (lower) costs. For Instructor Use Ony
Inventories
6 - 73
S-A E 254 Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?” What is your response? Include a comparison of the tax effect, statement of financial position effect, and income statement effect for FIFO versus average-cost. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 254 It is always good to hear from you and you have certainly asked a very good question. Since the consistency principle requires that you adopt accounting methods and stay with them (until there is need for a proper change), it is very important to consider the options before starting a business. I suggest that you consider using either the—Average-cost or First-In, First-Out (FIFO) method. These methods are based on the assumption of cost flows instead of the actual physical flow of goods. The effects on the income statement, statement of financial position, and tax returns depend on whether your company experiences rising prices or falling prices. Here is a summary of the effects for each inventory method, for companies that experience rising prices (the opposite will be true for falling prices). Inventory Method Average FIFO
Tax Effect Lower net income and lower taxes Higher net income, thus higher taxes
Income Statement Effect Lower net income Higher net income. Thus more attractive for external financial reporting
Statement of Financial Position Effect Ending inventory is below latest cost. Most realistic ending inventory because latest costs are matched to ending inventory
S-A E 255 Jerry White is studying for the next accounting mid-term examination. What should Jerry know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of "net realizable value" in the lower-of-cost-or- net realizable value method? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 255 Jerry should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is lower than its cost. The writedown to net realizable value should be recognized in the period in which the price decline occurs. (b) Net realizable value is the estimated selling price in the normal course of business, less estimated costs to complete and sell. For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
S-A E 256 Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic
Solution 256 The overstatement of ending inventory will cause cost of goods sold to be understated. Consequently, net income for the period will be overstated. The effect on the statement of financial position is that assets and equity will be overstated. The subsequent period will have an overstatement of beginning inventory. This will cause cost of goods sold to be overstated and net income to be understated, counterbalancing the overstatement of income in the prior period. S-A E 257 (Ethics) Lois Howe and Ron Dole are department managers in the housewares and shoe departments, respectively, for Litwins, a large department store. Ron has observed Lois taking inventory from her own department home, apparently without paying for it. He hesitates confronting Lois because he is due to be promoted, and needs Lois' recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Lois tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning. Litwins recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Ron relaxes. "The system will catch Lois now," he says to himself. Required: 1. Is Ron's attitude justified? Why or why not? 2. What, if any, action should Ron take now? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Internal Controls
Solution 257 1. Ron's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it. 2. Ron should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Ron's apparent fear of not being promotable because of a “goody-goody” image seems unjustified. It would seem more likely that Ron's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Litwins if someone else reports Lois's actions. The resulting investigation may implicate Ron because of his failure to notify the proper authorities in a timely manner.
For Instructor Use Ony
Inventories
6 - 75
S-A E 258 (Communication) Jim Mahan, a new employee of Riggs Company, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Jim reasoned that the goods should be included in inventory sooner because Riggs paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Riggs’s inventory at all. Jim told Sara Himes, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Jim's opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sara Himes has reported the problem to the accounting department. Required: You are Jim's supervisor. Write a memo to Jim explaining why the error should have been corrected. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA
Solution 258 MEMO TO:
Jim Mahan, Accounting Department
FROM: Mary Farr, Supervisor DATE:
March 12, 2020
It has come to my attention that $1,000 in consigned goods were included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February's entries would correct the error. The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January's inventory and expenses would have been overstated, and February's understated, but the net effect would have been zero. Since the $1,000 is a fairly large amount, however, that still would not have been appropriate. The error you made, however, was to enter into inventory goods that the company did not own, and will not own. Consigned goods are owned by the consignors until purchased by customers. We only provide our shops for the consignors to sell their goods, and we collect a fee for doing so. Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter. (signature)
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP QUESTIONS 1. Which of the following should not be included in the inventory of a company using GAAP? a. None of these answer choices are correct. b. Goods in transit from another company shipped FOB shipping point. c. Goods shipped on consignment to another company. d. Goods held on consignment from another company. Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2. Which method of inventory costing is prohibited under IFRS? a. Average-cost. b. FIFO. c. LIFO. d. Specific identification. Ans: C, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. GAAP requires the following a. ending inventory is written down to market value and may be written up in future periods to its market value. b. ending inventory is written down to market value and may be written up in future periods to its market value but not above its original cost. c. ending inventory is written down to market value but cannot be written up. d. ending inventory is written up and down to market value each reporting period. Ans: C, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Ony
CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH CHAPTER LEARNING OBJECTIVES 1. Define fraud and the principles of internal control. A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. The fraud triangle refers to the three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization. Internal control consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. The principles of internal control are establishment of responsibility; segregation of duties; documentation procedures; physical controls; independent internal verification; and human resource controls such as bonding and requiring employees to take vacations. 2. Apply internal control principles to cash. Internal controls over cash receipts include: (a) designating specific personnel to handle cash; (b) assigning different individuals to receive cash, record cash, and maintain custody of cash; (c) using remittance advices for mail receipts, cash register tapes for over-the-counter receipts, and deposit slips for bank deposits; (d) using company safes and bank vaults to store cash with access limited to authorized personnel, and using cash registers in executing over-the-counter receipts; (e) making independent daily counts of register receipts and daily comparison of total receipts with total deposits; and (f) bonding personnel that handle cash and requiring them to take vacations. . Internal controls over cash disbursements include: (a) having specific individuals such as the treasurer authorized to sign checks and approve invoices; (b) assigning different individuals to approve items for payment, pay the items, and record the payment; (c) using prenumbered checks and accounting for all checks, with each check supported by an approved invoice; (d) storing blank checks in a safe or vault with access restricted to authorized personnel, and using a checkwriting machine to imprint amounts on checks; (e) comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and (f) bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks. Companies operate a petty cash fund to pay relatively small amounts of cash. They must establish the fund, make payments from the fund, and replenish the fund when the cash in the fund reaches a minimum level. 3. Identify the control features of a bank account. A bank account contributes to good internal control by providing physical controls for the storage of cash. It minimizes the amount of currency that a company must keep on hand, and it creates a double record of a depositor's bank transactions. It is customary to reconcile the balance per books and balance per bank to their adjusted balances. The steps in the reconciling process are to determine deposits in transit, outstanding checks, errors by the depositor or the bank, and unrecorded bank memoranda. 4. Explain the reporting of cash. Companies list cash last in the current assets section of the statement of financial position. In some cases, they report cash together with cash equivalents. Cash restricted for a special purpose is reported separately as a current asset or as a non-current asset, depending on when the cash is expected to be used.
7-2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
The most important element of the fraud triangle is rationalization.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
2.
Employees sometimes commit fraud because of personal financial problems caused by too much debt.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
3.
The safeguarding of assets is an objective of a company's system of internal control.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
4.
Internal control systems must be monitored periodically for their adequacy.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
5.
Internal control is most effective when several people are responsible for a given task.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
6.
The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
7.
Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
8.
The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
9.
An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as a check on the other.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
10.
A segregation of duties among employees eliminates the possibility of collusion.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
11.
The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
12.
In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash 13.
7-3
Firms use physical controls primarily to safeguard their assets.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
14.
For efficiency of operations and better control over cash, a company should maintain only one bank account.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
15.
Cash registers are an important internal control device used in controlling over-thecounter receipts.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
16.
Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
17.
Control over cash disbursements is improved if major expenditures are paid by check.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
18.
Electronic Funds Transfer (EFT) is a disbursement system that uses telephone or computer to transfer cash from one location to another.
Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Resource Management, AICPA FN: None, AICPA PC: Project Management, IMA: Business Economics
19.
A voucher system is used by many large companies as a means of controlling cash receipts.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
20.
The petty cash fund eliminates the need for a bank checking account.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
21.
Cash register overages are deposited in the petty cash fund and cash shortages are made-up from the petty cash fund.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
22.
A deposit ticket is a negotiable instrument that can be transferred to another party by endorsement.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: None, AICPA PC: None, IMA: Business Economics
23.
If a company deposits all its receipts in the bank and pays all its bills by check, then the monthly bank statement balance will always agree with the company's record of its checking account balance.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
Checks from customers who pay their accounts promptly are called outstanding checks.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics
For Instructor Use Only
7-4 25.
Test Bank for Financial Accounting: IFRS Edition, 4e All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
26.
A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled checks.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
27.
Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
28.
Cash which is restricted for a specific use should be separately reported.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Cash equivalents, such as highly liquid investments that can be converted into a specific amount of cash, are currently reported with cash on the statement of financial position.
Ans: T, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
30.
Cash equivalents are currently reported as short-term investments on the statement of financial position.
Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
31.
Savings accounts are usually classified as cash on the statement of financial position.
Ans: T, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
32.
Certificates of deposit are currently classified as cash on the statement of financial position.
Ans: T, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
33.
Petty cash funds are not included in the cash balance reported on the statement of financial position.
Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
34.
A compensating balance is included in the amount of cash reported on the statement of financial position.
Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
35.
Because cash is the least liquid current asset it is listed last in the current assets section of the statement of financial position.
Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
36.
Short-term, highly liquid investments are currently reported as short-term investments on the statement of financial position.
Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash 37.
7-5
Because cash is the most liquid current asset it is listed first in the current assets section of the statement of financial position.
Ans: F, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
38.
Internal control consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
39.
In general, documents should be prenumbered and all documents should be accounted for.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Internal Controls
40.
Collusion may result when one individual circumvents prescribed controls and may significantly impair the effectiveness of a system.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
41.
Personnel who handle cash receipts should have the option of taking a vacation or not.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
42.
The duties of approving an item for payment and paying the item should be done by different departments or individuals.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
43.
The custodian of the petty cash fund has the responsibility of recording a journal entry every time cash is used from the fund.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
44.
A debit memorandum could show the collection of a note receivable by the bank.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
45.
To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
7-6
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 46.
Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets b. Overstate liabilities in order to be conservative c. Enhance the accuracy and reliability of accounting records d. Increase efficiency of operations
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
47.
Which of the following is not one of the main factors that contribute to fraudulent activity? a. Opportunity b. Incompatible duties c. Financial pressure d. Rationalization
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
48.
Internal control is defined, in part, as a plan that safeguards a. all statement of financial position accounts. b. assets. c. liabilities. d. equity.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
49.
Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them a. increases the potential for errors and irregularities. b. decreases the potential for errors and irregularities. c. is an example of good internal control. d. is a good example of safeguarding the company's assets.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
50.
The custodian of a company asset should a. have access to the accounting records for that asset. b. be someone outside the company. c. not have access to the accounting records for that asset. d. be an accountant.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
51.
Internal auditors a. are hired by accounting firms to audit business firms. b. are employees of the taxing authority who evaluate the internal controls of companies filing tax returns. c. evaluate the system of internal controls for the companies that employ them. d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash 52.
7-7
When two or more people get together for the purpose of circumventing prescribed controls, it is called a. a fraud committee. b. collusion. c. a division of duties. d. bonding of employees.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
53.
The principle of establishing responsibility does not include a. one person being responsible for one task. b. authorization of transactions. c. independent internal verification. d. approval of transactions.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
54.
The control principle related to not having the same person authorize and pay for goods is known as a. establishment of responsibility. b. independent internal verification. c. segregation of duties. d. rotation of duties.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
55.
Two individuals at a retail store work the same cash register. You evaluate this situation as a. a violation of establishment of responsibility. b. a violation of segregation of duties. c. supporting the establishment of responsibility. d. supporting internal independent verification.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
56.
An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of a. establishment of responsibility is violated. b. independent internal verification is violated. c. documentation procedures is violated. d. segregation of duties is violated.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
57.
Controls that enhance the accuracy and reliability of the accounting records are a. automated controls. b. external controls. c. physical controls. d. human resource.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
7-8 58.
Test Bank for Financial Accounting: IFRS Edition, 4e Related selling activities do not include a. ordering the merchandise. b. making a sale. c. shipping the goods. d. billing the customer.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
59.
Related purchasing activities include a. ordering, receiving, paying. b. ordering, selling, paying. c. ordering, shipping, billing. d. selling, shipping, paying.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
60.
Joe is warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates a. documentation procedures are violated. b. independent internal verification is violated. c. segregation of duties is violated. d. establishment of responsibility is violated.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
61.
Physical controls to safeguard assets do not include a. cashier department supervisors. b. vaults. c. television monitors. d. security guards.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
62.
In large companies, the independent internal verification procedure is often assigned to a. computer operators. b. management. c. internal auditors. d. outside auditors.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
63.
Maximum benefit from independent internal verification is obtained when a. it is made on a pre-announced basis. b. it is done by the employee possessing custody of the asset. c. discrepancies are reported to management. d. it is done at the time of the audit.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash 64.
7-9
If employees are bonded a. it means that they are not allowed to handle cash. b. they have worked for the company for at least 10 years. c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
65.
Mrs. Smith has worked for Grand Inc., for 20 years without taking a vacation. An internal control feature that would address this situation would be a. human resource controls. b. establishment of responsibility. c. physical controls. d. documentation procedures.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
66.
A system of internal control a. is infallible. b. can be rendered ineffective by employee collusion. c. invariably will have costs exceeding benefits. d. is premised on the concept of absolute assurance.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
67.
Checks received through the mail should a. immediately be endorsed "For Deposit Only." b. be sent to the accounts receivable subsidiary ledger clerk for immediate posting to the customer's account. c. be cashed at the bank as soon as possible. d. be "rung up" on a cash register immediately.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
68.
Proper control for over-the-counter cash receipts includes a. a cash register with totals visible to the customer. b. using electronic cash registers with no tapes. c. cash count sheets requiring only the supervisor's signature. d. cash count sheets requiring only the cashier's signature.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
69.
A company stamps checks received in the mail with the words "For Deposit Only". This endorsement is called a(n) a. blank endorsement. b. rubber stamp. c. restrictive endorsement. d. operational endorsement.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
7 - 10 70.
Test Bank for Financial Accounting: IFRS Edition, 4e The daily cash count of cash register receipts made by department supervisors is an example of a. human resource controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
71.
The use of remittance advices for mail receipts is an example of a. documentation procedures. b. human resource controls. c. physical controls. d. independent internal verification.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
72.
Allowing only designated personnel to handle cash receipts is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
73.
Control over cash disbursements is generally more effective when a. all bills are paid in cash. b. disbursements are made by the accounts payable subsidiary clerk. c. payments are made by check. d. all purchases are made on credit.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
74.
Reconciling the bank statement monthly is an example of a. segregation of duties. b. independent internal verification. c. establishment of responsibility. d. documentation procedures.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
75.
An exception to disbursements being made by check is acceptable when cash is paid a. to an owner. b. to employees as wages. c. from petty cash. d. to employees as loans.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash 76.
7 - 11
Allowing only the treasurer to sign checks is an example of a. documentation procedures. b. segregation of duties. c. human resource controls. d. establishment of responsibility.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
77.
Blank checks a. should be safeguarded. b. should be pre-signed. c. do not need to be safeguarded since they must be signed to be valid. d. should not be prenumbered.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
78.
An employee authorized to sign checks should not record a. owner cash contributions. b. mail receipts. c. cash disbursement transactions. d. sales transactions.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
79.
A voucher system is a series of prescribed control procedures a. to check the credit worthiness of customers. b. designed to assure that disbursements by check are proper. c. which eliminates the need for a sales journal. d. specifically designed for small firms who may not have checking accounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
80.
Under a voucher system, a prenumbered voucher is prepared for every a. cash receipt, regardless of source. b. transaction entered into by the business. c. expenditure except those made from petty cash. d. journal entry.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
81.
A credit balance in Cash Over and Short is reported as a(n) a. asset. b. liability. c. miscellaneous expense. d. miscellaneous revenue.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
7 - 12
Test Bank for Financial Accounting: IFRS Edition, 4e
82.
The entry to replenish a petty cash fund includes a credit to a. Petty Cash. b. Cash. c. Freight-In. d. Postage Expense.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
83.
A debit balance in Cash Over and Short is reported as a a. contra asset. b. miscellaneous asset. c. miscellaneous expense. d. miscellaneous revenue.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
A petty cash fund of $100 is replenished when the fund contains $4 in cash and receipts for $93. The entry to replenish the fund would a. credit Cash Over and Short for $3. b. credit Miscellaneous Revenue for $3. c. debit Cash Over and Short for $3. d. debit Miscellaneous Expense for $3.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
A petty cash fund is generally established in order to a. pay for all merchandise purchased on account. b. pay employees’ wages. c. make loans internally to employees. d. pay relatively small expenditures.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
86.
A petty cash fund should be replenished a. every day. b. at the end of every accounting period. c. once a year. d. as soon as an expense is paid from the fund.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
87.
A petty cash fund should not be used for a. postage due. b. loans to the petty cash custodian. c. taxi fares. d. customer lunches.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash 88.
7 - 13
The size of the petty cash fund is dependent on a. the wishes of the custodian of the fund. b. anticipated disbursements for the year. c. anticipated disbursements for a three- to four-week period. d. the size of the regular cash account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
89.
Replenishing the petty cash fund requires a. a debit to Cash. b. a credit to Petty Cash. c. debits to various expense accounts. d. no accounting entry.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
90.
Entries are made to the Petty Cash account when a. establishing the fund. b. making payments out of the fund. c. recording shortages in the fund. d. replenishing the fund.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91.
A €250 petty cash fund has cash of €44 and receipts of €200. The journal entry to replenish the account would include a credit to a. Cash for €206. b. Petty Cash for €206. c. Cash Over and Short for €6. d. Cash for €200.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
A $200 petty cash fund has cash of $34 and receipts of $164. The journal entry to replenish the account would include a a. debit to Cash for $164. b. credit to Petty Cash for $166. c. debit to Cash Over and Short for $2. d. credit to Cash for $164.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
93.
A $300 petty cash fund has cash of $54 and receipts of $252. The journal entry to replenish the account would include a a. debit to Cash for $252. b. credit to Petty Cash for $252. c. credit to Cash Over and Short for $6. d. credit to Cash for $252.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
7 - 14 94.
Test Bank for Financial Accounting: IFRS Edition, 4e If a petty cash fund is established in the amount of $250, and contains $148 in cash and $106 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to which of the following accounts? a. Petty Cash, $106. b. Petty Cash, $102. c. Cash, $102; Cash Over and Short, $4. d. Cash, $102.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
95.
If a petty cash fund is established in the amount of ₤350, and contains ₤203 in cash and ₤140 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to which of the following accounts? a. Petty Cash, ₤140. b. Petty Cash, ₤147. c. Cash, ₤100; Cash Over and Short, ₤7. d. Cash, ₤147.
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
96.
A CHF220 petty cash fund has cash of CHF54 and receipts of CHF164. The journal entry to replenish the account would include a a. debit to Cash for CHF164. b. credit to Petty Cash for CHF220. c. debit to Cash Over and Short for CHF2. d. credit to Cash for CHF164.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
97.
Bellingham Company's ₤300 petty cash fund has cash of ₤56 and receipts of ₤240. The journal entry to replenish the account would include a a. debit to Cash for ₤300. b. debit to Cash Over and Short for ₤4. c. credit to Petty Cash for ₤240. d. credit to Cash for ₤240.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
98.
Gabana Inc.'s €150 petty cash fund has cash of €9 and receipts of €136. The journal entry to replenish the account would include a. credit to Cash Over and Short for €5. b. credit to Petty Cash for €141. c. debit to Cash for €136. d. credit to Cash for €141.
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Fraud, Internal Control, and Cash 99.
7 - 15
On May 1, 2020, Vuitton Company established a petty cash fund by issuing a check for €750 to Antoinette Mercier, the custodian of the petty cash fund. On May 31, 2020, Mercier submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is €30 cash in the fund: Freight-In Supplies Expense Entertainment of clients Postage Expense
€249 195 186 75
The journal entry to establish the petty cash fund would include a a. debit to Cash for €750. b. debit to Cash Over and Short for €750. c. credit to Cash for €750. d. credit to Accounts Payable for €750. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
100.
On May 1, 2020, Vuitton Company established a petty cash fund by issuing a check for €750 to Antoinette Mercier, the custodian of the petty cash fund. On May 31, 2020, Mercier submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is €30 cash in the fund: Freight-In Supplies Expense Entertainment of clients Postage Expense
€249 195 186 75
The journal entry to replenish the account would include a a. debit to Cash Over and Short for €15. b. credit to Petty Cash for €705. c. debit to Cash for €705. d. credit to Cash for €750. Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
101
On October 2, 2020, Bienvenu Manufacturing Company established a petty cash fund by issuing a check for €350 to the custodian of the petty cash fund. On October 31, 2020, the custodian submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is €15 cash in the fund: Freight-In Supplies Expense Entertainment of clients Postage Expense
€145 55 89 50
The journal entry to establish the petty cash fund would include a a. credit to Cash for €350. b. credit to Cash Over and Short for €350. c. credit to Accounts Receivable for €350. d. credit to Accounts payable for €350. Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
7 - 16 102
Test Bank for Financial Accounting: IFRS Edition, 4e On October 2, 2020, Bienvenu Manufacturing Company established a petty cash fund by issuing a check for €350 to the custodian of the petty cash fund. On October 31, 2020, The custodian submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is €15 cash in the fund: Freight-In Supplies Expense Entertainment of clients Postage Expense
€145 55 89 50
The journal entry to replenish the account would include a. debit to Cash Over and Short for €4. b. credit to Cash Over and Short for €4. c. debit to Petty Cash for €339. d. credit to Cash for €350. Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
103.
The petty cash fund of CHF400 for the Hansen Company appeared as follows on July 31, 2020: Cash Petty cash vouchers Freight-in Postage Balloons for a special occasion Client entertainment
CHF15 CHF77 90 54 130
On July 31, the office manager gives instruction to increase the petty cash fund to CHF600. The journal entry to replenish the petty cash fund would include a a. debit to Petty Cash for CHF400. b. credit to Cash Over and Short for CHF34. c. credit to Cash for CHF385. d. debit to Accounts Receivable for CHF34. Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
104.
The petty cash fund of CHF400 for the Hansen Company appeared as follows on July 31, 2020: Cash Petty cash vouchers Freight-in Postage Balloons for a special occasion Client entertainment
CHF15 CHF77 90 54 130
On July 31, the office manager gives instruction to increase the petty cash fund to CHF600. The journal entry to increase the petty cash fund would include a. credit to Cash for CHF585. b. credit to Petty Cash for CHF385. c. debit to Cash for CHF185. d. debit to Petty Cash for CHF200. Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Fraud, Internal Control, and Cash 105.
7 - 17
Which one of the following is not necessarily a party to a check? a. Maker b. Buyer c. Payee d. Payer
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
106.
A bank statement a. lets a depositor know the financial position of the bank as of a certain date. b. is a credit reference letter written by the depositor's bank. c. is a bill from the bank for services rendered. d. shows the activity which increased or decreased the depositor's account balance.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
107.
Which one of the following would not cause a bank to debit a depositor's account? a. Bank service charge b. Collection of a note receivable c. Wiring of funds to other locations d. Checks marked NSF
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
108.
A company maintains the asset account, Cash in Bank, on its books, while the bank maintains an account which is a. a contra-asset account. b. a liability account. c. also an asset account. d. an equity account.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
109.
A remittance advice attached to a company check provides a. details about the running cash balance in the checking account. b. the magnetic bank routing numbers. c. an explanation of the purpose of the check. d. the signature space for the maker.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
110.
A deposit made by a company will appear on the bank statement as a a. debit. b. credit. c. debit memorandum. d. credit memorandum.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
111.
A check returned by the bank marked "NSF" means a. no service fee. b. no signature found. c. not satisfactorily filled-out. d. not sufficient funds.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
7 - 18
Test Bank for Financial Accounting: IFRS Edition, 4e
112.
A debit memorandum would not be issued by the bank for a. a bank service charge. b. the issuance of traveler's checks. c. the wiring of funds. d. the collection of a notes receivable.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
113.
If the month-end bank statement shows a balance of ¥770,000, outstanding checks are ¥240,000, a deposit of ¥80,000 was in transit at month end, and a check for ¥10,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. ¥600,000. b. ¥620,000. c. ¥460,000. d. ¥920,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
114.
In preparing its bank reconciliation for the month of April 2020, Franklin, Inc. has available the following information. Balance per bank statement, 4/30/20 NSF check returned with 4/30/20 bank statement Deposits in transit, 4/30/20 Outstanding checks, 4/30/20 Bank service charges for April
$60,410 625 7,500 7,800 30
What should be the adjusted cash balance at April 30, 2020? a. $60,755. b. $60,110. c. $59,435. d. $59,405. Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
The cash account shows a balance of $58,000 before reconciliation. The bank statement does not include a deposit of $2,300 made on the last day of the month. The bank statement shows a collection by the bank of $940 and a customer’s check for $320 was returned because it was NSF. A customer’s check for $450 was recorded on the books as $540, and a check written for $79 was recorded as $97. The correct balance in the cash account was a. $58,512. b. $58,548. c. $58,728. d. $58,848.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Fraud, Internal Control, and Cash 116.
7 - 19
The cash account shows a balance of $68,000 before reconciliation. The bank statement does not include a deposit of $4,600 made on the last day of the month. The bank statement shows a collection by the bank of $1,880 and a customer’s check for $640 was returned because it was NSF. A customer’s check for $790 was recorded on the books as $970, and a check written for $159 was recorded as $195. The correct balance in the cash account was a. $69,024. b. $69,096. c. $69,456. d. $73,696.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
117.
If the month-end bank statement shows a balance of $75,000, outstanding checks are $30,000, a deposit of $10,000 was in transit at month end, and a check for $1,250 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $53,750. b. $56,250. c. $36,250. d. $93,750.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
118.
In preparing its bank reconciliation for the month of April 2020, Gantner, Inc. has the following information available. Balance per bank statement, 4/30/20 NSF check returned with 4/30/20 bank statement Deposits in transit, 4/30/20 Outstanding checks, 4/30/20 Bank service charges for April
$74,580 900 10,000 10,400 40
What should be the adjusted cash balance at April 30, 2020? a. $75,040. b. $74,180. c. $73,280. d. $73,240. Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
In preparing its August 31, 2020 bank reconciliation, Acme Corp. has the following information available. Balance per bank statement, 8/31/20 $20,950 Deposit in transit, 8/31/20 3,900 Customer’s check returned—not sufficient funds, 8/30/20 600 Outstanding checks, 8/31/20 2,750 Bank service charges for August 100 At August 31, 2020, Acme’s adjusted cash balance is a. $22,100. b. $21,500. c. $21,400. d. $19,800.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
7 - 20 120.
Test Bank for Financial Accounting: IFRS Edition, 4e Tyler, Inc. had the following bank reconciliation at March 31, 2020: Balance per bank statement, 3/31/20 Add: Deposit in transit Less: Outstanding checks Balance per books, 3/31/20 Data per bank for the month of April 2020 follow: Deposits Disbursements
€74,400 20,600 95,000 25,200 €69,800 €89,400 99,400
All reconciling items at March 31, 2020 cleared the bank in April. Outstanding checks at April 30, 2020 totaled €12,000. There were no deposits in transit at April 30, 2020. What is the cash balance per books at April 30, 2020? a. €52,400 b. €59,800 c. €64,400 d. €73,000 Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
121.
On a bank reconciliation, deposits in transit are a. added to the bank balance. b. deducted from the bank balance. c. added to the book balance. d. deducted from the book balance.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
122.
A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money. b. when an employee is suspected of fraud. c. to explain any difference between the depositor's balance per books and the balance per bank. d. by the person who is authorized to sign checks.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
123.
Deposits in transit a. have been recorded on the company's books but not yet by the bank. b. have been recorded by the bank but not yet by the company. c. have not been recorded by the bank or the company. d. are checks from customers which have not yet been received by the company.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
124.
In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank. b. deducted from the balance per books. c. added to the balance per books. d. deducted from the balance per bank.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash 125.
7 - 21
If a check correctly written and paid by the bank for $519 is incorrectly recorded on the company's books for $591, the appropriate treatment on the bank reconciliation would be to a. add $72 to the bank's balance. b. add $72 to the book's balance. c. deduct $72 from the bank's balance. d. deduct $519 from the book's balance.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
126.
Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: a. Accounts Receivable Cash b. Cash Accounts Receivable c. Miscellaneous Expense Accounts Receivable d. No adjusting entry is necessary.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
127.
Nolan Company had checks outstanding totaling $21,600 on its June bank reconciliation. In July, Nolan Company issued checks totaling $155,700. The July bank statement shows that $97,200 in checks cleared the bank in July. A check from one of Nolan Company's customers in the amount of $1,200 was also returned marked "NSF." The amount of outstanding checks on Nolan Company's July bank reconciliation should be a. $58,500. b. $80,100. c. $78,900. d. $36,900.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
128.
Each of the following items affect the cash balance per books except a. bank service charges. b. notes collected by the bank. c. NSF checks. d. outstanding checks.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
7 - 22 129.
Test Bank for Financial Accounting: IFRS Edition, 4e Heath Company gathered the following reconciling information in preparing its July bank reconciliation: Cash balance per books, 7/31 ₤15,000 Deposits in transit 300 Notes receivable and interest collected by bank 1,700 Bank charge for check printing 40 Outstanding checks 4,000 NSF check 340 The adjusted cash balance per books on July 31 is a. ₤16,320. b. ₤16,020. c. ₤12,620. d. ₤12,920.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
130.
Wynn Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank statement, 9/30 Note receivable collected by bank Outstanding checks Deposits in transit Bank service charge NSF check
$9,000 4,000 6,000 3,000 50 800
Determine the cash balance per books (before adjustments) for Wynn Company. a. $6,850. b. $12,000. c. $2,850. d. $10,000. Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
Bank errors a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence. d. are corrected by making an adjusting entry on the depositor's books.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
132.
An adjusting entry is not required for a. outstanding checks. b. collection of a note by the bank. c. NSF checks. d. bank service charges.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Fraud, Internal Control, and Cash 133.
7 - 23
Kline Company had checks outstanding totaling $38,400 on its May bank reconciliation. In June, Kline Company issued checks totaling $239,400. The July bank statement shows that $178,200 in checks cleared the bank in July. A check from one of Kline Company's customers in the amount of $1,800 was also returned marked "NSF." The amount of outstanding checks on Kline Company's July bank reconciliation should be a. $117,600. b. $61,200. c. $99,600. d. $20,800.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
134.
Quayle Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check The adjusted cash balance per books on August 31 is a. $11,120. b. $10,820. c. $7,420. d. $7,720.
$9,800 300 1,700 40 4,000 340
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
135.
Fairly Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 $6,400 Deposits in transit 600 Notes receivable and interest collected by bank 1,480 Bank charge for check printing 50 Outstanding checks 3,000 NSF check 280 The adjusted cash balance per books on April 30 is a. $8,150. b. $7,880. c. $7,550. d. $8,110.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
7 - 24 136.
Test Bank for Financial Accounting: IFRS Edition, 4e Jeter Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank statement, 9/30 $26,800 Note receivable collected by bank 16,800 Outstanding checks 25,200 Deposits in transit 12,600 Bank service charge 210 NSF check 3,360 Using the above information, determine the cash balance per books (before adjustments) for the Jeter Company. a. $23,230 b. $39,400 c. $970 d. $42,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
137.
In the month of November, Coler Company wrote checks in the amount of $37,000. In December, checks in the amount of $50,632 were written. In November, $33,872 of these checks were presented to the bank for payment, and $43,532 were presented in December. What is the amount of outstanding checks at the end of November? a. $7,100 b. $3,128 c. $10,228 d. $14,200
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
138.
In the month of November, Coler Company wrote checks in the amount of $37,000. In December, checks in the amount of $50,632 were written. In November, $33,872 of these checks were presented to the bank for payment, and $43,532 were presented in December. What is the amount of outstanding checks at the end of December? a. $7,100 b. $3,128 c. $10,228 d. $14,200
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
139.
At April 30, Mareska Company has the following bank information: cash balance per bank €6,800; outstanding checks €280; deposits in transit €550; credit memo for interest €10; bank service charge €20. What is Mareska’s adjusted cash balance on April 30? a. €7,060 b. €7,080 c. €6,530 d. €7,070
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Fraud, Internal Control, and Cash 140.
7 - 25
At June 30, Mareska Company has the following bank information: cash balance per bank €8,500; outstanding checks €560; deposits in transit €1,100; credit memo for interest €20; bank service charge €40. What is Mareska’s adjusted cash balance on June 30? a. €9,020 b. €9,060 c. €7,960 d. €9,040
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
Rainey Company wrote checks totaling $42,700 during October and $46,625 during November. $40,600 of these checks cleared the bank in October, and $45,550 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $3,175 b. $575 c. $1,525 d. $4,950
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
142.
Tayler Company wrote checks totaling $68,320 during October and $74,600 during November. $64,960 of these checks cleared the bank in October, and $72,880 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $5,080 b. $920 c. $2,440 d. $7,920
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
143.
Osborn Company assembled the following information in completing its March bank reconciliation: balance per bank $3,820; outstanding checks $775; deposits in transit $1,250; NSF check $80; bank service charge $25; cash balance per books $4,400. As a result of this reconciliation, Osborn will a. reduce its cash account by $475. b. reduce its cash account by $25. c. increase its cash account by $55. d. reduce its cash account by $105.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
144.
Tavarez Company assembled the following information in completing its July bank reconciliation: balance per bank $7,640; outstanding checks $1,550; deposits in transit $2,500; NSF check $160; bank service charge $50; cash balance per books $8,800. As a result of this reconciliation, Tavarez will a. reduce its cash account by $950. b. reduce its cash account by $50. c. increase its cash account by $110. d. reduce its cash account by $210.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
7 - 26 145.
Test Bank for Financial Accounting: IFRS Edition, 4e If a check correctly written and paid by the bank for ¥6,180 is incorrectly recorded on the company’s books for ¥6,810, the appropriate treatment on the bank reconciliation would be to a. add ¥630 to the book’s balance. b. subtract ¥630 from the book’s balance. c. deduct ¥630 from the bank’s balance. d. deduct ¥6,180 from the book’s balance.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
146.
In the month of May, Grimm Company wrote checks in the amount of $185,000. In June, checks in the amount of $253,160 were written. In May, $169,360 of these checks were presented to the bank for payment, and $217,660 in June. What is the amount of outstanding checks at the end of May? a. $35,500 b. $15,640 c. $51,140 d. $71,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
147.
In the month of May, Grimm Company .wrote checks in the amount of $185,000. In June, checks in the amount of $253,160 were written. In May, $169,360 of these checks were presented to the bank for payment, and $217,660 in June. What is the amount of outstanding checks at the end of June? a. $35,500 b. $15,640 c. $51,140 d. $71,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
148.
El Greco Inc'.s month-end bank statement shows a balance of €71,400, outstanding checks are €15,400, and a deposit of €3,500 which was in transit at month end. In reconciling the bank statement, El Greco discovered that a check for €700 was erroneously charged by the bank against the company's account. The adjusted balance in the bank account at month end is a. €58,800. b. €59,500. c. €60,200. d. €71,400.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
149.
In preparing its bank reconciliation for the month of December 2020, Reinhardt Company has the following information available Balance per bank statement, 12/31/2020 NSF check returned with 12/31/2020 bank statement Deposits in transit as of 12/31/2020 Outstanding checks as of 12/31/2020 Bank service charges for December
For Instructor Use Only
CHF41,000 450 6,000 5,200 10
Fraud, Internal Control, and Cash
7 - 27
What amount should be reported for cash on the company's December 31, 2020 statement of financial position? a. CHF41,800 b. CHF41,790 c. CHF41,340 d. CHF40,200 Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
150.
In preparing its June 30, 2020 bank reconciliation, Huang Company has the following information available: Balance per bank statement, 6/30/2020 Deposits in transit at 6/30/2020 Outstanding checks, 6/30/2020 Note collected by bank in June
¥977,500 102,400 170,200 111,250
The adjusted cash balance at June 30, 2020 is a. ¥909,700. b. ¥1,045,300. c. ¥1,088,750. d. ¥1,156,550. Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
151.
Longfellow Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 Deposits in transit Notes receivable and interest collected by bank Bank charge for check printing Outstanding checks NSF check The adjusted cash balance per books at April 30 is a. ₤10,820. b. ₤10,670. c. ₤8,970. d. ₤6,590.
₤10,300 390 1,700 30 4,100 1,300
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
152.
Rodriguez Company gathered the following reconciling information in preparing its February bank reconciliation: Cash balance per books, 2/28 Deposits in transit Bank charge for check printing Outstanding checks NSF check
For Instructor Use Only
€21,100 8,900 50 7,500 420
7 - 28
Test Bank for Financial Accounting: IFRS Edition, 4e The cash balance reported on the February 28 statement of financial position will be a. €22,500. b. €22,030. c. €21,100. d. €20,630.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
153.
Le Bateau Manufacturing Inc. gathered the following reconciling information in preparing its May bank reconciliation: Cash balance per books, 5/31 €14,200 Deposits in transit 3,150 Notes receivable and interest collected by bank 5,850 Bank charge for check printing 60 Outstanding checks 2,960 NSF check 870 The adjusted cash balance per books on May 31 is a. €13,460. b. €14,390. c. €19,120. d. €19,130.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
154.
Hanson-Swiss Wholesale Corporation gathered the following reconciling information in preparing its March bank reconciliation: Cash balance per books, 3/31 CHF29,500 Deposits in transit 7,300 Notes receivable and interest collected by bank 2,500 Bank charge for check printing 50 Outstanding checks 4,500 NSF check 950 The cash balance reported on the company's March statement of financial position is a. CHF29,500. b. CHF31,000. c. CHF32,300. d. CHF33,850.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
155.
In the month of May, Jansen Company wrote checks in the amount of $78,200. In the June, checks in the amount of $70,000 were written. In May, $74,000 of these checks were presented to the bank for payment, and $64,000 in June. What is the amount of outstanding checks at the end of May? a. CHF10,200. b. CHF6,200. c. CHF6,000. d. CHF4,200.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash 156.
7 - 29
In the month of May, Jansen Company wrote checks in the amount of $78,200. In June, checks in the amount of $70,000 were written. In May, $74,000 of these checks were presented to the bank for payment, and $64,000 in June. What is the amount of outstanding checks at the end of June? a. CHF10,200. b. CHF6,200. c. CHF6,000. d. CHF4,200.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
157.
Franco Company wrote checks totaling €74,180 during June and €77,300 during July. In June, €72,500 of these checks cleared the bank. In July, checks of €76,460 cleared the bank. What was the amount of outstanding checks at July 31? a. €840. b. €1,680. c. €2,520. d. €3,960.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
158.
Bertram Company assembled the following information in completing its May bank reconciliation: balance per bank ₤15,640 outstanding checks ₤3,550; deposits in transit ₤2,500; NSF check ₤1,360; bank service charge ₤50; cash balance per books ₤16,000. As a result of this reconciliation, Bertram will a. reduce its cash account by ₤50. b. reduce its cash account by ₤1,410. c. increase its cash account by ₤1,050. d. increase its cash account by ₤360.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
159.
Tang Company assembled the following information in completing its June bank reconciliation: balance per bank HK$21,460; outstanding checks HK$12,325; deposits in transit HK$13,750; NSF check HK$2,240; bank service charge HK$85; cash balance per books HK$25,210. As a result of this reconciliation, Tang will a. reduce its cash account by HK $3,750. b. increase its cash account by HK $1,425. c. increase its cash account by HK $2,240. d. reduce its cash account by HK $2,325.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
160.
Which of the following items would be reported as cash on the statement of financial position? a. Note payable due in 90 days. b. Cash equivalent. c. Cash that will be used for future expansion, beginning in eighteen months. d. Restricted cash that will not be used within the upcoming year.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
7 - 30 161.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following would not be reported on the statement of financial position as a cash equivalent? a. Money market funds b. Commercial paper c. Treasury bills d. Restricted cash
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
162.
All of the following would be included as a cash equivalent on the statement of financial position except a. money market funds. b. commercial paper c. U.S. Treasury bills, due in 30 days. d. cash restricted for plant expansion in 2 years.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
163.
Cash equivalents include each of the following except a. bank certificates of deposit. b. money market funds. c. petty cash. d. U.S Treasury bills.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
164.
Which of the following would not be reported on the statement of financial position as a cash equivalent? a. Money market funds b. Sixty-day certificate of deposit c. Six-month Treasury bills d. Money market savings certificate
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
165.
Compensating balances are a restriction on the use of a company's cash and should be a. reported as a current asset. b. reported as a noncurrent asset. c. disclosed in the notes to the financial statements. d. reported as a reduction of cash.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
166.
The principles of internal control include all of the following except a. establishment of responsibility. b. combining of duties. c. physical controls. d. independent internal verification.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash 167.
7 - 31
An example of poor internal control is a. the accountant should not have physical custody of the asset nor access to it. b. the custodian of an asset should not maintain or have access to the accounting records. c. one person should be responsible for handling related transactions. d. a salesperson makes the sale, and a different person ships the goods.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
168.
Having different individuals receive cash, record cash receipts, and hold the cash is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
169.
Storing cash in a company safe is an application of which internal control principle? a. Segregation of duties b. Documentation procedures c. Physical controls d. Establishment of responsibility
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
170.
Using prenumbered checks and having an approved invoice for each check is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
171.
An application of good internal control over cash disbursements is a. following payment, the approved invoice should be stamped PAID. b. blank checks should be stored in the treasurer's desk. c. each check should be compared with the approved invoice after the check is issued. d. check signers should record the cash disbursements.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
172.
When making a payment from the petty cash fund for postage stamps, the following journal entry is made. a. Supplies ................................... XXXX Petty Cash ........................ XXXX b. Postage Expense ..................... XXXX Petty Cash ........................ XXXX c. Miscellaneous Expense ........... XXXX Petty Cash ........................ XXXX d. No entry is made.
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
7 - 32
Test Bank for Financial Accounting: IFRS Edition, 4e
173.
All of the following would involve a debit memorandum except a. a bank service charge. b. an NSF check. c. the cost of printing checks. d. interest earned.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
174.
A bank may issue a credit memorandum for a. a bank service charge. b. an NSF (not sufficient funds) check from a customer. c. the collection of a note receivable for the depositor by the bank. d. the cost of printing checks.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
175.
Journal entries are required by the depositor for all of the following except a. collection of a note receivable. b. bank errors. c. bank service charges. d. an NSF check.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
176.
Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of a. 1 month or less when purchased. b. 3 months or less when purchased. c. 6 months or less when purchased. d. 1 year or less when purchased.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Fraud, Internal Control, and Cash
7 - 33
BRIEF EXERCISES BE 177 Match the principle of internal control to each of the following cases. a) b) c) d) e)
Establishment of responsibility Segregation of duties Accountability for assets Documentation procedures Physical controls
_____ 1. Employees’ time is tracked using a time clock. _____ 2. Employees who receive shipments of goods do not have access to the accounting records for merchandise. _____ 3. Shipping documents are prenumbered. _____ 4. The bookkeeper does not have physical custody of assets. _____ 5. Only the treasurer of the company can sign checks. Ans: A, LO: 1, Bloom: C, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 177 1. 2. 3. 4. 5.
(4 min.)
e b d b a
BE 178 Identify which principle of internal control is being followed in each of the following cases. 1. Warehouse employees do not have access to the accounting records. 2. Prenumbered shipping documents are prepared for each shipment of goods. 3. The locked warehouse is accessible only by warehouse employees with keys. Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 178
(3 min.)
1. Segregation of duties 2. Documentation procedures 3. Physical controls
For Instructor Use Only
7 - 34
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 179 Identify the internal control procedures applicable to cash receipts for Ferguson Company in each of the following cases. 1. All cashiers are bonded. 2. The treasurer compares the total cash receipts to the bank deposit daily. 3. The bookkeeper records cash receipts which are held by the treasurer. 4. Only the treasurer holds cash receipts. 5. Deposit slips are completed for each deposit. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 179 1. 2. 3. 4. 5.
(4 min.)
Human resource controls Independent internal verification Segregation of duties Establishment of responsibility Documentation procedures.
BE 180 Identify the internal control procedures applicable to cash disbursements followed by Downey Company in each of the following cases. 1. Company checks are prenumbered. 2. Only the treasurer is authorized to sign checks. 3. All employees are required to take vacations. 4. Blank checks are stored in a locked safe. 5. The bookkeeper, not the treasurer, records cash disbursements. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 180 1. 2. 3. 4. 5.
(4 min.)
Documentation procedures Establishment of responsibility Human resource controls Physical controls Segregation of duties
BE 181 On October 1, Clutter Company’s petty cash fund of €120 is replenished. The fund contains cash of €25, and receipts for supplies of €55 and postage of €40. Prepare the journal entry to record the replenishment of the petty cash fund. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181
(3 min.)
Supplies .............................................................................. Postage Expense ................................................................. Cash ............................................................................
For Instructor Use Only
55 40 95
Fraud, Internal Control, and Cash
7 - 35
BE 182 Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation. 1. EFT transfer to a supplier 2. Bank service charge 3. Check printing charge 4. Error recording check # 214 which was written for $230 but recorded for $320 5. Collection of note and interest by the bank on company’s behalf Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 182 1. 2. 3. 4. 5.
(3 min.)
b b b a a
BE 183 Identify whether each of the following items would be (a) added to the book balance, (b) deducted from the book balance in a bank reconciliation, (c) added to the bank balance, or (d) deducted from the bank balance. 1. Deposits in transit 2. Bank service charge 3. Collection of note and interest by the bank on company’s behalf 4. NSF check 5. Outstanding checks Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 183 1. 2. 3. 4. 5.
( 4 min.)
c b a b d
BE 184 Identify which of the following reconciling items would require an adjusting entry to be made by Farrell Company. 1. Deposits in transit totaled $2,000. 2. A check written to the company for $350 by Harder Company was returned NSF. 3. The bank charged the company $46 for printing checks. 4. Outstanding checks totaled $1,667. 5. A debit memorandum reported an EFT of $178 to Paco Utilities. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
7 - 36
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 184
(3 min.)
Adjusting entries would be required for: 2, 3, and 5 because they are reconciling items for the books. BE 185 Epley Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case. 1. A check for $59 written to the company by J. Neutron was returned NSF. 2. The monthly service charge by the bank was $34. 3. The bank collected a $1,000 note plus interest of $97 on the company’s behalf. The company had not accrued the interest. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 185
(4 min.)
1. Debit: Accounts Receivable 2. Debit: Miscellaneous Expense 3. Debit: Cash
Credit: Cash Credit: Cash Credit: Note Receivable, Interest Revenue
BE 186 The following reconciling items are applicable to the bank reconciliation for the Hunsicker Company. Indicate how each item should be shown on a bank reconciliation. a. b. c. d.
Outstanding checks. Bank credit memorandum for collecting a note for the depositor. Bank debit memorandum for service charge. Deposit in transit.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 186 a. b. c. d.
(4 min.)
Outstanding checks should be deducted from the balance per bank. Bank credit memorandum should be added to the balance per books. Bank debit memorandum should be deducted from the balance per books. Deposits in transit should be added to the balance per bank.
BE 187 At August 31, Litke Company has this bank information: cash balance per bank ₤7,150; outstanding checks ₤962; deposits in transit ₤1,700; and a bank service charge ₤20. Determine the adjusted cash balance per bank at August 31, 2020. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash Solution 187
7 - 37
(5 min.) Litke Company Partial Bank Reconciliation August 31, 2020
Cash balance per bank Add: Deposit in transit
₤7,150 1,700 8,850 962 ₤7,888
Less: Outstanding checks Adjusted cash balance per bank BE 188
Given the following information, determine the adjusted cash balance per books. a. b. c. d. e. f.
Balance per books as of June 30, $8,300. Outstanding checks, $600. NSF check returned with bank statement, $130. Deposit mailed the afternoon of June 30, $300. Check printing charges, $30. Interest earned on checking account, $40.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 188
(4 min.)
$8,180: ($8,300 – $130 – $30 + $40)
EXERCISES Ex. 189 Match each of the following principles of internal control with the appropriate description below. A. Establishment of responsibility B. Segregation of duties C. Documentation procedures D. Physical controls E. Independent internal verification F. Human resource controls _____ 1.
Involves the review, comparison, and reconciliation of data prepared by other employees.
_____ 2.
Provide evidence that transactions and events have occurred.
_____ 3.
Includes the authorization and approval of transactions.
_____ 4.
Rotating employees' duties and requiring employees to take vacations.
_____ 5.
Related activities should be assigned to different individuals.
_____ 6.
Using garment sensors to deter theft.
Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
7 - 38
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 189 1. E 2. C
(5 min.) 3. A 4. F
5. B 6. D
Ex. 190 Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described. Internal Control Principles A. Establishment of responsibility B. Segregation of duties C. Physical controls D. Documentation procedures E. Independent internal verification F. Human resource controls ____
1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.
____
2. Three people handle cash sales from the same cash register drawer.
____
3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.
____
4. The person who is authorized to sign checks approves purchase orders for payment.
____
5. Some cash payments are not recorded because checks are not prenumbered.
____
6. Cash shortages are not discovered because there are no daily cash counts by supervisors.
____
7. The treasurer of the company has not taken a vacation for over 20 years.
Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 190 1. 2. 3. 4.
B A C B
(5 min.) 5. D 6. E 7. F
Ex. 191 Joe Foss has worked for Dr. Sam Milton for several years. Joe demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Joe's primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Joe doesn't bother with giving each patient a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office, Joe offers to help Ann post the payments to the patients' accounts receivable. She is always happy to receive his help because he is a very conscientious worker.
For Instructor Use Only
Fraud, Internal Control, and Cash Ex. 191
7 - 39
(Cont.)
Instructions Identify any principles of internal control that may be violated in this medical office situation. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 191
(10 min.)
Violations: 1. It is Ann's responsibility to post payments to patient accounts. In allowing Joe to assist her, the establishment of responsibility principle is violated. 2. Although it appears to be a small office, it is not appropriate that Joe both opens the mail, receives and records cash receipts from patients, and also appears to have custody of cash. This situation violates the segregation of duties principle. By posting to patients' accounts, it would be possible to post credits to patient accounts and pocket the cash. 3. The documentation principle is violated when patients are not given cash receipts. Although many professional offices do not have cash registers, computerized or manual receipts are customary and necessary. 4. Independent internal verification is also being violated. There is no independent counting of the cash and comparison to total receipts. 5. Human resource controls are being violated. There is no mention of Joe being bonded. Also, personnel should be required to take vacations. Ex. 192 Listed below are seven errors or problems which might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply. Possible Errors or Problems 1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise. 2. A small fire destroys 3 days of cash receipts. 3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection. 4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer. 5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand. 6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor. 7. Cashiers with over 5 years’ experience are not bonded.
For Instructor Use Only
7 - 40 Ex. 192
Test Bank for Financial Accounting: IFRS Edition, 4e (Cont.) Internal Control Principles
a. b. c. d. e. f.
Establishment of responsibility Segregation of duties Physical controls Documentation procedures Independent internal verification Human resource controls
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 192 1. 2. 3. 4.
(10 min.)
b c c c
5. a and e 6. d and e 7. f
Ex. 193 Match the internal control principle below with the appropriate cash receipts procedure described. a. b. c. d. e. f.
Documentation procedures Establishment of responsibility Independent internal verification Human resource controls Physical controls Segregation of duties
_____ 1.
Only designated personnel are authorized to handle cash receipts.
_____ 2.
Different individuals receive cash and record cash receipts.
_____ 3.
Use remittance advice and cash register tapes.
_____ 4.
Store cash in safes and bank vaults.
_____ 5.
Treasurer compares total receipts to bank deposits daily.
_____ 6.
Bonding of employees that handle cash.
Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 193 1. b 2. f
(5 min.) 3. a 4. e
5. c 6. d
For Instructor Use Only
Fraud, Internal Control, and Cash
7 - 41
Ex. 194 Match the internal control principle below with the appropriate cash disbursements procedure described. a. Establishment of responsibility b. Segregation of duties c. Documentation procedures d. Physical controls e. Independent internal verification f. Human resource controls _____ 1. _____ 2.
Compare checks to invoices. Different individuals approve and make payments.
_____ 3. _____ 4.
Print check amounts by machine with indelible ink. Only designated personnel are authorized to sign checks.
_____ 5. _____ 6.
Each check must have an approved invoice. Requiring employees to take vacations.
Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Solution 194 1. e 2. b
(5 min.) 3. d 4. a
5. c 6. f
Ex. 195 The petty cash fund of €200 for Vernon Company appeared as follows on December 31, 2020: Cash Petty cash vouchers Supplies Postage Balloons for a special occasion Meals
€94.60 €19.40 40.00 18.00 25.00
Instructions 1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain. 2. Prepare in general journal form the entry to replenish the fund. 3. On December 31, the office manager gives instructions to increase the petty cash fund by €100. Make the appropriate journal entry. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
7 - 42
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 195
(10 min.)
1. Petty cash should be replenished on a periodic basis or when the cash is low. It must be replenished on the statement of financial position date so that the expenses represented by the petty cash vouchers can be recorded in the proper accounting period. 2. Supplies ........................................................................................... Postage Expense ............................................................................. Miscellaneous Expense ................................................................... Meals Expense ................................................................................. Cash Over and Short ....................................................................... Cash ........................................................................................
19.40 40.00 18.00 25.00 3.00
3. Petty Cash ........................................................................................ Cash ........................................................................................
100.00
105.40 100.00
Ex. 196 Prepare the entry to replenish the $200 petty cash fund of Kruger Company, assuming the fund has receipts for: freight-out $60, postage $105, and miscellaneous expense $20. The fund contains $8 in cash. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 196
(5 min.)
Freight-Out ............................................................................................. Postage Expense ................................................................................... Miscellaneous Expense ......................................................................... Cash Over and Short ............................................................................. Cash ($200 – $8)........................................................................
60 105 20 7 192
Ex. 197 On October 1, 2020, Herman Company establishes an imprest petty cash fund by issuing a check for $200 to Jill Gray, the custodian of the petty cash fund. On October 31, 2020, Jill Gray submitted the following paid petty cash receipts for replenishment of the petty cash fund when there is $47 cash in the fund: Freight-Out $27 Supplies Expense 35 Entertainment of Clients 60 Postage Expense 28 Instructions Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Fraud, Internal Control, and Cash Solution 197 Oct. 1
31
7 - 43
(10 min.)
Petty Cash............................................................................ Cash ............................................................................ (To establish a petty cash fund)
200
Cash Over and Short ........................................................... Freight-Out ........................................................................... Supplies Expense ................................................................ Entertainment Expense ........................................................ Postage Expense ................................................................. Cash ............................................................................ (To record expenses for October and to replenish the petty cash fund)
3 27 35 60 28
200
153
Ex. 198 Hemingway Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $200. During March the following petty cash receipts were found in the petty cash box. Date 3/5 7 9 11 14
Receipt No. 1 2 3 4 5
For Stamp Inventory Freight-Out Miscellaneous Expense Travel Expense Miscellaneous Expense
Amount $78 42 12 48 10
The fund was replenished on March 15 when the fund contained $8 in cash. On March 20, the amount in the fund was increased to $300. Instructions Journalize the entries in March that pertain to the operation of the petty cash fund. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 198 Mar. 1 15
20
(5 min.)
Petty Cash............................................................................ Cash ............................................................................
200
Postage Expense ................................................................. Freight-Out ........................................................................... Miscellaneous Expense ....................................................... Travel Expense .................................................................... Cash Over and Short ........................................................... Cash ............................................................................
78 42 22 48 2
Petty Cash............................................................................ Cash ............................................................................
100
For Instructor Use Only
200
192 100
7 - 44
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 199 Gordon Company is unable to reconcile the bank balance at January 31. Gordon’s reconciliation is as follows. Cash balance per bank Add: NSF check Less: Bank service charge Adjusted balance per bank
€5,340 1,240 35 €6,545
Cash balance per books Less: Deposits in transit Add: Outstanding checks Adjusted balance per books Instructions (a) Prepare a correct bank reconciliation. (b) Journalize the entries required by the reconciliation.
€5,815 850 1,650 €6,615
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Internal Controls
Solution 199
(8 min.)
(a) Cash balance per bank statement ................................................... Add: Deposits in transit ....................................................................
€5,340 850 6,190 1,650 €4,540
Less: Outstanding checks ................................................................ Adjusted cash balance per bank ...................................................... Cash balance per books .................................................................. Less: NSF check .............................................................................. Bank service charge ................................................................ Adjusted cash balance per books ....................................................
€5,815 1,240 35
(b) Accounts Receivable ........................................................................ Cash ........................................................................................
1,240
Miscellaneous Expense ................................................................... Cash ........................................................................................
35
1,275 €4,540 1,240 35
Ex. 200 On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $820, and no. 357, $655. The May bank statement and the May cash payments journal show the following.
Date 5/4 5/2 5/17 5/12 5/20 5/29 5/30
Bank Statement Checks Paid Check No. Amount 354 650 355 820 358 159 359 275 360 890 363 480 362 750
Date 5/2 5/5 5/10 5/15 5/22 5/24 5/29
For Instructor Use Only
Cash Payments Journal Checks Issued Check No. Amount 358 159 359 275 360 890 361 950 362 750 363 480 364 840
Fraud, Internal Control, and Cash
For Instructor Use Only
7 - 45
7 - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 200
(Cont.)
Instructions Using step 2 in the reconciliation procedure, list the outstanding checks at May 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 200
(3 min.)
The outstanding checks are as follows: No. 357 361 364 Total
Amount $ 655 950 840 $2,445
Ex. 201 The information below relates to the Cash account in the ledger of Remington Company. Balance September 1—$25,720; Cash deposited—$96,000. Balance September 30—$26,100; Checks written—$95,620. The September bank statement shows a balance of $24,635 on September 30 and the following memoranda. Credits Collection of $1,250 note plus interest $50 $1,300 Interest earned on checking account $65
Debits NSF check: J. E. Hoover Safety deposit box rent
$635 $75
At September 30, deposits in transit were $6,695, and outstanding checks totaled $4,575. Instructions Prepare the bank reconciliation at September 30. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash Solution 201 (a)
7 - 47
(10 min.)
REMINGTON COMPANY Bank Reconciliation September 30 Cash balance per bank statement ................................................... Add: Deposits in transit ....................................................................
$24,635 6,695 31,330 4,575 $26,755
Less: Outstanding checks ................................................................ Adjusted cash balance per bank ...................................................... Cash balance per books .................................................................. Add: Collection of note receivable ($1,250 + $50) ........................... Interest earned ........................................................................ Less: NSF check .............................................................................. Safety deposit box rent ........................................................... Adjusted cash balance per books ....................................................
$26,100 $1,300 65 635 75
1,365 27,465 710 $26,755
Ex. 202 The cash records of Landis Company show the following four situations. 1. The June 30 bank reconciliation indicated that deposits in transit total $1,080. During July the general ledger account Cash shows deposits of $23,620, but the bank statement indicates that only $21,400 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $1,020. During the month of July, Landis Company books show that $26,800 of checks were issued. The bank statement showed that $24,600 of checks cleared the bank in July. 3. In September, deposits per the bank statement totaled $40,100, deposits per books were $38,100, and deposits in transit at September 30 were $3,150. 4. In September, cash disbursements per books were $36,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $3,150. There were no bank debit or credit memoranda. No errors were made by either the bank or Landis Company. Instructions Answer the following questions. (a) In situation (1), what were the deposits in transit at July 31? (b) In situation (2), what were the outstanding checks at July 31? (c) In situation (3), what were the deposits in transit at August 31? (d) In situation (4), what were the outstanding checks at August 31? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
7 - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 202
(12 min.)
(a) Deposits in transit: Deposits per books in July ...................................................... Less: Deposits per bank in July ............................................... Deposits in transit, June 30 ............................................ July receipts deposited in July ......................................................... Deposits in transit, July 31 ...............................................................
$21,400 (1,080)
(b) Outstanding checks: Checks per books in July ........................................................ Less: Checks clearing bank in July ......................................... Outstanding checks, June 30 ......................................... July checks cleared in July ............................................................... Outstanding checks, July 31 ............................................................
$24,600 (1,020)
$23,620 20,320 $ 3,300 $26,800 23,580 $ 3,220
(c) Deposits in transit: Deposits per bank statement in September ............................ Add: Deposits in transit, September 30 ................................... Total deposits to be accounted for .......................................... Less: Deposits per books ........................................................ Deposits in transit, August 31 ..................................................
$40,100 3,150 43,250 38,100 $ 5,150
(d) Outstanding checks: Checks clearing bank in September ........................................ Add: Outstanding checks, September 30 ................................ Total checks to be accounted for ............................................ Less: Cash disbursements per books ..................................... Outstanding checks, August 31 ...............................................
$37,500 3,150 40,650 36,550 $ 4,100
Ex. 203 Laymon Boat Company's bank statement for the month of September showed a balance per bank of €7,000. The company's Cash account in the general ledger had a balance of €4,667 at September 30. Other information is as follows: (1) Cash receipts for September 30 recorded on the company's books were €5,000 but this amount does not appear on the bank statement. (2) The bank statement shows a debit memorandum for €60 for check printing charges. (3)
(4) (5)
(6)
Check No. 119 payable to Mann Company was recorded in the cash payments journal and cleared the bank for €248. A review of the accounts payable subsidiary ledger shows a €36 credit balance in the account of Mann Company and that the payment to them should have been for €284. The total amount of checks still outstanding at September 30 amounted to €5,800. Check No. 138 was correctly written and paid by the bank for €429. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for €492. The bank returned an NSF check from a customer for €530.
For Instructor Use Only
Fraud, Internal Control, and Cash Ex. 203 (7)
7 - 49
(Cont.)
The bank included a credit memorandum for €2,060 which represents collection of a customer's note by the bank for the company; principal amount of the note was €2,000 and interest was €60. Interest has not been accrued.
Instructions (a) Prepare a bank reconciliation for Laymon Boat Company at September 30. (b) Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 203
(25 min.)
(a)
LAYMON BOAT COMPANY Bank Reconciliation September 30
Cash balance per bank Add: (1) Deposit in transit
€ 7,000 5,000 12,000 5,800 € 6,200
Less: (4) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (5) Accounts Payable Error (7) Collect €2,000 note and interest €60 Less: (2) Check printing (6) NSF Check Adjusted cash balance per books
€ 4,667 € 63 2,060 60 530
2,123 6,790 590 € 6,200
Note: Item (3) is not a reconciling item. (b) Sept. 30
30
30
30
Cash ................................................................................ Accounts Payable..................................................... (To correct error in recording Check No. 138)
63
Cash ................................................................................. Notes Receivable ..................................................... Interest Revenue ...................................................... (To record collection of note receivable and interest by the bank)
2,060
Miscellaneous Expense .................................................... Cash ......................................................................... (To record check printing charges)
60
Accounts Receivable......................................................... Cash ......................................................................... (To record NSF check)
530
For Instructor Use Only
63
2,000 60
60
530
7 - 50
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 204 Dillman Food Store developed the following information in recording its bank statement for the month of March. Balance per books March 31 $ 2,905 Balance per bank statement March 31 $10,900 ——————————————————————————————————————————— (1) Checks written in March but still outstanding $6,000. (2) Checks written in February but still outstanding $2,800. (3) Deposits of March 30 and 31 not yet recorded by bank $5,200. (4) NSF check of customer returned by bank $1,200. (5) Check No. 210 for $594 was correctly issued and paid by the bank but incorrectly entered in the cash payments journal as payment on account for $549. (6) Bank service charge for March was $50. (7) A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in March. (8) The bank collected a note receivable for the company for $5,000 plus $150 interest revenue. Instructions Prepare a bank reconciliation at March 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 204
(20 min.) DILLMAN FOOD STORE Bank Reconciliation March 31
Cash balance per books $2,905 Add: (7) Error on Check No. 318 $ 540 (8) Collect $5,000 note and interest $150 5,150 5,690 8,595 Less: (4) NSF Check 1,200 (5) Error on Check No. 210 45 (6) Bank Service Charge 50 1,295 Adjusted cash balance per books $7,300
Cash balance per bank Add: (3) Deposit in transit
$10,900 5,200 16,100
Less: (1) Mar. outstanding checks ($6,000) (2) Feb. outstanding checks ($2,800) 8,800 Adjusted cash balance per bank $ 7,300
For Instructor Use Only
Fraud, Internal Control, and Cash
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Ex. 205 Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item. Code A Add to cash balance per books B Deduct from cash balance per books C Add to cash balance per bank D Deduct from cash balance per bank E Does not affect the bank reconciliation Items: ____
1. Outstanding checks.
____
2. Bank service charge.
____
3. Check for $320 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $230.
____
4. Deposit in transit.
____
5. The bank returns deposited check marked NSF.
____
6. The bank collects notes receivable and interest for depositor.
____
7. Bank debit memorandum for check printing fees.
____
8. Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed.
____
9. The bank charged a check against the company which should have been charged to another company.
____ 10. A check for $236 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $263. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 205 1. 2. 3. 4. 5.
D B B C B
(10 min.) 6. 7. 8. 9. 10.
A B E C A
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 206 The following adjusting entries for Pare Company were prepared after completing a bank reconciliation. For each of the following adjustments, prepare a probable explanation for the adjusting entry. 1. Supplies ........................................................................................... Cash ........................................................................................
150
2. Accounts Receivable—B. Lowe ....................................................... Cash ........................................................................................
420
3. Cash ................................................................................................ Notes Receivable .................................................................... Interest Revenue .....................................................................
2,200
4. Sales Revenue ................................................................................. Cash ........................................................................................
81
5. Miscellaneous Expense ................................................................... Cash ........................................................................................
20
150 420 2,000 200 81 20
Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 206
(10 min.)
1. To adjust book balance for error in recording supplies. 2. To record an NSF check returned with the bank statement. 3. To record collection of Notes Receivable and interest upon notification by bank through bank statement. 4. To adjust book balance for transposition error in recording sales. 5. To reduce the book balance for bank service or check printing charges. Ex. 207 The cash balance per books for Feagen Company on September 30, 2020 is $10,740.93. The following checks and receipts were recorded for the month of October, 2020: No. 17 18 19 20 21
Amount $372.96 $780.62 $157.00 $587.50 $234.15
Checks No. 22 23 24 25
Receipts Amount $ 578.84 $1,687.50 $ 921.30 $ 246.03
Amount $843.86 $941.54 $808.58 $967.00
For Instructor Use Only
Date 10/ 5 10/21 10/27 10/30
Fraud, Internal Control, and Cash
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Ex. 207 (Cont.) In addition, the bank statement for the month of October is presented below: Balance Deposits and Credits Checks and Debits Balance Last Statement No. Total Amount No. Total Amount This Statement ———————————————————————————————————————— $5,404.84 5 $10,178.36 10 $3,632.19 $11,951.01 ———————————————————————————————————————— Checks and other debits Deposits Date Balance ——————————————————————— No. Amount No. Amount No. Amount ———————————————————————————————————————— 14 148.29 17 372.96 22 578.84 5,484.38 10/ 1 $9,875.31 18 708.62 24 921.30 843.86 10/ 8 $9,219.03 19 157.00 25 246.03 941.54 10/23 $9,541.58 21 234.15 35.00 SC 808.58 10/29 $10,101.01 230.00 NSF 2,100.00 CM 10/31 $11,951.01 ———————————————————————————————————————— Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo) ———————————————————————————————————————— Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Long, a customer, in settlement of an accounts receivable. An entry had not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 which has not been accrued. The bank service charge is $35.00. Instructions (a) Prepare a bank reconciliation at October 31. (b) Prepare the adjusting journal entries required by the bank reconciliation. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 30, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 207 (a)
(30–35 min.) FEAGEN COMPANY Bank Reconciliation October 31, 2020
Cash balance per bank statement........................................... Add: Deposits in transit .........................................................
$11,951.01 967.00 12,918.01
Less: Outstanding checks No. 20 ................................................................. No. 23 ................................................................. Adjusted cash balance per bank .............................................
$ 587.50 1,687.50
Cash balance per books.......................................................... Add: Error in recording check No. 18 .................................... Note collected by bank ..................................................
$ 8,736.01* $ 72.00 2,100.00
Less: Bank service charge ..................................................... NSF check .................................................................... Adjusted cash balance per books ........................................... *9/30 balance per books + Receipts – Checks written = $10,740.93 + $3,560.98 – $5,565.90 =
2,275.00 $ 10,643.01
35.00 230.00
2,172.00 10,908.01 265.00 $ 10,643.01
10/31 balance per books $8,736.01
(b) Oct. 31 Cash ............................................................................... Accounts Payable .................................................. (To correct recording error on check No. 18)
72.00
31 Cash ............................................................................... Notes Receivable................................................... Interest Revenue ................................................... (To record collection of note and interest)
2,100.00
31 Miscellaneous Expense .................................................. Cash ...................................................................... (To record bank service charge for the month of October)
35.00
31 Accounts Receivable—S. Long ...................................... Cash ...................................................................... (To record NSF check)
230.00
For Instructor Use Only
72.00
2,040.00 60.00
35.00
230.00
Fraud, Internal Control, and Cash
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Ex. 208 Riley Company received a notice with its bank statement that the bank had collected a note receivable for ₤8,000 plus ₤400 of interest. The bank had credited these amounts to Riley's account less a collection fee of ₤10. Riley Company had already accrued the interest for this note on its books. (a)
How will these items affect Riley Company's bank reconciliation?
(b)
Prepare the journal entry that Riley Company will make to record this information on its books.
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208 (a)
(5 min.)
Riley Company must add the amount of the note plus interest less the collection charge to its cash balance per books on the bank reconciliation. Add: Collection of note receivable ₤8,390
(b)
Cash ............................................................................................. Miscellaneous Expense ................................................................ Note Receivable ................................................................... Interest Receivable ..............................................................
8,390 10 8,000 400
Ex. 209 The cash records of Morris Company show the following: 1. The June 30 bank reconciliation indicated that deposits in transit totaled $390. During July the general ledger account Cash shows deposits of $9,900, but the bank statement indicates that only $9,340 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $800. During the month of July, Morris Company books show that $11,670 of checks were issued, yet the bank statement showed that $11,200 of checks cleared the bank in July. There were no bank debit or credit memoranda and no errors were made by either the bank or Morris Company. Answer the following questions: (a) What were the deposits in transit at July 31? (b) What were the outstanding checks at July 31? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 209 (a)
(10 min.)
Deposits in Transit: Deposits per books in July ............................................. Deposits per the bank in July ......................................... Less: June 30 deposits in transit .................................... July receipts deposited in July........................................ Deposits in transit, July 31 .............................................
(b)
$ 9,900 $ 9,340 390 $
8,950 950
Outstanding Checks: Checks per books in July ............................................... Checks clearing the bank in July .................................... Less: Outstanding checks, June 30 .............................. July checks clearing in July ............................................ Outstanding checks, July 31 ..........................................
$11,670 $11,200 800 10,400 $ 1,270
Ex. 210 Indicate how each of the following items would be shown on a bank reconciliation. 1. 2. 3. 4. 5. 6.
Bank error (The bank charged our account with another company's check) Check printing charge Deposits in transit Note collected by the bank NSF checks Outstanding checks
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 210 1. 2. 3. 4. 5. 6.
(7 min.)
Added to balance per bank Deducted from balance per books Added to balance per bank Added to balance per books Deducted from balance per books Deducted from balance per bank
For Instructor Use Only
Fraud, Internal Control, and Cash
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Ex. 211 The cash records of Sanders Company show the following: 1. In September, deposits per the bank statement totaled €39,600; deposits per books €37,000; and deposits in transit at September 30 were €2,500. 2. In September, cash disbursements per books were €35,500; checks clearing the bank were €37,800; and outstanding checks at September 30 were €4,500. There were no bank debit or credit memoranda and no errors were made by either the bank or Sanders Company. Answer the following questions: (a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 211 (a)
(10 min.)
Deposits in Transit: Deposits per bank statement in September ................ Add: Deposits in transit, September 30 ...................... Total deposits to be accounted for .............................. Less: Deposits per books ............................................ Deposits in transit, August 31 .....................................
(b)
€39,600 2,500 42,100 37,000 € 5,100
Outstanding Checks: Checks clearing the bank in September ..................... Add: Outstanding checks, September 30 ................... Total checks to be accounted for ................................ Less: Cash disbursements per books ......................... Outstanding checks, August 31 ..................................
For Instructor Use Only
€37,800 4,500 42,300 35,500 € 6,800
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 212 Listed below are items that may be useful in preparing the March 2020, bank reconciliation for Grider Machine Works. Using the following code, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process. Code A B C D E
Located or Treated Add to the cash balance per books Deduct from the cash balance per books Add to the cash balance per bank Deduct from the cash balance per bank Does not affect the bank reconciliation
____
1. Included with the bank statement materials was a check from Bob Simpson for $50 stamped "account closed."
____
2. A personal deposit by Jim Grider to his personal account in the amount of $300 for dividends on his General Electric ordinary shares was credited to the company account.
____
3. The bank statement included a debit memorandum for $27 for two books of blank checks for Grider Machine Works.
____
4. The bank statement contains a credit memorandum for $15 interest on the average checking account balance.
____
5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings.
____
6. Two checks totaling $316, which were outstanding at the end of February, cleared in March and were returned with the March statement.
____
7. The bank statement included a credit memorandum dated March 28, 2020, for $30 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.
____
8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369, did not clear the bank during March.
____
9. On March 24, 2020, Grider Machine Works delivered to the bank for collection a $5,000, 3-month note from Don Decker. A credit memorandum dated March 29, 2020, indicated the collection of the note and $100 of interest.
____ 10. The bank statement included a debit memorandum for $20 for the collection service on the above note and interest. Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash Solution 212 1. 2. 3. 4. 5.
B D B A C
7 - 59
(10 min.) 6. 7. 8. 9. 10.
E A D A B
Ex. 213 The following information was used to prepare the March 2020, bank reconciliation for Grider Machine Works. Identify the items that require adjustment to the cash balance per books and prepare the appropriate adjusting entries. 1. Included with the bank statement materials was a check from Bob Simpson for $50 stamped "NSF." 2. A personal deposit by Jim Grider to his personal account in the amount of $300 for dividends on his General Electric ordinary shares was credited to the company account. 3. The bank statement included a debit memorandum for $27 for two books of blank checks for Grider Machine Works. 4. The bank statement contains a credit memorandum for $15 interest on the average checking account balance. 5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included in the bank statement postings. 6. Two checks totaling $316, which were outstanding at the end of February, cleared in March and were returned with the March statement. 7. The bank statement included a credit memorandum dated March 28, 2020, for $30 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns. 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369, did not clear the bank during March. 9. On March 24, 2020, Grider Machine Works delivered to the bank for collection a $5,000, 3-month note from Don Decker. A credit memorandum dated March 29, 2020, indicated the collection of the note and $100 of interest. 10. The bank statement included a debit memorandum for $20 for the collection service on the above note and interest. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 213 Item #1 Item #3 Item #4
(20 min.)
Accounts Receivable............................................................ Cash ............................................................................
50
Miscellaneous Expense ....................................................... Cash ............................................................................
27
Cash ..................................................................................... Interest Revenue .........................................................
15
For Instructor Use Only
50 27 15
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 213 Item #7 Item #9
Item #10
(Cont.)
Cash ..................................................................................... Interest Revenue .........................................................
30
Cash ..................................................................................... Note Receivable .......................................................... Interest Revenue .........................................................
5,100
Miscellaneous Expense ........................................................ Cash ............................................................................
20
30 5,000 100 20
Ex. 214 Compute Whyte Company’s adjusted cash balance per books based on the following information: Beginning cash balance per books Deposit in transit Check printing charge Note collected by bank for Whyte
$4,500 800 20 1,500
Ans: N/A, LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 214
(5 min.)
Beginning cash balance per books Add: Collection of note Less: Check printing charge Adjusted cash balance per books
$4,500 1,500 6,000 20 $5,980
COMPLETION STATEMENTS 215. Internal control consists of the related methods and measures adopted to ____________ its assets, enhance the ______________ of its records and ensure______________ with laws and regulations. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
216. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
217. The ______________ of an asset should not have access to the accounting records of that asset. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
For Instructor Use Only
Fraud, Internal Control, and Cash
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218. Employees of a company who evaluate the effectiveness of the company's system of internal controls on a year-round basis are called ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
219. Using _______________ documents is a control measure which helps in accounting for all documents in a series and also prevents a document from being recorded more than once. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
220. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
221. Two limitations of systems of internal control are the concept of ______________ and the ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
222. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
223. A voucher is recorded in the ________________ and filed according to the date on which it is to be paid. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
224. A __________________ fund is used to pay relatively small expenditures. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
225. A debit memorandum issued by the bank ______________ the cash balance in the depositor's account. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
226. There are three parties to a check: (1)_______________, (2)______________, and the (3)______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
227. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
228. The difference between the cash in bank balance shown on the company's books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
229. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
230. A check correctly written for $270 was incorrectly entered in the cash payments journal for $720. In preparing a bank reconciliation, $_____________ must be ______________ the cash balance per ______________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Answers to Completion Statements 215. 216. 217. 218. 219. 220. 221. 222.
safeguard, reliability, compliance segregation of duties custodian internal auditors prenumbered bonded reasonable assurance, human element check, cash
223. 224. 225. 226. 227. 228. 229. 230.
voucher register petty cash reduces maker, payer, payee electronic funds transfer (EFT) time lags, errors deducted, bank $450, added to, books
MATCHING 231. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Prenumbered documents Custody of an asset should be kept separate from the record-keeping for that asset Cash registers, garment sensors and burglar alarms are examples Bonding employees Collusion Cash
G. H. I. J. K. L. M. N. O.
Bank statement Payee Maker Canceled checks NSF checks Outstanding checks Petty cash receipt Cash equivalents Voucher system
____
1. Segregation of duties.
____
2. One to whom a check is payable.
____
3. Two or more employees circumventing prescribed procedures.
____
4. Prevent a transaction from being recorded more than once.
____
5. Checks which have been returned by the maker's bank for lack of funds.
____
6. Checks which have been paid by the depositor's bank.
____
7. Shows the depositor's bank transactions and balances.
____
8. Anything that a bank will accept for deposit.
For Instructor Use Only
Fraud, Internal Control, and Cash Matching 231. ____
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(Cont.)
9. Physical controls.
____ 10. One who issues a check. ____ 11. Insurance protection against misappropriation of assets. ____ 12. An extensive network of approvals by authorized individuals. ____ 13. Document indicating the purpose of a petty cash expenditure. ____ 14. Issued checks that have not been paid by the bank. ____ 15. Highly liquid investments. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Answers to Matching 1. 2. 3. 4. 5.
B H E A K
6. 7. 8. 9. 10.
J G F C I
11. 12. 13. 14. 15.
D O M L N
SHORT-ANSWER ESSAY QUESTIONS S-A E 232 Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 232 The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money. S-A E 233 Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business, affect the implementation of a system of internal controls. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 233 The implementation of a system of internal controls is affected by cost benefit considerations, the human element, and the size of the business. A company's system of internal control can provide reasonable assurance, but not absolute assurance, that assets are properly safeguarded and that the accounting records are reliable. The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. A very costly set of safeguards may produce something approaching absolute assurance, but the value of the benefits received would not come close to outweighing the costs. The human element can cause a good system of internal control to become ineffective due to employee fatigue, carelessness, or indifference. Additionally, collusion between two or more employees to circumvent prescribed controls may significantly impair the effectiveness of the system. The size of a business impacts internal control because a smaller business may not have the necessary resources available to affect the implementation of desirable controls. S-A E 234 (a) Identify the three activities that pertain to a petty cash fund, and indicate an internal control principle that is applicable to each activity. (b) When are journal entries required in the operation of a petty cash fund? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 234 The activities in a petty cash system and the related principles are: (a) (1)
Establishing the fund.
*
(2)
Making payments from the fund.
*
(3)
Replenishing the fund.
*
Establishment of responsibility for custody of fund. Documentation procedures because the custodian must use a prenumbered petty cash receipt. Independent internal verification because the request for replenishment must be approved before the check is written.
(b) Journal entries are required for a petty cash fund when it is established and replenished. Entries are also required when the size of the fund is increased or decreased. S-A E 235 The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
For Instructor Use Only
Fraud, Internal Control, and Cash
7 - 65
Solution 235 The cash balance per books will not agree with the cash balance shown on the bank statement due to time lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the company records it (outstanding checks, deposits in transit) or the company records a transaction in a period later than the bank records it (NSF check, collection of a note, etc.). A common error is transposition of amounts in the recording process. S-A E 236
(Ethics)
Moyer Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company's management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them. Required: "Internal controls exist because most people can't be trusted." Is this true? Explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 236 Internal controls exist, not because most people can't be trusted, but to protect the company's assets from those few who can't be trusted. If it were a perfect world, and everyone could be trusted, internal controls would not be needed. However, it does not follow that internal controls indicate the opposite. It is true that anyone is capable of practically any action, if motivation and opportunity are both present. Since it is extremely difficult to measure motivation to directly or indirectly harm the company, let alone to monitor changes in motivation, a company's best recourse is to prevent opportunity. Rather than feel threatened by internal control measures, honest employees should feel grateful. When responsibility for all activities is clearly defined and when access to company assets is carefully controlled, the honest employees can demonstrate their honesty. When all employees are considered to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one among them is dishonest. S-A E 237
(Communication)
Medaid is a medical office management franchise. There are currently twenty-five medical offices managed by a Medaid franchisee. One of the services provided to franchisees is assistance in training various staff members. Medaid is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls. Required: Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
For Instructor Use Only
7 - 66
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 237 All the controls discussed in this manual may seem unnecessary to you. It may also seem that management trusts no one. However, these practices and procedures actually benefit you, the employee. First, internal control policies clearly outline who is to be responsible for various activities, such as making the daily deposit of cash in the bank. If a problem arises regarding a deposit, it is very clear to whom the company should turn to resolve the problem. If correct procedures were not followed, blame is not placed on all employees. Only those who did not follow correct procedures are held accountable for their actions. Also, strong internal controls discourage many opportunistic people, who find such opportunities to harm the company are extremely limited. Finally, all these systems, practices, and procedures result in a well-managed company that is less likely to suffer unnecessary losses, and a much better place for you to work and build a career.
GAAP QUESTIONS 1. Which of the following is the correct accounting under GAAP for cash? a. Cash on hand is not reported on the statement of financial position as Cash. b. Restricted cash funds cannot be reported as a current asset. c. Restricted cash funds may be reported as a current or non-current asset depending on the circumstances. d. Cash cannot be combined with cash equivalents. Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
2. The Sarbanes-Oxley Act applies to a. all European companies listed on European exchanges. b. all U.S. companies listed on U.S. exchanges. c. all companies that list shares on any securities exchange in any country. d. all U.S. companies and all European companies. Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
3. High-quality accounting requires both high-quality accounting standards and a. the development of new principles of internal control activities. b. government intervention to ensure that the public interest is protected. c. high-quality auditing standards. d. a reconsideration of SOX to make it less onerous. Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
4. Cash equivalents under GAAP a. may be required to be reported separately from cash in the future. b. are significantly different than the cash equivalents discussed in the textbook. c. are generally disclosed separately from cash. d. None of these answer choices are correct. Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
CHAPTER 8 ACCOUNTING FOR RECEIVABLES CHAPTER LEARNING OBJECTIVES 1. Explain how companies recognize accounts. Receivables are frequently classified as (1) accounts receivable, (2) notes receivable, and (3) other receivables. Accounts receivable are amounts customers owe on account. Notes receivable are claims for which lenders issue formal instruments of credit as proof of debt. Other receivables include non-trade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. Companies record accounts receivable when they provide a service on account or at the point-of-sale of merchandise on account. Accounts receivable are reduced by sales returns and allowances. Cash discounts reduce the amount received on accounts receivable. When interest is charged on a past due receivable, the company adds this interest to the accounts receivable balance and recognizes it as interest revenue. 2. Describe how companies value accounts receivable and record their disposition. There are two methods of accounting for uncollectible accounts: the allowance method and the direct write-off method. Companies use the percentage-of-receivables basis to estimate uncollectible accounts using the allowance method. The percentage-of-receivables basis emphasizes the cash realizable value of the accounts receivable. An aging schedule is often used with this basis. When a company collects an account receivable, it credits Accounts Receivable. When a company sells (factors) an account receivable, a service charge expense reduces the amount received. 3. Explain how companies recognize, value, and dispose of notes receivable. For a note stated in months, the maturity date is found by counting the months from the date of issue. For a note stated in days, the number of days is counted, omitting the issue date and counting the due date. The formula for computing interest is: Face value × Interest rate × Time. Companies record notes receivable at face value. In some cases, it is necessary to accrue interest prior to maturity. In this case, companies debit Interest Receivable and credit Interest Revenue. Notes can be held to maturity. At that time the face value plus accrued interest is due, and the note is removed from the accounts. In many cases, the holder of the note speeds up the conversion by selling the receivable to another party (a factor). In some situations, the maker of the note dishonors the note (defaults), in which case the company transfers the note and accrued interest to an account receivable or writes off the note. 4. Describe the statement presentation and analysis of receivables. Companies should identify in the statement of financial position or in the notes to the financial statements each major type of receivable. Short-term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses; interest revenue appears under other income and expense in the non-operating activities section of the statement. Managers and investors evaluate accounts receivable for liquidity by computing a turnover ratio and an average collection period. As with accounts receivable, companies report notes receivable at their cash (net) realizable value. The notes receivable allowance account is Allowance for Doubtful Accounts. The computation and estimations involved in valuing notes receivable at cash realizable value, and in recording the proper amount of bad debt expense and related allowance, are similar to those for accounts receivable.
8-2
Test Bank for Financial Accounting, IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
Trade receivables occur when two companies trade or exchange notes receivables.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2.
Other receivables include nontrade receivables such as loans to company officers.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
3.
Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
4.
Other receivables, such as income taxes refundable and advances to employees, are reported as “accounts receivable” on the statement of financial position.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
5.
Recognizing accounts receivable for a sale to a customer involves debiting accounts receivable, an income statement account, and crediting sales revenue a statement of financial position account.
Ans: F, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
6.
Receivables are valued and reported in the statement of financial position at their gross amount less any sales returns and allowances and less any cash discounts.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
The three primary accounting problems with accounts receivable are: (1) recognizing, (2) depreciating, and (3) disposing.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
8.
If a retailer assesses a finance charge on the amount owed by a customer, Accounts Receivable is debited for the amount of the interest.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
9.
If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves statement of financial position accounts.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
10.
The percentage of receivables basis of estimating expected uncollectible accounts emphasizes income statement relationships.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11.
Under the direct write-off method, no attempt is made to match bad debts expense to sales revenues in the same accounting period.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 12.
8-3
Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13.
Allowance for Doubtful Accounts is a contra asset account.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
14.
Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
IFRS require that the direct write-off method be used for financial reporting purposes if it is also used for tax purposes.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
16.
Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
17.
Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Accounts Receivable.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
19.
An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
21.
Accounts receivable are reported in the statement of financial position at their cash realizable value which is accounts receivable less the allowance for doubtful accounts.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
22.
The allowance for doubtful accounts is closed at the end of the fiscal year and is accomplished by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
8-4 23.
Test Bank for Financial Accounting, IFRS Edition, 4e IFRS requires the allowance method of accounting for bad debts when bad debts are immaterial in amount.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
Under the allowance method, companies debit every bad debt write-off to Allowance for Doubtful Accounts rather than to Bad Debts Expense.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
Under the allowance method, the recovery of bad debts affects both the income statement and the statement of financial position.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
26
The percentage of receivables basis of estimating bad debts emphasizes statement of financial position relationships and cash realizable value of accounts receivable.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
27.
When using the percentage of receivables basis of estimating bad debts, the amount of the bad debt adjusting entry will impact statement of financial position accounts only.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
28.
When using the percentage of receivables basis of estimating bad debts, the company disregards the existing balance in the statement of financial position account Allowance for Doubtful Accounts.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
29.
When using the percentage of receivables basis of estimating bad debts, the company can totally disregard cash realizable value of accounts receivable
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
30.
Notes receivable are reported on the statement of financial position following accounts receivable because notes receivable give the payee a weaker legal claim to assets than accounts receivable.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
31.
Sales resulting from the use of Visa and MasterCard are considered credit sales by the retailer.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
A factor purchases receivables from businesses for a fee and collects the remittances directly from customers.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
33.
A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables
For Instructor Use Only
8-5
8-6 34.
Test Bank for Financial Accounting, IFRS Edition, 4e Receivables may be sold because they may be the only reasonable source of cash to the seller.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
35.
If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
36.
A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
The maturity date of a 1-month note receivable dated June 30 is July 30.
Ans: T, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
39.
On the date of issue, a note receivable is reported on the statement of financial position at its maturity value.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
40.
On the statement of financial position, notes receivable are valued at their cash (net) realizable value, identical to how accounts receivable are valued.
Ans: T, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
41.
The value associated with a dishonored note receivable is removed from the statement of financial position since the note is no longer negotiable.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
42.
Short-term receivables appear in the current assets section of the statement of financial position above short-term investments.
Ans: T, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
43.
In the statement of financial position, companies need only report the cash (net) realizable value of accounts and notes receivable.
Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
44.
The accounts receivable turnover is computed by using two accounts reported on the statement of financial position, accounts receivable and allowance for doubtful accounts.
Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
45.
U.S. GAAP accounts for short-term receivables at amortized cost, adjusted for allowances for doubtful accounts, whereas IFRS requires fair values for receivables.
For Instructor Use Only
Accounting for Receivables
8-7
Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
46.
The criteria used to derecognize a receivable under IFRS uses a combination of an approach focused on risks and rewards and loss of control.
Ans: T, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
47.
The accounts receivable turnover is computed by dividing total sales by the average net receivables during the year.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the financial statements.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
Notes receivable represent claims for which formal instruments of credit are issued as evidence of debt.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
50.
Two methods used in accounting for uncollectible accounts are (1) the direct write-off method (2) the allowance method.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
51.
The account Allowance for Doubtful Accounts is closed out at the end of the year.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
In order to accelerate the receipt of cash from receivables, owners may sell the receivables to another company for cash.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
53.
When counting the exact number of days to determine the maturity date of a note, the date of issue is included but the due date is omitted.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
54.
A note is dishonored when it is not fully paid at maturity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
55.
Short-term receivables are reported in the current assets section after short-term investments.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
8-8
Test Bank for Financial Accounting, IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 56.
Claims for which formal instruments of credit are issued as proof of the debt are a. accounts receivable. b. interest receivable. c. notes receivable. d. other receivables.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
Interest is usually associated with a. accounts receivable. b. notes receivable. c. doubtful accounts. d. bad debts.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
58.
The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. notes receivable. c. accounts receivable. d. income tax receivable.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
59.
Which of the following receivables would not be classified as an "other receivable"? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
60.
Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. non-trade receivables. c. trade receivables. d. merchandise receivables.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
61.
The term "receivables" refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Receivables 62.
8-9
Among the types of receivables reported on the statement of financial position, which of the following is considered the most significant claim held by a company? a. Others receivables (including loans to officers). b. Notes receivable. c. Accounts receivable. d. Advances to employees.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Caps On Company manufactures sporting goods and clothing. Caps On sold merchandise to Pro Sports Company on June 5, 2020 for $3,000, terms 2/10, n/30. On June 9, 2020 Pro Sports returns merchandise worth $200 to Caps On. On June 14, 2020 Caps On receives payment in full from Pro Sports. Which of the following is true regarding the transaction on June 14, 2020? a. Caps On receives $2,800 from Pro Sports. b. Caps On receives $2,744 from Pro Sports. c. Pro Sports will pay $2,940 to Caps On. d. All of these answer choices are correct.
Ans: B, LO: 1, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
The entry to record merchandise returned to the seller includes a a. debit to Sales Returns and Allowances. b. debit to Sales Revenue. c. credit to Inventory. d. debit to either Sales Returns and Allowances or Sales Revenue.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
65.
Which one of the following is not a primary problem associated with accounts receivable? a. Depreciating accounts receivable b. Recognizing accounts receivable c. Valuing accounts receivable d. Disposing of accounts receivable
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
Trade accounts receivable are valued and reported on the statement of financial position a. in the investment section. b. at gross amounts less sales returns and allowances. c. at cash realizable value. d. only if they are not past due.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing. b. depreciating, valuing, and collecting. c. recognizing, valuing, and disposing. d. accrual, bad debts, and disposing.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
8 - 10 68.
Test Bank for Financial Accounting, IFRS Edition, 4e Which of the following would require a compound journal entry? a. To record merchandise returned that was previously purchased on account. b. To record sales on account. c. To record purchases of inventory when a discount is offered for prompt payment. d. To record collection of accounts receivable when a cash discount is taken.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
69.
The adjusting entry a retailer makes to record interest on customer amounts due includes a debit to a. Notes Receivable. b. Interest Receivable. c. Accounts Receivable. d. Interest Revenue.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
70.
A customer charges a treadmill at Mike's Sport Shop. The price is €800 and the financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account. What is the amount of the finance charge? a. €24 b. €6 c. €72 d. €2
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
A customer charges a treadmill at Mike's Sport Shop. The price is €2,000 and the financing charge is 9% per annum if the bill is not paid in 30 days. The customer fails to pay the bill within 30 days and a finance charge is added to the customer's account. The accounts affected by the journal entry made by Mike's Sport Shop to record the finance charge are a. Accounts Receivable Cash b. Cash Finance Receivable c. Accounts Receivable Interest Payable d. Accounts Receivable Interest Revenue
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
72.
The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Receivables 73.
8 - 11
If a department store fails to make the entry to accrue the finance charges due from customers, a. accounts receivable will be overstated. b. interest revenue will be understated. c. interest expense will be overstated. d. interest expense will be understated.
Ans: B, LO: 1, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
74.
Under the allowance method, writing off an uncollectible account a. affects only statement of financial position accounts. b. affects both statement of financial position and income statement accounts. c. affects only income statement accounts. d. is not acceptable practice.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
75.
When a company determines a particular account to be uncollectible, it charges the loss to Bad Debt Expense under a. the allowance method. b. the direct writeoff method. c. both the allowance method and the direct write–off method. d. None of these answer choices are correct.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
76.
If a company fails to record estimated bad debt expense, a. cash realizable value is understated. b. expenses are understated. c. revenues are understated. d. receivables are understated.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
77.
Wright sells softball equipment. On November 14, they shipped $2,000 worth of softball uniforms to Paola Middle School, terms 2/10, n/30. On November 21, they received an order from Paola Middle School for $1,500 worth of custom printed bats to be produced in December. On November 30, Paola Middle School returned $250 of defective merchandise. Wright has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the statement of financial position as of November 30? a. $3,500 b. $3,250 c. $2,000 d. $1,750
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
8 - 12 78.
Test Bank for Financial Accounting, IFRS Edition, 4e Fowler Company on July 15 sells merchandise on account to Coffey Co. for $3,000, terms 2/10, n/30. On July 20, Coffey Co. returns merchandise worth $1,200 to Fowler Company. On July 24, payment is received from Coffey Co. for the balance due. What is the amount of cash received? a. $1,800 b. $1,764 c. $1,740 d. $3,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
79.
The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts expense in the a. direct write-off method. b. percentage of receivables basis. c. percentage of receivables and direct write-off method. d. None of these choices are correct.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
80.
When the allowance method is used to account for uncollectible accounts, Bad Debt Expense is debited when a. a sale is made. b. an account becomes bad and is written off. c. management estimates the amount of uncollectible accounts. d. a customer's account becomes past-due.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
When an account becomes uncollectible and must be written off, a. Allowance for Doubtful Accounts should be credited. b. Accounts Receivable should be credited. c. Bad Debt Expense should be credited. d. Sales should be debited.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
82.
The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase income in the period it is collected. b. will decrease income in the period it is collected. c. requires a correcting entry for the period in which the account was written off. d. does not affect income in the period it is collected.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
83.
Cash realizable value is the difference between the a. account receivable balance and the allowance account balance. b. Net sales and the allowance account balance. c. accounts receivable balance and bad debt expense. d. Net sales and bad debt expense.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Receivables 84.
8 - 13
An aging of a company's accounts receivable indicates that $7,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,100 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $7,500. b. debit to Allowance for Doubtful Accounts for $6,400. c. debit to Bad Debt Expense for $6,400. d. credit to Allowance for Doubtful Accounts for $7,500.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
A debit balance in the Allowance for Doubtful Accounts a. is the normal balance for that account. b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. c. indicates that actual bad debt write-offs have been less than what was estimated. d. cannot occur if the percentage of receivables method of estimating bad debts is used.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
86.
Under the direct write-off method of accounting for uncollectible accounts, Bad Debts Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
87.
An alternative name for Bad Debt Expense is a. Deadbeat Expense. b. Uncollectible Accounts Expense. c. Collection Expense. d. Credit Loss Expense.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
88.
A reasonable amount of uncollectible accounts is evidence a. that the credit policy is too strict. b. that the credit policy is too lenient. c. of a sound credit policy. d. of poor judgments on the part of the credit manager.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
89.
Bad Debt Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
8 - 14 90.
Test Bank for Financial Accounting, IFRS Edition, 4e The best managed companies will have a. no uncollectible accounts. b. a very strict credit policy. c. a very lenient credit policy. d. some accounts that will prove to be uncollectible.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
91.
Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
92.
The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales. b. bad debts are significant in amount. c. the company is a retailer. d. the company charges interest on accounts receivable.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
93.
Bad Debt Expense is sometimes called a. Allowance for Doubtful Accounts. b. Loss from Default. c. Uncollectible Accounts Expense. d. None of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
94.
When the allowance method of accounting for uncollectible accounts is used, Bad Debts Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
95.
The net amount expected to be received in cash from receivables is called the a. gross realizable value. b. gross cash value. c. allowance value. d. cash(net) realizable value.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 96.
8 - 15
To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. b. debit to Bad Debt Expense 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.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
97.
Under the allowance method of accounting for uncollectible accounts, a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off. b. Bad Debt Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the statement of financial position is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
98.
Allowance for Doubtful Accounts on the statement of financial position a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is offset against accounts receivable.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. total accounts receivable will decrease. c. allowance account will increase. d. total accounts receivable will stay the same.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
100.
If an account is collected after having been previously written off, a. the allowance account should be debited. b. only the control account needs to be credited. c. both income statement and statement of financial position accounts will be affected. d. there will be both a debit and a credit to accounts receivable.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
101.
When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
8 - 16 102.
Test Bank for Financial Accounting, IFRS Edition, 4e The preferred method of accounting for uncollectible accounts is the a. actual method. b. Net realizable method. c. direct write-off method. d. allowance method.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
103.
The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value. b. the relationship between accounts receivable and bad debt expense. c. income statement relationships. d. the relationship between sales and accounts receivable.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
Hahn Company uses the percentage of receivables method for recording bad debt expense. Year-end accounts receivable are $1,500,000, and the allowance account has a $2,000 debit balance Management estimates that 1% accounts receivable will be uncollectible. What adjusting entry will Hahn Company make to record the bad debt expense? a. Bad Debt Expense ......................................................... 13,000 Allowance for Doubtful Accounts .......................... 13,000 b. Bad Debt Expense ......................................................... 17,000 Allowance for Doubtful Accounts .......................... 17,000 c. Bad Debt Expense ......................................................... 17,000 Accounts Receivable ............................................ 17,000 d. Bad Debt Expense ......................................................... 15,000 Accounts Receivable ............................................ 15,000
Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
105.
The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record estimated uncollectible accounts a. is relevant when using the percentage of receivables basis. b. is relevant when using the direct write-off method. c. is relevant to both bases methods of adjusting for uncollectible accounts. d. will never show a debit balance at this stage in the accounting cycle.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
106.
The direct write-off method of accounting for bad debts a. uses an allowance account. b. uses a contra-asset account. c. does not require estimates of bad debt losses. d. is the preferred method under IFRS.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 107.
8 - 17
Under the direct write-off method of accounting for uncollectible accounts a. the allowance account is increased for the actual amount of bad debt at the time of write-off. b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. c. balance sheet relationships are emphasized. d. bad debt expense is always recorded in the period in which the revenue was recorded.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
108.
An aging of a company's accounts receivable indicates that $10,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $10,000. b. debit to Allowance for Doubtful Accounts for $7,600. c. debit to Bad Debt Expense for $7,600. d. credit to Allowance for Doubtful Accounts for $10,000.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
109.
An aging of a company's accounts receivable indicates that $21,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $6,000 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $21,000. b. debit to Bad Debt Expense for $27,000. c. debit to Bad Debt Expense for $15,000. d. credit to Allowance for Doubtful Accounts for $6,000.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
Using the percentage of receivables basis for recording bad debts expense, estimated uncollectible accounts are ¥500,000. If the balance of the Allowance for Doubtful Accounts is ¥120,000 debit before adjustment, what is the amount of bad debts expense for that period? a. ¥500,000 b. ¥120,000 c. ¥620,000 d. ¥380,000
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
Using the percentage of receivables basis for recording bad debts expense, estimated uncollectible accounts are ¥500,000. If the balance of the Allowance for Doubtful Accounts is ¥100,000 credit before adjustment, what is the amount of bad debts expense for that period? a. ¥500,000 b. ¥400,000 c. ¥600,000 d. ¥100,000
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
8 - 18 112.
Test Bank for Financial Accounting, IFRS Edition, 4e Using the percentage of receivables basis for recording bad debts expense, estimated uncollectible accounts are ¥500,000. If the balance of the Allowance for Doubtful Accounts is ¥100,000 debit before adjustment, what is the balance after adjustment? a. ¥500,000 b. ¥600,000 c. ¥400,000 d. ¥100,000
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
Using the allowance method, the uncollectible accounts for the year is estimated to be $84,000. If the balance for the Allowance for Doubtful Accounts is a $21,000 credit before adjustment, what is the amount of bad debts expense for the period? a. $21,000 b. $63,000 c. $84,000 d. $105,000
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
114.
Using the allowance method, the uncollectible accounts for the year is estimated to be $84,000. If the balance for the Allowance for Doubtful Accounts is a $21,000 debit before adjustment, what is the amount of bad debts expense for the period? a. $21,000 b. $63,000 c. $84,000 d. $105,000
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
In reviewing the accounts receivable, the cash realizable value is $33,000 before the write-off of a $2,000 account. What is the cash realizable value after the write-off? a. $33,000 b. $2,000 c. $35,000 d. $31,000
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116.
In 2020, the Dugan Co. had net credit sales of $1,500,000. On January 1, 2020, Allowance for Doubtful Accounts had a credit balance of $32,000. During 2020, $60,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivable basis). If the accounts receivable balance at December 31 was $400,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2020? a. $40,000 b. $68,000 c. $72,000 d. $60,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Receivables 117.
8 - 19
A company has an accounts receivable balance of $800,000 at year end and it estimates that uncollectible accounts will be 2% of accounts receivable If Allowance for Doubtful Accounts has a credit balance of $1,000 prior to adjustment, its balance after adjustment will be a credit of a. $17,000. b. $16,000. c. $15,980. d. $15,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
118.
In 2020, Garrison Company had net credit sales of $2,250,000. On January 1, 2020, Allowance for Doubtful Accounts had a credit balance of $54,000. During 2020, $90,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $700,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2020? a. $60,000 b. $225,000 c. $106,000 d. $90,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
119.
Using the following information: Accounts receivable Allowance for doubtful accounts Cash realizable value
12/31/19 €2,100,000 (180,000) €1,920,000
During 2020, sales on account were €580,000 and collections on account were €344,000. Also during 2020, the company wrote off €32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at €236,000. The change in the cash realizable value from the balance at 12/31/19 to 12/31/20 was a a. €268,000 increase. b. €236,000 increase. c. €148,000 increase. d. €204,000 increase. Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
8 - 20 120.
Test Bank for Financial Accounting, IFRS Edition, 4e Using the following information: Accounts receivable Allowance for doubtful accounts Cash realizable value
12/31/19 €2,100,000 (180,000) €1,920,000
During 2020, sales on account were €580,000 and collections on account were €344,000. Also during 2020, the company wrote off €32,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at €236,000. Bad debts expense for 2020 is a. €88,000. b. €56,000. c. €236,000 d. €4,000. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
121.
During 2020, Hitchcock Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,850 which had been written off as uncollectible in 2019. As a result of these transactions, the change in the accounts receivable balance indicates a a. $402,150 increase. b. $192,000 increase. c. $186,150 increase. d. $408,000 increase.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
122.
Klosterman Corporation’s unadjusted trial balance includes the following balances (assume normal balances): Accounts Receivable Allowance for Doubtful Accounts
$373,000 5,325
Bad debts are estimated to be 3% of outstanding receivables. What amount of bad debts expense will the company record? a. $11,190 b. $5,865 c. $11,403 d. $10,977 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Receivables 123.
8 - 21
Black Company provides for bad debts expense at the rate of 2% of accounts receivable. The following data are available for 2020: Allowance for doubtful accounts, 1/1/20 (Cr.) ........................ Accounts written off as uncollectible during 2020 .................. Ending accounts receivable ...................................................
$ 21,000 13,000 3,500,000
The Allowance for Doubtful Accounts balance at December 31, 2020, should be a. $70,000 b. $78,000 c. $62,000 d. $13,000 Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
124.
In 2020, Freeze Company had credit sales of $1,800,000. On January 1, 2020, Allowance for Doubtful Accounts had a credit balance of $45,000. During 2020, $75,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance balance should be 10% of the accounts receivable balance. What should be the required adjustment to the Allowance for Doubtful Accounts at December 31, 2020 If the ending account receivable balance $480,000? a. $78,000 b. $75,000 c. $93,000 d. $48,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
125.
An analysis and aging of the accounts receivable of Downs Company at December 31 revealed the following data: Accounts Receivable ............................................................. Allowance for Doubtful Accounts per books before adjustment (Cr.) ....................................................... Amounts expected to become uncollectible...........................
₤980,000 100,000 109,000
The cash realizable value of the accounts receivable at December 31, after adjustment, is: a. ₤971,000 b. ₤880,000 c. ₤871,000 d. ₤771,000 Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
126.
Franks Company has a debit balance of $4,000 in its Allowance for Doubtful Accounts before any adjustments are made at the end of the year. Based on review and aging of its accounts receivable at the end of the year, Franks estimates that $80,000 of its receivables are uncollectible. The amount of bad debts expense which should be reported for the year is: a. $4,000 b. $76,000 c. $80,000 d. $84,000
For Instructor Use Only
8 - 22
Test Bank for Financial Accounting, IFRS Edition, 4e
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
127.
Which of the following methods is not acceptable for financial reporting purposes? a. Percentage of sales (emphasis on income statement). b. Percentage of receivables (emphasis on statement of financial position). c. Direct write-off. d. All of these answer choices are acceptable.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
128.
Which of the following is false regarding the Allowance for Doubtful Accounts? a. The Allowance for Doubtful Accounts is closed at the end of the fiscal year. b. Cash realizable value reduces receivables in the statement of financial position by the amount of estimated uncollectible receivables. c. Cash realizable value is also referred to as "amortized cost" by the International Accounting Standards Board. d. Cash realizable value is also referred to as "cash (net) realizable value.”
Ans: A, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
129.
Which of the following relationships best describes the percentage of receivables basis of valuing accounts receivable? a. Matching, emphasis on income statement relationships. b. Cash realizable value emphasis on income statement relationships. c. Matching, emphasis on statement of financial position relationships. d. Cash realizable value, emphasis on statement of financial position relationships.
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
130.
Which of the following transactions affects only statement of financial position accounts? a. Recovery of a bad debt using the allowance method. b. Recording bad debt expense using the allowance method. c. Writing off a bad debt using the direct write-off method. d. Recording bad debt expense using the percentage of receivables basis.
Ans: A, LO: 2, Bloom: K, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
131.
Which of the following statements is false regarding the different bases used for the allowance method? a. Three bases are generally accepted, the percentage of sales, the percentage of receivables and the direct write-off. b. Management can choose whichever basis it prefers. c. If management wishes to emphasize the cash realizable value of receivables it will select the percentage of receivables basis. d. The company must determine its past experience with bad debt losses regardless of which basis it selects.
Ans: A, LO: 2, Bloom: K, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Receivables 132.
8 - 23
The_______________ produces the better estimate of cash realizable value and reflects a statement of financial position viewpoint. a. Direct write-off method. b. Factoring of accounts receivable. c. Percentage of receivable basis. d. Expense recognition principle.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
133.
Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. At December 31, 2020, Gowns estimates total bad debts that will become uncollectible in the future as €6,608. The existing balance in the Allowance for Doubtful Accounts is a credit balance of €1,408. The Accounts Receivable balance at December 31, 2020 is €105,600. The amount of the bad debt adjusting entry at December 31, 2020 will impact the statement of financial position accounts by a. Increasing expenses by €6,608. b. Increasing the Allowance for Doubtful Accounts by €6,608. c. Increasing Accounts Receivable by €5,200. d. Increasing the Allowance for Doubtful Accounts by €5,200.
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
134.
Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. At December 31, 2020, Gowns estimates total bad debts that will become uncollectible in the future as €11,140. The existing balance in the Allowance for Doubtful Accounts is a credit balance of €2,640. The Accounts Receivable balance at December 31, 2020 is €198,000. The cash realizable value of Accounts Receivable reported on the statement of financial position at December 31, 2020 is a. €195,360. b. €209,140. c. €186,860. d. €189,500.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
135.
Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. At December 31, 2020, Gowns estimates total bad debts that will become uncollectible in the future as €11,140. The existing balance in the Allowance for Doubtful Accounts is a debit balance of €2,640. The Accounts Receivable balance at December 31, 2020 is €198,000. The amount of the bad debts adjusting entry at December 31, 2020 will impact the statement of financial position by a. Increasing expenses by €11,140. b. Increasing the Allowance for Doubtful Accounts by €13,780. c. Increasing the Allowance for Doubtful Accounts by €11,140. d. Increasing the Allowance for Doubtful Accounts by €8,500.
Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
8 - 24 136.
Test Bank for Financial Accounting, IFRS Edition, 4e Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. At December 31, 2020, Gowns estimates total bad debts that will become uncollectible in the future as €11,140. The existing balance in the Allowance for Doubtful Accounts is a debit balance of €2,640. The Accounts Receivable balance at December 31, 2020 is €198,000. The cash realizable value of Accounts Receivable reported on the statement of financial position at December 31, 2020 is a. €184,220. b. €209,140. c. €186,860. d. €189,500.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
137.
Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. For the year ended December 31, 2020, Gowns' total credit sales are €2,500,000. Management of the company estimates that 2% of receivables will become uncollectible. The existing balance in the Allowance for Doubtful Accounts is a debit balance of €3,000. The Accounts Receivable balance at December 31, 2020 is €440,000. The entry to record bad debt expense at December 31, 2020 will impact the statement of financial position by a. Increasing expenses by €8,800. b. Increasing the Allowance for Doubtful Accounts by €8,800. c. Increasing the Allowance for Doubtful Accounts by €11,800. d. Increasing the Allowance for Doubtful Accounts by €5,800.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
138.
Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. For the year ended December 31, 2020, Gowns' total credit sales are €2,500,000. Management of the company estimates that 2% of receivables will become uncollectible. The existing balance in the Allowances for Doubtful Accounts is a debit balance of €3,000. The Accounts Receivable balance at December 31, 2020 is €440,000. The cash realizable value of Accounts Receivable reported on the statement of financial position at December 31, 2020 is a. €434,200. b. €431,200. c. €428,200. d. €448,800.
Ans: B, SO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
139.
Gowns, Inc. uses the percentage of receivables basis to estimate its bad debts. For the year ended December 31, 2020, Gowns' total credit sales are €2,500,000. Management of the company estimates that 2% of receivables will become uncollectible. The existing balance in the Allowances for Doubtful Accounts is a credit balance of €3,000. The Accounts Receivable balance at December 31, 2020 is €440,000. The cash realizable value of Accounts Receivable reported on the statement of financial position at December 31, 2020 is a. €448,800. b. €434,200. c. €431,200. d. €428,200.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Receivables 140.
8 - 25
Miles to Go is a travel agency specializing in tours to Africa and Australia. Miles to Go has $2,000,000 in accounts receivable and factors these receivables with Fox Factors. The agreement with Fox calls for a service charge of 2% of the amount of receivables sold. The net effects on the statement of financial position for Miles to Go of factoring its receivables is a(n) a. Increase in assets of $40,000. b. Increase in assets of $1,960,000. c. Increase in equity of $1,960,000. d. Decrease in equity of $40,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: , Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
141.
Miles to Go is a travel agency specializing in tours to Africa and Australia. Miles to Go has $4,000,000 in accounts receivable. During 2020, Miles to Go enters into a factoring arrangement with Fox Factors to factor 75% of their receivables. The agreement with Fox calls for a services charge of 2% of the amount of receivables sold. The effects on the statement of financial position for Miles to Go of factoring its receivables includes a(n) a. Increase in cash of $2,940,000. b. Increase in assets of $4,000,000. c. Increase in cash of $3,920,000. d. Increase in equity of $80,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: , Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
142.
On October 1, 2020, Brosnan Company sells (factors) $800,000 of receivables to Nation Factors, Inc. Nation assesses a service charge of 3% of the amount of receivables sold. The journal entry to record the sale by Brosnan will include: a. a debit of $800,000 to Accounts Receivable. b. a credit of $824,000 to Cash. c. a debit of $824,000 to Cash. d. a debit of $24,000 to Service Charge Expense.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
143.
On March 1, 2020, Joe Miles purchased a suit at Calvin's Fine Apparel Store. The suit cost $400 and Joe used his Calvin credit card. Calvin charges 2% per month interest if payment on credit charges is not made within 30 days. On April 30, 2020, Joe had not yet made his payment. What entry should Calvin make on April 30th? a. Uncollectible Account ..................................................... 400 Accounts Receivable ............................................. 400 b. Bad Debt Expense ......................................................... 392 Interest Expense ............................................................ 8 Accounts Receivable ............................................. 400 c. Accounts Receivable...................................................... 408 Interest Revenue ................................................... 8 Sales Revenue ...................................................... 400 d. Accounts Receivable...................................................... 8 Interest Revenue ................................................... 8
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
8 - 26 144.
Test Bank for Financial Accounting, IFRS Edition, 4e Newland Retailers accepted $80,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Newland Retailers will include a credit to Sales Revenue of $80,000 and a debit(s) to a. Cash $76,800 and Service Charge Expense $3,200. b. Accounts Receivable $86,400 and Service Charge Expense $3,200. c. Cash $76,800 and Interest Expense $3,200. d. Accounts Receivable $80,000.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
145.
ABC Company accepted a national credit card for a €12,500 purchase. The cost of the goods sold is €10,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by €2,425 b. Increase by €2,500 c. Increase by €2,125 d. Increase by €12,125
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
146.
Major advantages of credit cards to the retailer include all of the following except the a. issuer does the credit investigation of customers. b. issuer undertakes the collection process. c. retailer receives more cash from the credit card issuer. d. All of these answer choices are correct.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
147.
The sale of receivables by a business a. indicates that the business is in financial difficulty. b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a factor. d. can be a quick way to generate cash for operating needs.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
148.
If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n) a. selling expense. b. interest expense. c. other expense. d. contra asset.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
149.
If a company sells its accounts receivables to a factor, a. the seller pays a commission to the factor. b. the factor pays a commission to the seller. c. there is a gain on the sale of the receivables. d. the seller defers recognition of sales revenue until the account is collected.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 150.
8 - 27
Retailers generally consider sales from the use of national credit card sales as a a. credit sale. b. collection of an accounts receivable. c. cash sale. d. collection of a note receivable.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
151.
Receivables might be sold to a. lengthen the cash-to-cash operating cycle. b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly. d. finance companies at an amount greater than cash realizable value.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
152.
A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables? a. The loss section of the income statement will increase each time receivables are sold. b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold. c. Selling expenses will increase each time accounts are sold. d. The other income and expense section of the income statement will increase each time accounts are sold.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
153.
Oliver Furniture factors $800,000 of receivables to Kwik Factors, Inc. Kwik Factors assesses a 2% service charge on the amount of receivables sold. Oliver Furniture factors its receivables regularly with Kwik Factors. What journal entry does Oliver make when factoring these receivables? a. Cash ............................................................................... 784,000 Loss on Sale of Receivables .......................................... 16,000 Accounts Receivable ............................................. 800,000 b. Cash ............................................................................... 784,000 Accounts Receivable ............................................. 784,000 c. Cash ............................................................................... 800,000 Accounts Receivable ............................................. 784,000 Gain on Sale of Receivables ................................. 16,000 d. Cash ............................................................................... 784,000 Service Charge Expense ............................................... 16,000 Accounts Receivable ............................................. 800,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
154.
When customers make purchases with a national credit card, the retailer a. is responsible for maintaining customer accounts. b. is not involved in the collection process. c. absorbs any losses from uncollectible accounts. d. receives cash equal to the full price of the merchandise sold from the credit card company.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
8 - 28
155.
Test Bank for Financial Accounting, IFRS Edition, 4e
The retailer considers Visa and MasterCard sales as a. cash sales. b. promissory sales. c. credit sales. d. contingent sales.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
156.
The basic issues in accounting for notes receivable include each of the following except a. analyzing notes receivable. b. disposing of notes receivable. c. recognizing notes receivable. d. valuing notes receivable.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
157.
A 60-day note receivable dated June 17 has a maturity date of a. August 17. b. August 16. c. August 15. d. August 14.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
158.
Assuming a 360-day year, the maturity value of a ¥1,500,000, 10%, 60-day note receivable dated July 3 is a. ¥1,500,000. b. ¥1,650,000. c. ¥1,515,000. d. ¥1,525,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
159.
A 90-day note dated April 14 has a maturity date of a. July 15. b. July 13. c. July 14. d. July 16.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
160.
A 30-day note dated May 14 has a maturity date of a. June 12. b. June 13. c. June 14. d. June 11.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 161.
8 - 29
A promissory note a. is not a formal credit instrument. b. may be used to settle an accounts receivable. c. has the party to whom the money is due as the maker. d. cannot be factored to another party.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
162.
Which of the following is not true regarding a promissory note? a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party. c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by name.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
163.
The two key parties to a promissory note are the a. maker and a bank. b. debtor and the payee. c. maker and the payee. d. sender and the receiver.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
164.
When calculating interest on a promissory note with the maturity date stated in terms of days, the a. maker pays more interest if 365 days are used instead of 360. b. maker pays the same interest regardless if 365 or 360 days are used. c. payee receives more interest if 360 days are used instead of 365. d. payee receives less interest if 360 days are used instead of 365.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
165.
Assuming a 360-day year, the maturity value of a $15,000, 9%, 60-day note receivable dated February 10th is a. $15,225. b. $15,113. c. $15,000. c. $16,350.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
166.
The interest on an $8,000, 7%, 1-year note receivable is a. $8,000. b. $560. c. $8,056. d. $8,560.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
8 - 30 167.
Test Bank for Financial Accounting, IFRS Edition, 4e The maturity value of a ¥1,200,000, 8%, 3-month note receivable is a. ¥1,224,000. b. ¥1,209,600. c. ¥1,296,000. d. ¥1,207,992.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
168.
Assuming a 360-day year, the interest on a $10,000, 6%, 60-day note receivable is a. $600. b. $100. c. $200. d. $300.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
169.
Assuming a 360-day year, the interest on a €20,000, 6%, 90-day note receivable is a. €1,200. b. €600. c. €300. d. €900.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
170
On November 1, Kinder Company received a $15,000, 10%, three-month note receivable. The cash to be received by Kinder Company when the note becomes due is: a. $15,000. b. $15,250. c. $15,375. d. $16,500.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
171.
On June 17, 2020, Pear, Inc. writes a 60-day, 6%, $40,000 note to settle an open account with Solar Solutions. Who will record a note receivable on its statement of financial position, and on what date will note be recorded? a. Pear, Inc. on June 17, 2020. b. Pear, Inc. on August 16, 2020. c. Solar Solutions on August 16, 2020. d. Solar Solutions on June 17, 2020.
Ans: D, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
172.
On June 17, 2020, Pear, Inc. writes a 60-day, 6%, $40,000 note to settle an open account with Solar Solutions. At what amount will the payee record the note receivable on its statement of financial position, and on what date will the note be recorded? a. $42,400 on June 17, 2020. b. $42,400 on September 16, 2020. c. $40,000 on June 17, 2020. d. $40,400 on June 17, 2020.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 173.
8 - 31
On January 15, 2020, Raymond Company received a two-month, 9%, $10,000 note from William Pentel for the settlement of his open account. The entry by Raymond Company on January 15, 2020 would include a: a. debit of $10,150 to Notes Receivable. b. debit of $10,000 to Notes Receivable. c. credit of $10,150 to Accounts Receivable. d. credit of $10,000 to Notes Receivable.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
174.
On January 15, 2020, Raymond Company received a two-month, 9%, $10,000 note from William Pentel for the settlement of his open account. The entry by Raymond Company on March 15, 2020, if Pentel dishonors the note and collection is expected is: a. Accounts Receivable—W. Pentel .................................. Notes Receivable ..................................................
10,000
b. Accounts Receivable—W. Pentel .................................. Notes Receivable .................................................. Interest Revenue ...................................................
10,150
c. Accounts Receivable—W. Pentel .................................. Interest Lost ................................................................... Notes Receivable ..................................................
9,850 150
d. Bad Debts Expense ....................................................... Notes Receivable ..................................................
10,150
10,000 10,000 150
10,000 10,150
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
175.
Notes receivable are recognized in the accounts at a. cash (net) realizable value. b. face value. c. gross realizable value. d. maturity value.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
176.
A note receivable is a negotiable instrument which a. eliminates the need for a bad debts allowance. b. can be transferred to another party by endorsement. c. takes the place of checks in a business firm. d. can only be collected by a bank.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
177.
A company that receives an interest bearing note receivable will a. debit Notes Receivable for the maturity value of the note. b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note. d. credit Notes Receivable for the face value of the note.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
8 - 32
Test Bank for Financial Accounting, IFRS Edition, 4e
178.
The face value of a note refers to the amount a. that can be received if sold to a factor. b. borrowed plus interest received at maturity from the maker. c. that is identified on the formal instrument of credit. d. remaining after a service charge has been deducted.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
179.
Parks Company receives a $25,000, 3-month, 8% promissory note from Todd Company in settlement of an open accounts receivable. What entry will Parks Company make upon receiving the note? a. Notes Receivable ........................................................... Accounts Receivable—Todd Company .................
25,500
b. Notes Receivable ........................................................... Accounts Receivable—Todd Company ................. Interest Revenue ...................................................
25,500
c. Notes Receivable ........................................................... Interest Receivable ................................................ Accounts Receivable—Todd Company ................. Interest Revenue ...................................................
25,000 500
d. Notes Receivable ........................................................... Accounts Receivable—Todd Company .................
25,000
25,500 25,000 500
25,000 500 25,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
180.
When a note is accepted to settle an open account, Notes Receivable is debited for the note's a. net realizable value. b. maturity value. c. face value. d. face value plus interest.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
181.
Short-term notes receivable are reported at a. cash (net) realizable value. b. face value. c. gross realizable value. d. maturity value.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
182.
Short-term notes receivables a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value. c. use the same estimations and computations as accounts receivable to determine cash realizable value. d. present the same valuation problems as long-term notes receivables.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Accounting for Receivables 183.
8 - 33
When a note receivable is dishonored, a. interest revenue is never recorded. b. bad debts expense is recorded. c. the maturity value of the note is written off. d. Accounts Receivable is debited if eventual collection is expected.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
184.
Rodgers Company lends Lanier Company $80,000 on April 1, accepting a four-month, 9% interest note. Rodgers Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared? a. Note Receivable ............................................................ 80,000 Cash ..................................................................... 80,000 b. Interest Receivable ....................................................... 600 Interest Revenue .................................................. 600 c. Cash .............................................................................. 600 Interest Revenue .................................................. 600 d. Interest Receivable ....................................................... 2,400 Interest Revenue .................................................. 2,400
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
185.
When a note receivable is honored, Cash is debited for the note's a. net realizable value. b. maturity value. c. gross realizable value. d. face value.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
186.
On June 17, 2020, Pear, Inc. writes a 60-day, 6%, $40,000 note to settle an open account with Solar Solutions. Assuming that Pear, Inc. pays the note in full on its due date and a 360 day year is used to calculate interest, how much cash will Solar Solutions record on its statement of financial position, and on what date will the cash be received? a. $42,400 on June 17, 2020. b. $40,400 on August 16, 2020. c. $42,400 on August 16, 2020. d. $40,400 on June 17, 2020.
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
187.
Charlie Co. lends Caroline Green Inc. $30,000 on June 1, 2020, accepting a five-month, 9% interest-bearing note. Assuming the date Charlie's statement of financial position is September 30, 2020, what amounts will Charlie record related to this note? a. Charlie Co will not record anything related to the note since it matures on November 1, 2020. b. Charlie Co will record interest revenue of $2,700. c. Charlie Co will record interest revenue of $1,125 d. Charlie Co will record interest revenue of $900.
Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
8 - 34 188.
Test Bank for Financial Accounting, IFRS Edition, 4e Which of the following statements is true concerning how derecognition of receivables is treated under IFRS and U.S. GAAP? a. U.S. GAAP permits partial derecognition; IFRS does not. b. The criteria used to derecognize a receivable under IFRS uses a combination of an approach focused on risks and rewards and loss of control. c. The criteria used to derecognize a receivable under U.S. GAAP uses risks and rewards as the primary criterion. d. All of these answer choices are correct.
Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
189.
Which of the following statements is true regarding accounting for receivables under IFRS and U.S. GAAP? a. U.S. GAAP has four specifically defined categories for financial assets, which include loans and receivables. b. U.S. GAAP accounts for short-term receivables at amortized cost, adjusted for allowances for doubtful accounts, whereas IFRS requires fair value for receivables. c. In their current deliberations regarding accounting for financial instruments, it appears that IASB wants amortized costs for receivables, but GAAP is tending toward fair value. d. All of these answer choices are correct.
Ans: C, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
190.
Maloney Company had net credit sales during the year of ₤1,200,000 and cost of goods sold of ₤800,000. The balance in accounts receivable at the beginning of the year was ₤120,000, and the end of the year it was ₤180,000. What was the accounts receivable turnover? a. 5.0 b. 6.7 c. 8.0 d. 10.0
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
191.
The average collection period for accounts receivable is computed by dividing 365 days by a. net credit sales. b. average accounts receivable. c. ending accounts receivable. d. accounts receivable turnover.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
192.
The financial statements of Hudson Manufacturing Company report net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Hudson? a. 3.8 times b. 6 times c. 10.0 times d. 7.5 times
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Accounting for Receivables 193.
8 - 35
The financial statements of Hudson Manufacturing Company report net sales of $360,000 and accounts receivable of $50,000 and $30,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days? a. 81.1 b. 40.6 c. 30.4 d. 50.7
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
194.
The financial statements of Gentry Manufacturing Company report net sales of €480,000 and accounts receivable of €80,000 and €40,000 at the beginning and end of the year, respectively. What is the accounts receivable turnover for Gentry? a. 8 times b. 12 times c. 6 times d. 4 times
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
195.
The financial statements of Gentry Manufacturing Company report net sales of €480,000 and accounts receivable of €80,000 and €40,000 at the beginning and end of the year, respectively. What is the average collection period for accounts receivable in days? a. 33.4 times b. 60.8 times c. 45.6 times d. 30.4 times
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
196.
Which of the following are also called trade receivables? a. Accounts receivable b. Other receivables c. Advances to employees d. Income taxes refundable
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
197.
On February 1, 2020, Janssen Company sells merchandise on account to Nicholson Company for $5,000. The entry to record this transaction by Janssen Company is a. Sales Revenue ..................................................................... Accounts Payable .........................................................
5,000
b. Cash ..................................................................................... Sales Revenue .............................................................
5,000
c. Accounts Receivable............................................................ Sales Revenue .............................................................
5,000
d. Notes Receivable ................................................................. Accounts Receivable ....................................................
5,000
5,000 5,000 5,000 5,000
Ans: C, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
8 - 36 198.
Test Bank for Financial Accounting, IFRS Edition, 4e Writing off an uncollectible account under the allowance method requires a debit to a. Accounts Receivable. b. Allowance for Doubtful Accounts. c. Bad Debt Expense. d. Uncollectible Accounts Expense.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
199.
When the allowance method of recognizing bad debts expense is used, the entry to recognize that expense a. increases net income. b. decreases current assets. c. has no effect on current assets. d. has no effect on net income.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
200.
The direct write-off method a. is acceptable for financial reporting purposes. b. debits Allowance for Doubtful Accounts to record write-offs of accounts. c. shows only actual losses from uncollectible accounts receivable. d. estimates bad debt losses.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
201.
Putnam Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts were $1,400,000 and $70,000 (Cr.), respectively. An aging of accounts receivable indicated that $118,000 are expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is a. $118,000. b. $48,000. c. $188,000. d. $70,000.
Ans: B, LO:2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
202.
In recording the sale of accounts receivable, the commission charged by a factor is recorded as a. Bad Debt Expense. b. Commission Expense. c. Loss on Sale of Receivables. d. Service Charge Expense.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables 203.
8 - 37
Kessler Co., makes a credit card sale to a customer for $1,000. The credit card sale has a grace period of 30 days and then an interest charge of 1.5% per month is added to the balance. If the unpaid balance on the above sale is $600 at the end of the grace period, the interest charge is a. $15. b. $12. c. $6. d. $9.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
204.
The interest rate specified on any note is for a a. day. b. month. c. week. d. year.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
205.
On February 1, Platt Company received a €9,000, 10%, four-month note receivable. The cash to be received by Platt Company when the note becomes due is a. €300. b. €9,000. c. €9,300. d. €9,900.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
206.
The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to a. Notes Receivable. b. Cash. c. Allowance for Doubtful Accounts. d. Accounts Receivable.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
207.
Which of the following statements concerning receivables is incorrect? a. Receivables are often listed after short-term investments. b. Companies report bad debt expense as a selling expense. c. Both the gross amount of receivables and the allowance for doubtful accounts should be reported. d. Interest revenue is shown under other income and expense.
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
208.
The accounts receivable turnover is computed by dividing a. total sales by average net accounts receivable. b. net credit sales by average net accounts receivable. c. total sales by ending net accounts receivable. d. net credit sales by ending net accounts receivable.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
8 - 38
Test Bank for Financial Accounting, IFRS Edition, 4e
BRIEF EXERCISES BE 209 Record the following transactions for Turnbull Company. 1. On August 4, Turnbull sold merchandise on account to Tabor Company for $750, terms 2/10, n/30. 2. On August 7, Turnbull granted Tabor a sales allowance and reduced the cost of the merchandise by $50 because some of the goods were slightly damaged. 3. On August 12, Tabor paid the account in full. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 209
(6 min.)
1. Accounts Receivable......................................................................... Sales Revenue ........................................................................
750
2. Sales Returns and Allowances ........................................................ Accounts Receivable ...............................................................
50
3. Sales Discounts ............................................................................... Cash ................................................................................................. Accounts Receivable ...............................................................
14 686
750 50
700
BE 210 At December 31, 2019, Grayson Company reported Accounts Receivable of €38,000 and Allowance for Doubtful Accounts of €3,500. On January 7, 2020, Duffy Enterprises declares bankruptcy and it is determined that the receivable of €1,200 from Duffy is not collectible. 1. What is the cash realizable value of Accounts Receivable at December 31, 2019? 2. What entry would Grayson make to write off the Duffy account? 3. What is the cash realizable value of Accounts Receivable after the Duffy account is written off? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 210
(5 min.)
1. Cash realizable value = €38,000 – €3,500 = €34,500 2. Allowance for Doubtful Accounts ..................................................... Accounts Receivable—Duffy ...................................................
1,200
3. Cash realizable value = (€38,000 – €1,200) – (€3,500 – €1,200) = €34,500
For Instructor Use Only
1,200
Accounting for Receivables
8 - 39
BE 211 Longbine Company’s ledger at the end of the current year shows Accounts Receivable of $150,000. Instructions a. If Allowance for Doubtful Accounts has a credit balance of $3,000 in the trial balance and bad debts are expected to be 4% of accounts receivable, journalize the adjusting entry for the end of the period. b.
If Allowance for Doubtful Accounts has a debit balance of $3,000 in the trial balance and bad debts are expected to be 4% of accounts receivable, journalize the adjusting entry for the end of the period.
Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 211
(5 min.)
(a) Bad Debts Expense ........................................................................ 3,000 Allowance for Doubtful Accounts ($6,000 – $3,000) ............ (To adjust the allowance account to total estimated uncollectible, $150,000 × .04 = $6,000) (b) Bad Debts Expense ........................................................................ Allowance for Doubtful Accounts ($6,000 + $3,000) ............
3,000
9,000 9,000
BE 212 Patel Co. sells Christmas angels. Patel determines that at the end of December, it has the following aging schedule of Accounts Receivable: Customer
Total
Not Yet Due 1–30 31–60
DV Farmer
$500
JJ Joysen
300
NJ Bell
250
JC Net
200
200
?
300
300
350
200
100
1%
5%
10%
20%
50%
?
?
?
?
?
% uncollectible Total Estimated Uncollectible Amounts
?
$300
Number of Days Past Due 61–90 Over 90
$200
100
200 150
100
Compute the net receivables based on the above information at the end of December. (There was no beginning balance in the Allowance for Doubtful Accounts). Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
8 - 40
Test Bank for Financial Accounting, IFRS Edition, 4e
Solution 212
(5 min.)
Customer
Total
Not Yet Due 1–30 31–60
DV Farmer
$ 500
JJ Joysen
300
NJ Bell
250
JC Net
200
200
$1,250
300
300
350
200
100
1%
5%
10%
20%
50%
$3
$15
$35
$40
$50
% uncollectible Total Estimated Uncollectible Amounts
$143
$300
Number of Days Past Due 61–90 Over 90
$200
100
200 150
100
Net Receivables = ($1,250 – $143 = $1,107) BE 213 Rainey Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred. Oct. 15 25
Sold $12,000 of accounts receivable to Good Factors, Inc. who assesses a 3% finance charge. Made sales of $700 on VISA credit cards. The credit card service charge is 2%.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 213 Oct. 15
25
(5 min.)
Cash ........................................................................................ Service Charge Expense ($12,000 × 3%) .............................. Accounts Receivable ..................................................
11,640 360
Cash ........................................................................................ Service Charge Expense ($700 × 2%) ................................... Sales Revenue ............................................................
686 14
For Instructor Use Only
12,000
700
Accounting for Receivables
8 - 41
BE 214 Determine the interest on the following notes: (a) ¥200,000 at 6% for 90 days. (b) ¥120,000 at 9% for 5 months. (c) ¥300,000 at 8% for 60 days (d) ¥240,000 at 7% for 6 months Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 214
(5 min.)
(a) ¥3,000 (¥200,000 × .06 × 90/360) (b) ¥4,500 (¥120,000 × .09 × 5/12) (c) ¥4,000 (¥300,000 × .08 × 60/360) (d) ¥8,400 (¥240,000 × .07 × 6/12) BE 215 Flint Distributors has the following transactions related to notes receivable during the last two months of the year. Dec.
1
Loaned $18,000 cash to G. Kingsley on a 1-year, 6% note.
16
Sold goods to D. Jones, receiving a $4,800, 60-day, 7% note.
31
Accrued interest revenue on all notes receivable.
Instructions Journalize the transactions for Flint Distributors. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 215 Dec
1
Dec 16
Dec. 31
(6 min.)
Notes Receivable— G. Kingsley .......................................... Cash ............................................................................ (To record loan made to G. Kingsley)
18,000
Notes Receivable— D. Jones .............................................. Sales Revenue ............................................................ (To record sale to D. Jones)
4,800
Interest Receivable .............................................................. Interest Revenue*........................................................ (To record accrued interest)
104
*Calculation of interest revenue Kingsley note:$18,000 × 6% × 30/360 = $ 90 Jones note: 4,800 × 7% × 15/360 = 14 Total accrued interest $104 For Instructor Use Only
18,000
4,800
104
8 - 42
Test Bank for Financial Accounting, IFRS Edition, 4e
BE 216 Compute the maturity value for each of the following notes receivable. 1. An $8,000, 6%, 3-month note dated July 20. Maturity value $____________. 2. A $12,000, 9%, 150-day note dated August 5. Maturity value $____________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 216
(5 min.)
1. Maturity value: $8,120 $8,000 × 6% × 3/12 = $120 + $8,000 = $8,120 2. Maturity value: $12,450 $12,000 × 9% × 150/360 = $450 + $12,000 = $12,450 BE 217 On February 7, Camp Company sold goods on account to Fillmore Enterprises for €6,000, terms 2/10, n/30. On March 9, Fillmore gave Camp a 60-day, 9% promissory note in settlement of the account. Record the sale and the acceptance of the promissory note on the books of Camp Company. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 217 February 7 March 9
(4 min.) Accounts Receivable ...................................................... Sales Revenue ......................................................
6,000
Notes Receivable ........................................................... Accounts Receivable .............................................
6,000
6,000 6,000
BE 218 On March 9, Fillmore gave Camp Company a 60-day, 9% promissory note for €6,000. Fillmore honors the note on May 9. Record the collection of the note and interest by Camp assuming that no interest has been accrued. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 218 May 9
(3 min.)
Cash ........................................................................................ Interest Revenue ......................................................... Note Receivable ..........................................................
For Instructor Use Only
6,090 90 6,000
Accounting for Receivables
8 - 43
BE 219 On March 9, Fillmore gave Camp Company a 60-day, 9% promissory note for €6,000. Fillmore dishonors the note on May 9. Record the entry that Camp would make when the note is dishonored, assuming that no interest has been accrued. Ans: N/A, LO: 3, Bloom: AN, K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 219 May 9
(3 min.)
Accounts Receivable—Fillmore ............................................. Interest Revenue ............................................................ Note Receivable .............................................................
6,090 90 6,000
BE 220 The following data exists for Gilkey Company. 2020 $ 80,000 540,000
Accounts Receivable Net Sales
2019 $ 70,000 410,000
Calculate the accounts receivable turnover and the average collection period for accounts receivable in days for 2020. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 220 (5 min.) Accounts receivable turnover =
Average collection period =
$540,000 = 7.2 times ($80,000 + $70,000 / 2)
365 days = 50.7 days 7.2
EXERCISES Ex. 221 Presented below are various receivable transactions entered into by Dayton Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet. a. b. c. d. e. f.
Loaned a company officer $4,000. Accepted a $2,000 promissory note from a customer as payment on account. Determined that a $10,000 income tax refund is due from the IRS. Sold goods to a customer on account for $5,000. Recorded $500 accrued interest on a note receivable due next year. Advanced $1,000 to a trusted employee.
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
8 - 44
Test Bank for Financial Accounting, IFRS Edition, 4e
Solution 221 a. b. c. d. e. f.
(10 min.)
Other Receivables Note Receivable Other Receivables Accounts Receivable Other Receivables Other Receivables
Ex. 222 Prepare journal entries to record the following transactions entered into by Glaser Company: 2019 June 1
Received a $30,000, 8%, 1-year note from Ann Duff as full payment on her account.
Nov.
1
Sold merchandise on account to Malone, Inc. for $18,000, terms 2/10, n/30.
Nov.
5
Malone, Inc. returned merchandise worth $500.
Nov.
9
Received payment in full from Malone, Inc.
Dec. 31 2020 June
Accrued interest on Duff's note. 1
Ann Duff honored her promissory note by sending the face amount plus interest. No interest has been accrued in 2020.
Ans: N/A, LO: 1,3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 222 2019 June 1 Nov. Nov. Nov.
1 5 9
Dec. 31
2020 June 1
(15 min.)
Notes Receivable ................................................................. Accounts Receivable—A. Duff ....................................
30,000
Accounts Receivable—Malone, Inc. ..................................... Sales Revenue ............................................................
18,000
Sales Returns and Allowances ............................................. Accounts Receivable—Malone, Inc. ............................
500
Cash ..................................................................................... Sales Discounts ($17,500 × .02) .......................................... Accounts Receivable—Malone, Inc. ............................
17,150 350
Interest Receivable ............................................................... Interest Revenue ......................................................... ($30,000 × 8% × 7 ÷ 12 = $1,400)
1,400
Cash ..................................................................................... Notes Receivable ........................................................ Interest Receivable ...................................................... Interest Revenue ......................................................... ($30,000 × 8% × 5/12 = $1,000)
32,400
For Instructor Use Only
30,000 18,000 500
17,500 1,400
30,000 1,400 1,000
Accounting for Receivables
8 - 45
Ex. 223 Record the following transactions for Yockey Company. 1. On April 12, sold $17,000 of merchandise to Hauser Inc., terms 2/10, n/30. 2. On April 15, Hauser returned $2,000 of merchandise. 3. On April 22, Hauser paid for the merchandise. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 223
(7 min.)
1. Accounts Receivable ....................................................................... Sales Revenue .....................................................................
17,000
2. Sales Returns and Allowances ........................................................ Accounts Receivable............................................................
2,000
3. Cash ($15,000 – $300) .................................................................... Sales Discounts ($15,000 × 2%) ..................................................... Accounts Receivable ($17,000 – $2,000) ............................
14,700 300
17,000 2,000
15,000
Ex. 224 (a) On January 6, Stegner Co. sells merchandise on account to Molina Inc. for €8,000, terms 2/10, n/30. On January 16, Molina Inc. pays the amount due. Prepare the entries on Stegner's books to record the sale and related collection. (b) On January 10, Jill Flynn uses her Calhoun Co. credit card to purchase merchandise from Calhoun Co. for €9,000. On February 10, Flynn is billed for the amount due of €9,000. On February 12, Flynn pays €5,000 on the balance due. On March 10, Flynn is billed for the amount due, including interest at 2% per month on the unpaid balance as of February 12. Prepare the entries on Calhoun Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 224
(12 min.)
(a) Jan.
Accounts Receivable—Molina..................................... Sales Revenue ...................................................
8,000
Cash (€8,000 – €160).................................................. Sales Discounts (2% ´ €8,000) ................................... Accounts Receivable—Molina ............................
7,840 160
Accounts Receivable—Flynn ...................................... Sales Revenue ...................................................
9,000
Cash .......................................................................... Accounts Receivable—Flynn .............................
5,000
Accounts Receivable—Flynn ...................................... Interest Revenue ................................................ [2% ´ (€9,000 – €5,000)]
80
6 16
(b) Jan. 10 Feb. 12 Mar. 10
For Instructor Use Only
8,000
8,000
9,000 5,000 80
8 - 46
Test Bank for Financial Accounting, IFRS Edition, 4e
Ex. 225 Coffeldt Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 4% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 2019, and December 31, 2020, appear below: Net Credit Sales Accounts Receivable Allowance for Doubtful Accounts
12/31/19 $400,000 150,000 5,000
12/31/20 $450,000 200,000 ?
Instructions (a) Record the following events in 2020. Aug. 10 Determined that the account of Sue Lang for $1,000 is uncollectible. Sept. 12 Determined that the account of Tom Woods for $4,000 is uncollectible. Oct. 10 Received a check for $550 as payment on account from Sue Lang, whose account had previously been written off as uncollectible. She indicated the remainder of her account would be paid in November. Nov. 15 Received a check for $450 from Sue Lang as payment on her account. (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2020. (c) What is the balance of Allowance for Doubtful Accounts at December 31, 2020? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 225
(20 min.)
(a) Aug. 10
Allowance for Doubtful Accounts ................................. Accounts Receivable—Sue Lang ....................... (To write off Sue Lang account)
1,000
Allowance for Doubtful Accounts ................................. Accounts Receivable—Tom Woods ................... (To write off Tom Woods account)
4,000
Accounts Receivable— Sue Lang ............................... Allowance for Doubtful Accounts ........................ (To reinstate Sue Lang account previously written off)
1,000
Cash ............................................................................ Accounts Receivable— Sue Lang ...................... (To record collection on account)
550
Cash ............................................................................ Accounts Receivable— Sue Lang ...................... (To record collection on account)
450
Bad Debt Expense [ ($200,000 × 4%) – $1,000] ......... Allowance for Doubtful Accounts ........................ (To record estimate of uncollectible accounts)
7,000
Sept. 12
Oct. 10
Nov. 15
(b) Dec. 31
For Instructor Use Only
1,000
4,000
1,000
550
450
7,000
Accounting for Receivables Solution 225
8 - 47
(cont.)
(c) Balance of Allowance for Doubtful Accounts at December 31, 2020, is $8,000 ($5,000 – $1,000 – $4,000 + $1,000 + $7,000). Ex. 226 Moore Company had a $700 credit balance in Allowance for Doubtful Accounts at December 31, 2020, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts $170,000 1% 1–30 days past due 15,000 3% 31–60 days past due 12,000 6% 61–90 days past due 5,000 12% Over 90 days past due 9,000 25% Total Accounts Receivable $211,000 Instructions (a) Prepare the adjusting entry on December 31, 2020, to recognize bad debts expense. (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $500 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 226
(15 min.)
Current Accounts 1-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due Total Accounts Receivable
$ 170,000 15,000 12,000 5,000 9,000 $ 211,000
Estimated Percentage Uncollectible 1% 3% 6% 12% 30%
Estimated Uncollectible $1,700 450 720 600 2,700 $6,170
(a) Bad Debt Expense ......................................................................... 5,470 Allowance for Doubtful Accounts ($6,170 – $700) ............... (To adjust the allowance account to total estimated uncollectible)
5,470
(b) Bad Debt Expense ......................................................................... 6,670 Allowance for Doubtful Accounts ($6,170 + $500) ............... (To adjust the allowance account to total estimated uncollectible)
6,670
For Instructor Use Only
8 - 48
Test Bank for Financial Accounting, IFRS Edition, 4e
Ex. 227 Compute bad debts expense based on the following information: (a) Ramsey Company estimates that 2% of accounts receivable will become uncollectible. Accounts receivable are $400,000, at the end of the year, and the allowance for doubtful accounts has a $500 credit balance. (b) Ramsey Company estimates that 3% of accounts receivable will become uncollectible. Accounts receivable are $150,000 at the end of the year, and the allowance for doubtful accounts has a $900 debit balance. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227
(4 min.)
(a) Bad debts expense = $7,500 [($400,000 × .02) – $500] (b) Bad debts expense = $5,400 [($150,000 × .03) + $900] Ex. 228 The December 31, 2019 balance sheet of Sauder Company had Accounts Receivable of ₤500,000 and a credit balance in Allowance for Doubtful Accounts of ₤33,000. During 2020, the following transactions occurred: sales on account ₤1,300,000; sales returns and allowances, ₤50,000; collections from customers, ₤1,215,000; accounts written off ₤35,000; previously written off accounts of ₤5,000 were collected. Instructions (a) Journalize the 2020 transactions. (b) If the company uses the percentage-of-receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 4% of accounts receivable, what is the adjusting entry at December 31, 2020? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 228
(15–20 min.)
(a) Accounts Receivable ...................................................................... 1,300,000 Sales Revenue ..................................................................... (To record credit sales) Sales Returns and Allowances ....................................................... Accounts Receivable ............................................................ (To record credits to customers)
50,000 50,000
Cash .............................................................................................. 1,215,000 Accounts Receivable ............................................................ (To record collection of receivables) Allowance for Doubtful Accounts .................................................... Accounts Receivable ............................................................ (To write off specific accounts) For Instructor Use Only
1,300,000
1,215,000
35,000 35,000
Accounting for Receivables Solution 228
8 - 49
(cont.)
Accounts Receivable ...................................................................... Allowance for Doubtful Accounts ......................................... (To reverse write-off of account)
5,000
Cash ............................................................................................. Accounts Receivable............................................................ (To record collection of account)
5,000
5,000
5,000
(b) Percentage-of-receivables basis: ACCOUNTS RECEIVABLE 500,000 1,300,000 5,000 Bal.
50,000 1,215,000 35,000 5,000
ALLOWANCE FOR DOUBTFUL ACCOUNTS 35,000 Bal.
500,000
Required balance (₤500,000 × .04) ............................................................... Balance before adjustment ............................................................................ Adjustment required ...................................................................................... Dec. 31
33,000 5,000 3,000
Bad Debt Expense ......................................................... Allowance for Doubtful Accounts ...........................
₤20,000 3,000 ₤17,000
17,000 17,000
Ex. 229 On December 31, 2020, the balance in Accounts Receivable for Nolte Company was $680,000 and net credit sales amounted to $3,700,000 during 2020. An aging analysis of the accounts receivable indicated that $39,000 in accounts are expected to be uncollectible. Instructions Prepare the adjusting entries to record estimated bad debts expense using the percentage of receivables basis under each of the following independent assumptions: (a) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 229
(10 min.)
(a) Bad Debt Expense ($39,000 – $3,200) ................................... Allowance for Doubtful Accounts ...................................
35,800
(b) Bad Debt Expense ($39,000 + $730)...................................... Allowance for Doubtful Accounts ...................................
39,730
For Instructor Use Only
35,800 39,730
8 - 50
Test Bank for Financial Accounting, IFRS Edition, 4e
Ex. 230 On February 28, Landis Company had accounts receivable in the amount of $437,000 and Allowance for Doubtful Accounts had a credit balance of $2,140 before adjustment. Net credit sales for February amounted to $2,500,000. The credit manager estimated that uncollectible accounts expense would amount to 2% of accounts receivable. On March 10, an accounts receivable from Kathy Brown for $6,100 was determined to be uncollectible and written off. However, on March 31, Brown received an inheritance and immediately paid her past due account in full. Instructions (a) Prepare the journal entries made by Landis Company on the following dates: 1. February 28 2. March 10 3. March 31 (b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31. Ans: N/A, LO: 2 Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 230
(15 min.)
(a) 1. Feb. 28 Bad Debt Expense [ ($437,000 × .02) – $2,140] ...... Allowance for Doubtful Accounts ..................... (To record the bad debt expense for February)
6,600
2. Mar. 10 Allowance for Doubtful Accounts .............................. Accounts Receivable—K. Brown ..................... (To write off K. Brown account deemed uncollectible)
6,100
3. Mar. 31 Accounts Receivable—K. Brown .............................. Allowance for Doubtful Accounts ..................... (To reinstate an account previously written off)
6,100
Mar. 31 Cash ......................................................................... Accounts Receivable—K. Brown ..................... (To record payment on account in full)
6,100
(b) $2,140 + $6,600 – $6,100 + $6,100 = $8,740.
For Instructor Use Only
6,600
6,100
6,100
6,100
Accounting for Receivables
8 - 51
Ex. 231 Greig Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions: January 5 Sold merchandise to Jane Harder for €1,000, terms n/15. April
15 Received €200 from Jane Harder on account.
August 21 Wrote off as uncollectible the balance of the Jane Harder account when she declared bankruptcy. October 5 Unexpectedly received a check for €300 from Jane Harder. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 231
(10 min.)
January 5 Accounts Receivable—J. Harder ...................................... Sales Revenue ......................................................... April
1,000 1,000
15 Cash ................................................................................. Accounts Receivable—J. Harder .............................
200
August 21 Allowance for Doubtful Accounts ...................................... Accounts Receivable—J. Harder .............................
800
October 5 Accounts Receivable—J. Harder ...................................... Allowance for Doubtful Accounts..............................
300
Cash ................................................................................. Accounts Receivable—J. Harder .............................
300
200 800 300 300
Ex. 232 Kosko Furniture Store has credit sales of $400,000 in 2020 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2020, $130,000 of accounts receivable remain uncollected. The credit manager prepared an aging schedule of accounts receivable and estimates that $4,000 will prove to be uncollectible. On March 4, 2021, the credit manager authorizes a write-off of the $1,000 balance owed by A. Noonan. Instructions (a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2020. (b) Show the statement of financial position presentation of accounts receivable on December 31, 2020. (c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $140,000 and the balance of Allowance for Doubtful Accounts is a credit of $2,000. Make the appropriate entry to record the write-off of the Noonan account. Also show the statement of financial position presentation of accounts receivable before and after the write-off. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
8 - 52
Test Bank for Financial Accounting, IFRS Edition, 4e
Solution 232
(20 min.)
(a) Bad Debt Expense ($4,000 + $600) ............................................... Allowance for Doubtful Accounts ..........................................
4,600 4,600
(b) Accounts Receivable ...................................................................... $130,000 Less: Allowance for Doubtful Accounts ......................................... 4,000 (c) Allowance for Doubtful Accounts .................................................... Accounts Receivable—A. Noonan ....................................... Accounts Receivable Less: Allowance for Doubtful Accounts Cash Realizable Value
Before Write-off $140,000 2,000 $138,000
$126,000
1,000 1,000 After Write-off $139,000 1,000 $138,000
Ex. 233 An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Dec. 17
20
27
31
Cash ........................................................................................ Sales Discounts ....................................................................... Accounts Receivable ...................................................... (To record collection of 12/4 sales, terms 2/10, n/30)
2,940 60 3,000
Cash ........................................................................................ 45,675 Notes Receivable .......................................................... Interest Revenue ........................................................... (Collection of $45,000, 6%, 90 day note dated Sept. 21. Interest had been accrued through Nov. 30.) Cash ........................................................................................ Bad Debt Expense .......................................................... (Collection of account previously written off as uncollectible under allowance method)
1,000
Bad Debts Expense ................................................................. Allowance for Doubtful Accounts .................................... (To recognize estimated bad debts based on 1% of accounts receivable of $700,000)
700
45,000 675
1,000
700
Instructions Prepare the correcting entries. Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Receivables Solution 233 Dec. 17
20
27
31
8 - 53
(15 min.)
Accounts Receivable............................................................ Sales Discounts........................................................... (To correct accounts for granting sales discount when discount period had lapsed)
60
Interest Revenue .................................................................. Interest Receivable...................................................... [To recognize collection of interest accrued through November 30 ($45,000 × 6% × 70/360 = $525)]
525
Bad Debt Expense ............................................................... Allowance for Doubtful Accounts................................. (To correct erroneous collection entry)
1,000
Bad Debt Expense ............................................................... Allowance for Doubtful Accounts................................. [To adjust balance in Bad Debts Expense to $7,000 (1% × $700,000)]
6,300
60
525
1,000
6,300
Ex. 234 Prepare the necessary journal entry for the following transaction. Francis Company sold €300,000 of its accounts receivables to a factor. The factor charges a 3% fee. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 234
(3 min.)
Cash (€300,000 – €9,000) ..................................................................... Service Charge Expense (€300,000 × 3%) ........................................... Accounts Receivable .................................................................
291,000 9,000 300,000
Ex. 235 Horton Company has the following accounts receivable in its general ledger at July 31: Accounts Receivable $40,000. During August, the following transactions occurred. Aug. 1
Added 1% finance charges to $20,000 of credit card balances for not paying within the 30 day grace period.
15
Sold $35,000 of accounts receivable to Fast Factors Inc. who charge a 2% commission.
28
Collected $7,000 from Horton credit card customers including $350 of finance charges previously billed.
Instructions (a) Journalize the transactions. (b) Indicate the statement presentation of finance and service charges. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
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Test Bank for Financial Accounting, IFRS Edition, 4e
Solution 235 (a) Aug. 1
15
28
(12 min.) Accounts Receivable .......................................................... Interest Revenue ........................................................ (To recognize finance charges—1% × $20,000)
200
Cash .................................................................................... Service Charge Expense ($35,000 × 2%)........................... Accounts Receivable .................................................. (To record sale of receivables to Fast Factors)
34,300 700
Cash .................................................................................... Accounts Receivable .................................................. (To record collection of Horton receivables)
7,000
200
35,000
7,000
(b) Service Charge Expense is a selling expense. Interest Revenue is classified under Other income and expense. Ex. 236 Listed below are two independent situations involving the disposition of receivables. 1.
Fultz Company sells $250,000 of its receivables to Quick Factors, Inc. Quick Factors assesses a finance charge of 2% of the amount of receivables sold.
Instructions Prepare the journal entry to record the sale of the receivables on Fultz Company's books. 2.
A restaurant is the site for a large company party. The bill totals $4,000 and is charged by the patron on a Visa credit card.
Instructions Assume a 3% service fee is charged by Visa. Record the entry for the transaction on the restaurant's books. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 236
(7 min.)
1. Cash ................................................................................................. Service Charge Expense ($250,000 × .02) ...................................... Accounts Receivable ...............................................................
245,000 5,000
2. Cash ................................................................................................. Service Charge Expense ($4,000 × .03) .......................................... Sales Revenue ...............................................................
3,880 120
For Instructor Use Only
250,000
4,000
Accounting for Receivables
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Ex. 237 Newman Stores accepts both its own and national credit cards. During the year the following selected summary transactions occurred. Jan. 15 20 Feb. 10 15
Made Newman credit card sales totaling $27,000. (There were no balances prior to January 15.) Made Visa credit card sales (service charge fee 2%) totaling $7,500. Collected $12,000 on Newman credit card sales. Added finance charges of 1% to Newman credit card balance.
Instructions (a) Journalize the transactions for Newman Stores. (b) Indicate the statement presentation of the financing charges and the credit card service charge expense for Newman Stores. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 237
(7 min.)
(a) Jan. 15
Accounts Receivable ..................................................... Sales Revenue .........................................................
27,000
Cash ($7,500 – $150) .................................................... Service Charge Expense ............................................... ($7,500 ´ 2%) Sales Revenue .........................................................
7,350 150
Cash .............................................................................. Accounts Receivable ................................................
12,000
Accounts Receivable ($15,000 ´ 1%) ........................... Interest Revenue ......................................................
150
20
(b) Feb. 10 15 (b)
Interest Revenue is reported under Other income and expense. Service Charge Expense is a selling expense.
For Instructor Use Only
27,000
7,500 12,000 150
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Test Bank for Financial Accounting, IFRS Edition, 4e
Ex. 238 Compute the maturity date and the maturity value associated with each of the following notes receivables. 1. A ¥2,500,000, 6%, 3-month note dated April 20. Maturity date ___________, Maturity value $____________. 2. A ¥3,500,000, 8%, 72-day note dated May 10. Maturity date ___________, Maturity value $____________. 3. An Y800,000, 9%, 30-day note dated September 20. Maturity date ___________, Maturity value $____________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 238
(10 min.)
1. Maturity date: July 20 Maturity value: ¥2,537,500 ¥2,500,000 × 6% × 3/12 = ¥37,500 + ¥2,500,000 = ¥2,537,500 2. Maturity date:
Term of note May (31–10) June Maturity date, July
72 days 21 30
51 21
Maturity value: ¥3,556,000 ¥3,500,000 × 8% × 72/360 = ¥56,000 + ¥3,500,000 = ¥3,556,000 3. Maturity date:
Term of note September (30–20) Maturity date, October
30 days 10 20
Maturity value: ¥806,000 ¥800,000 × 9% × 30/360 = ¥6,000 + ¥800,000 = ¥806,000 Ex. 239 Compute the maturity date and interest for the following notes. (a) (b)
Dates of Notes April 17 August 11
Terms 60 days 3 months
Principal $50,000 70,000
Interest Rate 6% 8%
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Accounting for Receivables Solution 239
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(3 min.)
Maturity Date (a) June 16 (b) November 11
Interest $500 ($40,000 × .06 × 60/360) $1,400 ($70,000 × .08 × 3/12)
Ex. 240 Compute the missing amount for each of the following notes: Principal Annual Interest Rate Time Total Interest ——————————————————————————————————————— (a) $60,000 10% 2.5 years ? ——————————————————————————————————————— (b) $120,000 ? 9 months $7,200 ——————————————————————————————————————— (c) ? 10% 90 days $2,000 ——————————————————————————————————————— (d) $40,000 9% ? $1,200 ——————————————————————————————————————— Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 240
(10 min.)
(a)
$15,000
($60,000 × .10 × 2.5 years) = $15,000
(b)
8%
($120,000 × ? × 9 ÷ 12 = $7,200; ? = 8%)
(c)
$80,000
(? × .10 × 90 ÷ 360 = $2,000; ? = $80,000)
(d)
4 months
($40,000 × .09 × ? = $1,200; ? = 4 ÷ 12)
Ex. 241 Ripken Supply Co. has the following transactions related to notes receivable during the last 2 months of 2019. Nov. 1 Dec. 11 16 31
Loaned $30,000 cash to Linda Waters on a 1-year, 8% note. Sold goods to Wainwright, Inc., receiving a $13,500, 90-day, 8% note. Received an $8,000, 6-month, 9% note in exchange for Don Garbo's outstanding accounts receivable. Accrued interest revenue on all notes receivable.
Instructions (a) Journalize the transactions for Ripken Supply Co. (b) Record the collection of the Waters note at its maturity in 2020. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
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Test Bank for Financial Accounting, IFRS Edition, 4e
Solution 241 (10 min.) (a) 2019 Nov. 1 Notes Receivable ..................................................... Cash ..................................................................... Dec. 11 16 31
30,000 30,000
Notes Receivable ..................................................... Sales Revenue .....................................................
13,500
Notes Receivable ..................................................... Accounts Receivable—Garbo ..............................
8,000
Interest Receivable ................................................... Interest Revenue*.................................................
490
13,500 8,000 490
*Calculation of interest revenue: Waters's note: $30,000 ´ 8% ´ 2/12 = $400 Wainwright's note: 13,500 ´ 8% ´ 20/360 = 60 Garbo's note: 8,000 ´ 9% ´ 15/360 = 30 Total accrued interest $490 (b) Nov. 1
2020 Cash ......................................................................... Interest Receivable ............................................... Interest Revenue* ................................................. Notes Receivable ................................................. *($30,000 ´ 8% ´ 10/12)
32,400 400 2,000 30,000
Ex. 242 Remington Company had the following select transactions. Apr.
1, 2019
July 1, 2019 Dec. 31, 2019 Apr. 1, 2020 Apr. 1, 2020
Accepted Carter Company's 1-year, 8% note in settlement of a ₤30,000 account receivable. Loaned ₤18,000 cash to David Pratt on a 9-month, 10% note. Accrued interest on all notes receivable. Received principal plus interest on the Carter note. David Pratt dishonored its note: Remington expects it will eventually collect.
Instructions Prepare journal entries to record the transactions. Remington prepares adjusting entries once a year on December 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Receivables Solution 242 4/1/19 7/1/19 12/31/19
4/1/20
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(12 min.)
Notes Receivable ................................................. Accounts Receivable—Carter ........................
30,000
Notes Receivable ................................................. Cash ...............................................................
18,000
Interest Receivable .............................................. Interest Revenue ............................................ (₤30,000 ´ 8% ´ 9/12)
1,800
Interest Receivable .............................................. Interest Revenue ............................................ (₤18,000 ´ 10% ´ 6/12)
900
Cash ..................................................................... Notes Receivable ........................................... Interest Receivable ........................................ Interest Revenue ............................................ (₤30,000 ´ 8% ´ 3/12 = ₤600)
32,400
Accounts Receivable............................................ Notes Receivable ........................................... Interest Receivable ........................................ Interest Revenue ............................................ (₤18,000 ´ 10% ´ 3/12 = ₤450)
19,350
30,000 18,000 1,800
900
30,000 1,800 600
18,000 900 450
Ex. 243 Prepare the necessary journal entries for the following transactions for Mahoney Co. May 25 Mahoney Co. received a $50,000, 2-month, 6% note from Kohler Company in settlement of an account receivable. July 25 Mahoney Co. received payment on the Kohler note. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 243 May 25 July 25
(5 min.)
Notes Receivable .............................................................. Accounts Receivable ................................................
50,000
Cash .................................................................................. Notes Receivable ..................................................... Interest Revenue ($50,000 × .06 × 2/12) .................
50,500
For Instructor Use Only
50,000 50,000 500
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Test Bank for Financial Accounting, IFRS Edition, 4e
Ex. 244 Record the following transactions in general journal form for Meyer Company. July
1
Received a $15,000, 8%, 3-month note, dated July 1, from Deb Gore in payment of her open account.
Oct.
1
Received notification from Deb Gore that she was unable to honor her note at this time. It is expected that Gore will pay at a later date.
Nov. 15
Received full payment from Deb Gore for her note receivable previously dishonored.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 244 July
Oct.
1
1
Nov. 15
(15 min.)
Notes Receivable ................................................................. Accounts Receivable— Deb Gore ............................... (To record acceptance of Deb Gore note as payment on account)
15,000
Accounts Receivable— Deb Gore ........................................ Notes Receivable ........................................................ Interest Revenue ($15,000 × 8% × 1/4) ..................... (To record dishonored note, $15,000, plus interest)
15,300
Cash ..................................................................................... Accounts Receivable—Deb Gore ................................ (To record payment on account)
15,300
15,000
15,000 300
15,300
Ex. 245 Pine Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Pine Boat Company. Feb. 12
Accepted a $40,000, 6%, 60-day note from Bob Weiss for a 24-foot motorboat built to his specifications.
April 14
Received notification from Bob Weiss that he was unable to honor his promissory note but that he expects to pay the amount owed in May.
May 26
Received a check from Bob Weiss for the total amount owed.
June 10
Received notification by the bank that Bob Weiss check was being returned "NSF" and that Mr. Weiss had declared personal bankruptcy.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Accounting for Receivables Solution 245 Feb. 12 April 14
May 26 June 10
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(15 min.)
Notes Receivable ................................................................. Sales Revenue ............................................................
40,000
Accounts Receivable—B. Weiss .......................................... Notes Receivable ........................................................ Interest Revenue ($40,000 × 6% × 1/6) ......................
40,400
Cash ..................................................................................... Accounts Receivable—B. Weiss .................................
40,400
Accounts Receivable—B. Weiss .......................................... Cash ............................................................................
40,400
Allowance for Doubtful Accounts ......................................... Accounts Receivable— B. Weiss ................................
40,400
40,000 40,000 400 40,400 40,400 40,400
Ex. 246 The following information is available for Sumner Company. Beginning accounts receivable Ending accounts receivable Net sales
$
80,000 120,000 1,100,000
Instructions Compute the accounts receivable turnover and the average collection period. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 246
(5 min.)
Accounts receivable turnover = 11 times $1,100,000 ÷ [($80,000 + $120,000) ÷ 2] Average collection period = 33.2 days (365 ÷ 11) Ex. 247 Scully Company had accounts receivable of €115,000 on January 1, 2020. The only transactions that affected accounts receivable during 2020 were net credit sales of €1,200,000, cash collections of €1,000,000, and accounts written off of €30,000. Instructions (a) Compute the ending balance of accounts receivable. (b) Compute the accounts receivable turnover for 2020. (c) Compute the average collection period in days. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
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Test Bank for Financial Accounting, IFRS Edition, 4e
Solution 247
(5 min.)
(a)
Beginning accounts receivable................................... Net credit sales........................................................... Cash collections ......................................................... Accounts written off .................................................... Ending accounts receivable .......................................
(b)
€1,200,000/[(€115,000 + €285,000)/2] = 6
(c)
365/6 = 60.8 days
€
115,000 1,200,000 (1,000,000) (30,000) € 285,000
COMPLETION STATEMENTS 248. Accounts receivable, which are also referred to as ______________ receivables, are amounts owed by customers on account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
249. The three primary accounting problems associated with accounts receivable are (1) ______________, (2) _______________, and (3) ______________ of accounts receivable. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
250. In order to encourage prompt payment of a trade receivable, companies often offer ______________ to customers. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
251. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
252. The two methods of accounting for uncollectible accounts are the ____________ method and the ______________ method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
253. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the statement of financial position. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
254. When the allowance method is used to account for uncollectible accounts, ______________ is credited when an account is determined to be uncollectible. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Accounting for Receivables
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255. The net amount expected to be collected in cash from receivables is the_____________ Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
256. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value and therefore emphasizes statement of financial position relationships. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
257. Sales resulting from the use of Visa and MasterCard are considered ______________ by the retailer. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
258. A finance company or bank that purchases receivables from businesses is known as a ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
259. A 75-day note receivable dated June 10 would mature on ______________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
260. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
261. A note which is not paid on the maturity date is said to be ______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 248. trade 249. recognizing, valuing, disposing 250. cash discounts 251. Bad Debt 252. allowance, direct write-off 253. contra asset, deducted 254. Accounts Receivable
255. 256. 257. 258. 259. 260. 261.
Cash (net) realizable value percentage of receivables, cash realizable cash sales factor August 24 Notes Receivable, Interest Revenue dishonored
For Instructor Use Only
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Test Bank for Financial Accounting, IFRS Edition, 4e
MATCHING 262. Match the items below by entering the appropriate code letter in the space provided. A. Aging of receivables B. Direct write-off method C. Promissory note D. Trade receivables E. Maker
F. G. H. I. J.
Percentage of receivables basis Factoring Dishonored note Average collection period Credit card sales
____
1. A written promise to pay a specified amount on demand or at a definite time.
____
2. Sales that involve the customer, the retailer, and the credit card issuer.
____
3. The party in a promissory note who is making the promise to pay.
____
4. Amounts owed by customers from the sale of goods and services.
____
5. A note which is not paid in full at maturity.
____
6. Analysis of customer account balances by length of time they have been unpaid.
____
7. Emphasizes expected cash realizable value of accounts receivable.
____
8. Generally not acceptable for financial reporting purposes.
____
9. The amount of time that a receivable is outstanding.
____ 10. Sale of accounts receivable to a factor. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5.
C J E D H
6. 7. 8. 9. 10.
A F B I G
SHORT-ANSWER ESSAY QUESTIONS S-A E 263 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 263 A promissory note gives the holder a stronger legal claim than one on an accounts receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest. For Instructor Use Only
Accounting for Receivables
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S-A E 264 Your friend Stan has opened an office supply store. He will extend open credit to local businesses and is concerned about potential bad debts. What can Stan do to reduce potential bad debts? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 264 1. Establish a reasonable policy for extending credit. The company needs to consider the risks of having either a ‘too tight’ or ‘too loose’ credit policy. Potential credit customers should be screened appropriately. 2. The company should decide upon the required payment period and communicate it to customers and employees. This period should be in line with the ones established by competitors. Also, employees should enforce the collection period but yet exercise judgment in unusual circumstances. 3. The company should evaluate the relationship among sales, accounts receivable, and cash collections to monitor trends and watch for potential problems. 4. The company should prepare an accounts receivable aging schedule on a regular basis. The collection department should follow up on past due accounts in a timely and professional manner. There should be a clear company policy regarding collection efforts and when to write off accounts. S-A E 265 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics
Solution 265 1. The use of bank credit cards increases sales. Many people want to use credit cards to make purchases. If a company does not offer this service, customers will buy from a competitor that does offer the services. 2. Bad debts are absorbed by the credit card company. 3. The company receives its cash (less the fees) immediately. 4. The company does not have to hire employees to approve credit and make collections for these sales. S-A E 266 An article recently appeared in the Wall Street Journal indicating that companies are selling their receivables at a record rate. Why are companies selling their receivables? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 266 The reasons companies are selling their receivables are: (1) Receivables may be sold because they may be the only reasonable source of cash. For Instructor Use Only
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Test Bank for Financial Accounting, IFRS Edition, 4e
(2) Billing and collection are often time-consuming and costly. It is often easier for a retailer to sell the receivables to another party with expertise in billing and collection matters. S-A E 267 Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa, MasterCard). Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 267 The advantages of a retail store using its own credit card are the avoidance of a 2 to 6 percent charge by the national credit card and the ability to issue credit to the customers of its choice. In addition, with its own credit card operation the retailer earns the interest on the unpaid balances. The disadvantages of a retail store using its own credit card are the risk of nonpayment (bad debts), the delay in receiving cash from the sales (cash is collected immediately from the national credit card company), and the costs of record keeping and managing (approving credit and collection) its own credit operation. S-A E 268
(Ethics)
Pierce Books, a small book publishing company, wrote off the debt of The Learning Center, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Pierce Books simply stopped sending bills. Nearly a year later, The Learning Center was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Pierce Books, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Pierce Books act ethically in reinstating the debt of one client, and not the other? Explain. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Problem Solving, IMA: Business Economics
Solution 268 Yes, it is ethical to reinstate the debt of The Learning Center, especially since there was no evidence given that The Learning Center attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Pierce Books. Pierce Books' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable. The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the country, and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Pierce Books can collect also because they apparently did not include interest in earlier bills sent to these clients, and because they stopped sending bills for some period of time.
For Instructor Use Only
Accounting for Receivables
8 - 67
Note that this solution is different from the case in which a debt is written off because of a bankruptcy. Had The Learning Center become bankrupt, Pierce Books could not have legally reinstated the debt, even if The Learning Center became solvent at some time in the future. S-A E 269 (Communication) Morrison Company received a letter from Mary Furman, a customer. Mary had purchased $425 worth of clothing from Morrison on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Morrison. Her total debt presently, with interest and late fees, is $351.13. Mary sent a letter to Morrison in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Morrison certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Morrison write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Morrison were among the best she had ever owned, and that she "told everybody" that Morrison was definitely the best place to get clothes.
For Instructor Use Only
8 - 68
Test Bank for Financial Accounting, IFRS Edition, 4e
S-A E 269
(Cont.)
Required: You are the accounting manager for Morrison. Write a short letter to Mary explaining why her debt cannot be written off. Ans: N/A, LO:2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Business Economics
Solution 269 (letterhead) (Date) Ms. Mary Furman 123 College View Apartments, #717 Lakeland University Lakeland, Michigan 60771 Dear Ms. Furman: Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Morrison clothing, and we're glad you tell your friends about us. As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form) is $351.13. Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Morrison extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Morrison or to the customer. We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider, and send your next payment today? If you need to renegotiate the size of the payments, you may contact Betty in the Credit Department to discuss the matter. I look forward to receiving your payment. Sincerely, Jill Gates Accounting Manager
For Instructor Use Only
Accounting for Receivables
8 - 69
GAAP QUESTIONS 1. Under GAAP, receivables are reported on the balance sheet at a. replacement cost. b. historical cost. c. amortized cost adjusted for estimated loss allowances. d. amortized cost. Ans: C, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2. In recording a factoring transaction a. IFRS allows partial derecognition. b. IFRS and GAAP allow partial derecognition. c. GAAP focuses on loss of control and risks and rewards. d. IFRS focuses on loss of control. Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. Under GAAP a. all financial instruments are recorded at fair value. b. it is always acceptable to use the direct write-off method. c. receivables should only be tested for impairment as a group. d. the entry to record estimated uncollected accounts is the same as IFRS. Ans: D, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4. Which of the following statements is true? a. The FASB and IASB would like to reduce the reliance on fair value accounting for financial instruments in the future. b. The fair value option allows, but does not require, that some types of financial instruments be recorded at fair value. c. The fair value option requires that some types of financial instruments be recorded at amortized cost. d. The fair value option requires that some types of financial instruments be recorded at fair value. Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
CHAPTER 9 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS CHAPTER LEARNING OBJECTIVES 1. Explain the accounting for to plant asset expenditures. The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Once cost is established, a company uses that amount as the basis of accounting for the plant asset over its useful life. Companies incur revenue expenditures to maintain the operating efficiency and productive life of an asset. They debit these expenditures to Maintenance and Repairs Expense as incurred. Capital expenditures increase the operating efficiency, productive capacity, or expected useful life of the asset. Companies generally debit these expenditures to the plant asset affected. 2.
Apply depreciation methods to plant assets. Depreciation is the allocation of the cost of a plant asset to expense over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, nor is it a process that results in an accumulation of cash. Three depreciation methods are: Effect on Method Annual Depreciation Formula Straight-line Constant amount Depreciable cost ÷ Useful life (in years) Units-of-activity Varying amount Depreciation cost per unit × Units of activity during the year Declining-balance Decreasing amount Book value at beginning of year × Declining-balance rate Companies make revisions of periodic depreciation in present and future periods, not retroactively. They determine the new annual depreciation by dividing the depreciable cost at the time of the revision by the remaining useful life
3. Explain how to account for the disposal of a plant asset. The accounting for disposal of a plant asset through retirement or sale is as follows: (a) Eliminate the book value of the plant asset at the date of disposal. (b) Record cash proceeds, if any. (c) Account for the difference between the book value and the cash proceeds as a gain or loss on disposal. (d) Record cash paid or received. 4. Describe how to account for natural resources and intangible assets. Companies compute depletion cost per unit by dividing the total cost of the natural resource minus residual value by the number of units estimated to be in the resource. They then multiply the depletion cost per unit by the number of units extracted and sold. The process of allocating the cost of an intangible asset is referred to as amortization. The cost of intangible assets with indefinite lives is not amortized. Companies normally use the straight-line method for amortizing intangible assets.
9-2
Test Bank for Financial Accounting: IFRS Edition, 4e
5. Discuss how plant assets, natural resources, and intangible assets are reported and analyzed. Companies usually combine plant assets and natural resources under property, plant, and equipment; they show intangibles separately under intangible assets. Either within the statement of financial position or in the notes to the financial statements, companies should disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They also should describe the depreciation and amortization methods used, and should disclose the amount of depreciation and amortization expense for the period. The asset turnover measures the productivity of a company’s assets in generating sales. a
6. Explain how to account for the exchange of plant assets. Ordinarily, companies record a gain or loss on the exchange of plant assets. The rationale for recognizing a gain or loss is that most exchanges have commercial substance. An exchange has commercial substance if the future cash flows change as a result of the exchange.
TRUE-FALSE STATEMENTS 1.
All plant assets (fixed assets) must be depreciated for accounting purposes.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, fair value becomes the basis for accountability.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Land is reported on the statement of financial position at its cost less accumulated depletion, or at its fair value, whichever is higher.
Ans: F, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
Land improvements are reported on the statement of financial position at their cost less accumulated depreciation.
Ans: T, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
Accumulated depreciation is reported on the statement of financial position as a deduction from plant assets.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
Recording depreciation on plant assets affects the statement of financial position and the income statement.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 9.
9-3
The depreciable cost of a plant asset is its original cost minus obsolescence.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
Recording depreciation each period is an application of the expense recognition principle.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
11.
The Accumulated Depreciation account represents a cash fund available to replace plant assets.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12.
In calculating depreciation, both plant asset cost and useful life are based on estimates.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13.
Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straightline method had been used.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
14.
Residual value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
15.
The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset’s useful life.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
Under the double-declining-balance method, the depreciation rate used each year remains constant.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
17.
Tax laws often do not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
Depending on whether a company uses the straight-line or declining-balance method, annual depreciation expense varies, but total depreciation is the same.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
A corporation may use straight-line depreciation in the financial statements to maximize net income, and at the same time, use an accelerated-depreciation method on the tax return to minimize income taxes.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9-4 20.
Test Bank for Financial Accounting: IFRS Edition, 4e Component depreciation is a method used to ensure that the depreciation rate remains constant from year to year.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
Component depreciation is the method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
IFRS allows companies to revalue plant assets to fair value at the reporting date.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
Assets that are experiencing rapid price changes must be revalued on an annual basis, otherwise less frequent revaluation is acceptable.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24.
The journal entry to record a revaluation when the asset’s fair value has increased includes a credit to the account Revaluation Surplus.
Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25.
The “Revaluation Surplus“ account that results from a revaluation of plant assets to fair value is reported on the statement of financial position as a contra account to the plant asset that was revalued.
Ans: F, LO: 2, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26.
A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
27.
A change in the estimated residual value of a plant asset requires a restatement of prior years’ depreciation.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
To determine a new depreciation amount after a change in estimate of a plant asset’s useful life, the asset’s remaining depreciable cost is divided by its remaining useful life.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Additions and improvements to a plant asset that increase the asset’s operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 30.
9-5
Capital expenditures are expenditures that increase the company’s investment in productive facilities.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
31.
Ordinary repairs should be recognized when incurred as revenue expenditures.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33.
Revenue expenditures are reported on the statement of financial position and would include the cost to paint a building.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
The fair value of a plant asset is always the same as its book value.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset’s book value.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The book value of a plant asset is the amount originally paid for the asset less anticipated residual value.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
40.
A plant asset must be fully depreciated before it can be removed from the books.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
9-6 41.
Test Bank for Financial Accounting: IFRS Edition, 4e If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
43.
The Accumulated Depletion account is deducted from the cost of the natural resource in the statement of financial position.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
45.
The cost of natural resources is not allocated to expense because the natural resources are not replaceable.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
Natural resources include standing timber and resources extracted from the ground, such as oil, gas, and minerals.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
The depletion associated with extracting copper from a mine will be reported on the statement of financial position if the company has not yet sold the copper.
Ans: T, LO: 4, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48.
Costs incurred during the research phase are reported as an intangible asset on the statement of financial position.
Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
Costs incurred in the development phase after technological feasibility has been achieved are expensed as incurred.
Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 52.
9-7
Development costs incurred after technological feasibility has been achieved are charged to an expense account.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
53.
The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
54.
The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the statement of financial position or notes.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
The asset turnover is calculated as total sales divided by ending total assets.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
56.
Franchises can be classified as a property, plant, and equipment item or as an intangible asset.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
U.S. GAAP requires companies to use component depreciation for assets which qualify for the treatment.
Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
U.S. GAAP requires companies to expense all research and development costs as incurred.
Ans: T, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
59.
Gains on exchanges of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP.
Ans: T, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
60.
Changes in depreciation method under IFRS are reported in current and future periods, but under U.S. GAAP such changes are treated as prior period adjustments.
Ans: F, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
61.
IFRS permits revaluation of most intangible assets, while U.S. GAAP prohibits revaluation of any intangible assets.
Ans: F, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
62.
An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9-8 a
63.
Test Bank for Financial Accounting: IFRS Edition, 4e Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
64.
When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
65.
When constructing a building, a company is permitted to include the construction cost and certain interest costs incurred in financing the project.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
66.
Recognition of depreciation permits the accumulation of cash for the replacement of the asset.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
68.
Depletion expense is reported in the income statement as an operating expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
Goodwill is not recognized in the financial statements unless it is acquired in the purchase of another business enterprise.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
70. A loss on the exchange of plant assets occurs when the fair value of the old asset is less than its book value.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
9-9
MULTIPLE CHOICE QUESTIONS 71.
The cost of a purchased building includes all of the following except a. closing costs. b. real estate broker’s commission. c. remodeling costs. d. All of these answer choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
72.
A company purchased land for $80,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at a. $87,000. b. $80,000. c. $85,000. d. $92,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73.
Which one of the following items is not considered a part of the cost of a truck purchased for business use? a. Sales tax b. Accident insurance c. Freight charges d. Cost of lettering on side of truck
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
74.
Which of the following assets does not decline in service potential over the course of its useful life? a. Equipment b. Furnishings c. Land d. Fixtures
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
75.
The four subdivisions for plant assets are a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment. c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
76.
The cost of land does not include a. real estate brokers’ commission. b. annual property taxes. c. accrued property taxes assumed by the purchaser. d. title fees.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 10 77.
Test Bank for Financial Accounting: IFRS Edition, 4e Gagner Clinic purchases land for $125,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land? a. $127,200 b. $125,000 c. $129,700 d. $127,500
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
78.
Carey Company buys land for €50,000 on 12/31/19. As of 3/31/20, the land has appreciated in value to €50,900. On 12/31/20, the land has an appraised value of €51,600. If Carey does not choose to revalue its long-term assets, what amount should the Land account be increased in 2020? a. €0 b. €700 c. €900 d. €1,600
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
79.
Hull Company acquires land for $86,000 cash. Additional costs are as follows: Removal of shed Filling and grading Salvage value of lumber of shed Broker commission Paving of parking lot Closing costs
$
300 1,500 120 1,530 10,000 560
Hull will record the acquisition cost of the land as a. $86,000. b. $88,090. c. $89,990. d. $89,770. Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
80.
Wesley Hospital installs a new parking lot. The paving cost ₤40,000 and the lights to illuminate the new parking area cost ₤20,000. Which of the following statements is true with respect to these additions? a. ₤40,000 should be debited to the Land account. b. ₤20,000 should be debited to Land Improvements. c. ₤60,000 should be debited to the Land account. d. ₤60,000 should be debited to Land Improvements.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
81.
Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
82.
9 - 11
Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not. c. Interest is capitalized during the construction as part of the cost of the building. d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
83.
A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true? a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof. c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. d. The wiring is part of the computer costs, not the building cost.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
84.
Engler Company purchases a new delivery truck for $56,000. The sales taxes are $3,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Engler record as the cost of the new truck? a. $60,540 b. $60,420 c. $59,000 d. $58,420
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
All of the following factors in computing depreciation are estimates except a. cost. b. residual value. c. salvage value. d. useful life.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
9 - 12 86.
Test Bank for Financial Accounting: IFRS Edition, 4e Presto Company purchased equipment and these costs were incurred: Cash price Sales taxes Insurance during transit Installation and testing Total costs
$27,500 1,800 320 430 $30,050
Presto will record the acquisition cost of the equipment as a. $27,500. b. $29,300. c. $29,620. d. $30,050. Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
87.
Angie’s Blooms purchased a delivery van for $35,000. The company was given a $3,000 cash discount by the dealer, and paid $1,500 sales tax. Annual insurance on the van is $500. As a result of the purchase, by how much will Angie’s Blooms increase its van account? a. $35,000 b. $33,000 c. $34,000 d. $33,500
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
88.
Yang Company purchased equipment on January 1 at a list price of ¥750,000, with credit terms 2/10, n/30. Payment was made within the discount period and Yang was given a ¥15,000 cash discount. Yang paid ¥37,500 sales tax on the equipment, and paid installation charges of ¥13,200. Prior to installation, Yang paid ¥30,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. ¥785,700 b. ¥815,700 c. ¥830,700 d. ¥757,500
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
89.
Robin Company acquires a piece of land on which it intends to build a factory to produce its primary product. The land is listed for sale at $460,000, but Robin Company’s real estate broker is able to negotiate a sales price of $430,000. The land contains an old office building that is razed at a cost of $25,000 ($29,000 in costs less $4,000 proceeds from salvaged materials). Robin Company pays a commission to the real estate broker of $23,000 and an attorney’s fee of $6,000. On its statement of financial position at December 31, 2020, what amount will Robin Company record as the cost of the land? a. $499,000 b. $455,000 c. $484,000 d. $524,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 90.
9 - 13
Chicago Furniture uses a variety of equipment in its manufacturing facility. On Chicago Furniture’s statement of financial position, the “Equipment” account balance would include all of the following costs except a. motor vehicle licenses on delivery trucks. b. installation costs on new equipment. c. sales taxes paid on new delivery truck. d. insurance during transit on new equipment.
Ans: A, LO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
91.
On January 1, 2020, Chicago Furniture purchases a new delivery truck. The company pays $80,000 for the truck, sales taxes of $4,500, and delivery costs of $2,300. Chicago Furniture pays a local vendor $4,800 to paint the company’s name and logo on the side of the truck. The company also pays $16,000 for an annual insurance policy and $1,700 for a motor vehicle license. At what amount will Chicago Furniture record the truck on its statement of financial position at January1, 2020? a. $80,000 b. $87,100 c. $91,600 d. $109,300
Ans: C, LO: 1, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
92.
Which of the following statement regarding depreciation is false? a. The concept of depreciation is inconsistent with the going concern assumption. b. Recognizing depreciation on an asset does not result in an accumulation of cash for replacement of the asset. c. The three factors affecting the computation of depreciation include cost, useful life, and residual value. d. Accumulated depreciation is reported on the statement of financial position as a deduction from plant assets.
Ans: A, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
93.
Depreciation a. is a process of asset valuation during the period of ownership by a company. b. applies to land, land improvements, buildings, and equipment. c. is accumulated and reported as a contra-asset on the statement of financial position. d. is recognized as a way to accumulated cash for the eventual replacement of assets.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
94.
The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 14 95.
Test Bank for Financial Accounting: IFRS Edition, 4e Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? a. Residual value b. Estimated useful life c. Cash needed to replace the plant asset d. Cost
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
96.
Depreciation is the process of allocating the cost of a plant asset over its useful life in a. an equal and equitable manner. b. an accelerated and accurate manner. c. a systematic and rational manner. d. a conservative market-based manner.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
97.
The book value of an asset is equal to the a. asset’s fair value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset’s cost less accumulated depreciation.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98.
The IFRS allows accountants to measure the change in a plant asset’s fair value a. at the reporting date. b. one time during the asset’s useful life. c. only when losses would have to be recognized. d. whenever management decides the fair value has changed.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
100.
Recording depreciation each period is necessary in accordance with the a. going concern principle. b. cost principle. c. expense recognition principle. d. asset valuation principle.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 101.
9 - 15
In computing depreciation, residual value is a. the fair value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plant asset’s depreciable cost. c. an estimate of a plant asset’s value at the end of its useful life. d. ignored in all the depreciation methods.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
102.
When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life. b. obsolescence factors. c. expected repairs and maintenance. d. the intended use of the asset.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
103.
Useful life is expressed in terms of units of activity, or units of output expected from the asset under the a. declining-balance method. b. straight-line method. c. units-of-activity method. d. none of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 2 AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
Equipment was purchased for $120,000. Freight charges amounted to $5,600 and there was a cost of $16,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $24,000 residual value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $28,320. b. $23,520. c. $19,680. d. $19,200.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
105.
A truck was purchased for ¥300,000 and it was estimated to have a ¥60,000 residual value at the end of its useful life. Monthly depreciation expense of ¥5,000 was recorded using the straight-line method. The annual depreciation rate is a. 20%. b. 2%. c. 8%. d. 25%.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
9 - 16 106.
Test Bank for Financial Accounting: IFRS Edition, 4e A company purchased factory equipment on April 1, 2020 for €240,000. It is estimated that the equipment will have a €30,000 residual value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2020 is a. €24,000. b. €21,000. c. €15,750. d. €18,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
107.
A company purchased office equipment for $200,000 and estimated a residual value of $40,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is a. 20%. b. 25%. c. 40%. d. 4%.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
108.
The declining-balance method of depreciation produces a. a decreasing depreciation expense each period. b. an increasing depreciation expense each period. c. a declining percentage rate each period. d. a constant amount of depreciation expense each period.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
109.
A company purchased factory equipment for ¥2,800,000. It is estimated that the equipment will have a ¥280,000 residual value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be a. ¥1,120,000. b. ¥672,000. c. ¥1,008,000. d. ¥483,840.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
110.
The units-of-activity method is generally not suitable for a. airplanes. b. buildings. c. delivery equipment. d. factory machinery.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 111.
9 - 17
A plant asset cost ₤320,000 and is estimated to have a ₤40,000 residual value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be a. ₤26,800. b. ₤45,000. c. ₤39,375. d. ₤35,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
112.
A factory machine was purchased for $175,000 on January 1, 2020. It was estimated that it would have a $35,000 residual value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2020. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2020 would be a. $17,500. b. $28,000. c. $35,000. d. $14,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
Which of the following methods of computing depreciation is production based? a. Straight-line b. Declining-balance c. Units-of-activity d. None of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
114.
Management should select the depreciation method that a. is easiest to apply. b. best measures the plant asset’s fair value over its useful life. c. best measures the plant asset’s contribution to revenue over its useful life. d. has been used most often in the past by the company.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
115.
The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is a. straight-line. b. units-of-activity. c. declining-balance. d. none of these answer choices are correct.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
9 - 18 116.
Test Bank for Financial Accounting: IFRS Edition, 4e On October 1, 2020, Holt Company places a new asset into service. The cost of the asset is $160,000 with an estimated 5-year life and $40,000 residual value at the end of its useful life. What is the depreciation expense for 2020 if Holt Company uses the straightline method of depreciation? a. $6,000 b. $32,000 c. $8,000 d. $16,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
117.
On October 1, 2020, Holt Company places a new asset into service. The cost of the asset is $160,000 with an estimated 5-year life and $40,000 residual value at the end of its useful life. What is the book value of the plant asset on the December 31, 2020, statement of financial position assuming that Holt Company uses the double-declining-balance method of depreciation? a. $104,000 b. $120,000 c. $144,000 d. $152,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
118.
Which depreciation method is most frequently used in businesses today? a. Straight-line b. Declining-balance c. Units-of-activity d. Double-declining-balance
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
119.
Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $36,000 that will produce an estimated 100,000 units over its useful life. Estimated residual value at the end of its useful life is $3,000. What is the depreciation cost per unit (rounded to the nearest cent)? a. $3.30 b. $3.60 c. $.33 d. $.36
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
120.
Units-of-activity is an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset. b. the asset’s use will be constant over its useful life. c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturing company.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 121.
9 - 19
The calculation of depreciation using the declining balance method, a. ignores residual value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year’s depreciation expense. c. yields an increasing depreciation expense each period. d. multiplies a declining percentage times a constant book value.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
122.
Farr Company purchased a new van for floral deliveries on January 1, 2020. The van cost €56,000 with an estimated life of 5 years and €14,000 residual value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2020? a. €11,200 b. €8,400 c. €16,800 d. €22,400
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
123.
Farr Company purchased a new van for floral deliveries on January 1, 2020. The van cost €56,000 with an estimated life of 5 years and €14,000 residual value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2021? a. €8,960 b. €26,880 c. €35,840 d. €13,440
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
124.
Moreno Company purchased equipment for $900,000 on January 1, 2019, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $40,000 residual value at the end of its useful life. The amount of depreciation expense recognized in the year 2021 will be a. $100,000. b. $60,000. c. $108,880. d. $68,880.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
125.
A plant asset was purchased on January 1 for $180,000 with an estimated residual value of $30,000 at the end of its useful life. The current year’s Depreciation Expense is $15,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $90,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 6 years. d. 4 years.
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
9 - 20 126.
Test Bank for Financial Accounting: IFRS Edition, 4e Equipment was purchased for $300,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $60,000 residual value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $70,800. b. $58,800. c. $49,200. d. $48,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
127.
Equipment was purchased for $85,000 on January 1, 2019. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 residual value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2020, if the straight-line method of depreciation is used? a. $33,400 b. $16,700 c. $14,300 d. $28,600
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
128.
A company purchased factory equipment on June 1, 2020, for ¥4,000,000. It is estimated that the equipment will have a ¥250,000 residual value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2020, is a. ¥375,000. b. ¥218,750. c. ¥187,500. d. ¥156,250.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
129.
A plant asset was purchased on January 1 for $100,000 with an estimated residual value of $20,000 at the end of its useful life. The current year’s Depreciation Expense is $10,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $50,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 5 years. d. 3 years.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 130.
9 - 21
Sargent Corporation bought equipment on January 1, 2020. The equipment cost €540,000 and had an expected residual value of €90,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is a. €540,000. b. €450,000. c. €300,000. d. €75,000.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
Sargent Corporation bought equipment on January 1, 2020. The equipment cost €540,000 and had an expected residual value of €90,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is a. €105,000. b. €108,000. c. €75,000. d. none of these answer choices are correct.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132.
Sargent Corporation bought equipment on January 1, 2020. The equipment cost €540,000 and had an expected residual value of €90,000. The life of the equipment was estimated to be 6 years. The book value of the equipment at the beginning of the third year would be a. €540,000. b. €450,000. c. €390,000. d. €150,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
133.
Tomko Company purchased machinery with a list price of $160,000. They were given a 10% discount by the manufacturer. They paid $1,000 for shipping and sales tax of $7,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $50,000. If Tomko uses straight-line depreciation, annual depreciation will be a. $10,250. b. $10,180. c. $15,250. d. $9,400.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
134.
Drago Company purchased equipment on January 1, 2019, at a total invoice cost of $800,000. The equipment has an estimated residual value of $20,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2020, if the straight-line method of depreciation is used? a. $160,000 b. $320,000 c. $156,000 d. $312,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
9 - 22 135.
Test Bank for Financial Accounting: IFRS Edition, 4e On January 1, a machine with a useful life of five years and a residual value of $150,000 was purchased for $450,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? a. $108,000 b. $180,000 c. $144,000 d. $86,400
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
136.
A machine with a cost of $400,000 has an estimated residual value of $25,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-ofactivity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $125,000 b. $75,000 c. $108,333 d. $133,333
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
137.
Equipment with a cost of ¥1,600,000 has an estimated residual value of ¥100,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? a. ¥400,000 b. ¥452,000 c. ¥330,000 d. ¥375,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
138.
Eckman Company purchased equipment for $120,000 on January 1, 2019, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $6,000 residual value at the end of its useful life. The amount of depreciation expense recognized in the year 2021 will be a. $17,280. b. $27,360. c. $28,800. d. $16,416.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
139.
Grimwood Trucking purchased a tractor trailer for $245,000. Grimwood uses the units-ofactivity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Residual value is estimated to be $35,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record? a. $17,500 b. $22,050 c. $18,900 d. $20,417
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 140.
9 - 23
On May 1, 2020, Pinkley Company sells office furniture for €80,000 cash. The office furniture originally cost €200,000 when purchased on January 1, 2013. Depreciation is recorded by the straight-line method over 10 years with a residual value of €20,000. What depreciation expense should be recorded on this asset in 2020? a. €6,000. b. €6,667. c. €9,000. d. €18,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
On May 1, 2020, Pinkley Company sells office furniture for €80,000 cash. The office furniture originally cost €200,000 when purchased on January 1, 2013. Depreciation is recorded by the straight-line method over 10 years with a residual value of €20,000. What gain should be recognized on the sale? a. €6,000. b. €12,000. c. €12,667. d. €24,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
142.
Mather Company purchased equipment on January 1, 2019 at a total invoice cost of $560,000; additional costs of $10,000 for freight and $50,000 for installation were incurred. The equipment has an estimated residual value of $20,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2020 if the straight-line method of depreciation is used is: a. $216,000. b. $220,000. c. $240,000. d. $124,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
143.
Kingston Company purchased a piece of equipment on January 1, 2019. The equipment cost $200,000 and had an estimated life of 8 years and a residual value of $25,000. What was the depreciation expense for the asset for 2020 under the double-declining-balance method? a. $25,000. b. $37,500. c. $50,000. d. $21,875.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
9 - 24 144.
Test Bank for Financial Accounting: IFRS Edition, 4e Which of the following statements is true regarding depreciation? a. External auditors select the method believed to be most appropriate and consistent with other companies in the same industry. b. The income statement is impacted by depreciation through the accumulated depreciation account, and the statement of financial position is impacted by depreciation expense. c. Once a company chooses a depreciation method, it should apply the same method consistently over the entire useful life of the asset. d. All of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
145.
On January 1, 2019, Chicago Furniture purchased a new delivery truck. The truck is expected to be driven a total of 130,000 miles during its useful life of 4 years; however, Chicago Furniture expects that 2020 and 2021 will be the years the truck is most frequently used for deliveries. If Chicago Furniture wants to achieve the best matching of expenses with revenues, which IFRS acceptable deprecation method should it select? a. Straight-line depreciation. b. Units-of-activity depreciation. c. Declining-balance depreciation. d. Component depreciation.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
146.
On January 1, 2020, Chicago Furniture purchased a new delivery truck. The company paid $80,000 for the truck, $16,000 for an annual insurance policy and $1,700 for a motor vehicle license. The truck has an estimated residual value of $7,000 at the end of its 4 year useful life and Chicago Furniture uses the double-declining-balance method for other similar assets. At what net amount will Chicago Furniture report the truck on its statement of financial position at December 31, 2020? a. $80,000 b. $40,000 c. $36,500 d. $48,850
Ans: B, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
147.
As a recent graduate of Regional University you’re aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation? a. The method used to ensure that the depreciation rate remains constant from year to year. b. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately. c. The method used to prorate annual depreciation on a time basis. d. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.
Ans: B, LO: 2, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 148.
9 - 25
Salem Company hired Kirk Construction to construct an office building for ₤11,200,000 on land costing ₤2,800,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2020 and it has a useful life of 40 years. The price of the building included land improvements costing ₤840,000 and property costing ₤1,050,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2020? a. ₤469,000 b. ₤280,000 c. ₤596,750 d. ₤526,750
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
149.
Salem Company hired Kirk Construction to construct an office building for ₤11,200,000 on land costing ₤2,800,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2020 and it has a useful life of 40 years. The price of the building included land improvements costing ₤840,000 and property costing ₤1,000,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company’s December 31, 2020 statement of financial position? a. ₤10,731,000 b. ₤10,603,250 c. ₤9,077,250 d. ₤10,920,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
150.
IFRS allows companies to revalue plant assets to fair value. Which of the following statements is true regarding revaluation? a. At the time a company purchases an asset it must decide whether to follow revaluation procedures for the asset; once the election is made, it must be followed for the remainder of the asset’s useful life. b. Assets that are experiencing rapid price changes must be revalued quarterly, other assets can be revalued on an annual basis. c. The journal entry to record a revaluation when the asset’s fair value has increased includes a credit to the account revaluation surplus. d. All of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
9 - 26 151.
Test Bank for Financial Accounting: IFRS Edition, 4e IFRS allows companies to revalue plant assets to fair value. When an asset has increased in value, where is the account “Revaluation Surplus” reported? a. On the income statement as part of income from continuing operations (other revenues and gains). b. On the income statement as part of discontinued operations (discontinuing historical cost). c. On the statement of financial position as part of accumulated comprehensive income (equity). d. All of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
152.
Able Towing Company purchased a tow truck for $225,000 on January 1, 2019. It was originally depreciated on a straight-line basis over 10 years with an assumed residual value of $45,000. On December 31, 2021, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2021) and the residual value to $7,500. What was the depreciation expense for 2021? a. $22,500. b. $18,000. c. $56,250. d. $45,375.
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
153.
Nicholson Company purchased equipment on January 1, 2019, for €120,000 with an estimated residual value of €30,000 and estimated useful life of 8 years. On January 1, 2021, Nicholson decided the equipment will last 12 years from the date of purchase. The residual value is still estimated at €30,000. Using the straight-line method the new annual depreciation will be: a. €6,750. b. €7,500. c. €9,000. d. €10,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
154.
An asset was purchased for ¥750,000. It had an estimated residual value of ¥150,000 and an estimated useful life of 10 years. After 5 years of use, the estimated residual value is revised to ¥120,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. ¥90,000. b. ¥66,000. c. ¥45,000. d. ¥63,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 155.
9 - 27
Equipment costing $120,000 with a residual value of $24,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the residual value, the depreciation expense for year 3 would be a. $14,400. b. $32,000. c. $24,000. d. $19,200.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
Ron’s Quik Shop bought machinery for $125,000 on January 1, 2019. Ron estimated the useful life to be 5 years with no residual value, and the straight-line method of depreciation will be used. On January 1, 2020, Ron decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2020? a. $20,000 b. $10,000 c. $16,667 d $25,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
157.
Each of the following is used in computing revised annual depreciation for a change in estimate except a. book value. b. fair value. c. depreciable cost. d. remaining useful life.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
158.
A change in the estimated useful life of equipment requires a. a retroactive change in the amount of periodic depreciation recognized in previous years. b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c. that the amount of periodic depreciation be changed in the current year and in future years. d. that income for the current year be increased.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
159.
Enos Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate? a. Revisions in useful life are permitted if approved by the taxing authority. b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision. d. Both current and future years will be affected by the revision.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
9 - 28 160.
Test Bank for Financial Accounting: IFRS Edition, 4e Don’s Copy Shop bought equipment for $150,000 on January 1, 2019. Don estimated the useful life to be 3 years with no residual value, and the straight-line method of depreciation will be used. On January 1, 2020, Don decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2020? a. $50,000 b. $20,000 c. $25,000 d. $37,500
Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
161.
Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as a. capital expenditures. b. expense expenditures. c. ordinary repairs. d. revenue expenditures.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
162.
Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally a. expensed when incurred. b. capitalized as a part of the cost of the asset. c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
163.
Which of the following is not true of ordinary repairs? a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures. c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
164.
Additions and improvements a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures. c. increase the book value of plant assets when incurred. d. typically only benefit the current accounting period.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 165.
9 - 29
Mento, Inc. spent $4,800,000 during 2020 to repair and update its plant assets. This consisted of $1,800,000 to paint the building, $345,000 to replace worn-out gears on motors, $960,000 to install special shelving that will increase operating efficiency in the plant, and $1,695,000 on new machinery. What amount of these costs would appear as assets on Mento, Inc.’s December 31, 2020 statement of financial position? a. $4,800,000 b. $2,655,000 c. $2,445,000 d. $4,455,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
166.
Touch Tronix Company has a piece of manufacturing equipment that has become obsolete. On December 21, 2020, the company discards the equipment which has a historical cost of $600,000 and accumulated depreciation of $530,000. What is the net impact on the long-term assets of Touch Tronix Company on its December 31, 2020 statement of financial position? a. Decrease of $600,000. b. Increase of $70,000. c. Decrease of $70,000. d. Decrease of $1,130,000.
Ans: C, LO: 3, Bloom: C, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
167.
When a company sells an asset at a gain, which of the following is true? a. Proceeds from the sale exceeded the historical cost of the asset on the statement of financial position. b. Proceeds from the sale were less than the book value of the asset on the statement of financial position. c. Proceeds from the sale exceeded the book value of the asset on the statement of financial position. d. Proceeds from the sale are equal to the historical cost of the asset on the statement of financial position.
Ans: C, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
168.
If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs. b. a loss on disposal occurs. c. either a gain or a loss can occur. d. neither a gain nor a loss occurs.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 30 169.
Test Bank for Financial Accounting: IFRS Edition, 4e A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset’s original cost. b. book value of the asset with the asset’s original cost. c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
170.
The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and its original cost.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
171.
If a plant asset is sold before it is fully depreciated, a. only a gain on disposal can occur. b. only a loss on disposal can occur. c. either a gain or a loss can occur. d. neither a gain nor a loss can occur.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
172.
If a plant asset is retired before it is fully depreciated, and the residual value received is less than the asset’s book value, a. a gain on disposal occurs. b. a loss on disposal occurs. c. there is no gain or loss on disposal. d. additional depreciation expense must be recorded.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173.
A company sells a plant asset which originally cost ¥630,000 for ¥210,000 on December 31, 2020. The Accumulated Depreciation account had a balance of ¥252,000 after the current year’s depreciation of ¥63,000 had been recorded. The company should recognize a a. ¥420,000 loss on disposal. b. ¥168,000 gain on disposal. c. ¥168,000 loss on disposal. d. ¥105,000 loss on disposal.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
174.
If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 175.
9 - 31
If a fully depreciated plant asset is still used by a company, the a. estimated remaining useful life must be revised to calculate the correct revised depreciation. b. asset is removed from the books. c. accumulated depreciation account is removed from the books but the asset account remains. d. asset and the accumulated depreciation continue to be reported on the statement of financial position without adjustment until the asset is retired.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
176.
Which of the following statements is not true when a fully depreciated plant asset is retired? a. The plant asset’s book value is equal to its estimated residual value. b. The accumulated depreciation account is debited. c. The asset account is credited. d. The plant asset’s original cost equals its book value.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
177.
If a plant asset is retired before it is fully depreciated, and no residual or scrap value is received, a. a gain on disposal will be recorded. b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded. d. no gain or loss on disposal will be recorded.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
178.
The book value of an asset will equal its fair value at the date of sale if a. a gain on disposal is recorded. b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated. d. a loss on disposal is recorded.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
179.
A truck costing $154,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $70,000. An insurance check for $175,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a a. Gain on Disposal of $21,000. b. credit to the Truck account of $84,000. c. credit to the Accumulated Depreciation account for $70,000. d. Gain on Disposal of $91,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
9 - 32 180.
Test Bank for Financial Accounting: IFRS Edition, 4e On July 1, 2020, Hale Kennels sells equipment for $80,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected residual value of $50,000. The accumulated depreciation account had a balance of $225,000 on January 1, 2020, using the straight-line method. The gain or loss on disposal is a. $45,000 gain. b. $30,000 loss. c. $45,000 loss. d. $30,000 gain.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
181.
A loss on disposal of a plant asset is reported in the financial statements a. in the Operating expenses section of the income statement. b. in the Other income and expense section of the income statement. c. as a direct increase to the retained earnings account on the statement of financial position. d. as a direct decrease to the Retained Earnings account on the statement of financial position.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
182.
Yanik Company’s delivery truck, which originally cost ₤112,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to ₤76,000. The company received ₤64,000 reimbursement from its insurance company. The gain or loss as a result of the fire was a. ₤48,000 loss. b. ₤28,000 loss. c. ₤48,000 gain. d. ₤28,000 gain.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
183.
A truck that cost $105,000 and on which $50,000 of accumulated depreciation has been recorded was disposed of for $45,000 cash. The entry to record this event would include a a. gain of $10,000. b. loss of $10,000. c. credit to the Truck account for $55,000. d. credit to Accumulated Depreciation for $50,000.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
184.
A truck that cost $108,000 and on which $90,000 of accumulated depreciation has been recorded was disposed of for $27,000 cash. The entry to record this event would include a a. gain of $9,000. b. loss of $9,000. c. credit to the Truck account for $18,000. d. credit to Accumulated Depreciation for $90,000.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 185.
9 - 33
Orr Corporation sold equipment for $20,000. The equipment had an original cost of $60,000 and accumulated depreciation of $30,000. As a result of the sale, a. net income will increase $20,000. b. net income will increase $10,000. c. net income will decrease $10,000. d. net income will decrease $20,000.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
186.
Powell’s Courier Service recorded a loss of $6,000 when it sold a machine that originally cost $56,000 for $10,000. Accumulated depreciation on the machine must have been a. $52,000. b. $16,000. c. $50,000. d. $40,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
187.
A plant asset cost ¥900,000 when it was purchased on January 1, 2013. It was depreciated by the straight-line method based on a 9-year life with no residual value. On June 30, 2020, the asset was discarded with no cash proceeds. What gain or loss should be recognized on the retirement? a. No gain or loss. b. ¥200,000 loss. c. ¥150,000 loss. d. ¥100,000 gain.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
188.
Nicklaus Company has decided to sell one of its old machines on June 30, 2020. The machine was purchased for $160,000 on January 1, 2016, and was depreciated on a straight-line basis for 10 years with no residual value. If the machine was sold for $52,000, what was the amount of the gain or loss recorded at the time of the sale? a. $36,000. b. $108,000. c. $44,000. d. $92,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
189.
On a statement of financial position, natural resources may be described more specifically as all of the following except a. land improvements. b. mineral deposits. c. oil reserves. d. timberlands.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 34 190.
Test Bank for Financial Accounting: IFRS Edition, 4e Natural resources are a. depreciated using the units-of-activity method. b. resources extracted from the ground. c. reported at their fair value. d. amortized over a period no longer than 40 years.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
191.
Depletion is a. a decrease in fair value of natural resources. b. the amount of spoilage that occurs when natural resources are extracted. c. the allocation of the cost of natural resources to expense. d. the method used to record unsuccessful patents.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
192.
The method most commonly used to compute depletion is the a. straight-line method. b. double-declining-balance method. c. units-of-activity method. d. effective interest method.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
193.
In computing depletion, residual value is a. always immaterial. b. ignored. c. impossible to estimate. d. included in the calculation.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
194.
If a mining company extracts 2,000,000 tons in a period but only sells 1,500,000 tons, a. total depletion on the mine is based on the 1,500,000 tons. b. depletion is expensed the 2,000,000 tons extracted. c. depletion is expensed the 1,500,000 tons extracted and sold. d. a separate accumulated depletion account is set up to record depletion on the 500,000 tons extracted but not sold.
Ans: C, LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
195.
A coal company invests €12 million in a mine estimated to have 20 million tons of coal and no residual value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion for the first year? a. €600,000 b. €240,000 c. €60,000 d. Cannot be determined from the information provided.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 196.
9 - 35
Accumulated Depletion a. is used by all companies with natural resources. b. has a normal debit balance. c. is a contra-asset account. d. is never shown on the statement of financial position.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
197.
On July 4, 2020, Wyoming Mining Company purchased the mineral rights to a granite deposit for $2,400,000. It is estimated that the recoverable granite will be 400,000 tons. During 2020, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of depletion expensed for 2020 would be a. $300,000. b. $180,000. c. $360,000. d. $600,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
198.
Depletion is computed by multiplying the depletion cost per unit by the a. total estimated units. b. total actual units. c. number of units extracted. d. number of units sold.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
199.
On January 1, 2020, Cooper Tree Company (CTC) purchases a copper mine for €17,500,000. The mine is estimated to have 20 million tons of copper and no residual value. CTC estimates that it will take 10 years to extract all the copper contained in the mine. CTC spends an additional €3,500,000 during the early part of 2020 preparing the mine. During 2020, CTC extracts and sells 3 million tons of copper. On CTC’s December 31, 2020 statement of financial position, at what net amount is the copper mine reported? a. €17,850,000 b. €18,900,000 c. €15,750,000 d. €14,875,000
Ans: A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
200.
On January 1, 2020, Cooper Tree Company (CTC) purchases a copper mine for €17,500,000. The mine is estimated to have 20 million tons of copper and no residual value. CTC estimates that it will take 10 years to extract all the copper contained in the mine. CTC spends an additional €3,500,000 during the early part of 2020 preparing the mine. During 2020, CTC extracts 3 million tons of copper; however due to price fluctuations none of the copper is sold during 2020. On CTC’s financial statement for 2020, how would the depletion associated with the extracted copper be reported? a. As an expense on the income statement. b. As inventory on the statement of financial position. c. As a loss on the income statement. d. As part of comprehensive income(unrealized gain).
Ans: B, LO: 4, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 36 201.
Test Bank for Financial Accounting: IFRS Edition, 4e Goodwill a. represents things of value associated with a company such as its investments and plant assets. b. is amortized using the straight-line method similar to other intangible assets. c. is reported in the statement of financial position under intangible assets. d. All of these answer choices are correct.
Ans: C, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
202.
Research and development costs are a. expenditures that may lead to patents, copyrights, and new products. b. development costs incurred after technological feasibility has been achieved and are capitalized and reported on the statement of financial position as an intangible asset. c. costs incurred in the research phase which are expensed as incurred. d. All of these answer choices are correct.
Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
203.
Intangible assets are the rights and privileges that result from ownership of long-lived assets that a. must be generated internally. b. are depletable natural resources. c. have been exchanged at a gain. d. do not possess physical substance.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
204.
Identify the item below where the terms are not related. a. Equipment—depreciation b. Franchise—depreciation c. Copyright—amortization d. Oil well—depletion
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
205.
A patent should a. be amortized over a period of 20 years. b. not be amortized if it has an indefinite life. c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
206.
The entry to record patent amortization usually includes a credit to a. Amortization Expense. b. Accumulated Amortization. c. Accumulated Depreciation. d. Patent.
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 207.
9 - 37
The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses. b. deducted from the book value of the patent. c. added to the cost of the patent. d. recognized as a loss in the current period.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
208.
An asset that cannot be sold individually in the market place is a. a patent. b. goodwill. c. a copyright. d. a trade name.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
209.
Goodwill can be recorded a. when customers keep returning because they are satisfied with the company’s products. b. when the company acquires a good location for its business. c. when the company has exceptional management. d. when a business is purchased.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
210.
On July 1, 2020, Jenks Company purchased the copyright to Jackson Computer Tutorials for $540,000. It is estimated that the copyright will have a useful life of 5 years with an estimated residual value of $40,000. The amount of amortization expense recognized for the year 2020 would be a. $108,000. b. $50,000. c. $100,000. d. $54,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
211.
All of the following intangible assets are amortized except a. copyrights. b. limited-life franchises. c. patents. d. trademarks.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
212.
Which of the following is not an intangible asset arising from a government grant? a. Goodwill b. Patent c. Trademark d. Trade name
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 38 213.
Test Bank for Financial Accounting: IFRS Edition, 4e Allocating the cost of an intangible asset is referred to as a. amortization. b. depletion. c. accretion. d. capitalization.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
214.
A patent a. has a legal life of 40 years. b. is nonrenewable. c. can be renewed indefinitely. d. is rarely subject to litigation because it is an exclusive right.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
215.
Copyrights are granted by the government a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years. c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
216.
Goodwill a. is only recorded when generated internally. b. can be subdivided and sold in parts. c. can only be identified with the business as a whole. d. can be defined as normal earnings less accumulated amortization.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
217.
In recording the acquisition cost of an entire business, a. goodwill is recorded as the excess of cost over the fair value of the net assets acquired. b. assets are recorded at the seller’s book values. c. goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the book value of the net assets acquired.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
218.
Research and development costs a. are classified as intangible assets. b. are expenditures that may lead to new processes and new products. c. should be included in the cost of the patent they relate to. d. are capitalized and then amortized over a period not to exceed 40 years.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 219.
9 - 39
A computer company has ¥3,000,000 in research costs. Before accounting for these costs, the net income of the company is ¥2,100,000. What is the amount of net income or loss after these research costs are accounted for? a. ¥900,000 loss b. ¥2,100,000 net income c. ¥0 d. Cannot be determined from the information provided.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
220.
Henson Company incurred $900,000 of research costs in its laboratory to develop a new product. It spent $120,000 in legal fees for a patent granted on January 2, 2020. On July 31, 2020, Henson paid $90,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2020? a. $900,000 b. $210,000 c. $1,110,000 d. Some other amount
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
221.
Given the following account balances at year end, compute the total intangible assets on the balance sheet of Kepler Enterprises. Cash Accounts Receivable Trademarks Goodwill Research Costs a. b. c. d.
€1,500,000 4,000,000 1,000,000 4,500,000 2,000,000
€11,500,000 €7,500,000 €5,500,000 €9,500,000
Ans: C, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
222.
Rooney Company incurred $560,000 of research costs in its laboratory to develop a patent granted on January 1, 2020. On July 31, 2020, Rooney paid $84,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2020, should be: a. $560,000. b. $84,000. c. $644,000. d. $476,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
9 - 40 223.
Test Bank for Financial Accounting: IFRS Edition, 4e Mehring Company reported net sales of $390,000, net income of $90,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company’s asset turnover? a. 1.08 b. 0.30 c. 1.30 d. 1.63
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
224.
During 2020, Rathke Corporation reported net sales of $3,500,000, net income of $1,440,000, and depreciation expense of $120,000. Rathke also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $960,000, and accumulated depreciation of $600,000. Rathke’s asset turnover is a. 3.5 times. b. 2.8 times. c. 2.3 times. d. 1.2 times.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
225.
During 2020, Stein Corporation reported net sales of $3,750,000 and net income of $2,250,000. Stein also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Stein’s asset turnover is a. 3.8 times. b. 3.0 times. c. 2.5 times. d. 1.8 times.
Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
226.
Natural resources are generally shown on the statement of financial position under a. Intangibles. b. Investments. c. Property, Plant, and Equipment. d. Equity.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
227.
Intangible assets a. should be reported under the heading Property, Plant, and Equipment. b. are not reported on the statement of financial position because they lack physical substance. c. should be reported as Current Assets on the statement of financial position. d. should be reported as a separate classification on the statement of financial position.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 228.
9 - 41
A company has the following assets: Buildings and Equipment, less accumulated depreciation of ¥3,000,000 Copyrights Patents Timberlands, less accumulated depletion of ¥4,200,000
¥14,400,000 1,440,000 6,000,000 7,200,000
The total amount reported under Property, Plant, and Equipment would be a. ¥29,040,000. b. ¥21,600,000. c. ¥27,600,000. d. ¥23,040,000. Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
229.
Which of the following is disclosed in the statement of financial position or the notes to the financial statements? a. The year the asset was purchased. b. Accumulated depreciation by class of asset. c. Depreciation method used. d. Depreciation expense for the period.
Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
230.
The asset turnover ratio a. Is computed by dividing net sales (income statement account) by average total assets (statement of financial position account). b. Measures how efficiently a company is using its net sales to purchase and use fixed assets. c. Measures how many dollars are invested in fixed assets per dollar of net sales. d. All of these answer choices are correct.
Ans: A, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
231.
Under U.S. GAAP a. property, plant, and equipment may not be revalued. b. component depreciation is not required. c. research and development costs are expensed as incurred. d. All of these answer choices are correct.
Ans: D, LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
232.
Which of the following statements concerning IFRS and U.S. GAAP is true? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of these answer choices are correct.
Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
9 - 42 a
Test Bank for Financial Accounting: IFRS Edition, 4e
233. A company decides to exchange its old machine and ¥2,310,000 cash for a new machine. The old machine has a book value of ¥1,890,000 and a fair value of ¥2,100,000 on the date of the exchange. The cost of the new machine would be recorded at a. ¥4,200,000. b. ¥4,410,000. c. ¥3,990,000. d. cannot be determined.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
234. A company exchanges its old office equipment and $100,000 for new office equipment. The old office equipment has a book value of $70,000 and a fair value of $50,000 on the date of the exchange. The cost of the new office equipment would be recorded at a. $170,000. b. $150,000. c. $120,000. d. cannot be determined.
Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
235. In an exchange of plant assets that has commercial substance, any difference between the fair value and the book value of the old plant asset is a. recorded as a gain or loss. b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss.
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
236. Gains on an exchange of plant assets that has commercial substance are a. deducted from the cost of the new asset acquired. b. deferred. c. not possible. d. recognized immediately.
Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
237. Losses on an exchange of plant assets that has commercial substance are a. not possible. b. deferred. c. recognized immediately. d. deducted from the cost of the new asset acquired.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
238. The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the a. book value of the old asset. b. fair value of the old asset. c. book value of the asset acquired. d. fair value of the new asset.
Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 239.
9 - 43
The cost of land includes all of the following except a. real estate brokers’ commissions. b. closing costs. c. accrued property taxes. d. parking lots.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
240.
A term that is not synonymous with property, plant, and equipment is a. plant assets. b. fixed assets. c. intangible assets. d. Plant and equipment.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
241.
The factor that is not relevant in computing depreciation is a. replacement value. b. cost. c. residual value. d. useful life.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
242.
Depreciable cost is the a. book value of an asset less its residual value. b. cost of an asset less its residual value. c. cost of an asset less accumulated depreciation. d. book value of an asset.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
243.
Santayana Company purchased a machine on January 1, 2018, for $40,000 with an estimated residual value of $10,000 and an estimated useful life of 8 years. On January 1, 2020, Santayana decides the machine will last 12 years from the date of purchase. The residual value is still estimated at $10,000. Using the straight-line method, the new annual depreciation will be a. $2,250. b. $2,500. c. $3,000. d. $3,333.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
244.
Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and are referred to as a. capital expenditures. b. expense expenditures. c. improvements. d. revenue expenditures.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 44 245.
Test Bank for Financial Accounting: IFRS Edition, 4e Additions and improvements are generally a. revenue expenditures. b. debited to an expense account. c. debited to accumulated depreciation. d. debited to an appropriate asset account.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
246.
A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the a. residual value of the asset sold. b. fair value of the asset sold. c. book value of the asset sold. d. accumulated depreciation on the asset sold.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
247.
The entry to record depletion expense a. decreases equity and assets. b. decreases net income and increases liabilities. c. decreases assets and liabilities. d. decreases assets and increases liabilities.
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
248.
All of the following are intangible assets except a. copyrights. b. goodwill. c. patents. d. research and development costs.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
249.
The asset turnover ratio is computed by dividing a. net income by average total assets. b. net sales by average total assets. c. net income by ending total assets. d. net sales by ending total assets.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
250. In an exchange of plant assets that has commercial substance a. neither gains nor losses are recognized immediately. b. gains, but not losses, are recognized immediately. c. losses, but not gains, are recognized immediately. d. both gains and losses are recognized immediately.
Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
9 - 45
BRIEF EXERCISES BE 251 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Parking lots _____ 2. Electricity used by a machine _____ 3. Excavation costs _____ 4. Interest on building construction loan _____ 5. Cost of trial runs for machinery _____ 6. Drainage costs _____ 7. Cost to install a machine _____ 8. Fences _____ 9. Unpaid (past) property taxes assumed _____10. Cost of tearing down a building when land and a building on it are purchased Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 251 1. 2. 3. 4. 5.
LI X B B E
(5 min.) 6. 7. 8. 9. 10.
L E LI L L
BE 252 DeLong Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, €73,000; broker’s fees, €6,000; title search and other fees, €5,000; demolition of an old building on the property, €5,700; grading, €1,200; digging foundation for the road, €3,000; laying and paving driveway, €25,000; lighting €7,500; signs, €1,500. List the items and amounts that should be included in the Land account. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 252
(3 min.)
Purchase price Broker’s fees Title search and other fees Demolition of old building Grading Land acquisition cost
€73,000 6,000 5,000 5,700 1,200 €90,900
For Instructor Use Only
9 - 46
Test Bank for Financial Accounting: IFRS Edition, 4e
BE 253 Hadicke Company purchased a delivery truck for $50,000 on January 1, 2019. The truck was assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute depreciation expense using the double-declining-balance method for the years 2019 and 2020. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 253
(4 min.)
Double the straight-line rate: 1 ÷ 5 = 20%; 20% × 2 = 40% 2019: Book value ($50,000) × 40% = $20,000 depreciation expense 2020: Book value ($50,000 – $20,000) × 40% = $12,000 depreciation expense BE 254 Hadicke Company purchased a delivery truck for $50,000 on January 1, 2019. The truck was assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck was driven 18,000 miles in 2019 and 22,000 miles in 2020. Compute depreciation expense using the units-of-activity method for the years 2019 and 2020. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 254
(4 min.)
Depreciation expense per mile: ($50,000 – $10,000) ÷ 100,000 miles = $.40 per mile Depreciation expense for 2019: Depreciation expense for 2020:
18,000 miles ($.40 per mile) = $7,200 22,000 miles ($.40 per mile) = $8,800
BE 255 Karnes Company purchased a truck for $44,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $4,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided. Units-of-activity
$
Double-declining-balance
$
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 255
(6 min.)
Units-of-activity [($44,000 – $4,000) ÷ 100,000] × 27,000 = $10,800
$10,800
Double-declining-balance year 1— [$44,000 × (1/4 × 2)] = $22,000 year 2— [($44,000 – $22,000) × (1/4 × 2)] = $11,000
$11,000
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
9 - 47
BE 256 On January 1, 2017, Reyes Company purchased a computer system for $30,500. The system had an estimated useful life of 5 years and no residual value. At January 1, 2019, the company revised the remaining useful life to two years. What amount of depreciation will be recorded for 2019 and 2020? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 256
(4 min.)
Original depreciation: $30,500 ÷ 5 = $6,100 per year Book value at January 1, 2019: $30,500 – ($6,100 + $6,100) = $18,300 Depreciation for 2019 and 2020: $18,300 ÷ 2 = $9,150 per year BE 257 Miley Enterprises sold equipment on January 1, 2020 for ₤5,000. The equipment had cost ₤33,000. The balance in Accumulated Depreciation at January 1 is ₤30,000. What entry would Robot make to record the sale of the equipment? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 257
(4 min.)
Calculate gain or loss on sale: Proceeds Book value Gain on Disposal
₤5,000 3,000 (₤33,000 – ₤30,000) ₤2,000
Entry to record sale: Cash................................................................................................. Accumulated Depreciation—Equipment .......................................... Gain on Disposal ..................................................................... Equipment ...............................................................................
5,000 30,000 2,000 33,000
BE 258 On January 1, 2020, Lakeside Enterprises purchased natural resources for $2,400,000. The company expects the resources to produce 12,000,000 units of product. (1) What is the depletion cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion for the month? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 258
(3 min.)
(1) Depletion cost per unit: $2,400,000 ÷ 12,000,000 units = $.20 per unit (2) Depletion for January: $.20 × 20,000 = $4,000 BE 259 On January 2, 2020, Harlan Company purchased a patent for $42,000. The patent has an estimated useful life of 25 years and a 20-year legal life. What entry would the company make at December 31, 2020 to record amortization expense on the patent? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
9 - 48
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 259 (3 min.) Amortization Expense ($42,000 ÷ 20) .................................................... Patent ............................................................................................
2,100 2,100
BE 260 Using the following data for Notson, Inc., compute its asset turnover. Notson, Inc. Net Income 2020 Total Assets 12/31/20 Total Assets 12/31/19 Net Sales 2019
$ 123,000 2,420,000 1,880,000 3,010,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 260
(3 min.)
Asset Turnover: =
Net Sales Avg. Total Assets
=
$3,010,000 ($2,420,000 + $1,880,000) ÷ 2
= 1.4 times
EXERCISES Ex. 261 Kemp Company purchased factory equipment with an invoice price of €85,000. Other costs incurred were freight costs, €1,100; installation wiring and foundation, €2,200; material and labor costs in testing equipment, €700; oil lubricants and supplies to be used with equipment, €500; fire insurance policy covering equipment, €1,400. The equipment is estimated to have a €5,000 residual value at the end of its 10-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be __________. Ans: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 261
(10 min.)
(a)
Invoice cost Freight costs Installation wiring and foundation Material and labor costs in testing Acquisition cost
(b)
If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be 20% (10 years = 10% ´ 2).
For Instructor Use Only
€85,000 1,100 2,200 700 €89,000
Plant Assets, Natural Resources, and Intangible Assets
9 - 49
Ex. 262 For each entry below make a correcting entry if necessary. If the entry given is correct, then state “No entry required.” (a) The $60 cost of repairing a printer was charged to Equipment. (b) The $5,000 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the equipment. (c) The $6,000 closing costs associated with the acquisition of land were debited to Legal Expense. (d) A $500 charge for transportation expenses on new equipment purchased was debited to Freight-In. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 262 (a) (b) (c) (d)
(10 min.)
Repairs Expense........................................................................... Equipment ............................................................................
60
Equipment ..................................................................................... Maintenance and Repairs Expense .....................................
5,000
Land ............................................................................................. Legal Expense .....................................................................
6,000
Equipment ..................................................................................... Freight-In ..............................................................................
500
60 5,000 6,000 500
Ex. 263 Lewallen Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land. Debits 1. Cost of real estate purchased as a plant site (land and building). 2. Accrued real estate taxes paid at the time of the purchase of the real estate. 3. Cost of demolishing building to make land suitable for construction of a new building. 4. Architect’s fees on building plans. 5. Excavation costs for new building. 6. Cost of filling and grading the land. 7. Insurance and taxes during construction of building. 8. Cost of repairs to building under construction caused by a small fire. 9. Interest paid during the year, of which $54,000 pertains to the construction period. 10. Full payment to building contractor. 11. Cost of parking lots and driveways. 12. Real estate taxes paid for the current year on the land. Total Debits
For Instructor Use Only
$ 220,000 4,000 15,000 14,000 29,000 5,000 6,000 7,000 69,000 740,000 46,000 4,000 $1,159,000
9 - 50 Ex. 263
Test Bank for Financial Accounting: IFRS Edition, 4e (Cont.)
Credits 13. Insurance proceeds for fire damage. 14. Proceeds from residual of demolished building Total Credits
$3,000 3,500 $6,500
Instructions Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns. Item
Land
Building
Other
Account Title
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA
Solution 263 Item 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Totals
(15 min.) Land $220,000 4,000 15,000
Building
Other
Account Title
$ 7,000 15,000
Fire Loss Interest Expense
46,000 4,000 (3,000)
Land Improvements Taxes Expense Fire Loss
$ 14,000 29,000 5,000 6,000 54,000 740,000
(3,500) $240,500
$843,000
$69,000
Ex. 264 On March 1, 2020, Joyner Company acquired real estate on which it planned to construct a small office building. The company paid $65,000 in cash. An old warehouse on the property was razed at a cost of $7,600; the residual materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney’s fee for work concerning the land purchase, $4,000 real estate broker’s fee, $7,800 architect’s fee, and $14,000 to put in driveways and a parking lot. Instructions Determine the amount to be reported as the cost of the land. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Solution 264
9 - 51
(4 min.)
Cost of land Cash paid .......................................................... Net cost of removing warehouse....................... ($7,600 – $1,700) Attorney’s fee .................................................... Real estate broker’s fee .................................... Total ......................................................
$65,000 5,900 1,100 4,000 $76,000
Ex. 265 Chang Company purchased a machine at a cost of ¥1,800,000. The machine is expected to have a ¥100,000 residual value at the end of its 5-year useful life. Instructions Compute annual depreciation for the first and second years using the (a) straight-line method. (b) double-declining-balance method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 265
(8 min.)
(a) Straight-line method: Years 1 and 2 depreciation = ¥340,000/yr. (¥1,800,000 – ¥100,000) ÷ 5 (b) Double-declining-balance method: Year 1 depreciation = ¥720,000 (¥1,800,000 – 0) × *40% Year 2 depreciation = ¥432,000 (¥1,800,000 – ¥720,000) × 40% *(1/5 × 2) Ex. 266 Guardado Company purchased a new machine for $400,000. It is estimated that the machine will have a $40,000 residual value at the end of its 5-year useful service life. The double-decliningbalance method of depreciation will be used. Instructions Prepare a depreciation schedule which shows the annual depreciation expense on the machine for its 5-year life. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
9 - 52
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 266
(10 min.) Declining-balance rate = 2 ÷ 5 = 40%
Book Value Beginning Depreciation Year of Year × Rate = 1 $400,000 × 40% 2 240,000 × 40% 3 144,000 × 40% 4 86,400 × 40% 5 51,840 × 40%
Annual Depreciation Expense $160,000 96,000 57,600 34,560 11,840*
End of Year Accumulated Book Value Depreciation End of Year $160,000 $240,000 256,000 144,000 313,600 86,400 348,160 51,840 360,000 40,000
*Adjusted to $11,840 because ending book value should not be less than expected residual value. Ex. 267 Marlow Company purchased equipment on January 1, 2019 for $90,000. It is estimated that the equipment will have a $5,000 residual value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life. Instructions Answer the following independent questions. 1. Compute the amount of depreciation expense for the year ended December 31, 2019, using the straight-line method of depreciation. 2. If 16,000 units of product are produced in 2019 and 24,000 units are produced in 2020, what is the book value of the equipment at December 31, 2020? The company uses the units-ofactivity depreciation method. 3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2021? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 267
(15 min.) C–S Years
1.
Straight-line method: =
2.
Units-of-activity method: =
=
C–S Units
($90,000 – $5,000) 5
=
2019 16,000 units × $.85 2020 24,000 units × $.85 Accumulated depreciation
= $13,600 = 20,400 = $34,000
Cost of asset Less: Accumulated Depreciation Book value
$90,000 34,000 $56,000
= $17,000 per year
($90,000 – $5,000) 100,000 units
For Instructor Use Only
= $0.85 per unit
Plant Assets, Natural Resources, and Intangible Assets Solution 267
9 - 53
(Cont.)
3. Double-declining-balance method:
2019 2020 2021
Book Value Beginning of Year × $90,000 54,000 32,400
Declining Balance Rate 40% 40% 40%
=
Depreciation Expense $36,000 21,600 12,960
Accumulated Depreciation $36,000 57,600 70,560
Ex. 268 A plant asset acquired on October 1, 2020, at a cost of ¥6,000,000 has an estimated useful life of 10 years. The residual value is estimated to be ¥600,000 at the end of the asset’s useful life. Instructions Determine the depreciation expense for the first two years using: (a) the straight-line method. (b) the double-declining-balance method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 268 (a)
(b)
(10 min.)
Straight-line method Year 1 =
(¥6,000,000 – ¥600,000) 10 years
Year 2
¥540,000
= ¥540,000 × 3 ÷ 12 = ¥135,000
Double-declining-balance method Constant rate — 2 ÷ 10 = 20% Year 1 ¥6,000,000 × 20% × (3 ÷ 12) = ¥300,000 Year 2 ¥5,700,000 × 20% = ¥1,140,000
Ex. 269 Andy’s, a popular pizza hang-out, has a thriving delivery business. Andy’s has a fleet of three delivery automobiles. Prior to making the entry for this year’s depreciation expense, the subsidiary ledger for the fleet is as follows: Accumulated Estimated Depr.—Beg. Miles Operated Car Cost Residual Value Life in Miles of the Year During Year 1 $21,000 $3,000 50,000 $2,520 20,000 2 27,000 3,600 60,000 2,340 22,000 3 20,000 2,500 70,000 2,000 19,000 Instructions (a) Determine the depreciation rates per mile for each car. (b) Determine the depreciation expense for each car for the current year. (c) Make one compound journal entry to record the annual depreciation expense for the fleet. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
9 - 54
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 269 (a)
(10 min.)
Car 1 =
($21,000 – $3,000) 50,000 miles
= $0.36 per mile
Car 2 =
($27,000 – $3,600) 60,000 miles
= $0.39 per mile
Car 3 =
($20,000 – $2,500) 70,000 miles
= $0.25 per mile
(b)
Car 1 — Car 2 — Car 3 —
20,000 miles × $0.36 = $7,200 22,000 miles × $0.39 = $8,580 19,000 miles × $0.25 = $4,750
(c)
Depreciation Expense ................................................................... Accumulated Depreciation—Car 1 ....................................... Accumulated Depreciation—Car 2 ....................................... Accumulated Depreciation—Car 3 .......................................
20,530 7,200 8,580 4,750
Ex. 270 The Nichols Clinic purchased a new surgical laser for $80,000. The estimated residual value is $5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year 4; 2,000 hours in year 5. Instructions (a) Compute the annual depreciation for each of the five years under each of the following methods: (1) straight-line. (2) units-of-activity. (b)
If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.
(c)
Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?
Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Solution 270
(10 min.)
(a) (1) Straight-line method: =
($80,000 – $5,000) 5 years
(2) Units-of-activity method: = Year 1 2 3 4 5 Year 1 Year 2 Year 3 Year 4 Year 5 Total
9 - 55
1,600 2,200 2,400 1,800 2,000
× × × × ×
$7.50 7.50 7.50 7.50 7.50
Straight-line $15,000 15,000 15,000 15,000 15,000 $75,000
= $15,000 per year
($80,000 – $5,000) 10,000 hours
= $7.50/hour
= $12,000 = 16,500 = 18,000 = 13,500 = 15,000 Units-of-Activity $12,000 16,500 18,000 13,500 15,000 $75,000
(b)
The units-of-activity method can be justified based on the variable usage the laser will receive during its useful life.
(c)
The straight-line method provides the highest depreciation expense for the first year, and therefore the lowest first year income. Over the five-year period, both methods result in the same total depreciation expense ($75,000) and, therefore, the same total income.
Ex. 271 The December 31, 2019 statement of financial position of Cooper Company showed Equipment of €80,000 and Accumulated Depreciation of €22,000. On January 1, 2020, the company decided that the equipment has a remaining useful life of 6 years with a €4,000 residual value. Instructions Compute the (a) depreciable cost of the equipment and (b) revised annual depreciation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 271
(5 min.)
(a) Book value, 1/1/20 (€80,000 – €22,000) Less residual value Depreciable cost
€58,000 4,000 €54,000
(b) Revised annual depreciation = €9,000 (€54,000 ÷ 6)
For Instructor Use Only
9 - 56
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 272 Northeast Airlines purchased an aircraft on January 1, 2018, at a cost of $45,000,000. The estimated useful life of the aircraft is 20 years, with an estimated residual value of $5,000,000. On January 1, 2021 the airline revises the total estimated useful life to 13 years with a revised residual value of $4,000,000. Instructions (a) Compute the depreciation expense and book value at December 31, 2020 using the straight-line method and the double-declining-balance method. (b)
Assuming the straight-line method is used, compute the depreciation expense for the year ended December 31, 2021.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 272 (a)
(20 min.)
Year 2018 2019 2020
Straight-line Depreciable Depreciation Annual Cost × Rate = Depreciation $40,000,000 5% $2,000,000 Ö Ö Ö Ö Ö Ö
Accumulated Depreciation $2,000,000 4,000,000 6,000,000
Book Value $43,000,000 41,000,000 39,000,000
Year 2018 2019 2020
Double-declining-balance Book Value Depreciation Annual Beginning Year × Rate = Depreciation $45,000,000 10% $4,500,000 40,500,000 Ö 4,050,000 36,450,000 Ö 3,645,000
Accumulated Depreciation $ 4,500,000 8,550,000 12,195,000
Book Value $40,500,000 36,450,000 32,805,000
(b)
Book value, January 1, 2021 Less: Revised residual value Depreciable cost
$39,000,000 4,000,000 $35,000,000
Remaining useful life
10 yrs.
Revised annual depreciation
$3,500,000
Ex. 273 Payton Company purchased a machine on January 1, 2020, at a cost of $90,000. It is expected to have an estimated residual value of $5,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2020 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the doubledeclining-balance method. Net income for the year ended December 31, 2020 was $55,000 as the result of depreciating the machine incorrectly. Instructions Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected net income. (Show computations.) Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Solution 273
9 - 57
(10 min.)
Depreciation taken: ($90,000 – 0) × .40 = Correct depreciation: ($90,000 – $5,000) ÷ 5 yrs. = Overstatement of depreciation =
$36,000 17,000 $19,000
Accumulated Depreciation ............................................................... Depreciation Expense ............................................................. Correct net income: Net income as reported Add: Overstatement of depreciation expense Correct net income
19,000 19,000
$55,000 19,000 $74,000
Ex. 274 Equipment was acquired on January 1, 2016, at a cost of ¥2,000,000. The equipment was originally estimated to have a residual value of ¥100,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2019, using the straight-line method. On January 1, 2020, the estimated residual value was revised to ¥140,000 and the useful life was revised to a total of 8 years. Instructions Determine the Depreciation Expense for 2020. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 274
(5 min.)
Calculate the book value at the time of the revision: ¥2,000,000 – ¥100,000 10 years
= ¥190,000 annual depreciation expense
4 years have been depreciated: ¥190,000 × 4 = ¥760,000 Book value at the time of the revision: ¥2,000,000 – ¥760,000 = ¥1,240,000 Calculate the revised annual depreciation: ¥1,240,000 – ¥140,000 4 years remaining
= ¥275,000 revised annual depreciation
The Depreciation Expense for 2020 is ¥275,000.
For Instructor Use Only
9 - 58
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 275 Steve White the new controller of Weinberg Company, has reviewed the expected useful lives and residual values of selected depreciable assets at the beginning of 2020. His findings are as follows. Type of Asset Building Warehouse
Date Acquired 1/1/14 1/1/15
Cost $1,600,000 207,000
Accumulated Depreciation 1/1/20 $228,000 40,000
Useful Life in Years Old Proposed 40 50 25 20
Residual Value Old Proposed $80,000 $52,000 7,000 5,000
All assets are depreciated by the straight-line method. Weinberg Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Steve’s proposed changes. Instructions (a) Compute the revised annual depreciation on each asset in 2020. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2020. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 275 (a)
(10 min.)
Type of Asset Book value, 1/1/20 Less: Residual value Depreciable cost
Building $1,372,000 52,000 $1,320,000
Warehouse $167,000 5,000 $162,000
44
15
30,000
$ 10,800
Revised useful life in years Revised annual depreciation (b)
Dec. 31
$
Depreciation Expense—Building ................... Accumulated Depreciation— Building ................................................
30,000 30,000
Ex. 276 Kennett Company purchased a machine on January 1, 2020. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) installation costs necessary to secure the machinery to the building flooring.
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Ex. 276
9 - 59
(Cont.)
Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue. (a)_____________
(b)______________
(c)______________
(d)______________
(e)_____________
(f)______________
(g)______________
(h)______________
Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 276
(5 min.)
(a) Capital
(b) Capital
(c) Capital
(d) Revenue
(e) Capital
(f)
(g) Revenue
(h) Capital
Capital
Ex. 277 Eckan Word Processing Service uses the straight-line method of depreciation. The company’s fiscal year end is December 31. The following transactions and events occurred during the first three years. 2019
July
1
Nov. 3 Dec. 31
Purchased a computer from the Computer Center for $1,900 cash plus sales tax of $150, and shipping costs of $50. Incurred ordinary repairs on computer of $140. Recorded 2019 depreciation on the basis of a four year life and estimated residual value of $500.
2020
Dec. 31
Recorded 2020 depreciation.
2021
Jan.
Paid $300 for an upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.
1
Instructions Prepare the necessary entries. (Show computations.) Ans: N/A, LO: 1,2, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 277 2019
July Nov.
(15 min.) 1 3
Dec. 31
Equipment ................................................................ Cash ................................................................
2,100
Maintenance and Repairs Expense ......................... Cash ................................................................
140
Depreciation Expense .............................................. Accumulated Depreciation—Equipment .......... [($2,100 – $500) ÷ 4 × 1/2]
200
For Instructor Use Only
2,100 140 200
9 - 60
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 277 2020
2021
(Cont.)
Dec. 31
Jan.
1
Depreciation Expense............................................... Accumulated Depreciation—Equipment .......... ($1,600 ÷ 4)
400
Equipment................................................................. Cash.................................................................
300
400
300
Ex. 278 Identify the following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery. (b) Construction of a new wing on an office building. (c) Painting the exterior of a building. (d) Oil change on a company truck. (e) Replacing a computer chip with a larger chip, which increases productive capacity. No extension of useful life expected. (f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10. (h) Painting and lettering of a used truck upon acquisition of the truck. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 278 (a) (b) (c) (d)
revenue capital revenue revenue
(5 min.) (e) (f) (g) (h)
capital capital revenue capital
Ex. 279 On January 1, 2018 Marsh Company purchased and installed a telephone system at a cost of ₤20,000. The equipment was expected to last five years with a residual value of ₤3,000. On January 1, 2019 more telephone equipment was purchased to tie-in with the current system for ₤12,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Marsh Company uses the straight-line method of depreciation. Instructions Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2019 through the useful life of the new equipment.
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Ex. 279
9 - 61
(Cont.)
Telephone Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) ___________________________________________________________________________ 2019 2020 2021 2022 Ans: N/A, LO: 1, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 279
(25 min.)
Telephone Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) ———————————————————————————————————————— 2019 ₤12,000 ₤(3,000) ₤(9,000) 2020 (3,000) 3,000 2021 (3,000) 3,000 2022 (3,000) 3,000 Total ₤12,000 ₤(12,000) -0Ex. 280 Gurney Company sold equipment on July 31, 2020 for $75,000. The equipment had cost $210,000 and had $120,000 of accumulated depreciation as of January 1, 2020. Depreciation for the first 6 months of 2020 was $10,000. Instructions Prepare the journal entry to record the sale of the equipment. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 280
(6 min.)
Cash ...................................................................................................... Accumulated Depreciation ($120,000 + $10,000) ................................. Loss on Disposal $75,000 – ($210,000 – $130,000) ............................. Equipment .....................................................................................
75,000 130,000 5,000 210,000
Ex. 281 (a)
Payne Company purchased equipment in 2013 for $90,000 and estimated a $6,000 residual value at the end of the equipment’s 10-year useful life. At December 31, 2019, there was $58,800 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2020, the equipment was sold for $26,000. Prepare the appropriate journal entries to remove the equipment from the books of Payne Company on March 31, 2020. For Instructor Use Only
9 - 62 Ex. 281 (b)
Test Bank for Financial Accounting: IFRS Edition, 4e (Cont.)
Judson Company sold a machine for $15,000. The machine originally cost $35,000 in 2017 and $8,000 was spent on a major overhaul in 2020 (charged to Machinery account). Accumulated Depreciation on the machine to the date of disposal was $28,000. Prepare the appropriate journal entry to record the disposition of the machine.
(c)
Donahue Company sold office equipment that had a book value of $7,000 for $8,000. The office equipment originally cost $20,000 and it is estimated that it would cost $25,000 to replace the office equipment. Prepare the appropriate journal entry to record the disposition of the office equipment.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 281 (a)
(b)
(c)
(15 min.)
Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ............................... (To record depreciation expense for the first 3 months of 2020. $8,400 × 1/4 = $2,100)
2,100
Cash .............................................................................................. Loss on Disposal ........................................................................... Accumulated Depreciation—Equipment ($58,800 + $2,100) ........ Equipment ............................................................................ (To record sale of equipment at a loss)
26,000 3,100 60,900
Cash .............................................................................................. Accumulated Depreciation—Equipment........................................ Equipment ............................................................................ (To record disposition of machine at book value)
15,000 28,000
Cash .............................................................................................. Accumulated Depreciation—Equipment........................................ Equipment ............................................................................ Gain on Disposal of Plant Assets ......................................... (To record disposal of office equipment at a gain)
8,000 13,000
For Instructor Use Only
2,100
90,000
43,000
20,000 1,000
Plant Assets, Natural Resources, and Intangible Assets
9 - 63
Ex. 282 Hanshew’s Lumber Mill sold two machines in 2020. The following information pertains to the two machines: Purchase Useful Residual Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 €88,000 7/1/16 5 yrs. €8,000 Straight-line 7/1/20 €20,000 #2 €70,000 7/1/19 5 yrs. €7,500 Double-declining12/31/20 €42,000 balance Instructions (a) Compute the depreciation on each machine to the date of disposal. (b)
Prepare the journal entries in 2020 to record depreciation expense and the sale of each machine.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 282
(20 min.)
(a) Machine #1 Year Depreciable Cost ´ 2016 €80,000 2017 Ö 2018 Ö 2019 Ö 2020 Ö *One-half a year.
Depreciation Rate = 20% Ö Ö Ö Ö
Annual Depreciation € 8,000* 16,000 16,000 16,000 8,000*
Accumulated Depreciation € 8,000 24,000 40,000 56,000 64,000
Machine #2 Year 2019 2020
Book Value Beginning of Year ´ €70,000 56,000
DDB Rate 40% 40%
Annual Depreciation € 14,000* 22,400
Accumulated Depreciation € 14,000 36,400
*One-half a year. (b)
Machine 1 Depreciation Expense 8,000 Accumulated Depreciation—Equip. 8,000
Machine 2 22,400 22,400
Cash Loss on Disposal of Equipment Accumulated Depreciation—Equip. Equipment Gain on Disposal of Equipment
42,000 -036,400
20,000 4,000* 64,000 88,000 -0-
*€88,000 – €64,000 = €24,000; €24,000 – €20,000 = €4,000. **€42,000 – (€70,000 – €36,400) = €8,400.
For Instructor Use Only
70,000 8,400**
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Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 283 Presented below are selected transactions for Corbin Company for 2020. Jan.
1
Received $3,000 scrap value on retirement of machinery that was purchased on January 1, 2009. The machine cost $90,000 on that date, and had a useful life of 10 years with no residual value.
April 30
Sold a machine for $31,000 that was purchased on January 1, 2017. The machine cost $90,000, and had a useful life of 5 years with no residual value.
Dec. 31
Discarded a business automobile that was purchased on April 1, 2016. The car cost $42,000 and was depreciated on a 5-year useful life with a residual value of $2,000.
Instructions Journalize all entries required as a result of the above transactions. Corbin Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2019. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 283 Jan.
1
April 30
Dec. 31
(15 min.)
Cash ..................................................................................... Accumulated Depreciation—Equipment ............................... Equipment ................................................................... Gain on Disposal of Plant Assets ................................
3,000 90,000
Depreciation Expense .......................................................... Accumulated Depreciation—Equipment ...................... ($90,000 × 1/5 × 4/12 = $6,000)
6,000
Cash ..................................................................................... Accumulated Depreciation—Equipment ($18,000 × 3 1/3) .. Equipment ................................................................... Gain on Disposal of Plant Assets ($31,000 – $30,000) .............................................
31,000 60,000
Depreciation Expense .......................................................... Accumulated Depreciation—Equipment ......................
8,000
Accumulated Depreciation—Equipment ($8,000 × 4 3/4) .... Loss on Disposal .................................................................. Equipment ...................................................................
38,000 4,000
For Instructor Use Only
90,000 3,000 6,000
90,000 1,000 8,000
42,000
Plant Assets, Natural Resources, and Intangible Assets
9 - 65
Ex. 284 Tidwell Company sold the following two machines in 2020: Cost Purchase date Useful life Residual value Depreciation method Date sold Sales price
Machine A $118,000 7/1/16 8 years $6,000 Straight-line 7/1/20 $55,000
Machine B $100,000 1/1/17 5 years $5,000 Double-declining-balance 8/1/20 $20,000
Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2020. The company has recorded depreciation on the machine through December 31, 2019. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 284
(20 min.)
July 1 Depreciation Expense ................................................................ Accumulated Depreciation—Machine A............................ ($118,000 – $6,000) × 1/8 × 6/12 = $7,000
7,000
Cash ........................................................................................... Accumulated Depreciation—Machine A* ................................... Loss on Disposal ($62,000 – $55,000) ...................................... Machine A .........................................................................
55,000 56,000 7,000
7,000
118,000
*2016 ($118,000 – $6,000) × 1/8 × 6/12 = $7,000 2017 ($118,000 – $6,000) × 1/8 = $14,000 2018 $14,000 2019 $14,000 2020 ($118,000 – $6,000) × 1/8 × 6/12 = $7,000 Total accumulated depreciation at date of disposal = $56,000 Aug. 1 Depreciation Expense ................................................................ Accumulated Depreciation—Machine B............................ ($100,000 – $78,400) ´ .40 ´ 7/12 = $5,040
5,040
Cash ........................................................................................... Accumulated Depreciation—Machine B** .................................. Machine B ......................................................................... Gain on Disposal ($20,000 – $16,560) .............................
20,000 83,440
**2017 2018 2019 2020
($100,000 – 0) × .40 = $40,000 ($100,000 – $40,000) × .40 = $24,000 ($100,000 – $64,000) × .40 = $14,400 ($100,000 – $78,400) × .40 × 7/12 = $5,040 Total accumulated depreciation at date of disposal = $83,440
For Instructor Use Only
5,040
100,000 3,440
9 - 66
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 285 Koch Company owns equipment that cost ₤110,000 when purchased on January 1, 2017. It has been depreciated using the straight-line method based on estimated residual value of ₤10,000 and an estimated useful life of 5 years. Instructions Prepare Koch Company’s journal entries to record the sale of the equipment in these four independent situations. (a) (b) (c) (d)
Sold for ₤56,000 on January 1, 2020. Sold for ₤56,000 on April 1, 2020. Sold for ₤22,000 on January 1, 2020. Sold for ₤22,000 on October 1, 2020.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 285 (a)
(b)
(c)
(d)
(12 min.)
Cash .......................................................................... Accumulated Depreciation—Equipment.................... [(₤110,000 – ₤10,000) ´ 3/5] Equipment ....................................................... Gain on Disposal of Plant Assets ......................
56,000 60,000
Depreciation Expense .......................................... [(₤110,000 – ₤10,000) ´ 1/5 ´ 3/12] Accumulated Depreciation—Equipment .............
5,000
Cash .............................................................................. Accumulated Depreciation—Equipment........................ (₤60,000 + ₤5,000) Equipment ....................................................... Gain on Disposal of Plant Assets ....................
56,000 65,000
Cash .............................................................................. Accumulated Depreciation—Equipment......................... Loss on Disposal of Plant Assets ................................... Equipment ................................................................
22,000 60,000 28,000
Depreciation Expense ................................................. [(₤110,000 – ₤10,000) ´ 1/5 ´ 9/12] Accumulated Depreciation—Equipment ...........
15,000
Cash .............................................................................. Accumulated Depreciation—Equipment........................ (₤60,000 + ₤15,000) Loss on Disposal of Plant Assets .................................. Equipment ..........................................................
22,000 75,000
For Instructor Use Only
110,000 6,000
5,000
110,000 11,000
110,000
15,000
13,000 110,000
Plant Assets, Natural Resources, and Intangible Assets
9 - 67
Ex. 286 On July 1, 2020, Jenner Inc. invested $720,000 in a mine estimated to have 800,000 tons of ore of uniform grade. During the last 6 months of 2020, 100,000 tons of ore were mined and sold. Instructions (a) Prepare the journal entry to record depletion. (b) Assume that the 100,000 tons of ore were mined, but only 85,000 units were sold. How are the costs applicable to the 15,000 unsold units reported? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 286 (a)
Dec. 31
(6 min.) Inventory........................................................ Accumulated Depletion ........................... (100,000 ´ $.90)
Cost Units estimated Depletion cost per unit [(a) ÷ (b)] (b)
90,000 90,000
(a) $720,000 (b) 800,000 tons $0.90
The costs pertaining to the unsold units are reported in current assets as part of inventory (15,000 ´ $.90 = $13,500).
Ex. 287 Neosho Mining invested $840,000 in a mine estimated to have 1,200,000 tons of ore with no residual value. During the first year, 200,000 tons of ore were mined and sold. Instructions Prepare the journal entry to record depletion. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 287
(5 min.)
Inventory ................................................................................................ Accumulated Depletion ($840,000 ÷ 1,200,000) × 200,000 .........
140,000 140,000
Ex. 288 Lowe Mining Company purchased a mine for $65 million which is estimated to have 250,000 tons of ore and a residual value of $10 million. (a)
In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to record depletion for the first year.
(b)
In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold. Prepare the journal entry to record depletion for the second year.
(c)
What amount and in what account are the tons of ore not sold reported?
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
9 - 68
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 288 (a)
(10 min.)
Calculation of the depletion/ton of coal: ($65,000,000 – $10,000,000) ÷ 250,000 tons = $220 per ton First Year: 50,000 tons × $220 = $11,000,000 Inventory...................................................................................... 11,000,000 Accumulated Depletion....................................................... 11,000,000
(b)
Second Year: 150,000 tons × $220 = $33,000,000 Inventory...................................................................................... 33,000,000 Accumulated Depletion....................................................... 33,000,000
(c)
The ore that is extracted and not sold is reported in the current assets section of the statement of financial position in an Inventory account. In this case, $5,500,000 (25,000 × $220) should be reported as inventory.
Ex. 289 Dayton Mining Company purchased land containing an estimated 15 million tons of ore at a cost of $6,000,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 10 years. Buildings costing $500,000 are erected on the site and are expected to last for 25 years. Equipment costing $350,000 with an estimated life of 12 years is installed. The buildings and the equipment possess no residual value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tons of ore. Instructions (a) Compute the depletion charge per ton. (b) Compute the depletion for the first year. (c) Compute the appropriate first year’s depreciation expense for the buildings. (d) Compute the appropriate first year’s depreciation expense for the equipment. (e) Prepare journal entries to record depletion and depreciation expense for the year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 289
(20 min.)
(a)
Depletion charge per ton: ($6,000,000 – $600,000) ÷ 15 million tons of ore = $.36 per ton
(b)
2,000,000 tons × $.36 = $720,000
(c)
The appropriate useful life is the shorter of the life of the mine or the life of the buildings. In this case, 10 years is the appropriate useful life ($500,000 ÷ 10 years = $50,000).
(d)
Same reasoning as (c). $350,000 ÷ 10 years = $35,000
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Solution 289 (e)
9 - 69
(Cont.)
Inventory ....................................................................................... Accumulated Depletion ........................................................ Depreciation Expense ................................................................... Accumulated Depreciation—Buildings ................................. Accumulated Depreciation—Equipment ..............................
720,000 720,000 85,000 50,000 35,000
Ex. 290 (a)
A company purchased a patent on January 1, 2020, for ¥2,500,000. The patent’s legal life is 20 years but the company estimates that the patent’s useful life will only be 5 years from the date of acquisition. On June 30, 2020, the company paid legal costs of ¥135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2020.
(b)
Clark Company purchased a franchise from Tastee Food Company for $400,000 on January 1, 2020. The franchise is for an indefinite time period and gives Clark Company the exclusive rights to sell Tastee Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2020.
(c)
Hulse Company incurred research costs of $500,000 in 2020 in developing a new product. Prepare the necessary journal entries during 2020 to record these events and any adjustments at year end on December 31, 2020.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 290 (a)
(b)
(15 min.)
December 31, 2020 Amortization Expense ................................................................... Patent ................................................................................... (To record patent amortization) ¥2,500,000 ÷ 5 years ¥500,000 ¥135,000 ÷ 54 months = ¥2,500 × 6 15,000 ¥515,000 January 1, 2020 Franchise ...................................................................................... Cash ..................................................................................... (To record acquisition of Tastee Food franchise)
515,000 515,000
400,000 400,000
December 31, 2020 No amortization of the franchise is required since its life is indefinite. (c)
2020 Research Expense........................................................................ Cash ..................................................................................... (To record research expense for the current year) December 31—no entry.
For Instructor Use Only
500,000 500,000
9 - 70
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 291 On January 2, 2020, Milroy Company purchased a patent for $280,000. The patent has an 8-year estimated useful life and a legal life of 20 years. Instructions Prepare the journal entry to record patent amortization. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 291
(3 min.)
Amortization Expense ............................................................................ Patents ($280,000 ÷ 8) ..................................................................
35,000 35,000
Ex. 292 For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer: A—Amortization D—Depreciation
P—Depletion N—None of these
____ 1. Goodwill
____
7. Timberlands
____ 2. Land
____
8. Franchises (indefinite life)
____ 3. Buildings
____
9. Licenses (limited life)
____ 4. Patents
____ 10. Land Improvements
____ 5. Copyrights
____ 11. Oil Deposits
____ 6. Research Costs
____ 12. Equipment
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 292 1. 2. 3. 4.
N N D A
(10 min.) 5. 6. 7. 8.
A N P N
9. 10. 11. 12.
A D P D
Ex. 293 For each of the following unrelated transactions, (a) determine the amount of the amortization or depletion expense for the current year, and (b) present the adjusting entries required to record each expense at year end. (1)
Timber rights were purchased on a tract of land for $360,000. The timber is estimated at 1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and sold.
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets Ex. 293 (2)
9 - 71
(Cont.)
Costs of $14,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $28,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 293 (1)
(10 min.)
Calculation of depletion/board ft.: $360,000 ÷ 1,200,000 = $.30/board ft. 75,000 × $.30 = $22,500 Depletion Expense ........................................................................ Accumulated Depletion ........................................................
(2)
22,500 22,500
Legal costs to successfully defend a patent are capitalized. Amortization Expense ................................................................... Patent ................................................................................... ($42,000 ÷ 12 years = $3,500)
3,500 3,500
Ex. 294 During the current year, Penny Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer. (a)
Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.
(b)
Purchased a trademark from another company. The trademark can be renewed indefinitely. Penny Company expects the trademark to contribute to revenue indefinitely.
(c)
Penny Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.
(d)
Penny Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research. Penny Company is very confident they will obtain this patent in the next few years.
Ans: N/A, LO: 4, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 294
(10 min.)
(a)
Operating Expense. Only successful patent defense costs can be capitalized.
(b)
Intangible Asset. Trademarks are renewable. Since Penny Company expects to use the trademark indefinitely, it will be recorded as an intangible asset, but it will not be amortized.
(c)
Intangible Asset. The patent cost of $2,000,000 should be amortized over its remaining useful life of 15 years since this is shorter than the maximum allowable period of 20 years.
(d)
Operating Expense. Research costs are required to be expensed.
For Instructor Use Only
9 - 72
Test Bank for Financial Accounting: IFRS Edition, 4e
Ex. 295 Presented below is information related to plant assets, natural resources, and intangibles at year end on December 31, 2020, for Rangel Company: Buildings Goodwill Patents Coal Mine Accumulated Depreciation Accumulated Depletion
€1,280,000 350,000 460,000 440,000 620,000 275,000
Instructions Prepare a partial statement of financial position for Rangel Company that shows how the above listed items would be presented. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 295
(10 min.) RANGEL COMPANY Statement of Financial Position (Partial) December 31, 2020
Property, Plant, and Equipment Buildings Less: Accumulated depreciation Coal mine Less: Accumulated depletion Total Property, Plant, and Equipment
€1,280,000 620,000 440,000 275,000
Intangibles Goodwill Patents Total Intangibles
€660,000 165,000 €825,000 350,000 460,000 810,000
Ex. 296 Compute the asset turnover based on the following: Beginning total assets Ending total assets Net income Net sales
$ 800,000 1,200,000 300,000 2,500,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 296
(3 min.)
Asset turnover = $2,500,000 ÷ [($800,000 + $1,200,000) ÷ 2] = 2.5 times
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
9 - 73
Ex. 297 During 2020 Perez Corporation reported net sales of $3,200,000 and net income of $1,500,000. Its statement of financial position reported average total assets of $1,600,000. Instructions Calculate the asset turnover. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 297
(3 min.)
Asset turnover =
$3,200,000 $1,600,000
= 2.0 times
Ex. 298 Indicate in the blank spaces below, the section of the statement of financial position where the following items are reported. Use the following code to identify your answer: PPE I O N/A ____ 1.
Property, Plant, and Equipment Intangibles Other Not on the statement of financial position
Goodwill
____ 7. Timberlands
____ 2. Land Improvements
____ 8. Franchises
____ 3. Buildings
____ 9. Licenses
____ 4. Accumulated Depreciation
____ 10. Equipment
____ 5. Trademarks
____ 11. Oil Deposits
____ 6. Research Costs
____ 12. Land
Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 298 1. 2. 3. 4. 5. 6. a
I PPE PPE PPE I N/A
(5 min.)
Goodwill Land Improvements Buildings Accumulated Depreciation Trademarks Research Costs
7. 8. 9. 10. 11. 12.
PPE I I PPE PPE PPE
Timberlands Franchises Licenses Equipment Oil Deposits Land
Ex. 299
Presented below are two independent situations: (a)
Waner Company exchanged an old machine (cost $100,000 less $60,000 accumulated depreciation) plus $5,000 cash for a new machine. The old machine had a fair value of $36,000. Prepare the entry to record the exchange of assets by Waner Company.
For Instructor Use Only
9 - 74 a
Ex. 299
(b)
Test Bank for Financial Accounting: IFRS Edition, 4e (Cont.)
Fisher Company trades old equipment (cost $90,000 less $54,000 accumulated depreciation) for new equipment. Fisher paid $36,000 cash in the trade. The old equipment that was traded had a fair value of $44,000. Prepare the entry to record the exchange of assets by Fisher Company. The transaction has commercial substance.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 299
(a)
(b)
a
(10 min.)
Equipment (new) ($36,000 + $5,000) ............................................ Accumulated Depreciation—Equipment........................................ Loss on Disposal of Plant Assets ($40,000 – $36,000)................. Equipment ............................................................................ Cash .....................................................................................
41,000 60,000 4,000
Equipment (new) ........................................................................... Accumulated Depreciation—Old Equipment ................................. Old Equipment ...................................................................... Cash ..................................................................................... Gain on Disposal of Plant Assets .........................................
80,000 54,000
Fair value of old equipment Book value of old equipment Gain recognized
$44,000 36,000 $ 8,000
FV of asset exchanged Plus: Cash Cost of new equipment
$44,000 36,000 $80,000
100,000 5,000
90,000 36,000 8,000
Ex. 300
Colaw Company exchanges equipment with Eaton Company and Mantle Company exchanges equipment with Fiero Company. The following information pertains to the exchanges: Equipment (cost) Accumulated depreciation Fair value of the equipment Cash paid
Colaw Company €114,000 50,000 70,000 45,000
Mantle Company €96,000 45,000 46,000 -0-
Instructions Prepare the journal entries to record the exchanges on the books of Colaw Company and Mantle Company. The transaction has commercial substance. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets a
Solution 300
9 - 75
(15 min.)
Colaw Company: Cost of equipment: Fair value of the old equipment Plus: Cash paid Cost Fair value Book value of old equipment Gain on disposal
€70,000 45,000 €115,000 70,000 64,000 €6,000
Equipment (new) .................................................................................... Accumulated Depreciation—Equipment (old) ........................................ Cash.............................................................................................. Equipment (old)............................................................................. Gain on Disposal...........................................................................
115,000 50,000 45,000 114,000 6,000
Mantle Company: Fair value of the old equipment Book value of old equipment Loss on disposal
€46,000 51,000 € (5,000)
Equipment (new) .................................................................................... Loss on Disposal ................................................................................... Accumulated Depreciation—Equipment (old) ........................................ Equipment (old)............................................................................. a
46,000 5,000 45,000 96,000
Ex. 301
Dodd Delivery Company and Hess Delivery Company exchanged delivery trucks on January 1, 2020. Dodd’s truck cost $84,000, had accumulated depreciation of $69,000, and has a fair value of $11,000. Hess’s truck cost $65,000, had accumulated depreciation of $54,000, and has a fair value of $11,000. Instructions (a) Journalize the exchange for Dodd Delivery Company. (b) Journalize the exchange for Hess Delivery Company. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 301
(a)
(10 min.)
Dodd Delivery Company: Cost Less: Accumulated depreciation Book value Fair value of old truck Loss on disposal
$84,000 69,000 15,000 11,000 $ 4,000
Equipment (new) ........................................................................... Accumulated Depreciation—Equipment (old) ............................... Loss on Disposal........................................................................... Equipment (old) .................................................................... For Instructor Use Only
11,000 69,000 4,000 84,000
9 - 76 a
Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 301
(b)
(Cont.)
Hess Delivery Company: Cost Less: Accumulated depreciation Book value Fair value of old truck Gain (Loss)
$65,000 54,000 11,000 11,000 $ -0-
Equipment (new) ........................................................................... Accumulated Depreciation—Equipment (old) ............................... Equipment (old) .................................................................... a
11,000 54,000 65,000
Ex. 302
Prepare the journal entries to record the following transactions for Eklund Company which has a calendar year end and uses the straight-line method of depreciation. a)
On September 30, 2020, the company exchanged old delivery equipment and $24,000 for new delivery equipment. The old delivery equipment was purchased on January 1, 2018 for $84,000 and was estimated to have a $12,000 residual value at the end of its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2019. It is estimated that the fair value of the old delivery equipment is $39,000 on September 30, 2020.
(b)
On June 30, 2020, the company exchanged old office equipment and $40,000 for new office equipment. The old office equipment originally cost $80,000 and had accumulated depreciation to the date of disposal of $35,000. It is estimated that the fair value of the old office equipment on June 30 was $50,000. The transaction has commercial substance.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 302
(15 min.)
(a) September 30, 2020 Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ............................... (To record depreciation expense for the first 9 months of 2020. $72,000 ÷ 5 years = $14,400 × 9/12 = $10,800) Equipment (new)................................................................................ Accumulated Depreciation—Equipment ($28,800 + $10,800) .......... Loss on Disposal of Plant Assets ($44,400 – $39,000) ..................... Equipment (old) .................................................................... Cash ..................................................................................... (To record exchange of old delivery equipment for new delivery equipment at a loss) Fair value of old delivery equipment Cash paid Cost of new delivery equipment
For Instructor Use Only
$39,000 24,000 $63,000
10,800 10,800
63,000 39,600 5,400 84,000 24,000
Plant Assets, Natural Resources, and Intangible Assets a
Solution 302
9 - 77
(Cont.)
(b) June 30, 2020 Equipment (new) ........................................................................... Accumulated Depreciation—Equipment (old) ............................... Equipment (old) .................................................................... Cash ..................................................................................... Gain on Disposal of Plant Assets ......................................... (To record exchange of old office equipment for new office equipment) Fair value of old office equipment Cash paid Cost of new office equipment
90,000 35,000 80,000 40,000 5,000
$ 50,000 40,000 $ 90,000
COMPLETION STATEMENTS 303. With the exception of land, plant assets experience a ______________ in service potential over their useful lives. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
304. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
305. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
306. The cost of paving, fencing, and lighting a new company parking lot is charged to a ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
307. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $______________. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
308. ______________ is the process of allocating the cost of a plant asset to expense over its useful life in a rational and systematic manner. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
309. The book value of a plant asset is obtained by subtracting ______________ from the ______________ of the plant asset. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
9 - 78
Test Bank for Financial Accounting: IFRS Edition, 4e
310. Three factors that affect the computation of periodic depreciation expense are (1) _______________, (2) _______________, and (3) _________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
311. The ________________ method of computing depreciation expense results in an equal amount of periodic depreciation throughout the service life of the plant asset. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
312. The declining-balance method of computing depreciation expense involves multiplying a _______________ book value by a _______________ percentage. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
313. The declining-balance method of computing depreciation is known as an _____________ depreciation method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
314. Ordinary repairs which maintain operating efficiency and expected productive life are called _______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
315. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as __________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
316. If disposal of a plant asset occurs at any time during the year, ___________________ for the fraction of the year to the date of disposal must be recorded. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
317. If fully depreciated equipment that cost $10,000 with no residual value is retired, the entry to record the retirement requires a debit to the ___________________________ account and a credit to the _____________________ account. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
318. If the proceeds from the sale of a plant asset exceed its ______________, a gain on disposal will occur. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
319. A plant asset originally cost $64,000 and was estimated to have a $4,000 residual value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a ______________ on disposal in the amount of $____________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets 320. Extractive industries are those businesses involved _______________ located in or near the earth’s crust.
in
finding
and
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Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
321. In recording the purchase of a business, goodwill should be recorded for the excess of ______________ over the _______________ of the net assets acquired. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
322. The allocation of the cost of an asset to expense over its useful life is called _________________ for tangible plant assets, ________________ for natural resources, and _________________ for intangible assets. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
323. The cost of a patent should be amortized over its ____________ life or its ____________ life, whichever is shorter. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
324. The ___________________ ratio is calculated by dividing net sales by average total assets. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
325. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the new asset acquired is equal to the ______________ of the asset given up plus any cash paid by the purchaser.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
326. A company exchanged an old machine, which originally cost $33,000 and has accumulated depreciation to date of $18,000, for a new machine. The old machine had a fair value of $21,000. The cost of the new machine should be recorded at $___________.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Answers to Completion Statements 303. 304. 305. 306. 307. 308. 309. 310. 311. 312. 313. 314. 315. 316. 317.
decline 318. book value Land 319. loss, 16,000 Land 320. natural resources Land Improvement 321. cost, fair value $20,900 322. depreciation, depletion, amortization Depreciation 323. legal, useful (or useful, legal) accumulated depreciation, cost 324. asset turnover a cost, residual value, useful life 325. fair value a straight-line 326. 21,000 declining, constant accelerated revenue expenditures capital expenditures depreciation Accumulated Depreciation—Equipment, Equipment
MATCHING 327. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Plant assets Depreciation Book value Residual value Straight-line method
F. G. H. I. J.
Units-of-activity method Double-declining-balance method Natural resources Revenue expenditure Capital expenditure
____
1. Small expenditures which primarily benefit the current period.
____
2. Cost less accumulated depreciation.
____
3. An accelerated depreciation method used for financial statement purposes.
____
4. Tangible resources that are used in operations and are not intended for resale.
____
5. Equal amount of depreciation each period.
____
6. Expected cash value of the asset at the end of its useful life.
____
7. Allocation of the cost of a plant asset to expense over its useful life.
____
8. Material expenditures which increase an asset’s operating efficiency, productive capacity, or useful life.
____
9. Consist of standing timber and underground deposits of oil or minerals.
____ 10. Useful life is expressed in terms of units of production or expected use. Ans: N/A, LO: 1, 2, 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
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Answers to Matching 327. 1. 2. 3. 4. 5.
I C G A E
6. 7. 8. 9. 10.
D B J H F
328. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Gain on disposal Loss on disposal Trademark Depletion Useful life
F. G. H. I. J.
Asset turnover ratio Goodwill Amortization Intangible asset Research costs
_____
1. Process of allocating the cost of an intangible asset to expense over its useful life.
_____
2. Is only recorded when an exchange has commercial substance.
_____
3. Examples are franchises and licenses.
_____
4. The allocation of the cost of a natural resource to expense over its useful life.
_____
5. Can be identified only with a business as a whole.
_____
6. A symbol that identifies a particular enterprise or product.
_____
7. When book value of asset is greater than the proceeds received from its sale.
_____
8. Must be expensed when incurred.
_____
9. Indicates how efficiently a company is able to generate sales with its assets.
_____ 10. An estimate of the expected productive life of an asset. Ans: N/A, LO: 3, 4, 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Matching 328. 1. 2. 3. 4. 5.
H A I D G
6. 7. 8. 9. 10.
C B J F E
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
SHORT-ANSWER ESSAY QUESTIONS S-A E 329 In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 329 The acquisition cost of property, plant, and equipment would include all expenditures deemed reasonable and necessary to prepare the asset for its intended purpose (use) and place. This includes getting an asset to its proper place, acquiring legal title, and getting the asset ready for its intended use. S-A E 330 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.” Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 330 Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset. The balance in Accumulated Depreciation represents the total amount of the asset’s cost that has been charged to expense to date; it is not a cash fund. S-A E 331 The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 331 An accelerated depreciation method is a method which produces higher depreciation expense in the early years than in the later years. The choice of an accelerated method can be justified if the asset being depreciated contributes more to the revenue-earning process in the earlier years and less in the later years. In such a situation, an accelerated method would properly match expense to revenue. S-A E 332 Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
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Solution 332 An expenditure is classified as a revenue expenditure if it maintains the operating efficiency and expected productive life of the asset and primarily benefits the current accounting period. Revenue expenditures are usually small amounts that occur frequently throughout the life of the asset and are often called ordinary repairs. An expenditure is classified as a capital expenditure if it increases (rather than maintains) operating efficiency, productive capacity, or expected useful life, and therefore benefits more than one accounting period. Capital expenditures are usually large amounts that occur infrequently during the life of the asset. Capital expenditures can be further classified as either additions or improvements. The distinction between a capital expenditure and a revenue expenditure is not always clear-cut. The purchase of an asset with a relatively insignificant cost (for example, the purchase of a $10 wastebasket with a 5 year useful life) may meet the criteria for classification as a capital expenditure, even though it is similar in many ways to a revenue expenditure (small amount, more frequent occurrence). The accounting constraint of materiality would indicate that this item could be recorded as an expense (more expedient) since it is not material enough to influence the decision of a reasonably prudent creditor or investor. S-A E 333 How is a gain or loss on the sale of a plant asset computed? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 333 In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs. S-A E 334 Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can’t it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 334 Goodwill is the value of all favorable attributes that relate to a business enterprise. As goodwill is the product of these attributes, and would not exist apart from them, goodwill cannot be separated from the company and then sold. This is different from a copyright or patent which can exist independent of a company, and can be sold apart from any other assets.
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
S-A E 335 What are the similarities and differences between the terms depreciation, depletion, and amortization? Ans: N/A, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 335 The terms depreciation, depletion, and amortization are all concerned with allocating the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a plant asset to expense, depletion to recognizing the cost of a natural resource as expense, and amortization to allocating the cost of an intangible asset to expense. S-A E 336 (Ethics) Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms’ offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor’s services. A PRS employee poses as an employee of the client’s office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year. In April of this year, PRS began selling a software product substitute before the competitor’s software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med’s product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services. PRS’s accountant, Mary Linsey, initially recorded the cash payments as “Loss from Lawsuit” and “Product Development,” respectively. However, Jack Grand, the controller, instructed Mary to create an intangible asset, named “Goodwill” and charge both costs to this account. “We’re protected from another lawsuit as long as this agreement is in effect,” he says. “It’s about as close to goodwill as we’ll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway.” Required: 1. What are the ethical issues? 2. What should Mary do? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
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Solution 336 1. The following are some of the ethical issues: a. Whether PRS should continue to obtain its information by deception b. Whether PRS makes a practice of pirating software c. Whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the state of the accounting system at PRS. 2. Mary should explain to her boss that goodwill arises only when a business is purchased. It is not allowed to write off lawsuit losses or product development costs (which these clearly are) over more than one year. She cannot allow her integrity to be compromised by misrecording these economic events. She could also point out that Mr. Grand’s attempt to delay recognition of the losses will undoubtedly be discovered by the auditors. All the records will then likely be subjected to much more scrutiny than would otherwise be the case. S-A E 337 (Communication) The Restor-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Restor-It decided to purchase another very large home, this time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that a modest return was all that was required, and so they agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the company, Dan Carlin, does not believe that a loss is possible. “We sold that house for more than we paid for it,” he said. “I know we put some money in it, but we had depreciated it for three years. How in the world can we have a loss?” Required: Write a short memo to Mr. Carlin explaining how it would be possible to have a loss. Do not try to use specific numbers for cost or depreciation. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
For Instructor Use Only
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Test Bank for Financial Accounting: IFRS Edition, 4e
Solution 337 MEMO TO:
Dan Carlin, President
FROM: Mary Martin, Accountant RE:
Loss on Pittsburg showcase
I understand that you are concerned about the loss on the Pittsburg showcase house. You have said that a loss is not possible, since we sold the house for more than we paid for it. Ordinarily, it would not be possible for any fixed asset to generate a loss if sold for more than the original purchase price. Accounting rules allow for writing down impaired assets, and depreciation also reduces the cost basis. In our case, however, we had added enough costs that it was almost like we purchased the house twice. Thus, we had a book value of $185,000 at the time of the sale, even though we had taken three years’ depreciation. All in all, I think that the Pittsburg house was still an excellent investment—we got far more benefit from the $10,000 “loss” than we would have had spending ten times that much in advertising. To prevent the problem in the future, however, you could have the Accounting Department calculate the book value before you negotiate a sales contract. That way, you’ll know the effect of the transaction on our income—though you should remember that book value is not a substitute for market value; we’ll still have to rely on real estate agents for that. Let me know if you have further questions. (signature)
For Instructor Use Only
Plant Assets, Natural Resources, and Intangible Assets
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GAAP QUESTIONS 1. Which of the following statements is correct? a. GAAP permits revaluation of property, plant, and equipment but not intangible assets. b. Both IFRS and GAAP permit revaluation of property, plant, and equipment but not intangible assets. c. IFRS permits revalution of property, plant, and equipment and intangible assets (except for good will). d. Both IFRS and GAAP permit revaluation of property, plant, and equipment and intangible assets (except for good will). Ans: C, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2. Rando Company has land that cost $450,000 but now has a fair value of $600,000. Rando Company follows GAAP to account for the land. Which of the following statements is correct? a. Rando Company would credit Retained Earnings by $150,000. b. Rando Company would report the land at $600,000. c. Rando Company would report a net income increase of $150,000 due to an increase in the value of land. d. Rando Company must continue to report the land at $450,000. Ans: D, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. Research and development costs are a. expensed under both GAAP and IFRS. b. expensed under GAAP. c. expensed under IFRS. d. None of these answer choices are correct. Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
CHAPTER 10 CURRENT LIABILITIES CHAPTER LEARNING OBJECTIVES 1. Explain how to account for current liabilities. A current liability is a debt that a company expects to pay within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, value-added and sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. When a promissory note is interest-bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note. Interest expense accrues over the life of the note. At maturity, the amount paid equals the face value of the note plus accrued interest. Companies record value-added and sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. These taxes are not an expense to the company. Companies initially record unearned revenues in an Unearned Revenue account. As a company recognizes revenue, a transfer from unearned revenue to revenue occurs. Companies report related payroll liabilities such as Social Security taxes payable, withholding taxes payable, and salaries and wages payable as current liabilities. Companies report the current maturities of long-term debt as a current liability in the statement of financial position. 2. Discuss how current liabilities are reported and analyzed. With notes payable, interest payable, accounts payable, and sales taxes payable, an obligation to make payment exists. In some cases, it is difficult to determine whether a liability exists. These situations are called contingent liabilities. If the contingency is probable (likely to occur) and the amount is reasonably estimable, the company should record the liability in the accounts. If the contingency is only reasonably possible (it could happen), then it should be disclosed only in the notes to the financial statements. If the possibility that the contingency will happen is remote (unlikely to occur), it need not be recorded or disclosed. Companies should report the nature and amount of each current liability in the statement of financial position or in schedules in the notes accompanying the statements. The liquidity of a company may be analyzed by computing working capital and the current ratio.
10 - 2
Test Bank for Financial Accounting: IFRS, 4e
TRUE-FALSE STATEMENTS 1.
A current liability must be paid out of current earnings.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
2.
Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
3.
The relationship between current liabilities and current assets is important in evaluating a company's ability to pay off its long-term debt.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
4.
A company whose current liabilities exceed its current assets may have a liquidity problem.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
5.
A note payable usually requires the borrower to pay interest.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
6.
Notes payable are often used instead of accounts payable.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
7.
A note payable must always be paid before an account payable.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
8.
A HK$30,000, 8%, 9-month note payable requires an interest payment of HK$1,800 at maturity.
Ans: T, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$30,000 ´ .08 ´ 9/12 (Prin. x Int. rate x Fraction of a yr. = Int.)
9.
Most notes are not interest bearing.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
10.
With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
11.
Interest expense on a note payable is only recorded at maturity.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
12.
Interest expense is reported under Other Expenses and Losses in the income statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting
13.
Unearned revenues should be classified as Other Revenues and Gains on the income statement.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting
14.
The higher the sales tax rate, the more profit a retailer can earn.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities 15.
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Metropolitan Symphony sells 200 season tickets for €100,000 that represents a five concert season. The amount of Unearned Ticket Revenue after the second concert is €40,000.
Ans: F, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (€100,000 / 5) ´ (5 - 2) = €60,000 [(Tot. unearned ticket rev.÷ No. of concerts) x No. of concerts yet to be performed = Bal. of unearned ticket rev.)
16.
During the month, a company sells goods for a total of HK$54,000, which includes sales taxes of HK$4,000; therefore, the company should recognize HK$50,000 in Sales Revenues and HK$4,000 in Sales Tax Expense.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
17.
Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
18.
The current ratio permits analysts to compare the liquidity of different sized companies.
Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
19.
Working capital is current assets divided by current liabilities.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
20.
Companies accrue a related liability for a provision if it is possible that an outflow of resources will be required and a reliable estimate can be made of the obligation amount.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
21.
A provision is a liability of uncertain timing or amount.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
22.
Social Security taxes and income taxes withheld are levied on both employees and the employer.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
23.
Social Security taxes withheld and income taxes withheld are required payroll deductions.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
24.
The employer incurs payroll tax expense equal to the amount withheld from the employees' wages for income taxes.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
25.
A debt that is expected to be paid within one year through the issuance of long-term debt is a current liability.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
26.
Notes payable usually are issued to meet long-term financing needs.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
27.
Companies often identify current maturities of long-term debt on the statement of financial position as long-term debt due within one year.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 4 28.
Test Bank for Financial Accounting: IFRS, 4e In a given year, total warranty expense is the sum of actual warranty costs incurred on units sold plus the estimated cost of servicing those units in the future.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
29.
Social Security taxes are an optional deduction from employee earnings.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
30.
Social Security taxes are a deduction from employee earnings and are also imposed upon employers as an expense.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
MULTIPLE CHOICE QUESTIONS 31.
All of the following are reported as current liabilities except a. accounts payable. b. bonds payable. c. notes payable. d. unearned revenues.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
32.
The relationship between current liabilities and current assets is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's Non-current debt.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
33.
Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating noncurrent liabilities.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
34.
A current liability is a debt that can reasonably be expected to be paid a. within one year or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
35.
Liabilities are classified on the statement of financial position as current or a. deferred. b. unearned. c. noncurrent. d. accrued.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities 36.
10 - 5
From a liquidity standpoint, it is more desirable for a company to have current a. assets equal current liabilities. b. liabilities exceed current assets. c. assets exceed current liabilities. d. liabilities exceed Non-current liabilities.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
37.
The relationship of current assets to current liabilities is used in evaluating a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
38.
Which of the following is usually not an accrued liability? a. Interest payable b. Wages payable c. Taxes payable d. Notes payable
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
39.
In most companies, current liabilities are paid within a. one year through the creation of other current liabilities. b. the operating cycle through the creation of other current liabilities. c. one year or the operating cycle out of current assets. d. the operating cycle out of current assets.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
40.
The entry to record the issuance of an interest-bearing note credits Notes Payable for the note's a. maturity value. b. market value. c. face value. d. cash realizable value.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
41.
With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
42.
A note payable is in the form of a. a contingency that is reasonably likely to occur. b. a written promissory note. c. an oral agreement. d. a standing agreement.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 6 43.
Test Bank for Financial Accounting: IFRS, 4e The entry to record the proceeds upon issuing an interest-bearing note is a. Interest Expense Cash Notes Payable b. Cash Notes Payable c. Notes Payable Cash d. Cash Notes Payable Interest Payable
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None AICPA FC: Measurement, IMA: Reporting
44.
Watunga Bank agrees to lend Hoffman Granite Company €600,000 on January 1. Hoffman Granite Company signs a €600,000, 8%, 9-month note. The entry made by Hoffman Granite on January 1 to record the proceeds and issuance of the note is a. Interest Expense................................................................... 36,000 Cash. .................................................................................... 564,000 Notes Payable ............................................................. 600,000 b. Cash ..................................................................................... 600,000 Notes Payable ............................................................. 600,000 c. Cash ..................................................................................... 600,000 Interest Expense................................................................... 36,000 Notes Payable ............................................................. 636,000 d. Cash ..................................................................................... 600,000 Interest Expense................................................................... 36,000 Notes Payable ............................................................. 600,000 Interest Payable ........................................................... 36,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
45.
Watunga Bank agrees to lend Hoffman Granite Company €600,000 on January 1. Hoffman Granite Company signs a €600,000, 8%, 9-month note. What is the adjusting entry required if Hoffman Granite Company prepares financial statements on June 30? a. Interest Expense................................................................... 24,000 Interest Payable ........................................................... 24,000 b. Interest Expense................................................................... 24,000 Cash ............................................................................ 24,000 c. Interest Payable.................................................................... 24,000 Cash ............................................................................ 24,000 d. Interest Payable.................................................................... 24,000 Interest Expense .......................................................... 24,000
Ans: A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €600,000 ´ .08 ´ 6/12 = €24,000 (Prin. x Int. rate x Fraction of a yr. = Int. exp.)
FOR INSTRUCTOR USE ONLY
Current Liabilities 46.
10 - 7
Watunga Bank agrees to lend Hoffman Granite Company €600,000 on January 1. Hoffman Granite Company signs a €600,000, 8%, 9-month note. What entry will Hoffman Granite make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable ...................................................................... 636,000 Cash ............................................................................ 636,000 b. Notes Payable ...................................................................... 600,000 Interest Payable ................................................................... 36,000 Cash ............................................................................ 636,000 c. Interest Expense .................................................................. 36,000 Notes Payable ...................................................................... 600,000 Cash ............................................................................ 636,000 d. Interest Payable ................................................................... 24,000 Notes Payable ...................................................................... 600,000 Interest Expense .................................................................. 12,000 Cash ............................................................................ 636,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €600,000 ´ .08 ´ 9/12 = €36,000 (Prin. x Int. rate x Fraction of a yr. = Int. pay.)
47.
As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
48.
When an interest-bearing note matures, the balance in the Notes Payable account is a. less than the total amount repaid by the borrower. b. the difference between the maturity value of the note and the face value of the note. c. equal to the total amount repaid by the borrower. d. greater than the total amount repaid by the borrower.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
49.
On October 1, Eli's Carpet Service borrows £125,000 from First Bank on a 3-month, £125,000, 8% note. What entry must Eli's Carpet Service make on December 31 before financial statements are prepared? a. Interest Payable ................................................................... Interest Expense ......................................................... b. Interest Expense .................................................................. Interest Payable .......................................................... c. Interest Expense .................................................................. Interest Payable .......................................................... d. Interest Expense .................................................................. Notes Payable .............................................................
Ans: C, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: £125,000 ´ .08 ´ 3/12 = £2,500 (Prin. x Int. rate x Fraction of a yr. = Int. exp.)
FOR INSTRUCTOR USE ONLY
2,500 2,500 10,000 10,000 2,500 2,500 2,500 2,500
10 - 8 50.
Test Bank for Financial Accounting: IFRS, 4e On October 1, Eli's Carpet Service borrows £125,000 from First Bank on a 3-month, £125,000, 8% note. The entry by Eli's Carpet Service to record payment of the note and accrued interest on January 1 is a. Notes Payable ...................................................................... 127,500 Cash ............................................................................ 127,500 b. Notes Payable ...................................................................... 125,000 Interest Payable.................................................................... 2,500 Cash ............................................................................ 127,500 c. Notes Payable ...................................................................... 125,000 Interest Payable.................................................................... 10,000 Cash ............................................................................ 135,000 d. Notes Payable ...................................................................... 125,000 Interest Expense................................................................... 2,500 Cash ............................................................................ 127,500
Ans: B, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: £125,000 + (£125,000 ´ .08 ´ 3/12) = £127,500 [Prin. + (Prin. x Int. rate x Fraction of a yr.) = Mat. value]
51.
Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid.
Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
52.
The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is a. Notes Payable Interest Payable Cash b. Notes Payable Interest Expense Cash c. Notes Payable Cash d. Notes Payable Cash Interest Payable
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
53.
Sales taxes collected by a retailer are recorded by a. crediting Sales Tax Revenue. b. debiting Sales Tax Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities 54.
10 - 9
Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
55.
Sales taxes collected by the retailer are recorded as a(n) a. revenue. b. liability. c. expense. d. asset.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
56.
On September 1, Bud's Painting Service borrows €150,000 from Highlands Bank on a 4-month, €150,000, 6% note. What entry must Bud's Painting Service make on December 31 before financial statements are prepared? a. Interest Payable ................................................................... 3,000 Interest Expense ......................................................... 3,000 b. Interest Expense .................................................................. 9,000 Interest Payable .......................................................... 9,000 c. Interest Expense .................................................................. 3,000 Interest Payable .......................................................... 3,000 d. Interest Expense .................................................................. 3,000 Notes Payable ............................................................. 3,000
Ans: C, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €150,000 ´ .06 ´ 4/12 = €3,000 (Prin. x Int. rate x Fraction of a yr. = Int. exp.)
57.
On September 1, Bud's Painting Service borrows €150,000 from Highlands Bank on a 4-month, €150,000, 6% note. The entry by Bud Painting Service to record payment of the note and accrued interest on January 1 is a. Notes Payable ...................................................................... 153,000 Cash ............................................................................ 153,000 b. Notes Payable ...................................................................... 150,000 Interest Payable ................................................................... 3,000 Cash ............................................................................ 153,000 c. Notes Payable ...................................................................... 150,000 Interest Payable ................................................................... 9,000 Cash ............................................................................ 159,000 d. Notes Payable ...................................................................... 150,000 Interest Expense .................................................................. 3,000 Cash ............................................................................ 153,000
Ans: B, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (€150,000 ´ .06 ´ 4/12) + €150,000 = €153,000 [(Prin. x Int. rate x Fraction of a yr.) + Prin. = Cash rec’d.]
FOR INSTRUCTOR USE ONLY
10 - 10 Test Bank for Financial Accounting: IFRS, 4e 58.
The interest charged on a HK$400,000 note payable, at the rate of 8%, on a 90-day note would be a. HK$32,000. b. HK$17,776. c. HK$8,000. d. HK$2,666.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$400,000 ´ .08 ´ 90/360 = HK$8,000 (Prin. x Int. rate x Fraction of a yr. = Int.)
59.
The interest charged on a $50,000 note payable, at the rate of 6%, on a 60-day note would be a. $3,000. b. $1,667. c. $750. d. $500.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $50,000 ´ .06 ´ 60/360 = $500 (Prin. x Int. rate x Fraction of a yr. = Int.)
60.
The interest charged on a HK$225,000 note payable, at the rate of 8%, on a 3-month note would be a. HK$18,000. b. HK$9,000. c. HK$4,500. d. HK$3,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$225,000 ´ .08 ´ 3/12 = HK$4,500 (Prin. x Int. rate x Fraction of a yr. = Int.)
61.
The interest charged on a £100,000 note payable, at the rate of 6%, on a 2-month note would be a. £6,000. b. £3,000. c. £1,500. d. £1,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: £100,000 ´ .06 ´ 2/12 = £1,000 (Prin. x Int. rate x Fraction of a yr. = Int.)
62.
On October 1, 2020, Dakota Company issued an €800,000, 10%, nine-month interestbearing note. If the Dakota Company is preparing financial statements at December 31, 2020, the adjusting entry for accrued interest will include a: a. credit to Notes Payable of €20,000. b. debit to Interest Expense of €20,000 c. credit to Interest Payable of €40,000. d. debit to Interest Expense of €30,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €800,000 ´ .10 ´ 3/12 = €20,000 (Prin. x Int. rate x Fraction of a yr. = Int. exp.)
FOR INSTRUCTOR USE ONLY
Current Liabilities 63.
10 - 11
On October 1, 2019, Pennington Company issued an €800,000, 10%, nine-month interest-bearing note. Assuming interest was accrued at June 30, 2020, the entry to record the payment of the note on July 1, 2020, will include a: a. debit to Interest Expense of €20,000. b. credit to Cash of €800,000 c. debit to Interest Payable of €60,000. d. debit to Notes Payable of €860,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €800,000 ´ .10 ´ 9/12 = €60,000 (Prin. x Int. rate x Fraction of a yr. = Int. pay.)
64.
Koppernaes Company has total proceeds (before segregation of sales taxes) from sales of $9,540. If the sales tax is 6%, the amount to be credited to the account Sales Revenue is: a. $9,540. b. $8,968. c. $10,112. d. $9,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $9,540 / (1 + .06) = $9,000 [Tot. sales ÷ (1 + sales tax %) = Sales rev.]
65.
Mackenzie Insurance Company collected a premium of €15,000 for a 1-year insurance policy on May 1. What amount should Mackenzie report as a current liability for Unearned Insurance Revenue at December 31? a. €0. b. €5,000. c. €10,000. d. €15,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (€15,000/12) ´ 4 = €5,000 [(Prem. ÷ No. mos. in a yr.) x No. of unexpired mos. = Unearn. ins. rev.]
66.
A company receives HK$396, of which HK$36 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Tax Expense for HK$36. b. credit to Sales Taxes Payable for HK$36. c. debit to Sales Revenue for HK$396. d. debit to Cash for HK$360.
Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
67.
A company receives HK$696, of which HK$56 is for sales tax. The journal entry to record the sale would include a a debit to Sales Tax Expense for HK$56. b. debit to Sales Taxes Payable for HK$56. c. debit to Sales Revenue for HK$696. d. debit to Cash for HK$696.
Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 12 Test Bank for Financial Accounting: IFRS, 4e 68.
A retail store does not segregate sales and the amount of sales tax on sales. If the sales tax rate is 5% and the register total amounted to $262,500, what is the amount of the sales taxes owed to the taxing agency? a. $250,000 b. $262,500 c. $13,125 d. $12,500
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $262,500 - ($262,500 / (1 + .05) = $12,500 [Sales tot. – (Sales tot. ÷ (1 + Sales tax %)) = Sales tax.]
69.
On January 1, 2020, Mazzeo Company, a calendar-year company, issued €1,600,000 of notes payable, of which €400,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2020, is a. Current Liabilities, €1,600,000. b. Long-term Debt, €1,600,000. c. Current Liabilities, €800,000; Non-current Debt, €800,000. d. Current Liabilities, €400,000; Non-current Debt, €1,200,000.
Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €1,600,000 - €400,000 = €1,200,000 (Tot. notes pay. – Portion coming due next yr. = L-T debt portion)
70.
On January 1, 2020, Key Company, a calendar-year company, issued £250,000 of notes payable, of which £62,500 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2020, is a. Current Liabilities, £250,000. b. Long-term Debt , £250,000. c. Current Liabilities, £62,500; Non-current Debt, £187,500. d. Current Liabilities, £187,500; Non-current Debt, £62,500.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: $250,000 - $62,500 = $187,500 (Tot. notes pay. – Portion coming due next yr. = L-T debt portion)
71.
A cash register tape shows cash sales of HK$3,000 and sales taxes of HK$240. The journal entry to record this information is a. Cash ..................................................................................... 3,240 Sales Revenue ............................................................ 3,240 b. Cash ..................................................................................... 3,240 Sales Taxes Payable ................................................... 240 Sales Revenue ............................................................ 3,000 c. Cash ..................................................................................... 3,000 Sales Tax Expense............................................................... 240 Sales Revenue ............................................................ 3,240 d. Cash ..................................................................................... 3,240 Sales Revenue ............................................................ 3,000 Sales Tax Revenue ..................................................... 240
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities 72.
10 - 13
Maple Street Bookstore has collected $1,500 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Maple Street Bookstore make to show the April remittance? a. Sales Taxes Payable ........................................................... 1,500 Cash ............................................................................ 1,500 b. Sales Tax Expense .............................................................. 1,500 Cash ............................................................................ 1,500 c. Sales Tax Expense .............................................................. 1,500 Sales Taxes Payable................................................... 1,500 d. No entry required.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
73.
Rhode Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to €81,900. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. €3,900 b. €4,095 c. €195 d. It cannot be determined.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €81,900 - (€81,900/1.05) = €3,900 [Tot. sales – (Tot. sales ÷ (1 + Sales tax %)) = Sales taxes]
74.
Sly's Salon has total receipts for the month of €9,275 including sales taxes. If the sales tax rate is 6%, what are Sly's sales for the month? a. €8,719 b. €9,832 c. €8,750 d. It cannot be determined.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €9,275 / 1.06 = €8,750 [Tot. sales ÷ (1 + Sales tax %) = Sales]
75.
The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
76.
A retail store does not segregate sales and the amount of sales tax on sales. If the sales tax rate is 5% and the register total amounted to HK$136,500, what is the amount of the sales taxes owed to the taxing agency? a. HK$130,000 b. HK$136,500 c. HK$6,825 d. HK$6,500
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: HK$136,500 - (HK$136,500/1.05) = HK$6,500 [Tot. sales – (Tot. sales ÷ (1 + Sales tax %) = Sales taxes]
FOR INSTRUCTOR USE ONLY
10 - 14 Test Bank for Financial Accounting: IFRS, 4e 77.
Advances from customers are classified as a(n) a. revenue. b. expense. c. current asset. d. current liability.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
78.
The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a noncurrent liability. d. not be separated from the long-term portion of debt.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
79.
Sales taxes collected by a retailer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
80.
Sales taxes collected by a retailer are reported as a. provisions. b. revenues. c. expenses. d. current liabilities.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
81.
Mast General Store has total receipts for the month of €45,990 including sales taxes. If the sales tax rate is 5%, what are Mast's sales for the month? a. €43,691 b. €43,800 c. €48,290 d. It cannot be determined.
Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic AICPA FC: Measurement, IMA: Reporting Solution: €45,990 / (1 + .05) = €43,800 [Tot. sales ÷ (1 + Sales tax %) = Sales]
82.
A cash register tape shows cash sales of HK$5,000 and sales taxes of HK$300. The journal entry to record this information is a. Cash ..................................................................................... 5,300 Sales Revenue ............................................................ 5,300 b. Cash ..................................................................................... 5,300 Sales Tax Revenue ..................................................... 300 Sales Revenue ............................................................ 5,000 c. Cash ..................................................................................... 5,000 Sales Tax Expense............................................................... 300 Sales Revenue ............................................................ 5,300 d. Cash ..................................................................................... 5,300 Sales Revenue ............................................................ 5,000 Sales Taxes Payable ................................................... 300
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities 83.
10 - 15
Carver's Pharmacy has collected $900 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Carver's Pharmacy make to show the March remittance? a. Sales Tax Expense .............................................................. 900 Cash ............................................................................ 900 b. Sales Taxes Payable ........................................................... 900 Cash ............................................................................ 900 c. Sales Tax Expense .............................................................. 900 Sales Taxes Payable................................................... 900 d. No entry required.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
84.
Dailey Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to €48,150. If the sales tax rate is 7%, what amount must be remitted to the state for February's sales taxes? a. €3,371 b. €3,150 c. €4,815 d. It cannot be determined.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €48,150 - (€48,150/1.07) = €3,150 [Tot. sales – (Tot. sales ÷ (1 + Sales tax %) = Sales taxes]
85.
Any balance in an unearned revenue account is reported as a(n) a. current liability. b. long-term debt. c. revenue. d. unearned liability.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
86.
Southern Foodie Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 80,000 subscriptions in January at $30 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ..................................................... 2,400,000 Subscription Revenue ................................................. 2,400,000 b. Cash .................................................................................... 2,400,000 Unearned Subscription Revenue ................................ 2,400,000 c. Subscriptions Receivable ..................................................... 400,000 Unearned Subscription Revenue ................................ 400,000 d. Prepaid Subscriptions .......................................................... 2,400,000 Cash ............................................................................ 2,400,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting
87.
Lulu Luxuries Company issued a four-year interest-bearing note payable for €200,000 on January 1, 2019. Each January the company is required to pay €50,000 on the note. How will this note be reported on the December 31, 2020 statement of financial position? a. Non-current debt, €200,000. b. Non-current debt, €150,000. c. Non-current debt, €100,000; Non-current debt due within one year, €50,000. d. Non-current debt, €150,000; Non-current debt due within one year, €50,000.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €200,000 - €50,000 - €50,000 = €100,000 [(Jan. 1, 2019 note pay bal. – Jan. 1, 2020 pmt = Bal. at Dec. 31, 2020); (Dec. 31, 2020 allocation: $50,000 as current liabl., $100,000 as N-C liabl.)]
FOR INSTRUCTOR USE ONLY
10 - 16 Test Bank for Financial Accounting: IFRS, 4e 88.
Vick Vickers has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Vickers account for the cash received at the end of the engagement? a. Cash Unearned Service Revenue b. Cash Service Revenue c. Prepaid Service Fees Service Revenue d. No entry is required when the engagement is concluded.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
89.
Which one of the following is shown first under current liabilities by many companies as a matter of custom? a. Accrued expenses b. Current maturities of long-term debt c. Sales taxes payable d. Notes payable
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
90.
Working capital is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
91.
The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets multiplied by current liabilities.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
92.
Monkee's Company has current assets of €45,000, current liabilities of €50,000, long-term assets of €90,000 and non-current liabilities of €40,000. Monkee's Company's working capital and its current ratio are: a. €45,000 and .90:1. b. €5,000 and 1.50:1. c. €5,000 and .90:1. d. (€5,000) and .90:1.
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: €45,000 - €50,000 = (€5,000); €45,000 / €50,000 = .90 : 1 [Curent assets – Current liabl. = Working cap.); (Current assets ÷ Current liabl. = Current ratio)]
FOR INSTRUCTOR USE ONLY
Current Liabilities 93.
10 - 17
Landfall Navigation began operations in 2020 and provides a one year warranty on the products it sells. They estimate that 20,000 of the 400,000 units sold in 2020 will be returned for repairs and that these repairs will cost $8 per unit. The cost of repairing 16,000 units presented for service in 2020 was $128,000. Landfall should report a. warranty expense of $32,000 for 2020. b. warranty expense of $160,000 for 2020. c. warranty liability of $160,000 on December 31, 2020. d. no warranty obligation on December 31, 2020, since this is only a provision.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: (20,000 - 16,000) ´ $8 = $32,000 + $128,000 = $160,000 [(Est. units – Actual units) x Cost per unit = Warranty expense + Exp. incurred]
94.
Wang Company sells 1,200 units of a product that has a one-year warranty on parts. The average cost of honoring one warranty contract is HK$60. During the year 60 contracts are honored at a cost of HK$3,600. It is estimated that 120 contracts will be honored in the following year. The adjusting entry at the end of the current year will include a a. credit to Warranty Liability for HK$7,200. b. credit to Warranty Liability for HK$10,800. c. debit to Warranty Expense for HK$3,600. d. debit to Warranty Expense for HK$10,800.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: 120 ´ HK$60 = HK$7,200 (Est. contracts x Ave. cost per contract = Warranty liabl.)
95.
The accounting for warranty cost is based on the expense recognition principle, which requires that the estimated cost of honoring warranty contracts should be recognized as an expense a. when the product is brought in for repairs. b. in the period in which the product was sold. c. at the end of the warranty period. d. only if the repairs are expected to be made within one year.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
96.
Common types of provisions are obligations to each of the following except a. environmental damage. b. litigation expense. c. warranty expense. d. payroll tax expense.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
97.
Current maturities of long-term debt a. require an adjusting entry. b. are optionally reported on the statement of financial position. c. can be properly classified during statement of financial position preparation, with no adjusting entry required. d. are not considered to be current liabilities.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
98.
In accounting for a provision, the term probable is defined as a. a probability of occurrence greater than 75%. b. reasonably possible or greater. c. more likely than not to occur. d. None of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 18 Test Bank for Financial Accounting: IFRS, 4e 99.
The accounting for warranty costs is based on the a. going concern principle. b. expense recognition principle. c. conservatism concept. d. historical cost principle.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
100.
Warranty expenses are reported on the income statement as a. administrative expenses. b. part of cost of goods sold. c. contra-revenues. d. selling expenses.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
101.
Lulzbot.com sells 6,000 units of its product for €500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average €50 per unit. In the year of sale, warranty contracts are honored on 120 units for a total cost of €6,000. What amount should Lulzbot.com accrue on December 31 for estimated warranty costs? a. €9,000 b. €6,000 c. €3,000 d. €45,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: [(6,000 ´ .03) - 120] ´ €50 = €3,000 [((Units sold x Est. defective %) – Actual defective units) x Ave. cost per unit = Warranty costs]
102.
Lulzbot.com sells 6,000 units of its product for €500 each during the year ending December 31, 2020. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average €50 per unit. In the year of sale, warranty contracts are honored on 120 units for a total cost of €6,000. What amount will be reported on Lulzbot.com's statement of financial position as Warranty Liability on December 31, 2020? a. €6,000 b. €9,000 c. €3,000 d. It cannot be determined.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA FC: Measurement, IMA: Reporting Solution: [(6,000 ´ .03) - 120] ´ €50 = €3,000 [((Units sold x Est. defective %) – Actual defective units) x Ave. cost per unit = Warranty liabl.]
103.
Current liabilities generally appear a. after non-current liabilities on the statement of financial position. b. in decreasing order of magnitude on the statement of financial position. c. in order of maturity on the statement of financial position. d. in increasing order of magnitude on the statement of financial position.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: reporting, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities 104.
10 - 19
The weekly payroll earned by employees is called a. take-home pay. b. net pay. c. net earnings. d. gross earnings.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
105.
Employee payroll deductions include each of the following except a. union dues. b. income taxes. c. Social Security taxes. d. All of these are payroll deductions.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
106.
The journal entry to record the payroll for a period will include a credit to Cash for the gross a. earnings less all payroll deductions. b. earnings of all paychecks issued. c. earnings less taxes payable. d. earnings.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
107.
A current liability is a debt that a company expects to pay within a. one year. b. the operating cycle. c. one year or the operating cycle, whichever is longer. d. one year or the operating cycle, whichever is shorter.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
108.
Which of the following statements concerning current liabilities is incorrect? a. Current liabilities include unearned revenues. b. A company that has more current liabilities than current assets may have liquidity issues. c. Current liabilities include prepaid expenses. d. A current liability is a debt that a company expects to pay within one year or the operating cycle whichever is longer.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
109.
On August 1, 2019, a company borrowed cash and signed a one-year interest-bearing note on which both the face value and interest are payable on August 1, 2020. How will the note payable and the related interest be classified in the December 31, 2019, statement of financial position? Note Payable Interest Payable a. Current liability Non-current liability b. Non-current liability Current liability c. Current liability Current liability d. Non-current liability Not shown
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA FC: Reporting, IMA: Reporting
FOR INSTRUCTOR USE ONLY
10 - 20 Test Bank for Financial Accounting: IFRS, 4e 110.
Companies report current liabilities on the statement of financial position a. in alphabetical order. b. in order of maturity. c. in random order. d. after non-current liabilities.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting
111.
A provision is recorded when the likelihood of occurrence is a. remote. b. reasonably possible. c. probable. d. nil or zero.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
112.
Under U.S. GAAP, liabilities are a. reported alphabetically. b. shown in order of magnitude. c. shown before equity. d. defined differently than under IFRS.
IFRS: Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Diversity, AICPA FC: Measurement, AICPA BB: International Perspective, IMA: Reporting
113.
Current liabilities presented under U.S. GAAP are shown a. alphabetically. b. in order of magnitude. c. in order of the dates they become due. d. before long-term liabilities.
IFRS: Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Diversity, AICPA FC: Measurement, AICPA BB: International Perspective, IMA: Reporting
114.
Under U.S. GAAP, contingent liabilities are a. reported in the financial statements. b. ignored completely. c. always disclosed in the financial statements. d. accounted for in the same way as under IFRS.
IFRS: Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Diversity, AICPA FC: Measurement, AICPA BB: International Perspective, IMA: Reporting
115.
U.S. GAAP and IFRS are similar for each of the following except for the a. accounting for contingent liabilities. b. definition of a liability. c. accounting for payroll taxes payable. d. None of these answers are correct.
IFRS: Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Diversity, AICPA FC: Measurement, AICPA BB: International Perspective, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities
10 - 21
BRIEF EXERCISES BE 116 Kingery Sales Company has the following selected accounts after posting adjusting entries: Accounts Payable Notes Payable, 3-month Accumulated Depreciation—Equipment Notes Payable, 5-year, 6% Salaries and Wages Expense Interest Payable Mortgage Payable Sales Taxes Payable
₤ 45,000 50,000 14,000 100,000 4,000 3,000 120,000 38,000
Instructions Prepare the current liability section of Kingery Sales Company's statement of financial position, assuming ₤25,000 of the mortgage is payable next year. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 116
(5 min.) KINGERY SALES COMPANY
Current Liabilities Notes Payable, 3-month Accounts Payable Sales Taxes Payable Current portion of long-term debt Interest Payable Total Current Liabilities
₤ 50,000 45,000 38,000 25,000 3,000 ₤161,000
BE 117 Identify which of the following would be classified as current liabilities as of December 31, 2020: 1. Salaries and Wages Payable 2. Bonds Payable, maturing in 2025 3. Interest Payable, due July 1, 2021 4. Income Taxes Payable 5. Notes Payable, due January 30, 2022 Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 117
(3 min.)
Current liabilities include: Salaries and Wages Payable, Income Taxes Payable, and Interest Payable BE 118 On December 1, Gilman Corporation borrowed $20,000 on a 90-day, 6% note. Prepare the entries to record the issuance of the note, the accrual of interest at year end, and the payment of the note. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 22 Test Bank for Financial Accounting: IFRS, 4e Solution 118 Dec 1
(5 min.)
Cash ........................................................................................ Notes Payable ................................................................
20,000
Dec 31 Interest Expense ..................................................................... Interest Payable ..............................................................
100
Mar 1
Interest Expense ..................................................................... Interest Payable ...................................................................... Notes Payable ......................................................................... Cash ...............................................................................
20,000 100 200 100 20,000 20,300
BE 119 During December 2019, Markowitz Publishing sold 3,000 12-month annual magazine subscriptions at a rate of $30 each. The first issues were mailed in February 2020. Prepare the entries on Markowitz’s books to record the sale of the subscriptions and the mailing of the first issues. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 119 December 2019
February 2020
(4 min.) Cash ......................................................................... Unearned Subscription Revenue ..................... (3,000 × $30 = $90,000)
90,000
Unearned Subscription Revenue .............................. Subscription Revenue ...................................... ($90,000 ÷ 12 = $7,500)
7,500
90,000
7,500
BE 120 Putman Company had cash sales of $102,600 (including taxes) for the month of June. Sales are subject to 8% sales tax. Prepare the entry to record the sale. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 120
(3 min.)
Cash .............................................................................................. Sales Revenue ($102,600 ÷ 1.08) ........................................ Sales Taxes Payable ............................................................
FOR INSTRUCTOR USE ONLY
102,600 95,000 7,600
Current Liabilities
10 - 23
EXERCISES Ex. 121 Howell Company has the following selected accounts after posting adjusting entries: Accounts Payable Notes Payable, 3-month Accumulated Depreciation—Equipment Salaries and Wages Payable Notes Payable, 5-year, 8% Warranty Liability Salaries and Wages Expense Interest Payable Mortgage Payable Sales Taxes Payable
€75,000 80,000 14,000 27,000 30,000 34,000 6,000 3,000 200,000 21,000
Instructions (a) Prepare the current liability section of Howell Company's statement of financial position, assuming €25,000 of the mortgage is payable next year. (List liabilities in magnitude order, with largest first.) (b)
Comment on Howel's liquidity, assuming total current assets are €500,000.
Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 121 (a)
(10 min.) HOWELL COMPANY
Current Liabilities Notes payable, 3-month Accounts payable Warranty liability Salaries and wages payable Long-term debt due within one year Sales taxes payable Interest payable Total Current Liabilities (b)
€ 80,000 75,000 34,000 27,000 25,000 21,000 3,000 €265,000
The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be €235,000 of current assets. The current assets are almost twice the current liabilities and it appears as though Howell Company has sufficient current resources to meet current obligations when due.
Ex. 122 Prepare the necessary journal entries for the following transactions: (a) On September 1, Cole Company borrowed $250,000 from National Bank on a 6-month, 6% note. (b) On December 31, Cole Company accrued interest (assume adjusting entries are only made at the end of the year). Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
10 - 24 Test Bank for Financial Accounting: IFRS, 4e Solution 122
(5 min.)
(a) Cash ............................................................................................... Notes Payable ......................................................................
250,000
(b) Interest Expense ............................................................................. Interest Payable ($250,000 × .06 × 4/12) .............................
5,000
250,000 5,000
Ex. 123 On March 1, Jordan Company borrows $180,000 from Ottawa Bank by signing a 6-month, 8%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Jordan Company. (a) Prepare the entry on March 1 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the semi-annual financial statements. Assume no other interest accrual entries have been made. (c) Prepare the adjusting entry at August 31 to accrue interest. (d) Prepare the entry to record payment of the note at maturity. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 123
(10 min.)
(a)
Cash ............................................................................ Notes Payable ....................................................
180,000
Interest Expense .......................................................... Interest Payable [($180,000 × 8% × (4 ÷ 12)] .....
4,800
Interest Expense .......................................................... Interest Payable ..................................................
2,400
Notes Payable ............................................................. Interest Payable ........................................................... Cash ...................................................................
180,000 7,200
(b) (c) (d)
March 1 June 30 Aug. 31 Sept. 1
180,000 4,800 2,400
187,200
Ex. 124 Wellington Company had the following transactions involving notes payable. Nov. 1, 2019 Dec. 31, 2019 Feb. 1, 2020
Borrows $150,000 from Olathe Bank by signing a 3-month, 10% note. Prepares the adjusting entry. Pays principal and interest to Olathe Bank.
Instructions Prepare journal entries for each of the transactions. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Current Liabilities Solution 124
10 - 25
(8 min.)
November 1, 2019 Cash ......................................................................................... Notes Payable..................................................................... December 31, 2019 Interest Expense ($150,000 ´ 10% ´ 2/12) ...................................................... Interest Payable ................................................................. February 1, 2020 Notes Payable .......................................................................... Interest Payable .......................................................................... Interest Expense ...................................................................... Cash ..............................................................................
150,000 150,000
2,500 2,500 150,000 2,500 1,250 153,750
Ex. 1254 Flores Company publishes a monthly sports magazine, Hunting Preview. Subscriptions to the magazine cost $20 per year. During October 2019, Flores sells 24,000 subscriptions beginning with the November issue. Flores prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue. Instructions (a) Prepare the entry in October for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, 2019, to record subscription revenue earned in December 2019. (c) Prepare the adjusting entry at March 31, 2020, to record subscription revenue earned in the first quarter of 2020. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 125 (a)
(b)
(c)
Oct. 31
Dec. 31
Mar. 31
(5 min.) Cash ................................................ Unearned Subscription Revenue (24,000 ´ $20) .............................
480,000
Unearned Subscription Revenue .... Subscription Revenue ($480,000 ´ 2/12) ........................
80,000
Unearned Subscription Revenue .... Subscription Revenue ($480,000 ´ 3/12) ....................
120,000
480,000
80,000
FOR INSTRUCTOR USE ONLY
120,000
10 - 26 Test Bank for Financial Accounting: IFRS, 4e Ex. 126 English Company billed its customers a total of $1,470,000 for the month of November. The total includes a 5% sales tax. Instructions (a) Determine the proper amount of revenue to report for the month. (b) Prepare the general journal entry to record the revenue and related liabilities for the month. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 126
(5 min.)
(a)
$1,470,000 ÷ 1.05 = $1,400,000 is the total sales revenue.
(b)
$1,400,000 × .05 = $70,000 is the sales tax liability. Journal Entry: Accounts Receivable .................................................................... 1,470,000 Sales Revenue .................................................................... Sales Taxes Payable ...........................................................
1,400,000 70,000
Ex. 127 Hibbett Company does not segregate sales and sales taxes on its cash register. Its register total for the month is $291,500, which includes a 6% sales tax. Instructions Compute sales taxes payable, and make the entry to record sales and sales taxes payable. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 127
(5 min.)
Sales taxes payable = $16,500 [$291,500 – ($291,500 ÷ 1.06)] Cash ....................................................................................................... Sales Taxes Payable ...................................................................... Sales Revenue ($291,500 ÷ 1.06) ..................................................
291,500 16,500 275,000
Ex. 128 Based on the following information, compute the (1) current ratio and (2) working capital. Current assets ¥180,000,000 Total assets 900,000,000 Current liabilities 80,000,000 Total liabilities 500,000,000 Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 128
(4 min.)
(1) Current ratio = 2.25:1 (¥180,000,000 ÷ ¥80,000,000) (2) Working capital = ¥100,000,000 (¥180,000,000 – ¥80,000,000)
FOR INSTRUCTOR USE ONLY
Current Liabilities
10 - 27
Ex. 129 Mehring's 2020 financial statements contained the following data (in millions). Current assets Total assets Current liabilities Total liabilities Cash Instructions Compute these values: (a) Working capital.
$20,890 42,430 15,160 32,580 380
Accounts receivable Interest expense Income tax expense Net income
(b)
$1,550 980 1,270 2,230
Current ratio.
Ans: N/A, LO: 3, Bloom: S, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 129
(4 min.)
(a) Working capital = $20,890 – $15,160 = $5,730 million (b) Current ratio = $20,890 ÷ $15,160 = 1.38:1
COMPLETION STATEMENTS 130. A current liability is a debt that a company expects to pay within ______________ year or the ______________, whichever is longer. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
131. Liabilities are classified on the statement of financial position as being _______________ liabilities or ______________ liabilities. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Reporting, IMA: Reporting
132. Obligations in written form are called ______________ and usually require the borrower to pay interest. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
133. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
134. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
135.
The current ratio is current assets divided by ______________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: FSA
136. A provision has greater uncertainty than other liabilities about the ______________ or ______________ of the future expenditure required to settle the obligation. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
137. Two taxes which are levied against employees' wages that must be deducted in arriving at net pay are (1)______________ taxes and (2)______________ taxes. FOR INSTRUCTOR USE ONLY
10 - 28 Test Bank for Financial Accounting: IFRS, 4e Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
138. The employer incurs a payroll tax expense equal to the amount contributed by each employee for ______________ taxes. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA FC: Measurement, IMA: Reporting
Answers to Completion Statements 130. 131. 132. 133. 134.
one, operating cycle current, non-current notes payable face value, interest current liability
135. 136. 137. 138.
current liabilities timing, amount Social Security, income Social Security
MATCHING 139. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D.
Current liability Notes payable Employee payroll deductions Current ratio
E. F. G. H.
Provision Gross earnings Social Security taxes Working capital
____
1. Total compensation earned by an employee.
____
2. An obligation in the form of a written note.
____
3. A liability of uncertain timing or amount.
____
4. A measure computed as current assets minus current liabilities.
____
5. A measure of a company’s liquidity.
____
6. A debt that a company expects to pay within one year or the operating cycle.
____
7. Amounts withheld from gross earnings to determine the amount of a paycheck.
____
8. Benefits provided by a government which are funded from taxes assessed on both the employer and employees.
Ans: N/A, LO: 1, 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA FC: Measurement, IMA: Reporting
Answers to Matching 1. 2. 3. 4.
F B E H
5. 6. 7. 8.
D A C G
FOR INSTRUCTOR USE ONLY
Current Liabilities
10 - 29
SHORT-ANSWER ESSAY QUESTIONS S-A E 140 A company will incur product repair costs in the future if products that it sells currently under warranty are brought in for repair during the warranty period. The company will also incur bad debt expense in the future if customers who buy on credit currently are unable to pay their accounts. Are the accounting procedures for these two potential costs (warranty expense and bad debt expense) related or guided by the same accounting principle? Briefly explain. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA FC: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 140 The accounting procedures for both warranty expense and bad debt expense are guided by the expense recognition principle. Accounting for warranty expense requires matching the expense with the period in which the revenue is earned for the product under warranty. Similarly, accounting for bad debt expense matches the bad debt expense resulting from credit sales with the period when revenue from the credit sale is earned. The accounting procedures for matching these costs with the related revenues are also similar because the costs can be estimated based on prior experience. Matching is possible by basing the expense on an estimate, using past data as a guide. S-A E 141 What is a provision? Give an example of a provision that is usually recorded in the accounts. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA FC: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 141 A provision is a liability of uncertain timing or amount. Provisions are very common and may be reported as either a current or non-current liability. Common examples of provisions are obligations related to warranty expense or product guarantees, and environmental damage. Warranty costs are a provision usually recorded in the accounts. S-A E 142 An employee's net pay consists of gross earnings less payroll deductions. Give two or three examples of payroll deductions. Are these deductions recognized as payroll expenses by the employer? What type of payroll expense does the employer incur related to having a payroll? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA FC: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 142 Payroll deductions include income taxes, Social Security taxes, and union dues. Income tax and union dues deductions do not represent payroll expenses for the employer because the employer is only acting as an agent in collecting these deductions. The expense that does constitute payroll expense for the employer is the employer share of Social Security taxes.
FOR INSTRUCTOR USE ONLY
10 - 30 Test Bank for Financial Accounting: IFRS, 4e S-A E 143 (Ethics) Borowitz Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system. Required: Is it ethical for a company to have a secret system like the one described? Explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA FC: Measurement, AICPA PC: Professional Demeanor, Communication, IMA: Business Applications
Solution 143 Secret systems that seek to verify the integrity of the non-secret primary system are certainly ethical. In fact, nearly all fraud and theft detection systems are secret. It is only the misuse of these systems, such as to obtain unauthorized information, or to commit some other crime, that is unethical. S-A E 144 (Communication) Kellog Industries is a manufacturing company that makes various industrial components out of aluminum. Kellog is located in a large city in Europe. Various labor disputes have occurred in the city, some with acrimonious public debate concerning the honesty of management. During one of Kellog's routine employee meetings, Colin Ross, a production worker, brought up the issue of the cost of a worker as reported in the company's annual report. The cost was given as €32,000 per year. Colin points out that the average wage rate of €12 per hour is at most around €25,000 in gross earnings. He asks whether the company is adding in overtime, because if so, the figures are misleading because the employees are not allowed to work overtime. Required: Prepare a note explaining to Mr. Ross how Kellog might calculate a cost per employee that is greater than gross earnings. Explain in general terms only. Do not use any calculations. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA FC: Measurement, AICPA PC: Communication, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Current Liabilities
10 - 31
Solution 144 (letterhead) Dear Mr. Ross: I was happy to meet with you in the monthly employee meetings. It was good to see that you had given so much thought to each issue. One of the issues about which you expressed concern was the company's use of a $32,000 figure as an average cost of an employee, when the average wage rate of an employee is only $12 per hour. You were right that the average gross pay of an employee is only around $25,000. There are, however, some additional costs that most employees never hear about, but that companies must pay. One of these is unemployment insurance. Exactly how much we pay depends on how many layoffs there are in the company and in the state, but we have to pay unemployment taxes on all employees. The greatest additional cost is employee benefits. We pay around $2,000 per year per employee to get the best insurance benefits we can for our employees. We also pay for your uniforms; and we help you stay up-to-date by sponsoring employee education programs. I know this note has been pretty general—you'll be glad to see all the figures spelled out in detail in next year's annual report. Thanks again for coming to the meetings. I hope to see you again next month. (signature)
FOR INSTRUCTOR USE ONLY
CHAPTER 11
LONG-TERM LIABILITIES CHAPTER LEARNING OBJECTIVES 1. Describe the major characteristics of bonds. Bonds can have many different features and may be secured, unsecured, convertible, or callable. The terms of the bond issue are set forth in a bond indenture, and a bond certificate provides the specific information about the bond itself. 2. Explain the accounting for bond transactions. When companies issue bonds, they debit Cash for the cash proceeds and credit Bonds Payable for the face value of the bonds. When bondholders redeem bonds at maturity, the issuing company credits Cash and debits Bonds Payable for the face value of the bonds. When bonds are redeemed before maturity, the issuing company (a) eliminates the carrying value of the bonds at the redemption date, (b) records the cash paid, and (c) recognizes the gain or loss on redemption. 3. Explain how to account for other non-current liabilities. A typical non-current liability is mortgage notes payable. The terms of the loan generally require the borrower to make equal installment payments. Each payment consists of (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases. A lease grants the right to use specific property for a period of time in return for cash payments. For a lease, the lessee records the asset and related obligation at the present value of the future lease payments. 4. Discuss how non-current liabilities are reported and analyzed. Companies should report the nature and amount of each long-term debt in the statement of financial position or in the notes accompanying the financial statements. Companies may sell bonds to investors to raise long-term capital. Bonds offer the following advantages over ordinary shares: (a) shareholder control is not affected, (b) tax savings result, and (c) earnings per share may be higher. Shareholders and long-term creditors are interested in a company’s long-run solvency. Debt to assets and times interest earned are two ratios that provide information about debt-paying ability and long-run solvency. a
5.
a
Apply the effective-interest method of amortizing bond discount and bond premium. The effective-interest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest.
6. Apply the straight-line method of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period.
11 - 2
Test Bank for Financial Accounting, IFRS, Edition, 4e
TRUE-FALSE STATEMENTS 1.
Each bondholder may vote for the board of directors in proportion to the number of bonds held.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
Callable bonds are bonds that can be converted into common stock at the bondholder’s option.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
A debenture bond is an unsecured bond which is issued against the general credit of the borrower.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Bonds are a form of interest-bearing notes payable.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
6.
The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
7.
The board of directors may authorize more bonds than are issued.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
8.
Gains and losses are not recognized when convertible bonds are converted into common stock.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
Generally, convertible bonds do not pay interest.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
10.
The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
11.
If $150,000 face value bonds are issued at 103, the proceeds received will be $103,000.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
12.
Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
13.
If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities 14 .
11 - 3
Each bondholder may vote for the board of directors in proportion to the number of bonds held.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15.
Bond interest paid by a corporation is not an expense, but dividends paid are an expense of the corporation.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
16.
A debenture bond is an unsecured bond which is issued against the general credit of the borrower.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
Neither corporate bond interest nor dividends are deductible for tax purposes.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
18.
A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
19.
If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
20.
If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
21.
If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
22.
If $800,000, 6% bonds are issued on January 1, and pay interest annually, the amount of interest paid on the following January 1 will be $48,000.
Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
23.
If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
24.
A CHF10,000,000 bond with a quoted prices of 101 ¼ is sold for CHF10,250,000.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
25.
If HK$1,800,000, 5%, bonds are issued on January 1, and pay interest annually, the amount of interest paid the following January will be HK$90,000.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 4 26.
Test Bank for Financial Accounting, IFRS, Edition, 4e Bonds are reported on the statement of financial position at their carrying value.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
27.
If $2,000,000 par value bonds with a carrying value of $1,990,400 are redeemed at 97, a loss on redemption will be recorded.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
28.
The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
30.
Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
31.
A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
32.
The amount by which the principal of a mortgage will be reduced in the next year will be reported on the statement of financial position as a current liability.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
33.
Non-current liabilities are reported in a separate section of the statement of financial position immediately below current liabilities.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
34.
The times interest earned is computed by dividing net income by interest expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
35.
The debt to assets ratio is computed by dividing non-current liabilities by total assets.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
36.
The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
37.
Bond premiums must be amortized using the effective-interest method.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics a
38.
Bond discounts must be amortized using the straight-line method.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
39.
Current maturities of long-term debt are often identified as long-term debt due within one year on the statement of financial position. FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 5
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40.
The terms of the bond issue are set forth in a formal legal document called a bond indenture.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
The carrying value of bonds at maturity should be equal to the face value of the bonds.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
Non-current liabilities are reported in a separate section of the statement of financial position immediately before current liabilities.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 6
Test Bank for Financial Accounting, IFRS, Edition, 4e
MULTIPLE CHOICE QUESTIONS 43.
Each of the following is correct regarding bonds except they are a. a form of interest-bearing notes payable. b. attractive to many investors. c. issued by corporations and governmental agencies. d. sold in large denominations.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
The contractual interest rate is always stated as a(n) a. monthly rate. b. daily rate. c. semiannual rate. d. annual rate.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
45.
Secured bonds are bonds that a. are in the possession of a bank. b. are registered in the name of the owner. c. have specific assets of the issuer pledged as collateral. d. have detachable interest coupons.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitments of the issuing company is called a. a bond indenture. b. a bond debenture. c. trading on the equity. d. a term bond.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
47.
Shareholders of a company may be reluctant to finance expansion through issuing more equity because a. leveraging with debt is always a better idea. b. their earnings per share may decrease. c. the price of the stock will automatically decrease. d. dividends must be paid on a periodic basis.
Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
48.
Which of the following is not an advantage of issuing bonds instead of ordinary shares? a. Shareholder control is not affected. b. Earnings per share may be lower. c. Income to shareholders may increase. d. Tax savings result.
Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities 49.
11 - 7
Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. bearer bonds.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
Bonds issued against the general credit of the borrower are called a. callable bonds. b. debenture bonds. c. mortgage bonds. d. sinking fund bonds.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
Bonds that may be exchanged for ordinary shares at the option of the bondholders are called a. options. b. share bonds. c. convertible bonds. d. callable bonds.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called a. callable bonds. b. early retirement bonds. c. options. d. debentures.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
Bonds that have specific assets of the issuer pledged as collateral are a. secured bonds. b. callable bonds. c. convertible bonds. d. debenture bonds.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
A bond secured by specific assets set aside to redeem the bonds is called a a. convertible bond. b. sinking fund bond. c. mortgage bond. d. secured bond.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
The interest rate investors demand for loaning funds is the a. market interest rate. b. stated rate. c. contractual interest rate. d. bond interest rate.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 8 56.
Test Bank for Financial Accounting, IFRS, Edition, 4e Companies with good credit ratings use ___________________ bonds extensively. a. callable bonds. b. convertible bonds. c. mortgage bonds. d. debenture bonds.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
57.
Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
Bonds will always fall into which one of the following pairs of categories? a. Secured or unsecured b. Mortgage or sinking fund c. Debenture or unsecured d. Callable or convertible
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
59.
Which of the following statements concerning bonds is not a true statement? a. Bonds are generally sold through an investment company. b. The bond indenture is prepared after the bonds are printed. c. The bond indenture and bond certificate are separate documents. d. The trustee keeps records of each bondholder.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
60.
A corporation recognizes a gain or loss a. only when bonds are converted into ordinary shares. b. only when bonds are redeemed before maturity. c. when bonds are redeemed at or before maturity. d. when bonds are converted into ordinary shares and when they are redeemed before maturity.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
61.
If there is a loss on bonds redeemed early, the a. loss is debited directly to Retained Earnings. b. bonds’ carrying value was less than the redemption price. c. bonds’ carrying value was greater than the redemption price. d. loss is debited to Interest Expense, as a cost of financing.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
62.
A HK $600,000 bond was retired at 98 when the carrying value of the bond was HK $590,000. The entry to record the retirement would include a a. gain on bond redemption of HK $10,000. b. loss on bond redemption of HK $10,000. c. loss on bond redemption of HK $2,000. d. gain on bond redemption of HK $2,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 9
Solution: HK $590,000 - (HK $600,000 ´ .98) = HK $2,000 gain [Carry. val. B/P – (Face val. B/P x Sell. price) = Gain on redemp.]
63.
A €1,000 face value bond with a quoted price of 98 is selling for a. €1,000. b. €980. c. €908. d. €98.
Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €1,000 ´ .98 = €980 (Face val. B/P x Sell. price = Sale price)
64.
A bond with a face value of HK $200,000 and a quoted price of 102⅛ has a selling price of a. HK $240,225. b. HK $204,025. c. HK $200,225. d. HK $204,250.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $200,000 ´ 1.02125 = HK $204,250 (Face val. B/P x Sell. price = Sale price)
65.
If the market interest rate is greater than the contractual interest rate, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated interest rate is increased.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
The total cost of borrowing is increased only if the a. bonds were issued at a premium. b. bonds were issued at a discount. c. bonds were sold at face value. d. market interest rate is less than the contractual interest rate on that date.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
67.
If the market interest rate is 5%, a €10,000, 6%, 10-year bond that pays interest annually would sell at an amount a. less than face value. b. equal to face value. c. greater than face value. d. that cannot be determined.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
68.
The selling price of a €10,000, 5-year bond, will be less than €10,000 if the a. contractual interest rate is less than the market interest rate. b. contractual interest rate is greater than the market interest rate. c. bond is convertible. d. contractual interest rate is equal to the market interest rate. FOR INSTRUCTOR USE ONLY
11 - 10 Test Bank for Financial Accounting, IFRS, Edition, 4e Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities 69.
11 - 11
Martinez Corporation issues 2,000, 10-year, 8%, €1,000 bonds dated January 1, 2020, at 98. The journal entry to record the issuance will show a a. debit to Cash of €2,000,000. b. debit to Bonds Payable for €40,000. c. credit to Bonds Payable for €2,040,000. d. debit to Cash for €1,960,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €1,000 ´ 2,000 ´ .98 = €1,960,000 (Face val. B/P x Nmbr. B/P iss. x Sell. price = Dr. to cash)
70.
The market interest rate is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
71.
If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect. b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate. d. bondholder will receive effectively less interest than the contractual interest rate.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
72.
The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the a. market interest rate increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market interest rate decreases, then bond prices will go up. d. contractual interest rate increases, the market interest rate will decrease.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
73.
The carrying value of bonds will equal the market price a. at the close of every trading day. b. at the end of the fiscal period. c. on the date of issuance. d. every six months on the date interest is paid.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
74.
The sale of bonds above face value a. is a rare occurrence. b. will cause the total cost of borrowing to be less than the bond interest paid. c. will cause the total cost of borrowing to be more than the bond interest paid. d. will have no net effect on Interest Expense by the time the bonds mature.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 12 Test Bank for Financial Accounting, IFRS, Edition, 4e 75.
Bond interest paid is a. higher when bonds sell at a discount. b. lower when bonds sell at a premium. c. the same whether bonds sell at a discount or a premium. d. higher when bonds sell at a discount and lower when bonds sell at a premium.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
76.
Bond Corporation issues 5,000, 10-year, 8%, €1,000 bonds dated January 1, 2020, at 103. The journal entry to record the issuance will show a a. debit to Cash of €5,000,000. b. credit to Bonds Payable for €5,150,000. c. credit to Bonds Payable for €5,030,000. d. credit to Cash for €5,150,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €1,000 ´ 5,000 ´ 103 = €5,150,000 (Face val. B/P x Nmbr. B/P iss. x S.P. = Cr. to B/P)
77.
Rikki Company received proceeds of €188,000 on 10-year, 6% bonds issued on January 1, 2020. The bonds had a face value of €200,000, pay interest annually on December 31, and have a call price of 101. Rikki uses the straight-line method of amortization. What is the amount of interest Rikki must pay the bondholders in 2020? a. €11,200 b. €12,000 c. €13,200 d. €10,800
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €200,000 ´ .06 = €12,000 (Face val. B/P x Int. rate = Int. pd.)
78.
A HK $600,000 bond was retired at 102 when the carrying value of the bond was HK $622,000. The entry to record the retirement would include a a. gain on bond redemption of HK $12,000. b. loss on bond redemption of HK $10,000. c. loss on bond redemption of HK $12,000. d. gain on bond redemption of HK $10,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $622,000 – (HK $600,000 ´ 1.02) = HK $10,000 gain [Carry. val. B/P – (Face val. B/P x Sell. price) = Gain on redemp.]
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities 79.
11 - 13
Brooks Company received proceeds of €188,500 on 10-year, 8% bonds issued on January 1, 2018. The bonds had a face value of €200,000, pay interest annually on January 1, and have a call price of 101. Brooks uses the straight-line method of amortization. Brooks Company decided to redeem the bonds on January 1, 2020. What amount of gain or loss would Brooks report on its 2020 income statement? a. €9,200 gain b. €11,200 gain c. €11,200 loss d. €9,200 loss
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €200,000 – {€11,500 – [(€11,500/10) x 2]} = €190,800; (€200,000 x 1.01) - €190,800 = €11,200 Carry. val. B/P – {Dis. B/P – [(Dis. B/P/ Nmbr. yrs.) x 2]} = Carry. val. B/P; (Face val. B/P x Sell. price) – Carry. val. B/P = Loss on redemp.
80.
Choe Company has HK $1,500,000 of bonds outstanding. The unamortized premium is HK $19,600. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. HK $4,600 gain b. HK $4,600 loss c. HK $15,000 gain d. HK $15,000 loss
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (HK $1,500,000 + HK $19,600) - (HK $1,500,000 ´ 1.01) = HK $4,600 gain [(Face val. B/P + Prem. B/P) – (Face val. B/P x Sell. price) = Gain on redemp.]
81.
The current carrying value of Lane’s $800,000 face value bonds is $797,000. If the bonds are retired at 103, what would be the amount Lane would pay its bondholders? a. $797,000 b. $800,000 c. $820,910 d. $824,000
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800,000 ´ 1.03 = $824,000 (Face val. B/P x Sell. price = Amt. pd.)
82.
Robin Corporation retires its £800,000 face value bonds at 104 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is £829,960. The entry to record the redemption will include a a. credit of £2,040 to Loss on Bond Redemption. b. debit of £2,040 to Loss on Bond Redemption. c. credit of £32,040 to Premium on Bonds Payable. d. debit of £32,000 to Premium on Bonds Payable.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (£800,000 ´ 1.04) - £829,960 = £2,040 loss [(Face val. B/P x Sell. price) – Carry. val. B/P = Loss on redemp.]
FOR INSTRUCTOR USE ONLY
11 - 14 Test Bank for Financial Accounting, IFRS, Edition, 4e 83.
Which one of the following amounts increases each period when accounting for long-term notes payable? a. Cash payment b. Interest expense c. Principal balance d. Reduction of principal
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
84.
In the statement of financial position, mortgage notes payable are reported as a. a current liability only. b. a noncurrent liability only. c. both a current and a noncurrent liability. d. a current liability except for the reduction in principal amount.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
85.
A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal. Portion Allocated Portion Allocated to Interest Expense to Payment of Principal a. Increases Increases b. Increases Decreases c. Decreases Decreases d. Decreases Increases
Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
86.
The entry to record an installment payment on a long-term note payable is a. Mortgage Payable Cash b. Interest Expense Cash c. Mortgage Payable Interest Expense Cash d. Bonds Payable Cash
Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
87.
Autumn Company purchased a building on January 2 by signing a long-term €630,000 mortgage with monthly payments of €5,400. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment at January 31 will include a a. debit to the Cash account for €5,400. b. credit to the Cash account for €5,250. c. debit to the Interest Expense account for €5,250. d. credit to the Mortgage Payable account for €5,400.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €630,000 ´ .10 ´ 112 = €5,250 interest
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities (Mortg. x Int. rate x Time = Int. exp.)
FOR INSTRUCTOR USE ONLY
11 - 15
11 - 16 Test Bank for Financial Accounting, IFRS, Edition, 4e 88.
Lui Company purchased a building on January 2 by signing a long-term HK $480,000 mortgage with monthly payments of HK $4,500. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be a. HK $480,000. b. HK $479,500. c. HK $476,000. d. HK $475,500.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $480,000 ´ .10 ´ 112 = HK $4,000 interest; HK $480,000 - (HK $4,500 - HK $4,000) = HK $479,500 [(Mortg. x Int. rate x Time = Int. exp.; Mortg. – (Pymnt. – Int. exp.) = Mortg. after pymnt.]
89.
Harris Company borrowed €800,000 from Liber Bank on January 1, 2019 in order to expand its mining capabilities. The five-year note required annual payments of €208,349 and carried an annual interest rate of 8.5%. What is the amount of expense Harris must recognize on its 2020 income statement? a. €68,000 b. €56,070 c. €43,127 d. €49,659
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €208,349 - (€800,000 ´ .085) = €140,349 principal reduction; €800,000 - €140,349 = €659,651; €659,651 ´ .085 = €56,070 [Ann. pymnt. – (N/P x Int. rate) = Princp. reduc., 2019; N/P – Princp. reduc., 2019 = Carry. val. N/P, 2019; Carry val. N/P, 2019 x Int. rate = Int. exp., 2020]
90.
Harris Company borrowed $800,000 from Liber Bank on January 1, 2019 in order to expand its mining capabilities. The five-year note required annual payments of $208,349 and carried an annual interest rate of 8.5%. What is the balance in the notes payable account at December 31, 2020? a. €800,000 b. €507,372 c. €659,651 d. €664,000
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €208,349 - (€800,000 ´ .085) = €140,349 principal reduction; €800,000 - €140,349 = €659,651 balance 12/31/19; €208,349 - (€659,651 ´ .085) = €152,279 principal reduction; €659,651 - €152,279 = €507,372 balance 12/31/20 [Ann. pymnt. – (N/P x Int. rate) = Princp. reduc., 2019; N/P – Princp. reduc., 2019 = Carry. val. N/P, 2019; Ann. pymnt. – (Carry. val. N/P, 2019 x Int. rate) = Princp. reduc., 2020; Carry val. N/P, 2019 = Princp. reduc., 2020 = Carry. val. N/P, 2020]
91.
In a recent year Luke Corporation had net income of $250,000, interest expense of $50,000, and a times interest earned of 10. What was Luke Corporation’s income before taxes for the year? a. $550,000 b. $500,000 c. $450,000 d. None of these answer choices are correct.
Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 10 = ($250,000 + $50,000 + tax exp) / 50,000; Tax exp = $200,000; Inc before tax = $250,000 + $200,000 = $450,000 [Times int. earn. = (Net inc. + Int. exp. + Tax exp.) ÷ Int. exp; (Times int. earn. x Int. exp.) – (Net inc. + Int. exp.) = Tax exp.; Net inc. + Tax exp. = Inc. before tax]
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities 92.
11 - 17
The adjusted trial balance for Otam Corp. at the end of 2020 contained the following accounts. 5-year Bonds Payable 8% Interest Payable Notes Payable (3 mo.) Notes Payable (5 yr.) Mortgage Payable (€10,000 due currently) Salaries and Wages Payable Taxes Payable (due 3/15 of 2021)
€1,650,000 50,000 40,000 145,000 300,000 18,000 25,000
The total noncurrent liabilities reported on the statement of financial position are a. €1,945,000. b. €1,935,000. c. €2,095,000. d. €2,085,000. Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €1,500,000 + €150,000 + €145,000 + €290,000 = €2,085,000 (B/P + Prem. B/P + N/P + Long term mortg. = Long term liab.)
93.
The 2020 financial statements of Barker Co. contain the following selected data (in millions). Current Assets Total Assets Current Liabilities Total Liabilities Cash
£ 75 140 40 90 8
The debt to assets ratio is a. 64.3%. b. 53.3%. c. 28.6%. d. 147.4%. Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: £90 / £140 = 64.3% (Total liab. ÷ Total assets = Debt to assets ratio)
94.
Which of the following statements concerning leases is true? a. A lessee records a lease liability and an asset for all leases. b. The appearance of the account, Leased Liability, on the statement of financial position, signifies a lease term of less than one year. c. The portion of a lease liability expected to be paid in the next year is reported as a current liability. d. Present value is irrelevant in accounting for leases.
Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
95 .
Each of the following may be shown on a supporting schedule instead of on the statement of financial position except the a. current maturities of long-term debt. b. conversion privileges. c. interest rates. d. maturity dates.
Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 18 Test Bank for Financial Accounting, IFRS, Edition, 4e
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities 96.
11 - 19
The times interest earned is computed by dividing a. net income by interest expense. b. income before income taxes by interest expense. c. income before interest expense by interest expense. d. income before income taxes and interest expense by interest expense.
Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
In a recent year Chandler Corporation had net income of €150,000, interest expense of €40,000, and tax expense of €20,000. What was Chandler Corporation’s times interest earned for the year? a. 5.25 b. 4.75 c. 3.75 d. 4.25
Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (€150,000 + €40,000 + €20,000) / €40,000 = 5.25 [(Net inc. + Int. exp. + Tax exp.) ÷ Int. exp. = Times int. earn.]
98.
A major disadvantage resulting from the use of bonds is that a. earnings per share may be lowered. b. interest must be paid on a periodic basis. c. bondholders have voting rights. d. taxes may increase.
Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
99.
Zhou Company received proceeds of HK $188,000 on 10-year, 6% bonds issued on January 1, 2019. The bonds had a face value of HK $200,000, pay interest annually on December 31, and have a call price of 101. Zhou uses the straight-line method of amortization. What is the amount of interest expense Zhou will show with relation to these bonds for the year ended December 31, 2020? a. HK $12,000 b. HK $11,200 c. HK $13,200 d. HK $10,800
Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: FSA Solution: (HK $200,000 ´ .06) + [(HK $200,000 - HK $188,000) / 10] [(Face val. B/P x Int. rate) + {(Face val. B/P – Carry. val. B/P) ÷ 10} = Int. exp.] a
100. Garland Company received proceeds of €188,000 on 10-year, 6% bonds issued on January 1, 2018. The bonds had a face value of €200,000, pay interest annually on January 1, and have a call price of 101. Garland uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2020? a. €200,000 b. €190,400 c. €197,350 d. €189,200
Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €200,000 - [€12,000 - ((€12,000 / 10) ´ 2)] = €190,400 [Face val. B/P – {Dis. B/P – (Dis. B/P ÷ Nmbr. yrs.) x Time} = Carry. val. B/P]
FOR INSTRUCTOR USE ONLY
11 - 20 Test Bank for Financial Accounting, IFRS, Edition, 4e
a
101. If bonds have been issued at a discount, over the life of the bonds, the a. carrying value of the bonds will decrease. b. carrying value of the bonds will increase. c. interest expense will increase, if the discount is being amortized on a straight-line basis. d. unamortized discount will increase.
Ans: b, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
102. On January 1, Sage Corporation issues $1,000,000, 5-year, 12% bonds at 95 with interest payable on January 1. The carrying value of the bonds at the end of the second interest period is: a. $970,000 b. $950,000 c. $930,000 d. $960,000
Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000 ´ .95 = $950,000; $1,000,000 - $950,000 = $50,000 Disc.; ($50,000 / 5) ´ 2 = $20,000 Disc. amount.; $950,000 + $20,000 = $970,000 [Face amt. B/P x Sell. price = Sell. price B/P; Face amt. B/P – Sell price B/P = Dis. B/P; (Dis. B/P ÷ Nmbr. yrs.) x Time = Dis. amort.; Sell. price B/P + Dis. amort. = Carry. val. B/P, Yr. 2] a
103. If bonds are originally sold at a discount and amortized using the straight-line method: a. interest expense in the earlier years of the bond’s life will be less than the interest to be paid. b. interest expense in the earlier years of the bond’s life will be the same as interest to be paid. c. unamortized discount is subtracted from the face value of the bond to determine its carrying value. d. unamortized discount is added to the face value of the bond to determine its carrying value.
Ans: c, LO: 6, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
104. Presented here is a partial amortization schedule for Graceland Company who sold €100,000, five year 10% bonds on January 1, 2019 for €108,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2019 January 1, 2020
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium €8,000 (iv)
Bond Carrying Value €108,000 (v)
Which of the following amounts should be shown in cell (i)? a. €10,800 b. €11,600 c. €10,000 d. €2,000 Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €100,000 ´ 10% = €10,000 (Face val. B/P x Int. rate = Int. pd.)
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities a
11 - 21
105. Presented here is a partial amortization schedule for Graceland Company who sold $100,000, five year 10% bonds on January 1, 2019 for €108,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2019 January 1, 2020
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium €8,000 (iv)
Bond Carrying Value €108,000 (v)
Which of the following amounts should be shown in cell (ii)? a. €11,600 b. €8,400 c. €10,800 d. €9,200 Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €100,000 ´ 10% = €10,000 int. pd.; €8,000 ÷ 5 = €1,600 Premium amort.; €10,000 - €1,600 = €8,400 [(Face val. B/P x Int. rate = Int. pd.); Unamort. prem. ÷ Nmbr. yrs. = Ann. prem. amort.; Int. pd. – Ann. prem. amort. = Int. exp.] a
106. Presented here is a partial amortization schedule for Graceland Company who sold €200,000, six year 10% bonds on January 1, 2019 for €212,000 and uses annual straightline amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2019 January 1, 2020
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium €12,000 (iv)
Bond Carrying Value €212,000 (v)
Which of the following amounts should be shown in cell (iii)? a. €10,000 b. €12,000 c. €2,000 d. €1,200 Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €12,000 ÷ 6 = €2,000 (Unamort. prem. ÷ Nmbr. yrs. = Ann. prem. amort) a
107. Presented here is a partial amortization schedule for Graceland Company who sold €200,000, six year 10% bonds on January 1, 2019 for €212,000 and uses annual straightline amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2019 January 1, 2020
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium €12,000 (iv)
Which of the following amounts should be shown in cell (iv)?
FOR INSTRUCTOR USE ONLY
Bond Carrying Value €212,000 (v)
11 - 22 Test Bank for Financial Accounting, IFRS, Edition, 4e MC. 107 a. b. c. d.
(Cont.) €10,800 €6,000 €11,400 €10,000
Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €12,000 / 6 = €2,000 Prem. Amount.; €12,000 - €2,000 = €10,000 Unamort. Prem. [Unamort. prem. ÷ Nmbr. yrs. = Ann. prem. amort.; Unamort. prem. – Ann. prem. amort. = New unamort. prem.] a
108. Presented here is a partial amortization schedule for Graceland Company who sold €100,000, five year 10% bonds on January 1, 2019 for €108,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE
Interest Period January 1, 2019 January 1, 2020
Interest Paid
Interest Expense
Premium Amortization
(i)
(ii)
(iii)
Unamortized Premium €8,000 (iv)
Bond Carrying Value €108,000 (v)
Which of the following amounts should be shown in cell (v)? a. €109,600 b. €108,800 c. €106,400 d. €107,200 Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €8,000 / 5 = €1,600 Prem. Amount; €108,000 - €1,600 = €106,400 [Unamort. prem. ÷ Nmbr. yrs. = Ann. prem. amort.; Carry. val. B/P – Ann. prem. amort. = New carry. val. B/P] a
109. On January 1, Wellness Corporation issues $3,000,000, 5-year, 12% bonds at 95 with interest payable on January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a debit to a. Interest Expense, $180,000. b. Interest Expense, $360,000. c. Bonds Payable, $30,000. d. Bonds Payable, $15,000.
Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $3,000,000 ´ (1 - .95) = $150,000 Disc.; $150,000 / 5 = $30,000 Disc. Amount. [Face val. B/P x (1 – Sell. price) = Dis. B/P; Dis. B/P ÷ Nmbr. yrs. = Ann. dis. amort.] a
110. On January 1, 2020, HK $2,000,000, 10-year, 10% bonds, were issued for $1,943,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the amortization amount per year is a. HK $19,430. b. HK $4,750. c. HK $2,850. d. HK $5,700.
Ans: d, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $2,000,000 - HK $1,943,000 = HK $57,000; HK $57,000 / 10 = HK $5,700 (Face val. B/P – Sell. price B/P = Dis. B/P; Dis. B/P ÷ Nmbr. yrs. = Ann. dis. amort.)
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Noncurrent Liabilities a
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111. A corporation issues $500,000, 8%, 5-year bonds on January 1, 2020, for HK $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2020’s adjusting entry is a. HK $44,200. b. HK $40,000. c. HK $35,800. d. HK $4,200.
Ans: a, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (HK $500,000 ´ .08) + [(HK $500,000 - HK $479,000) / 5] = HK $44,200 [(Face val. B/P x Int. rate) + {(Face val. B/P – Sell. price B/P) ÷ Nmbr. yrs.} = Int. exp.] a
112. Shakey Company issued €500,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. €150,000 b. €160,000 c. €145,000 d. €140,000
Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (€500,000 ´ .06 ´ 5) + [€500,000 ´ (1.00 - .98)] = €160,000 [(Face val. B/P x Int. rate. x Nmbr. yrs.) + {Face val. B/P x (1 – Sell. price)} = Total int. cost B/P] a
113. Dakota Company issued €700,000 of 6%, 5-year bonds at 98, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. €686,000 b. €683,200 c. €688,800 d. €697,200
Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (€700,000 ´ .98) + (€14,000 / 5) = €688,800 [(Face val. B/P x Sell. price) + (Dis. B/P ÷ Nmbr. yrs.) = Carry. val. B/P] a
114. Wendy Company issued £600,000 of 8%, 5-year bonds at 105. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. £48,000 b. £54,000 c. £42,000 d. £6,000
Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (£600,000 ´ .08) - [(£600,000 ´ .05) / 5] = £42,000 [(Face val. B/P x Int. rate) – {(Face val. B/P x Prem.) ÷ Nmbr. yrs.} = Int. exp.]
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11 - 24 Test Bank for Financial Accounting, IFRS, Edition, 4e a
115. Hart Company issued $600,000 of 8%, 5-year bonds at 105, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $630,000 b. $627,000 c. $624,000 d. $633,000
Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($600,000 ´ 1.05) - [($600,000 ´ .05) / 5] = $624,000 [(Face val. B/P x Sell. price) – {(Face val. B/P x Prem.) ÷ Nmbr. yrs.} = New carry. val. B/P] a
116. On January 1, 2020, €3,000,000, 5-year, 10% bonds, were issued for $2,916,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the amortization amount per year is a. €14,000. b. €8,400. c. €7,000. d. €16,800.
Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (€3,000,000 - €2,916,000) / 5 = €16,800 [(Face val. B/P – Sell. price B/P) ÷ Nmbr. yrs. = Ann. dis. amort.] a
117. A corporation issues HK $500,000, 8%, 5-year bonds on January 1, 2020 for HK $479,000. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of interest expense to be recognized on December 31, 2020 is a. HK $42,100. b. HK $40,000. c. HK $44,200. d. HK $35,800.
Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (HK $500,000 ´ .08) + [(HK $500,000 - HK $479,000) / 5] = HK $44,200 [(Face val. B/P x Int. rate) + {(Face val. B/P – Sell. price B/P) ÷ Nmbr. yrs.} = Int. exp., 2017] a
118. Over the term of the bonds, the amount of unamortized discount will a. fluctuate up and down if the market is volatile. b. decrease. c. increase. d. be unaffected until the bonds mature.
Ans: b, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
119. Bond discount should be amortized to comply with a. the historical cost principle. b. the expense recognition principle. c. the revenue recognition principle. d. conservatism.
Ans: b, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
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Noncurrent Liabilities a
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120. Either the straight-line method or the effective-interest method of amortization will always result in a. the same amount of interest expense being recognized over the term of the bonds. b. the same amount of interest expense being recognized each year. c. more interest expense being recognized than if premium or discounts were not amortized. d. the same carrying value each year during the term of the bonds.
Ans: a, LO: 5,6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
121. A bond discount must a. always be amortized using straight-line amortization. b. always be amortized using the effective-interest method. c. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method. d. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interest method.
Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
122. When the effective-interest method of bond discount amortization is used, a. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date. b. the carrying value of the bonds will decrease each period. c. interest expense will not be a constant dollar amount over the life of the bond. d. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.
Ans: c, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
123. When the effective-interest method of bond premium amortization is used, the a. amount of premium amortized will get larger with successive amortization. b. carrying value of the bonds will increase with successive amortization. c. interest paid to bondholders will increase after each interest payment date. d. interest rate used to calculate interest expense will be the contractual rate.
Ans: a, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
124. Cotton Company issued €500,000 of 7%, 10-year bonds on one of its interest dates for €431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is used. Interest is paid annually. What amount of discount (to the nearest dollar) should be amortized for the first interest period? a. €4,770 b. €6,133 c. €7,732 d. €3,867
Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (€431,850 ´ .09) - (€500,000 ´ .07) = €3,867 [(Carry. val. B/P x Eff. rate) – (Face val. B/P x Int. rate) = Ann. dis. amort.]
FOR INSTRUCTOR USE ONLY
11 - 26 Test Bank for Financial Accounting, IFRS, Edition, 4e a
125. Cotton Company issued €500,000 of 7%, 10-year bonds on one of its interest dates for €431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is used. Interest is paid annually. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a a. debit to Interest Expense for €35,000. b. credit to Cash for €38,867. c. debit to on Bonds Payable for €3,867. d. debit to Interest Expense for €45,000.
Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (€431,850 ´ .09) - (€500,000 ´ .07) = €3,867 Discount [(Carry. val. B/P x Eff. rate) – (Face val. B/P x Int. rate) = Ann. dis. amort.] a
126. Cotton Company issued €500,000 of 7%, 10-year bonds on one of its interest dates for €431,850 to yield an effective annual rate of 9%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year? a. €30,229 b. €38,867 c. €45,000 d. €35,000
Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €431,850 ´ .09 = €38,867 (Carry. val. B/P x Eff. Rate = Int. exp.) a
127. On January 1, Choi Company issued HK $3,000,000, 7%, 5-year bonds with interest payable on December 31. The bonds sold for HK $3,216,288. The market rate of interest for these bonds was 6%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for a. HK $180,000. b. HK $225,140. c. HK $192,977. d. HK $210,000.
Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $3,216,288 ´ .06 = HK $192,977 (Carry. val. B/P x Mkt. rate = Int. exp.)
a
128. On January 1, Pacer Corporation issued $2,000,000, 13%, 5-year bonds with interest payable on January 1. The bonds sold for $2,197,080. The market rate of interest for these bonds was 11%. On December 31, using the effective-interest method, the debit entry to Interest Expense is for: a. $260,000. b. $285,620. c. $241,679. d. $220,000.
Ans: c, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,197,080 ´ .11 = $241,679 (Sell. price B/P x Mkt. rate = Int. exp.)
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities a
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129. Which of the following statements regarding the effective-interest method of accounting for bonds is false? a. IFRS does not requires the use of the effective interest method. b. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective-interest method is used. c. Over the life of the bonds, the carrying value increases for discounted bonds when using the effective-interest method. d. The effective-interest method applies a constant percentage to the bond carrying value to compute interest expense.
Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
130. A corporation issued HK $600,000, 10%, 5-year bonds on January 1, 2020 for HK $648,666, which reflects an effective-interest rate of 7%. Interest is paid annually on January 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on December 31, 2020, is a. HK $60,000. b. HK $42,000. c. HK $64,867. d. HK $45,407.
Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: HK $648,666 ´ .07 = HK $45,407 (Sell. price B/P x Eff. rate = Int. exp.)
131.
The market value (present value) of a bond is a function of all of the following except the a. dollar amounts to be received. b. length of time until the amounts are received. c. market rate of interest. d. length of time until the bond is sold.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
132.
The market rate of interest for a bond issue which sells for more than its face value is a. independent of the interest rate stated on the bond. b. higher than the interest rate stated on the bond. c. equal to the interest rate stated on the bond. d. less than the interest rate stated on the bond.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
133.
When a company retires bonds before maturity, the gain or loss on redemption is the difference between the cash paid and the a. carrying value of the bonds. b. face value of the bonds. c. original selling price of the bonds. d. maturity value of the bonds.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
11 - 28 Test Bank for Financial Accounting, IFRS, Edition, 4e 134.
Belle Corporation retires its bonds at 105 on January 1, following the payment of annual interest. The face value of the bonds is €600,000. The carrying value of the bonds at the redemption date is €621,500. The entry to record the redemption will include a a. credit of €21,500 to Loss on Bond Redemption. b. debit of €30,000 to Bonds Payable. c. credit of €8,500 to Gain on Bond Redemption. d. debit of €621,500 to Bonds Payable.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: €621,500 - €600,000 = €21,500 Premium (Carry. val. B/P – Face val. B/P = Prem.)
135.
Each payment on a mortgage note payable consists of a. interest on the original balance of the loan only. b. reduction of loan principal only. c. interest on the original balance of the loan and reduction of loan principal. d. interest on the unpaid balance of the loan and reduction of loan principal.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
136.
Able Electronics Company issues a $1,000,000, 8%, 20-year mortgage note on January 1. The terms provide for annual installment payments, exclusive of real estate taxes and insurance, of $101,852. After the first installment payment, the principal balance is a. $1,000,000. b. $920,000. c. $978,148. d. $898,148.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000 - [$101,852 - ($1,000,000 ´ .08)] = $978,148 [Mortg. – (Ann. pymnt. – {(Mortg. x Int. rate) = New mortg.]
137.
The debt to assets ratio is computed by dividing a. long-term liabilities by total assets. b. total debt by total assets. c. total assets by total debt. d. total assets by long-term liabilities.
Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
The effective-interest method for amortization of bond discounts is required under a. GAAP only. b. IFRS only. c. Both GAAP and IFRS. d. Neither GAAP or IFRS.
IFRS Ans: c, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
139.
Under GAAP, the proceeds from the issuance of convertible debt are reported as a. debt only. b. equity only. c. debt or equity depending on the circumstances. d. both debt and equity.
IFRS Ans: a, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
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Noncurrent Liabilities
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BRIEF EXERCISES BE 140 Shaffer Inc. is considering two alternatives to finance its construction of a new €5 million plant. (a) Issuance of 500,000 ordinary shares at the market price of €10 per share. (b) Issuance of €5 million, 8% bonds at par. Instructions Complete the following table. Income before interest and taxes
Issue Shares €2,000,000
Issue Bonds €2,000,000
Interest expense from bonds
_________
_________
Income before income taxes
€
€
Income tax expense (30%)
_________
_________
Net income
€________
€________
Outstanding shares
_________
800,000
Earnings per share
_________
_________
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 140
(5 min.)
Income before interest and taxes Interest (€5,000,000 × 8%) Income before income taxes Income tax expense (30%) Net income (a) Outstanding shares (b) Earnings per share (a) ÷ (b)
Issue Shares €2,000,000 0 2,000,000 600,000 €1,400,000 1,300,000 €1.08
Issue Bonds €2,000,000 400,000 1,600,000 480,000 €1,120,000 800,000 €1.40
BE 141 On January 1, 2020, Beltway Enterprises issued 9%, 5-year bonds with a face amount of €900,000 at par. Interest is payable semiannually on June 30 and December 31. Instructions Prepare the entries to record the issuance of the bonds and the first semiannual interest payment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 30 Test Bank for Financial Accounting, IFRS, Edition, 4e Solution 141 Jan.
1
June 30
(4 min.)
Cash ..................................................................................... Bonds Payable ............................................................
900,000
Interest Expense................................................................... Cash ............................................................................ (€900,000 × .09 ÷ 2 = €40,500)
40,500
900,000
40,500
BE 142 On January 1, 2020, Kentwood Company issued bonds with a face value of €1,000,000. The bonds carry a stated interest of 7% payable each January 1. Instructions a. Prepare the journal entry for the issuance assuming the bonds are issued at 97. b. Prepare the journal entry for the issuance assuming the bonds are issued at 102. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 142 (a) (b)
(5 min.)
Cash .............................................................................................. Bonds Payable .....................................................................
970,000 970,000
Cash .............................................................................................. 1,020,000 Bonds Payable .....................................................................
1,020,000
BE 143 On January 1, 2020, Frodo Corporation issued $800,000, 6%, 10-year bonds at face value. Interest is payable annually on January 1. Frodo Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2020. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 143 2020 Jul. 1 Dec. 31
(4 min.)
Cash ..................................................................................... Bonds Payable ............................................................
800,000
Interest Expense................................................................... Interest Payable ...........................................................
48,000
800,000 48,000
BE 144 On January 1, 2019, Zooland Enterprises sold 8%, 20-year bonds with a face amount of €1,500,000 for €1,440,000. Interest is payable annually on January 1. Instructions Calculate the carrying value of the bond at December 31, 2019 and 2020. Assume straight-line amortization. FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 31
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 144
(5 min.)
Annual amortization of discount: €60,000 ÷ 20 = €3,000 December 31, 2019: €1,440,000 + €3,000 = €1,443,000 December 31, 2020: €1,443,000 + €3,000 = €1,446,000 BE 145 Delta Company issued bonds with a face amount of $2,000,000 in 2013. As of January 1, 2020, the unamortized discount on bonds payable is $6,400. At that time, Delta redeemed the bonds at 101. Instructions Assuming that no interest is payable, make the entry to record the redemption. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 145 Jan. 1
(3 min.)
Bonds Payable ........................................................................ 1,993,600 Loss on Bond Redemption ...................................................... 26,400 Cash ...............................................................................
2,020,000
BE 146 Nicholson Inc. issues a €1,600,000, 10%, 10-year mortgage note on December 31, 2019, to obtain financing for a new building. The terms provide for annual installment payments of €260,392. Instructions Prepare the entry to record the mortgage loan on December 31, 2019, and the first installment payment on December 31, 2020. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 146 2019 Dec. 31 2020 Dec. 31
(5 min.)
Cash ..................................................................................... 1,600,000 Mortgage Payable ....................................................... Interest Expense .................................................................. Mortgage Payable ................................................................ Cash ............................................................................
FOR INSTRUCTOR USE ONLY
1,600,000
160,000 100,392 260,392
11 - 32 Test Bank for Financial Accounting, IFRS, Edition, 4e BE 147 Franco Corporation reports the following selected financial statement information at December 31, 2020: Total Assets $110,000 Total Liabilities 65,000 Net Income 1,800 Interest Revenue 600 Interest Expense 900 Income Tax Expense 300 Instructions Calculate the debt to assets ratio and the times interest earned. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 147 (4 min.) Debt to assets ratio: $65,000 ÷ $110,000 = 59% Times interest earned: ($1,800 + $900 + $300) ÷ $900 = 3.33 times a
BE 148
On January 1, 2020, Fabian Enterprises issued 9%, 10-year bonds with a face amount of €1,500,000 at 96. Interest is payable annually on January 1. The bonds were issued for an effective interest rate of 10%. Instructions Prepare the entries to record the issuance of the bonds and the first annual interest accrual and amortization assuming that the company uses effective-interest amortization. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 148
Jan. 1
Dec. 31
(5 min.)
Cash ..................................................................................... 1,440,000 Bonds Payable ............................................................ (€1,500,000 × .96 = €1,440,000) Interest Expense................................................................... Bonds Payable ............................................................ Interest ......................................................................... (€1,440,000 × .10 = €144,000) (€1,500,000 × .09 = €135,000)
1,440,000
144,000 9,000 135,000
a
BE 149
On January 1, 2020, Halston Enterprises issued 8%, 20-year bonds with a face amount of $3,000,000 at 101. Interest is payable annually on January 1. Instructions Prepare the entries to record the issuance of the bonds and the first annual interest accrual and amortization assuming that the company uses straight-line amortization. FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 33
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 149
Jan.
1
Dec. 31
(5 min.)
Cash ..................................................................................... 3,030,000 Bonds Payable ............................................................ ($3,000,000 × 1.01 = $3,030,000) Interest Expense .................................................................. Bonds Payable ..................................................................... Cash ............................................................................ ($3,000,000 × .08 = $240,000) ($30,000 ÷ 20 = $1,500)
3,030,000
238,500 1,500 240,000
EXERCISES Ex. 150 Banks Company is considering two alternatives to finance its purchase of a new €4,000,000 office building. (a) Issue 400,000 ordinary shares at €10 per share. (b) Issue 8%, 10-year bonds at par (€4,000,000). Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 800,000 ordinary shares outstanding prior to the new financing. Instructions Calculate each of the following for each alternative: (1) Net income. (2) Earnings per share. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 150
(12–15 min.) (a) Issue Shares €3,000,000 — 3,000,000 900,000 €2,100,000
(b) Issue Bonds €3,000,000 320,000 2,680,000 804,000 €1,876,000
Shares outstanding
1,200,000
800,000
(2) Earnings per share
€1.75
€2.35
Income before interest and taxes Interest (8% × $4,000,000) Income before income taxes Income tax expense (1) Net income
FOR INSTRUCTOR USE ONLY
11 - 34 Test Bank for Financial Accounting, IFRS, Edition, 4e Ex. 151 The board of directors of Gibson Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 ordinary shares with a $5 par value which are selling for $40 per share on the open market. Gibson Corporation currently has 100,000 ordinary shares outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $800,000 if the new factory equipment is purchased. Instructions Prepare a schedule which shows the expected net income after taxes and the earnings per share under each of the plans that the board of directors is considering. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 151
(10–12 min.) Plan #1 Issue Bonds $800,000 240,000 560,000 168,000 $392,000
Plan #2 Issue Shares $800,000 — 800,000 240,000 $560,000
Outstanding shares
100,000
200,000
Earnings per share
$3.92
$2.80
Income before interest and taxes Interest expense ($4,000,000 × 6%) Income before taxes Income taxes (30%) Net income
Ex. 152 United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1. Issue 50,000 ordinary shares with a $10 par value at $50 per share. 2. Issue $2,500,000, 10%, 10-year bonds at par. It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 30% and has 120,000 ordinary shares outstanding prior to the new financing. Instructions Determine the effect on net income and earnings per share for these two methods of financing. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities Solution 152
11 - 35
(10–15 min.)
The alternative effects on net income and earnings per share are as follows: Issue Shares $900,000 — 900,000 (270,000) $630,000
Issue Bonds $900,000 (250,000) 650,000 (195,000) $455,000
Outstanding shares
170,000
120,000
Earnings per share
$3.71
$3.79
Income before interest and taxes Interest (10% × $2,500,000) Income before income taxes Income tax expense Net income
Net income is higher if the equipment is financed through the issuance of shares. However, earnings per share is lower because of the additional number of ordinary shares that are outstanding. Ex. 153 Three plans for financing a ¥25,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%. Plan 1 Plan 2 Plan 3 9% Bonds — — ¥10,000,000 6% Preference Shares, ¥100 par — ¥10,000,000 5,000,000 Ordinary Shares, ¥10 par ¥25,000,000 15,000,000 10,000,000 Total ¥25,000,000 ¥25,000,000 ¥25,000,000 It is estimated that income before interest and taxes will be ¥5,000,000. Instructions Determine for each plan, the expected net income and the earnings per share. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 153
(14–19 min.)
Earnings before interest and income tax Deduct interest on bonds Income before income tax Deduct income tax Net Income Dividends on preference shares Available for dividends on ordinary shares
Plan 1 ¥5,000,000 — 5,000,000 (1,500,000) 3,500,000 — ¥3,500,000
Plan 2 ¥5,000,000 — 5,000,000 (1,500,000) 3,500,000 (600,000) ¥2,900,000
Plan 3 ¥5,000,000 (900,000) 4,100,000 (1,230,000) 2,870,000 (300,000) ¥2,570,000
Ordinary shares outstanding
2,500,000
1,500,000
1,000,000
¥1.40
¥1.93
¥2.57
Earnings per share
FOR INSTRUCTOR USE ONLY
11 - 36 Test Bank for Financial Accounting, IFRS, Edition, 4e Ex. 154 Taylor Corporation issued €3 million, 10-year, 6% bonds on January 1, 2020. Instructions Prepare the entry to record the sale of these bonds, assuming they were issued at (a) 98. (b) 103. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 154
(5–7 min.)
(a) Cash (€3,000,000 × 98%)............................................................... 2,940,000 Bonds Payable .....................................................................
2,940,000
(b) Cash (€3,000,000 × 103%)............................................................. 3,090,000 Bonds Payable .....................................................................
3,090,000
Ex. 155 On January 1, 2019, Lang Corporation issued $1,500,000, 8%, 10-year bonds at face value. Interest is payable annually on January 1. Lang Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2019 and January 1, 2020. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 155 2019 Jan. 1 Dec. 31 2020 Jan. 1
(6–10 min.)
Cash ..................................................................................... 1,500,000 Bonds Payable ........................................................... Interest Expense .................................................................. Interest Payable .......................................................... ($1,500,000 × 8% = $120,000)
120,000
Interest Payable ................................................................... Cash ...........................................................................
120,000
1,500,000 120,000
120,000
Ex. 156 On January 1, 2019 Porter Corporation issued €800,000, 6%, 5-year bonds at face value. Interest is payable annually on January 1. Instructions Prepare journal entries to record the (a) Issuance of the bonds. (b) Accrual of interest on December 31. (c) Payment of interest on January 1, 2020. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities Solution 156 (a) (b) (c)
11 - 37
(8 min.)
Cash.............................................................................................. Bonds Payable .....................................................................
800,000
Interest Expense ........................................................................... Interest Payable (€800,000 × 6%) .......................................
48,000
Interest Payable ............................................................................ Cash .....................................................................................
48,000
800,000 48,000 48,000
Ex. 157 The following section is taken from Brown Corp’s statement of financial position at December 31, 2019. Current liabilities Interest Payable .......................................................... $ 360,000 Non-current liabilities Bonds Payable, 9%, due January 1, 2024 ................. 4,000,000 Interest is payable annually on January 1. The bonds are callable on any interest date. Instructions (a) Journalize the payment of the bond interest on January 1, 2020. (b) Assume that on January 1, 2020, after paying interest, Brown calls bonds having a face value of $1,600,000. The call price is 104. Record the redemption of the bonds. (c) Prepare the entry to record the accrual of interest on December 31, 2020, assuming no previous accrual of interest on the remaining bonds. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 157 (a) (b)
(c)
(7–10 min.)
Interest Payable ............................................................................ Cash .....................................................................................
360,000 360,000
Bonds Payable .............................................................................. 1,600,000 Loss on Bond Redemption............................................................ 64,000 Cash ..................................................................................... ($1,600,000 × 1.04 = $1,664,000) ($1,664,000 - $1,600,000 = $64,000) Interest Expense ........................................................................... Interest Payable ................................................................... ([$4,000,000 - $1,600,000] × .09 = $216,000)
FOR INSTRUCTOR USE ONLY
1,664,000
216,000 216,000
11 - 38 Test Bank for Financial Accounting, IFRS, Edition, 4e Ex. 158 Carpino Company issued €800,000 of bonds on January 1, 2020. Instructions (a) Prepare the journal entry to record the retirement of the bonds at maturity, assuming the bonds were issued at 100. (b) Prepare the journal entry to record the retirement of the bonds before maturity at 98. Assume the carrying value of the bonds was €805,000. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 158
(9–12 min.) Retirement of bonds at maturity
(a)
Bonds Payable .............................................................................. Cash ........................................................................................
800,000 800,000
Retirement of bonds before maturity at 98 (b)
Bonds Payable .............................................................................. Cash ....................................................................................... Gain on Bond Redemption ......................................................
805,000 784,000 21,000
Ex. 159 Wood Company retired £750,000 face value, 9% bonds on June 30, 2020 at 98. The carrying value of the bonds at the redemption date was £760,000. Instructions Prepare the journal entry to record the redemption of the bonds. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 159
(5–7 min.)
Bonds Payable ....................................................................................... Gain on Bond Redemption ............................................................ Cash (£750,000 × 98%) ................................................................
760,000 25,000 735,000
Ex. 160 Presented below are two independent situations: (a)
Howell Corporation purchased €700,000 of its bonds on June 30, 2020, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was €679,000. The bonds pay annual interest and the interest payment due on June 30, 2020, has been made and recorded.
(b)
Justice, Inc. purchased €400,000 of its bonds at 97 on June 30, 2020, and immediately retired them. The carrying value of the bonds on the retirement date was €393,000. The bonds pay annual interest and the interest payment due on June 30, 2020, has been made and recorded.
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities Ex. 160
11 - 39
(cont.)
Instructions For each of the independent situations, prepare the journal entry to record the retirement of the bonds. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 160
(13–16 min.)
(a) June 30
Bonds Payable.............................................................. Loss on Bond Redemption ........................................... Cash ................................................................... (€700,000 × 102% = €714,000)
679,000 35,000
Bonds Payable.............................................................. Gain on Bond Redemption ................................. Cash ................................................................... (€400,000 × 97% = €388,000)
393,000
(b) June 30
714,000
5,000 388,000
Ex. 161 Riley Company issued a $4,000,000, 10%, 10-year mortgage note payable to finance the construction of a building at December 31, 2020. The terms provide for annual installment payments of $650,981. Instructions Prepare the entry to record: (a) the mortgage loan on December 31, 2020. (b) the first installment payment. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 161
(5–7 min.)
(a) Cash ............................................................................................... 4,000,000 Mortgage Payable ................................................................ (b) Interest Expense ($4,000,000 × 10%) ............................................ Mortgage Payable .......................................................................... Cash .....................................................................................
4,000,000
400,000 250,981 650,981
Ex. 162 Downey Corporation issues a ₤4,000,000, 5%, 20-year mortgage note payable on December 31, 2020, to obtain needed financing for the construction of a building addition. The terms provide for annual installment payments of ₤320,970 on December 31. Instructions (a) Prepare the journal entries to record the mortgage loan on December 31, 2020, and the first installment payment. (b) Will the amount of principal reduction in the second installment payment be more or less than with the first installment payment? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
FOR INSTRUCTOR USE ONLY
11 - 40 Test Bank for Financial Accounting, IFRS, Edition, 4e
Solution 162
(5–8 min.)
(a)
Cash ............................................................................ 4,000,000 Mortgage Payable ...............................................
Dec. 31 Dec. 31
(b)
Interest Expense .......................................................... Mortgage Payable ....................................................... Cash ................................................................... (₤4,000,000 × 5% × 1/2 = ₤200,000)
4,000,000
200,000 120,970 320,970
The amount of principal reduction will increase with each installment payment.
Ex. 163 Mert Company borrowed $1,500,000 on December 31, 2019, by issuing $1,500,000, 8% mortgage note payable. The terms call for annual installment payments of $210,000 on December 31. Instructions (a) Prepare the journal entries to record the mortgage loan and the first two installment payments. (b) Indicate the amount of mortgage note payable to be reported as a current liability and as a non-current liability at December 31, 2021. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 163 (a)
(5–8 min.)
December 31, 2019 Cash ............................................................................................ 1,500,000 Mortgage Payable ............................................................... December 31, 2020 Interest Expense ($1,500,000 × 8%) .................................................................... Mortgage Payable ....................................................................... Cash ................................................................... December 31, 2021 Interest Expense ($1,410,000 × 8%) .................................................................... Mortgage Payable ....................................................................... Cash ...................................................................
(b)
120,000 90,000 210,000
112,800 97,200
Current : $104,976 [$210,000 – ($1,312,800 × 8%)] Non-current: $1,207,824 [($1,500,000 – $90,000 – $97,200) – $104,976]
FOR INSTRUCTOR USE ONLY
1,500,000
210,000
Noncurrent Liabilities
11 - 41
Ex. 164 The adjusted trial balance for Payne Corporation at the end of the current year contained the following accounts: Bonds payable, 10% ............................................................ Interest payable ................................................................... Lease liability ....................................................................... Mortgage payable, 9%, due 2021 ........................................ Accounts payable .................................................................
€610,000 20,000 60,000 80,000 120,000
Instructions (a) Prepare the non-current liabilities section of the statement of financial position. (b) Indicate the proper statement of financial position classification for the accounts listed above that do not belong in the non-current liabilities section. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 164 (a)
(b)
(4–7 min.)
Non-current liabilities Bonds payable 10% Mortgage payable 9% Lease liability Total non-current liabilities
€610,000 80,000 60,000 €750,000
Interest payable and accounts payable should be classified as current liabilities.
Ex. 165 Stover Corporation reports the following amounts in their 2020 financial statements: At December 31, 2020 Total assets Total liabilities Total equity Interest expense Income tax expense Net income
For the Year 2020
$2,000,000 1,100,000 ? $20,000 100,000 150,000
Instructions (a) Compute the December 31, 2020, amount of equity. (b) Compute the debt to assets ratio at December 31, 2020. (c) Compute times interest earned for 2020. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
FOR INSTRUCTOR USE ONLY
11 - 42 Test Bank for Financial Accounting, IFRS, Edition, 4e Solution 165
(4–7 min.)
(a)
Total assets ................................................................................... Less : Total liabilities ..................................................................... Total equity ....................................................................................
(b)
Debt to assets ratio =
(c)
Times interest earned =
Total liabilities $1,100,000 = = 55% Total assets $2,000,000 Net income + Income tax expense + Interest expense Interest expense
= a
$2,000,000 1,100,000 $ 900,000
$150,000 + $100,000 + $20,000 = 13.5 times $ 20,000
Ex. 166
On December 31, 2019, Potter Corporation issued €2,000,000, 6%, 5-year bonds for €1,837,750. The bonds were sold to yield an effective-interest rate of 8%. Interest is paid annually on December 31. The company uses the effective-interest method of amortization. Instructions (a) Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.) (b) Prepare the journal entries that Potter Corporation would make on December 31, 2019, and December 31, 2020, and December 31, 2021 related to the bond issue. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 166 (15–22 min.)
(a)
POTTER CORPORATION Bond Discount Amortization Effective-Interest Method—annual Interest Payments 6% Bonds Issued at 8%
Interest Periods 12/31/19 12/31/20 12/31/21 (b)
Interest to be Paid (Issue date) €120,000 120,000
Interest Expense €147,020 149,182
Discount Amortization 27,020 29,182
Unamortized Discount €162,250 135,230 106,048
Carrying Value of Bonds €1,837,750 1,864,770 1,893,952
December 31, 2019 Cash .............................................................................................. 1,837,750 Bonds Payable ..................................................................... (To record issuance of bonds at a discount) December 31, 2020 Interest Expense ........................................................................... Bonds Payable ..................................................................... Cash ..................................................................................... (To record payment of interest and amortization of FOR INSTRUCTOR USE ONLY
1,837,750
147,020 27,020 120,000
Noncurrent Liabilities
11 - 43
discount) Solution 166 (cont.) December 31, 2021 Interest Expense ........................................................................... Bonds Payable ..................................................................... Cash ..................................................................................... (To record payment of interest and amortization of discount) a
149,182 29,182 120,000
Ex. 167
On December 31, 2020, Wayne, Inc. sold $4,000,000 (face value) of bonds. The bonds are dated December 30, 2020, pay interest annually on December 31, and will mature on December 31, 2023. The following schedule was prepared by the accountant for 2021. Annual Interest Period
Interest to be Paid
Interest Expense
Amortization
1
$320,000
$351,000
$31,000
Bond Carrying Value $3,900,000 3,931,000
Instructions On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) 1. What is the stated interest rate for this bond issue? 2. What is the market interest rate for this bond issue? 3. What was the selling price of the bonds as a percentage of the face value? 4. Prepare the journal entry to record the sale of the bond issue on December 31, 2020. 5. Prepare the journal entry to record the payment of interest and amortization on December 31, 2021. Ans: N/A, LO: 2, 5, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 167
(12–17 min.)
1. $320,000 ÷ $4,000,000 = 8% 2. $351,000÷ $3,900,000 = 9% 3. $3,900,000 ÷ $4,000,000 = .975 The bonds sold at 97.5. 4.
5.
December 31, 2020 Cash................................................................................................. 3,900,000 Bonds Payable ........................................................................ December 31, 2021 Interest Expense .............................................................................. Bonds Payable ........................................................................ Cash ........................................................................................
FOR INSTRUCTOR USE ONLY
3,900,000
351,000 31,000 320,000
11 - 44 Test Bank for Financial Accounting, IFRS, Edition, 4e a
Ex. 168
On January 1, 2020, Morten Corporation issued €5,000,000, 9%, 5-year bonds dated January 1, 2020, at 96. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all the journal entries that Morten Corporation would make related to this bond issue through January 1, 2021. Be sure to indicate the date on which the entries would be made. Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 168
(8–12 min.)
January 1, 2020 Cash(€5,000,000 × 96%) .............................................................. 4,800,000 Bonds Payable ..................................................................... (To record sale of bonds at a discount) December 31, 2020 Interest Expense ........................................................................... Bonds Payable (€200,000 ÷ 5) ............................................. Interest Payable (€5,000,00 × 9%) ....................................... (To record accrued interest and amortization of bond discount) January 1, 2021 Interest Payable ............................................................................ Cash ..................................................................................... (To record payment of interest) a
4,800,000
490,000 40,000 450,000
450,000 450,000
Ex. 169
Vance Company issued $1,000,000, 10%, 20-year bonds on January 1, 2020, at 104. Interest is payable annually on January 1. Vance uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2020 related to the bond issue. Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 169
Jan.
1
Dec. 31
(8–12 min.)
Cash ($1,000,000 × 104%) .................................................. 1,040,000 Bonds Payable ............................................................ Interest Expense................................................................... Bonds Payable ..................................................................... Interest Payable ........................................................... ($1,000,000 × 10% = $100,000) ($40,000 × 1/20 = $2,000)
FOR INSTRUCTOR USE ONLY
1,040,000
98,000 2,000 100,000
Noncurrent Liabilities a
11 - 45
Ex. 170
Jantz Company issued €750,000, 11%, 10-year bonds on December 31, 2019, for €690,000. Interest is payable annually on December 31. Jantz uses the straight-line method of amortization and has a calendar year end. Instructions Prepare the appropriate journal entries on (a) December 31, 2019. (b) December, 31, 2020. Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 170
(8–12 min.)
(a)
2019 Cash ............................................................................ Bonds Payable ...................................................
Dec. 31 (b) Dec. 31
2020 Interest Expense ......................................................... Bonds Payable ................................................... Cash ................................................................... (€750,000 × 11% = €82,500; €60,000 × 1/10 = €6,000)
FOR INSTRUCTOR USE ONLY
690,000 690,000 88,500 6,000 82,500
11 - 46 Test Bank for Financial Accounting, IFRS, Edition, 4e
COMPLETION STATEMENTS 171. The terms of a bond issue are set forth in a formal legal document called a bond ________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
172. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173. If bonds were issued at a premium, then the contractual interest rate was _____________ than the market interest rate. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
174. If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
175. If a €1 million, 10%, 10-year bond issue was sold at 98, the cash proceeds from the issuance of the bonds amounted to €________________. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
176. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
177. The straight-line method of amortization allocates the same amount to _______________ in each interest period.
Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
178. The ________________ method results in varying amounts of amortization and interest expense per period but a constant percentage rate.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 171. 172. 173. 174.
indenture debenture greater stated (contractual), market (effective)
175. 176. a 177. a 178. a
980,000 straight-line interest expense effective-interest
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 47
MATCHING 179. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Bonds Debenture bonds Bond indenture Premium (on a bond) Discount (on a bond) Effective-interest method of amortization
G. H. I. J.
Straight-line method of amortization Lease Debt to assets ratio Non-current liabilities
_____ 1. Obligations expected to be paid more than one year in the future. _____ 2. A legal document that sets forth the terms of a bond issue. _____ 3. Occurs when the contractual interest rate is less than the market interest rate. _____ a4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds. _____ 5. A solvency measure that indicates the percentage of assets provided by creditors. _____ 6. A form of interest-bearing notes payable. _____ 7. Occurs when the contractual interest rate is greater than the market interest rate. _____ 8. Unsecured bonds issued against the general credit of the borrower. _____ 9. A contractual agreement between a lessor and a lessee. _____a10. Produces a periodic interest expense that is the same amount each interest period. Ans: N/A, LO: 1, 2, 4, Bloom: , Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. a 4. 5.
J C E F I
6. 7. 8. 9. a 10.
A D B H G
FOR INSTRUCTOR USE ONLY
11 - 48 Test Bank for Financial Accounting, IFRS, Edition, 4e
SHORT-ANSWER ESSAY QUESTIONS S-A E 180 Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Ans: N/A, LO: 2, Bloom: N/A, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 180 The market interest rate often is different from the contractual interest rate and therefore bonds are frequently issued at amounts greater or less than face value. When the market interest rate is higher than the contractual rate, investors can find better investments elsewhere and consequently there is less demand for the bonds. So to make the bonds more attractive the issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market interest rate is less than the contractual rate there will be greater demand for the bonds because of the higher interest rate. Thus, the issue price will be greater than face value and the bonds will be issued at a premium. S-A E 181 When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss. Ans: N/A, LO: 2, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 181 For someone to purchase a bond at a discount, the stated interest rate normally must be below the market interest rate for similar bonds. Investors will need to make up the difference by paying less than the face value for the bonds. S-A E 182 Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption. Ans: N/A, LO: 2, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
Solution 182 A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its statement of financial position. A company will retire debt early only if it has sufficient cash resources. When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds. S-A E 183 Tim Stihl and Matt Jaffney are discussing how the market price of a bond is determined. Tim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is he right? Discuss. Ans: N/A, LO: 1, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Research, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 49
Solution 183 No, Tim is not right. The market price of any bond is a function of three factors: (1) The dollar amounts to be received by the investor (interest and principal), (2) The length of time until the amounts are received (interest payment dates and maturity date), and (3) The market interest rate. S-A E 184 A company desires to replace its current plant equipment with new equipment that costs $10,000,000. One possibility would be for the company to issue $10,000,000 of bonds and use the proceeds to purchase the equipment. Another possibility is to acquire the use of the equipment by signing a long-term lease with a leasing company. Describe and compare the financial statement effects of these two alternatives. Ans: N/A, LO: 3, 4, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 184 The bond alternative will result in the statement of financial position presentation of an asset (Equipment) and a noncurrent liability (Bonds Payable). The income statement will show the interest expense from the payment of interest to the bondholder and the depreciation expense for the equipment. The leasing alternative will result in the Right-of-Use presentation of a Leased Asset, recorded at the present value of the cash payments for the lease. The portion of the Lease Liability expected to be paid in the next year is reported as a current liability while the remainder is classified as a noncurrent liability. The income statement will show the interest expense, which is the financing cost, and since the lessee has essentially purchased the asset, the income statement will also show the amortization expense. S-A E 185 Sarah Mongan is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Sarah is saying? Ans: N/A, LO: 5, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
Solution 185 Sarah is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method.
FOR INSTRUCTOR USE ONLY
11 - 50 Test Bank for Financial Accounting, IFRS, Edition, 4e S-A E 186 (Ethics) Ton Janner, a 26-year-old entrepreneur, started Bells & Whistles (B&W), Inc., a firm that specializes in top-of-the-line add-ons for computer systems. The firm has a capital structure of approximately 60% debt. This was necessitated by the rapid growth of B&W, and Mr. Janner's lack of personal funds to sustain the growth. The 60% debt amount is quite high for firms in this field, and in fact slightly exceeds the debt covenants negotiated with the bank. B&W recently received notice that the bank considers the company's debt to be excessive, and that some accelerated repayment schedule will be adopted. The notice came at a particularly bad time. B&W is in the midst of a major upgrade of its own computer system. The hardware was to have been purchased outright, financed by the seller, Karl Miner, longtime friend of Mr. Janner. Mr. Miner really needs Mr. Janner’s business. Both believe in the long-term strength of B&W. He therefore suggests to Mr. Janner that the equipment be purchased by means of a short-term lease. Mr. Janner could renew the lease annually. Required: 1. Is Mr. Miner’s suggestion ethical? Explain. 2. If Mr. Janner accepts the suggestion, is he behaving ethically? Explain. Ans: N/A, LO: 3, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
Solution 186 1. Mr. Miner’s suggestion is ethical, at least on its face. Since a long-term lease is not possible, a short-term lease is a possibility. However, if there is some kind of agreement between the parties that essentially makes the lease a long-term one, it would not be ethical to treat it as a short-term lease for accounting purposes. 2. Since Mr. Miner’s suggestion is ethical, Mr. Janner's acceptance of the suggestion is also ethical, with the same provisions. However, he should not accept the suggestion if his ability to pay Mr. Miner will be compromised by the accelerated repayment required by the bank. S-A E 187 (Communication) Karen Kline works for Permier Press, a fairly large book publishing firm. Her best friend and rival, Mona, works for Copper Books, a smaller publisher. Both companies issue €100,000 in bonds on July 1. Permier's bonds were issued at a discount, while Copper's were issued at a premium. Mona sent Karen a fax the next day. She told Karen that it was obvious who the better publisher was—the market had shown its preference! She reminded Karen again of her recent increase in salary as further proof of the superiority of Copper Books. Required: Draft a short note for Karen to send to Mona. Explain how such a result could occur. Ans: N/A, LO: 2, Bloom: , Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Communications, IMA: Business Economics
FOR INSTRUCTOR USE ONLY
Noncurrent Liabilities
11 - 51
Solution 187 Many answers are possible. The format should be fairly informal, and the point that a discount or premium is not necessarily a judgment on the strength or weakness of a company should be addressed. A suggested note follows:
Mona— I can't believe that Copper can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Permier is a bad company just by the bond price. Our bonds were issued at a discount, not because of the market's evaluation of our company, but because we underestimated interest rates. Copper got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't). Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change. (signed)
FOR INSTRUCTOR USE ONLY
11 - 52 Test Bank for Financial Accounting, IFRS, Edition, 4e
GAAP QUESTIONS 1. Which of the following is false? a. Under GAAP, a liability is only recognized if it is a present obligation. b. Under GAAP, current liabilities are shown in order of magnitude. c. Under GAAP, an item is a current liability if it will be paid within the next 12 months or the operating cycle, whichever is longer. d. Under GAAP, current liabilities are presented before non-current liabilities. Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2. The accounting for bonds payable is a. not covered by GAAP. b. the same except that market price may be different because the present value calculations are different between IFRS and GAAP. c. different in that GAAP requires use of the straight-line method for amortization of bond premium and discount. d. essentially the same under IFRS and GAAP. Ans: D, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. Which of the following is true regarding accounting for amortization of bond discount and premium? a. GAAP is required to use the straight-line method. b. IFRS is required to use the effective-interest method. c. GAAP must use the effective-interest method, but IFRS may use either the effectiveinterest method or the straight-line method. d. Both IFRS and GAAP must use the effective-interest method. Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4. The joint projects of the FASB and IASB could potentially a. change the definition of assets. b. change the definition of liabilities. c. change the definition of equity. d. All of these answer choices are correct. Ans: D, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
FOR INSTRUCTOR USE ONLY
CHAPTER 12 CORPORATIONS: ORGANIZATION, SHARE TRANSACTIONS, AND EQUITY CHAPTER LEARNING OBJECTIVES 1. Discuss the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of shareholders, transferable ownership rights, ability to acquire capital, continuous life, corporate management, government regulations, and additional taxes. 2. Explain how to account for ordinary, preference, and treasury shares. When the issuance of ordinary shares for cash is recorded, the par value of the shares is credited to Share Capital–Ordinary. The portion of the proceeds that is above or below par value is recorded in a separate account. When no-par ordinary shares have a stated value, the entries are similar to those for par value shares. When no-par shares do not have a stated value, the entire proceeds are credited to Share Capital–Ordinary. Preference shares have contractual provisions that give them priority over ordinary shares in certain areas. Typically, preference shareholders have a preference to (1) dividends and (2) assets in liquidation. They sometimes do not have voting rights The cost method is generally used in accounting for treasury shares. Under this approach, Treasury Shares is debited at the price paid to reacquire the shares. The same amount is credited to Treasury Shares when the shares are sold. The difference between the sales price and cost is recorded in equity accounts, not in income statement accounts. 3. Explain how to account for cash dividends, share dividends, and share splits. Companies make entries for dividends at the declaration date and the payment date. At the declaration date, the entry is debit Cash Dividends and credit Dividends Payable. At the payment date, the entry is debit Dividends Payable and credit Cash. At the declaration date, the entry for small share dividend is debit Share Dividends, credit Share Premium–Ordinary, and credit Ordinary Share Dividends Distributable. At the payment date, the entry for a small share dividend is debit Ordinary Share Dividends Distributable and credit Share Capital–Ordinary. A share split reduces the par or stated value per share and increase the number of shares but does not affect balances in equity accounts 4. Discuss how equity is reported and analyzed. Companies report each of the individual debits and credits to retained earnings in the retained earnings statement. Additions and deductions consist generally of net income or net loss, cash and share dividends, and some disposals of treasury shares. A comprehensive equity section includes all equity accounts. It consists of two sections: share capital and retained earnings. It should also include notes to the financial statements that explain any restrictions on retained earnings and any dividends in arrears. One measure of profitability is the return on ordinary shareholders’ equity. It is calculated by dividing net income minus preference share dividends by average ordinary shareholders’ equity.
12 - 2
Test Bank for Financial Accounting: IFRS Edition, 4e
5. Describe the use and content of the statement of changes in equity. Corporations must disclose changes in equity accounts and may choose to do so by issuing a separate equity statement. This statement, prepared in columnar form, shows changes in each equity account and in total equity during the accounting period. When this statement is presented, a retained earnings statement is not necessary. 6. Compute book value per share. Book value per share represents the equity an ordinary shareholder has in the net assets of a corporation from owning one share. When there are only ordinary shares outstanding, the formula for computing book value is: Total ordinary shareholder’s equity ÷ Number of ordinary shares outstanding.
TRUE-FALSE STATEMENTS 1.
A corporation is not an entity which is separate and distinct from its owners.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
2.
A corporation can be organized for the purpose of making a profit or it may be not-forprofit.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
3.
A corporation acts under its own name rather than in the name of its shareholders.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
4.
If a corporation pays taxes on its income, then shareholders will not have to pay taxes on the dividends received from that corporation.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
5.
A corporation must be incorporated in each country in which it does business.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
6.
A shareholder of ordinary shares has the right to vote in the election of the board of directors.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Interaction, IMA: FSA
7.
Shareholders have the r4ight to keep the same percentage ownership when new shares are issued.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Interaction, IMA: FSA
8.
As soon as a corporation is authorized to issue shares, an accounting journal entry should be made recording the total value of the shares authorized.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Corporate Finance
9.
The par value of ordinary shares must always be equal to its fair value on the date the shares are issued.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
10.
When no-par value shares do not have a stated value, the entire proceeds from the issuance of the shares becomes legal capital.
Corporations: Organization, Share Transactions, and Equity
12 - 3
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
11.
The fair value of a corporation's shares is determined by the number of shares that the corporation has been authorized to issue.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
12.
A privately traded corporation would be traded on a national securities exchange such as the London Stock Exchange.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
13.
In most countries, a corporation’s creditors’ claim can only be paid out of that corporation’s assets.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
14.
Ownership rights in a corporation are evidenced by ordinary shares.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
15.
Ownership rights of a shareholder include the right to be involved in the daily operations of the corporation.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
16.
Corporations can pay dividends out of share capital in most countries.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
17.
When no-par ordinary shares that have a stated value are issued, the stated value is credited to Share Capital-Ordinary.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
18.
The par value of shares issued for noncash assets is never a factor in determining the cost of the assets received.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
19.
The acquisition of treasury shares by a corporation increases total assets and total equity.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
20.
Treasury shares purchased for €25 per share that are reissued at €20 per share, result in a Loss on Sale of Treasury Shares being recognized on the income statement.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
21.
Treasury Shares is a contra equity account.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
22.
The number of ordinary shares outstanding can never be greater than the number of shares issued.
12 - 4
Test Bank for Financial Accounting: IFRS Edition, 4e
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 23.
12 - 5
When treasury shares are purchased, the cost is debited to Share Capital - Ordinary.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
24.
The priorities associated with preference shares include the right to vote before the ordinary shareholders.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
25.
Preference shareholders have the right to receive assets in the event of liquidation before the ordinary shareholders.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
26.
Preference shares have contractual preference over ordinary shares in certain areas.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27.
Preference shareholders generally do not have the right to vote for the board of directors.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Investment Decisions
28.
Dividends in arrears on cumulative preference shares are considered a liability.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
Dividends may be declared and paid in cash or shares.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
30.
Cash dividends are not a liability of the corporation until they are declared by the board of directors.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
31.
The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
32.
A 3-for-1 ordinary share split will increase total equity but reduce the par or stated value per share.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
33.
Unpaid dividends on non-cumulative preference shares are called dividends in arrears.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
34.
Net losses reduce the balance of Share Capital–Ordinary.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
35.
Retained earnings represents the amount of cash available for dividends.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
12 - 6 36.
Test Bank for Financial Accounting: IFRS Edition, 4e Net income of a corporation should be closed to retained earnings and net losses should be closed to the share premium account.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
37.
A debit balance in the Retained Earnings account is identified as a deficit.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
38.
Retained earnings that are restricted are unavailable for dividends.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
39.
Restricted retained earnings are available for preference share dividends but unavailable for ordinary share dividends.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
40.
A comprehensive equity section in the statement of financial position will list the names of individuals who are eligible to receive dividends on the date of record.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
41.
Ordinary Share Dividends Distributable is shown in the equity section of the statement of financial position.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
42.
Return on ordinary shareholders’ equity is computed by dividing net income by ending ordinary shareholders’ equity.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
43.
The share capital category on the statement of financial position includes both preference and ordinary shares.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
44.
The term "reserves" is used for forms of equity other than that contributed by shareholders.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
45.
When a statement of changes in equity is presented, a retained earnings statement is not necessary.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
46.
Changes in the separate accounts comprising equity are not disclosed in the statement of changes in equity.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA a
47.
A statement of changes in equity shows the changes in each equity account and in total that have occurred during the year.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity
12 - 7
12 - 8 a
48.
Test Bank for Financial Accounting: IFRS Edition, 4e A book value per ordinary share is the same amount as the market value per share.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
49.
Organization costs are capitalized by debiting an intangible asset entitled Organization Costs.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
50.
The cash proceeds from issuing par value shares may be equal to or greater than, but not less than par value.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
51.
The cost of a noncash asset acquired in exchange for ordinary shares should be either the fair value of the consideration given up, or the fair value of the consideration received, whichever is more clearly determinable.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
52.
Under the cost method, Treasury Shares is debited at the price paid to reacquire the shares, and the same amount is credited to Treasury Shares when the shares are sold.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
53.
A dividend declared out of share capital or share premium is termed a liquidating dividend.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
54.
Ordinary Share Dividends Distributable is reported as share premium in the equity section.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
55.
Companies generally disclose retained earnings in the Notes to the financial statements.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity
12 - 9
MULTIPLE CHOICE QUESTIONS 56.
Which one of the following is a privately held corporation? a. Intel b. General Electric c. Caterpillar Inc. d. Cargill Inc.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is a. the sole proprietorship. b. the partnership. c. the corporation. d. not known.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
Under the corporate form of business organization a. a shareholder is personally liable for the debts of the corporation. b. shareholders' acts can bind the corporation even though the shareholders have not been appointed as agents of the corporation. c. the number of shares authorized is stipulated in its charter. d. shareholders wishing to sell their corporate shares must get the approval of other shareholders.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
59.
Shareholders of a corporation directly elect a. the president of the corporation. b. the board of directors. c. the treasurer of the corporation. d. all of the employees of the corporation.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
60.
The chief accounting officer in a company is known as the a. controller. b. treasurer. c. vice-president. d. president.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Leadership, IMA: None
61.
A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a a. corporation is organized for the purpose of making a profit. b. corporation is subject to government taxes. c. corporation is an accounting economic entity. d. corporation’s temporary accounts are closed at the end of the accounting period.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
12 - 10 Test Bank for Financial Accounting: IFRS Edition, 4e 62.
Which one of the following would not be considered an advantage of the corporate form of organization? a. Limited liability of owners b. Separate legal existence c. Continuous life d. Government regulations
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
63.
The concept of an "artificial being" refers to which form of business organization? a. Partnership b. Sole proprietorship c. Corporation d. Limited partnership
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
The two ways that a corporation can be classified by purpose are a. general and limited. b. profit and not-for-profit. c. local and national d. publicly held and privately held.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
65.
The two ways that a corporation can be classified by ownership are a. publicly held and privately held. b. share and non-share. c. inside and outside. d. majority and minority.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
66.
Which of the following would not be true of a privately held corporation? a. It is sometimes called a closely held corporation. b. Its shares are regularly traded on a National securities exchange. c. It does not offer its shares for sale to the general public. d. It is usually smaller than a publicly held company.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
67.
Which of the following is not true of a corporation? a. It may buy, own, and sell property. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may enter into binding legal contracts in its own name.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Business Economics
68.
Ed Tresh has invested $400,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Tresh stand to lose? a. Up to his total investment of $400,000. b. Zero. c. The $400,000 plus any personal assets the creditors demand. d. $200,000.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Investment Decisions
Corporations: Organization, Share Transactions, and Equity 69.
12 - 11
Which of the following statements reflects the transferability of ownership rights in a corporation? a. If a shareholder decides to transfer ownership, he must transfer all of his shares. b. A shareholder may dispose of part or all of his shares. c. A shareholder must obtain permission from the board of directors before selling shares. d. A shareholder must obtain permission from at least three other shareholders before selling shares.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: None, IMA: Corporate Finance
70.
A corporate board of directors does not generally a. select officers. b. formulate operating policies. c. declare dividends. d. execute policy.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Internal Controls
71.
A typical organization chart showing delegation of authority would show a. shareholders delegating to the board of directors. b. the board of directors delegating to shareholders. c. the chief executive officer delegating to the board of directors. d. the controller delegating to the chief executive officer.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Leadership, IMA: Internal Controls
72.
The officer who is generally responsible for maintaining the cash position of the corporation is the a. controller. b. treasurer. c. cashier. d. internal auditor.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Corporate Finance
73.
The ability of a corporation to obtain capital is a. enhanced because of limited liability and ease of share transferability. b. less than a partnership. c. restricted because of the limited life of the corporation. d. about the same as a partnership.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Corporate Finance
74.
Which of the following statements is not considered a disadvantage of the corporate form of organization? a. Additional taxes b. Government regulations c. Limited liability of shareholders d. Separation of ownership and management
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: None, IMA: None
12 - 12 Test Bank for Financial Accounting: IFRS Edition, 4e 75.
What is ordinarily the first step in the formation of a corporation in the United States? a. Development of by-laws for the corporation b. Issuance of the corporate charter c. Application for incorporation to the appropriate Secretary of State d. Registration with a government agency
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
76.
Which one of the following is not an ownership right of a shareholder in a corporation? a. To vote in the election of directors b. To declare dividends on the ordinary shares c. To share in assets upon liquidation d. To share in corporate earnings
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
77.
If a corporation has only one class of shares, it is referred to as a. classless shares. b. preference shares. c. solitary shares. d. ordinary shares.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
78.
The term residual claim refers to a shareholders’ right to a. receive dividends. b. share in assets upon liquidation. c. acquire additional shares when offered. d. exercise a proxy vote.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
79.
Which of the following factors does not affect the initial market price of shares? a. The company's anticipated future earnings b. The par value of the shares c. The current state of the economy d. The expected dividend rate per share
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
80.
If an investment banking firm underwrites a share issue, the a. risk of being unable to sell the shares stays with the issuing corporation. b. corporation obtains cash immediately from the investment firm. c. investment firm has guaranteed profits on the sale of the shares. d. issuance of shares is likely to be directly to creditors.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
81.
The par value of shares a. is legally significant. b. reflects the most recent market price. c. is selected by the IASB. d. is indicative of the worth of the shares.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 82.
12 - 13
The authorized shares of a corporation a. only reflects the initial capital needs of the company. b. is indicated in its by-laws. c. is indicated in its charter. d. must be recorded in a formal accounting entry.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
83.
Limited liability of shareholders means that a. the corporation is subject to strict government regulations. b. the entity is separate and distinct from its owners. c. creditors have no legal claim to the assets of the owners unless fraud has occurred. d. they are taxed as a separate legal entity.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
Double taxation means that a. the earnings of the corporation are taxed once to the corporation and a second time when distributed to the shareholders. b. corporate profits are taxed by more than one government entity. c. the corporation is taxed as a separate legal entity. d. the corporation's profits are taxed as personal income to the shareholders.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
85.
The face of a share certificate shows all of the following except a. the class of the share. b. the shareholder's name. c. the number of shares owned. d. the market value of the share.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
Which of the following is not a right of an ordinary shareholder? a. Right to vote and elect the board of directors. b. Right to receive dividends. c. Pre-emptive right. d. Share in assets at liquidation.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
Which of the following rights of an ordinary shareholder is being eliminated by many companies? a. Right to vote and elect the board of directors. b. Right to receive a pro rata share of dividends paid. c. Pre-emptive right. d. Share in assets at liquidation.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
88.
If a company issues par-value ordinary shares, the balance in Share Capital - Ordinary will be the a. market value of all shares issued. b. par value of all shares issued. c. market value of all shares authorized. d. par value of all shares outstanding.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12 - 14 Test Bank for Financial Accounting: IFRS Edition, 4e 89.
Voltaire Corporation issued 6,000 ordinary shares of CHF5 par value for CHF20 per share. The entry to record this transaction includes a credit to Share Premium–Ordinary for a. CHF120,000. b. CHF90,000. c. CHF30,000. d. CHF60,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90.
Voltaire Corporation issued 6,000 ordinary shares of CHF5 par value for CHF20 per share. This transaction will increase a. Share Premium–Ordinary by CHF120,000. b. total equity by CHF30,000. c. Retained Earnings by CHF90,000. d. Share Capital–Ordinary by CHF30,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
91.
Jahnke Corporation issued 10,000 shares of €2 par value ordinary shares for €11 per share. The journal entry to record the sale will include a. a debit to Cash for €20,000. b. a credit to Share Premium–Ordinary for €90,000. c. a credit to Share Capital–Ordinary for €110,000. d. a debit to Retained Earnings for €27,500.
Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
92.
La Vida Corporation issued 30,000 shares of no-par value ordinary shares for €29.50 per share. Which of the following statements is true? a. Share Premium–Ordinary account will increase by €345,000. b. The Cash account will increase by €30,000. c. Retained Earnings account will increase by €855,000. d. Share Capital–Ordinary account will increase by €885,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
93.
When shares are issued for legal services, the transaction is recorded by debiting Organization Expense for the a. stated value of the shares. b. par value of the shares. c. market value of the shares. d. book value of the shares.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
94.
If Vickers Company issues 8,000 ordinary shares with a $5 par value for $250,000, a. Share Capital–Ordinary will be credited for $250,000. b. Share Premium–Ordinary will be credited for $40,000. c. Share Premium–Ordinary will be credited for $210,000. d. Cash will be debited for $210,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 95.
12 - 15
If ordinary shares are issued for an amount greater than par value, the excess should be credited to a. Cash. b. Retained Earnings. c. Share Premium–Ordinary. d. Legal Capital.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
96.
If shares are issued for a non-cash asset, the asset should be recorded on the books of the corporation at a. fair value. b. cost. c. zero. d. a nominal amount.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
If shares are issued for less than par value, the account a. Share Premium–Ordinary is credited. b. Share Premium–Ordinary is debited if a debit balance exists in the account. c. Share Premium–Ordinary is debited if a credit balance exists in the account. d. Retained Earnings is credited.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98.
The sale of ordinary shares below par a. is a common occurrence in most jurisdictions. b. is not permitted in most jurisdictions. c. is a practice that most shareholders encourage. d. requires that a liability be recorded for the difference between the sales price and the par value of the shares.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
Share Premium–Ordinary a. is credited when a no-par share does not have a stated value. b. is reported as part of equity on the statement of financial position. c. represents the amount of legal capital. d. normally has a debit balance.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
100.
Dailey Company is a publicly held corporation whose $1 par value ordinary shares are actively traded at $22 per share. The company issued 3,000 shares to acquire land recently advertised at $82,000. When recording this transaction, Dailey Company will a. debit Land for $82,000. b. credit Share Capital–Ordinary for $66,000. c. debit Land for $66,000. d. credit Share Premium–Ordinary for $79,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 16 Test Bank for Financial Accounting: IFRS Edition, 4e 101.
Simon Company issued 3,000 ordinary shares with a €5 par value in payment of its attorney's bill of €60,000. The bill was for services performed in helping the company incorporate. Simon should record this transaction by debiting a. Legal Expense for €15,000. b. Legal Expense for €60,000. c. Organization Expense for €15,000. d. Organization Expense for €60,000.
Ans: d, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
102.
In the financial statements, organization costs appears a. immediately below Retained Earnings in the equity section. b. in the income statement. c. as part of share premium in the equity section. d. as an intangible asset.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103.
Chiu Company. issues 4,000 ordinary shares with a HK$10 par value at HK$16 per share. When the transaction is recorded, credits are made to a. Share Capital–Ordinary HK$24,000 and Share Premium–Ordinary HK$40,000. b. Share Capital–Ordinary HK$64,000. c. Share Capital–Ordinary HK$40,000 and Share Premium–Ordinary HK$24,000. d. Share Capital–Ordinary HK$40,000 and Retained Earnings HK$24,000.
Ans: c, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
104.
If Kiner Company issues 5,400 ordinary shares with a $5 par value for $96,000, the account a. Share Capital–Ordinary will be credited for $27,000. b. Share Premium–Ordinary will be credited for $27,000. c. Share Premium–Ordinary will be credited for $96,000. d. Cash will be debited for $69,000.
Ans: a, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
105.
Kerwin Packaging Corporation began business in 2019 by issuing 60,000 ordinary shares with a £5 par for £8 per share and 15,000 preference shares of 6%, £10 par at par. At year end, the common shares had a market value of £10. On its December 31, 2020, statement of financial position, Kerwin Packaging would report a. Share Capital–Ordinary of £600,000. b. Share Capital–Ordinary of £300,000. c. Share Capital–Ordinary of £320,000. d. Share Premium–Ordinary of £300,000.
Ans: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 106.
12 - 17
Kim, Inc. issued 15,000 ordinary shares with a stated value of ¥100/share. The total issue of shares sold for ¥150 per share. The journal entry to record this transaction would include a a. debit to Cash for ¥1,500,000. b. credit to Share Capital–Ordinary for ¥1,500,000. c. debit to Share Premium–Ordinary for ¥750,000. d. credit to Share Capital–Ordinary for ¥2,250,000.
Ans: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
107.
S. Lawyer performed legal services for E. Corp. Due to a cash shortage, an agreement was reached whereby E. Corp. would pay S. Lawyer a legal fee of approximately $20,000 by issuing 5,000 ordinary shares (par $1). The shares trade on a daily basis and the market price of the shares on the day the debt was settled is $3 per share. Given this information, the journal entry for E. Corp. to record this transaction is: a. Legal Expense 15,000 Share Capital–Ordinary 15,000 b. c.
d.
Legal Expense Share Capital–Ordinary
20,000
Legal Expense Share Capital–Ordinary Share Premium–Ordinary
20,000
Legal Expense Share Capital–Ordinary Share Premium–Ordinary
15,000
20,000 5,000 15,000 5,000 10,000
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
108.
Dawson Company issued 500 no-par ordinary shares for $7,500. Which of the following journal entries would be made if the shares have a stated value of $2 per share? a. Cash 7,500 Share Capital–Ordinary 7,500 b.
Cash
7,500 Share Capital–Ordinary Share Premium–Ordinary
c.
Cash
6,500 1,000 7,500
Share Capital–Ordinary Share Premium–Ordinary d.
Share Capital–Ordinary Cash
1,000 6,500 7,500 7,500
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 18 Test Bank for Financial Accounting: IFRS Edition, 4e 109.
The following data is available for BOX Corporation at December 31, 2020: Ordinary shares, par €10 (authorized 40,000 shares} €300,000 Treasury shares (at cost €15 per share) 900 Based on the data, how many ordinary shares are outstanding? a. 40,000 b. 30,000 c. 39,940 d. 29,940
Ans: d, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
The following data is available for BOX Corporation at December 31, 2020: Ordinary shares, par €10 (authorized 40,000 shares} €300,000 Treasury shares (at cost €15 per share) € 900 Based on the data, how many ordinary shares have been issued? a. 40,000 b. 30,000 c. 39,940 d. 29,940
Ans: b, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
Hong Company paid $60,000 to buy back 12,000 shares of its HK$1 par value ordinary shares. These shares were sold later at a selling price of HK$7 per share. The entry to record the sale includes a a. credit to Share Premium–Treasury for HK$24,000. b. credit to Retained Earnings for HK$24,000. c. debit to Share Premium–Treasury for HK$60,000. d. debit to Retained Earnings for HK$60,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
112.
Kendrick Corporation was organized on January 2, 2020. During 2020, Kendrick issued 20,000 shares at $32 per share, purchased 4,000 treasury shares at $26 per share, and had net income of $500,000. What is the total amount of equity at December 31, 2020? a. $740,000 b. $1,036,000 c. $1,044,000 d. $1,060,000
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
Elton Manufacturing Corporation purchased 8,000 shares of its own previously issued £10 par ordinary shares for £230,000. As a result of this event, a. Elton’s Share Capital–Ordinary account decreased £80,000. b. Elton’s total equity decreased £230,000. c. Elton’s Share Premium–Ordinary account decreased £150,000. d. All of these answer choices are correct.
Ans: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 114.
12 - 19
A corporation purchases 30,000 shares of its own $20 par ordinary shares for $35 per share, recording it at cost. What will be the effect on total equity? a. Increase by $1,050,000 b. Decrease by $600,000 c. Decrease by $1,050,000 d. Increase by $600,000
Ans: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
A corporation purchases 50,000 shares of its own $10 par ordinary shares for $25 per share, recording it at cost. What will be the effect on total equity? a. Increase by $500,000 b. Decrease by $1,250,000 c. Increase by $1,250,000 d. Decrease by $500,000
Ans: b, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
116.
Rebel Inc. issued 7,000 no-par ordinary shares with a stated value of $3 per share. The market price of the shares on the date of issuance was $12 per share. The entry to record this transaction includes a a. debit to Cash for $21,000. b. credit to Share Capital–Ordinary for $84,000. c. credit to Share Capital–Ordinary for $21,000. d. debit to Share Premium–Ordinary for $84,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
117.
Rancho Corporation sold 500 treasury shares for $40 per share. The cost for the shares was $30. The entry to record the sale will include a a. credit to Gain on Sale of Treasury Shares for $15,000. b. credit to Share Premium–Treasury for $5,000. c. debit to Share Premium–Ordinary for $5,000. d. credit to Treasury Shares for $20,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
118.
Each of the following is correct regarding treasury shares except that they have been a. issued. b. fully paid for. c. reacquired. d. retired.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
119.
Treasury shares are a. shares issued by the U.S. Treasury Department. b. shares purchased by a corporation and held as an investment in its treasury. c. corporate shares issued by the treasurer of a company. d. a corporation's own shares which have been reacquired but not retired.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12 - 20 Test Bank for Financial Accounting: IFRS Edition, 4e 120.
The acquisition of treasury shares by a corporation a. increases its total assets and total equity. b. decreases its total assets and total equity. c. has no effect on total assets and total equity. d. requires that a gain or loss be recognized on the income statement.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
Treasury shares should be reported in the equity section immediately after a. share capital–ordinary. b. share capital–preference. c. share premium–ordinary. d. retained earnings.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
A company would not acquire treasury shares a. in order to reissue shares to officers. b. as an asset investment. c. in order to increase trading of the company's shares. d. to have additional shares available to use in acquisitions of other companies.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
123.
Treasury shares are generally accounted for by the a. cost method. b. market value method. c. par value method. d. stated value method.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
124.
The Treasury Shares account is a(n) a. contra asset account. b. retained earnings account. c. asset account. d. contra equity account.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
125.
Four thousand treasury shares of Meyer, Inc., previously acquired at $12 per share, are sold at $18 per share. The entry to record this transaction will include a a. credit to Treasury Shares for $72,000. b. debit to Share Premium–Treasury for $24,000. c. debit to Treasury Shares for $48,000. d. credit to Share Premium–Treasury for $24,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 126.
12 - 21
Slaton Company originally issued 6,000 ordinary shares with a $10 par value for $90,000 ($15 per share). Slaton subsequently purchases 600 treasury shares for $27 per share and resells the 600 treasury shares for $29 per share. In the entry to record the sale of the treasury shares, there will be a a. credit to Share Capital–Ordinary for $16,200. b. credit to Treasury Shares for $6,000. c. debit to Share Premium–Ordinary of $18,000. d. credit to Share Premium–Treasury Shares for $1,200.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
127.
King George Company was authorized to issue 100,000 ordinary shares. The company issued 54,000 shares and later purchased 10,000 treasury shares. The number of outstanding ordinary shares is: a. 90,000. b. 46,000. c. 54,000. d. 44,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
128.
Peebles Company purchased 5,000 shares of its own £5 par value ordinary shares, paying £14 per share. The shares were originally sold for £9 each. The journal entry to record the purchase of treasury shares includes a debit to a. Share Capital–Ordinary for £25,000. b. Treasury Shares for £70,000. c. Share Premium–Ordinary for £20,000. d. Retained Earnings for £25,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
129.
Richard Company paid £46,000 to buy 8,000 shares of its £6 par value ordinary shares for distribution in an executive compensation plan. The stock was originally sold for £50,000. The entry to record the purchase includes a a. debit to Treasury Shares for £46,000. b. credit to Retained Earnings for £6,000. c. debit to Share Premium–Ordinary for £4,000. d. credit to Share Capital–Ordinary for £48,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
130.
Oxford Inc. was authorized to issue 200,000 £10 par value ordinary shares. As of December 31, 2020, the company had issued 88,000 shares at an average price of £22 per share. During 2020, the company felt that the shares were undervalued so it purchased 20,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 8,000 of the treasury for £25. Retained earnings was £829,000 at December 31, 2020. As of December 31, 2020, the number of outstanding ordinary shares is a. 68,000. b. 76,000. c. 88,000. d. 200,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12 - 22 Test Bank for Financial Accounting: IFRS Edition, 4e
Corporations: Organization, Share Transactions, and Equity 131
12 - 23
Oxford Inc. was authorized to issue 200,000 £10 par value ordinary shares. As of December 31, 2020, the company had issued 88,000 shares at an average price of £22 per share. During 2020, the company felt that the shares were undervalued so it purchased 20,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 8,000 of the treasury for £25. Retained earnings was £829,000 at December 31, 2020. The balance in the Treasury Shares account at December 31, 2020 is a. £180,000. b. £80,000. c. £216,000. d. £360,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
132.
James Corporation issued 5,000 preference shares with a par value of CHF100 for CHF205 per share. The entry to record this transaction includes a credit to Share Premium– Preference for a. CHF250,000. b. CHF500,000. c. CHF525,000. d. CHF1,025,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
133.
James Corporation issued 5,000 preference shares with a par value of CHF100 for CHF205 per share. This transaction will a. increase total equity by CHF1,025,000. b. increase Share Premium–Preference by CHF1,025,000. c. decrease Retained Earnings by CHF525,000. d. increase Share Capital–Ordinary by CHF525,000.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
134.
Le Bateau Company issued 70,000 shares of 5%, €100 par value preference shares for €114 per share. This transaction will a. increase the Share Premium–Preference account by €980,000. b. increase the Cash account by €7,000,000. c. increase the Retained Earnings account by €980,000. d. increase the Share Capital–Preference account by €980,000.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
135.
Freidrichs Company has issued and outstanding 11,000 shares of cumulative, 5%, €50 par value preference shares which it sold for €54 per share at the beginning of 2018. The company has never paid preference dividends. As of December 31, 2020, dividends in arrears are a. €55,000. b. €82,500. c. €101,250. d. €89,100.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12 - 24 Test Bank for Financial Accounting: IFRS Edition, 4e 136.
Looper, Inc. has 25,000 shares of 5%, ₤100 par value, noncumulative preference shares and 50,000 ordinary shares with a ₤1 par value outstanding at December 31, 2020. There were no dividends declared in 2019. The board of directors declares and pays a ₤300,000 dividend in 2020. What is the amount of dividends received by the common shareholders in 2020? a. ₤0 b. ₤125,000 c. ₤300,000 d. ₤175,000
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
137.
When preference shares are cumulative, preference dividends not declared in a period are a. considered a liability. b. called dividends in arrears. c. distributions of earnings. d. never paid.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
Which of the following is not a right or preference associated with preference stock? a. The right to vote b. First claim to dividends c. Preference to corporate assets in case of liquidation d. To receive dividends in arrears before ordinary shareholders receive dividends
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
139.
Cole Corporation issues 15,000 preference shares with a $50 par value for cash at $60 per share. The entry to record the transaction will consist of a debit to Cash for $900,000 and a credit or credits to a. Share Capital—Preference for $900,000. b. Share Capital—Preference for $750,000 and Share Premium—Preference for $150,000. c. Share Capital—Preference for $750,000 and Retained Earnings for $150,000. d. Share Premium for $900,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
140.
Dividends in arrears on cumulative preference shares a. are shown in equity in the statement of financial position. b. must be paid before ordinary shareholders can receive a dividend. c. should be recorded as a current liability until they are paid. d. enable the preference shareholders to share equally in corporate earnings with the ordinary shareholders.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
141.
Dividends in arrears on cumulative preference shares a. are considered to be a non-current liability. b. are considered to be a current liability. c. only occur when preference dividends have been declared. d. should be disclosed in the notes to the financial statements.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 142.
12 - 25
If preference shares are cumulative, the a. preference dividends not declared in a given year are called dividends in arrears. b. preference shareholders and the ordinary shareholders receive equal dividends. c. preference shareholders and the ordinary shareholders receive the same total dollar amount of dividends. d. ordinary shareholders will share in the preference dividends.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
143.
The Nice Corporation issues 20,000 preference shares with a €100 par value for cash at €110 per share. The entry to record the transaction will consist of a debit to Cash for €2,200,000 and a credit or credits to a. Share Capital—Preference for €2,200,000. b. Share Premium–Preference for €2,000,000. c. Share Capital—Preference for €2,000,000 and Retained Earnings for €200,000. d. Share Capital—Preference for €2,000,000 and Share Premium—Preference for €200,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
144.
Venco Corporation’s December 31, 2020 statement of financial position showed the following: Share capital—preference 6%, €20 par value, cumulative, 10,000 shares authorized; 7,500 shares issued € 150,000 Share capital–ordinary, €10 par value, 1,000,000 shares authorized; 975,000 shares issued, 960,000 shares outstanding 9,750,000 Share premium—preference 30,000 Share premium—ordinary 13,500,000 Retained earnings 3,750,000 Treasury shares (15,000 shares) 315,000 Venco declared and paid a €45,000 cash dividend on December 15, 2020. If the company’s dividends in arrears prior to that date were €9,000, Venco's ordinary shareholders received a. €36,000. b. €18,000. c. €27,000. d. no dividend.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
145.
Beckham Company has 2,000 shares of 5%, $100 par cumulative preference shares outstanding at December 31, 2020. No dividends have been paid on these shares for 2019 or 2020. Dividends in arrears at December 31, 2020 total a. $0. b. $1,000. c. $10,000. d. $20,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
12 - 26 Test Bank for Financial Accounting: IFRS Edition, 4e 146.
Ephram Company has 4,000 shares of 6%, €100 par non-cumulative preference shares outstanding at December 31, 2020. No dividends have been paid on these shares for 2019 or 2020. Dividends in arrears at December 31, 2020 total a. €0. b. €2,400. c. €24,000. d. €48,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
147.
Each of the following decreases retained earnings except a a. cash dividend. b. liquidating dividend. c. share dividend. d. All of these decrease retained earnings.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
148.
Each of the following decreases total equity except a a. cash dividend. b. liquidating dividend. c. share dividend. d. All of these decrease total equity.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
149.
Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash b. Approval of shareholders c. Declaration of dividends by the board of directors d. Retained earnings
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
150.
If a corporation declares a dividend out of share capital or share premium, it is known as a a. share dividend. b. capital dividend. c. paid dividend. d. liquidating dividend.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
151.
The date on which a cash dividend becomes a binding legal obligation is on the a. declaration date. b. date of record. c. payment date. d. last day of the fiscal year-end.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 152.
12 - 27
The effect of the declaration of a cash dividend by the board of directors is to a. b. c. d.
Increase Equity Assets Liabilities Liabilities
Decrease Assets Liabilities Equity Assets
Ans: c, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
153.
The cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is to a. decrease total liabilities and equity. b. increase total expenses and total liabilities. c. increase total assets and equity. d. decrease total assets and equity.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
154.
Ordinary Share Dividends Distributable is classified as a(n) a. asset account. b. equity account. c. expense account. d. liability account.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
155.
The effect of a share dividend is to a. decrease total assets and equity. b. change the composition of equity. c. decrease total assets and total liabilities. d. increase the par value per share.
Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
156.
If a corporation declares a 10% ordinary share dividend, the account to be debited on the date of declaration is a. Ordinary Share Dividends Distributable. b. Share Capital–Ordinary. c. Share Premium–Ordinary. d. Retained Earnings.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
157.
Which one of the following events would not require a formal journal entry on a corporation's books? a. 2 for 1 share split b. 100% share dividend c. 2% share dividend d. $1 per share cash dividend
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
12 - 28 Test Bank for Financial Accounting: IFRS Edition, 4e 158.
Share dividends and share splits have the following effects on retained earnings: a. b. c. d.
Share Splits Increase No change Decrease No change
Share Dividends No change Decrease Decrease No change
Ans: b, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
159.
Dividends are predominantly paid in a. earnings. b. property. c. cash. d. shares.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
160.
If a shareholder receives a dividend that reduces retained earnings by the fair value of the shares, the shareholder has received a a. large share dividend. b. cash dividend. c. contingent dividend. d. small share dividend.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
161.
Of the various dividends types, the two most common types in practice are a. cash and large share. b. cash and property. c. cash and small share. d. property and small share.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
162.
Regular dividends are declared out of a. Share Premium–Ordinary. b. Treasury Shares. c. Share Capital–Ordinary. d. Retained Earnings.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
163.
A corporation is not committed to a legal obligation when it declares a. a cash dividend. b. either a cash dividend or a share dividend. c. a share dividend. d. a distribution date.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 164.
12 - 29
Which of the following is not a significant date with respect to dividends? a. The declaration date b. The incorporation date c. The record date d. The payment date
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
165.
On the dividend record date, a. a dividend becomes a current obligation. b. no entry is required. c. an entry may be required if it is a share dividend. d. Dividends Payable is debited.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
166.
Which of the following statements regarding the date of a cash dividend declaration is not accurate? a. The dividend can be rescinded once it has been declared. b. The corporation is committed to a legal, binding obligation. c. The board of directors formally authorizes the cash dividend. d. A liability account must be increased.
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
167.
Indicate the respective effects of the declaration of a cash dividend on the following statement of financial position sections: a. b. c. d.
Total Assets Increase No change Decrease Decrease
Total Liabilities Decrease Increase Increase No change
Total Equity No change Decrease Decrease Increase
Ans: b, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
168.
The cumulative effect of the declaration and payment of a cash dividend on a company's statement of financial position is to a. decrease current liabilities and equity. b. increase total assets and equity. c. increase current liabilities and equity. d. decrease equity and total assets.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
169.
The declaration and distribution of a share dividend will a. increase total equity. b. increase total assets. c. decrease total assets. d. have no effect on total assets.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
12 - 30 Test Bank for Financial Accounting: IFRS Edition, 4e 170.
ABC Company has 1,000 shares of 6%, €100 par value, cumulative preference shares and 50,000 ordinary shares with a €1 par value outstanding at December 31, 2020. What is the annual dividend on the preference shares? a. €60 per share b. €6,000 in total c. €600 in total d. €.60 per share
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
171.
Agler Company has 10,000 shares of 5%, $100 par value, cumulative preference shares and 100,000 ordinary shares with a $1 par value outstanding at December 31, 2020. If the board of directors declares a $40,000 dividend, the a. preference shareholders will receive 1/10th of what the ordinary shareholders will receive. b. preference shareholders will receive the entire $40,000. c. $50,000 will be held as restricted retained earnings and paid out at some future date. d. preference shareholders will receive $20,000 and the ordinary shareholders will receive $20,000.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
172.
Manner, Inc. has 5,000 shares of 5%, ₤100 par value, noncumulative preference shares and 20,000 ordinary shares with a ₤1 par value outstanding at December 31, 2020. There were no dividends declared in 2019. The board of directors declares and pays a ₤55,000 dividend in 2020. What is the amount of dividends received by the ordinary shareholders in 2020? a. ₤0 b. ₤25,000 c. ₤55,000 d. ₤30,000
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
173.
Lopez Company has 2,500 shares of 6%, €50 par value, cumulative preference shares and 50,000 ordinary shares with a €1 par value outstanding at December 31, 2019, and December 31, 2020. The board of directors declared and paid a €5,000 dividend in 2019. In 2020, $22,000 of dividends are declared and paid. What are the dividends received by the preference and ordinary shareholders in 2020? a. b. c. d.
Preference €12,000 €11,000 €10,000 €7,500
Ordinary €10,000 €11,000 €12,000 €14,500
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 174.
12 - 31
Norton Company has 10,000 shares of 4%, $100 par value, noncumulative preference shares and 100,000 ordinary shares with a $1 par value outstanding at December 31, 2019, and December 31, 2020. The board of directors declared and paid a $30,000 dividend in 2019. In 2020, $110,000 of dividends are declared and paid. What are the dividends received by the preference and ordinary shareholders in 2020? a. b. c. d.
Preference $0 $40,000 $55,000 $50,000
Ordinary $110,000 $70,000 $55,000 $60,000
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
175.
The board of directors must assign a per share value to a share dividend declared that is a. greater than the par or stated value. b. less than the par or stated value. c. equal to the par or stated value. d. at least equal to the par or stated value.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
176.
Corporations generally issue share dividends in order to a. increase the market price per share. b. exceed shareholders' dividend expectations. c. increase the marketability of the shares. d. decrease the amount of capital in the corporation.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
177.
A shareholder who receives a share dividend would a. expect the market price per share to increase. b. own more shares. c. expect retained earnings to increase. d. expect the par value of the shares to change.
Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
178.
When share dividends are distributed, a. Ordinary Share Dividends Distributable is decreased. b. Retained Earnings is decreased. c. Share Premium-Ordinary is debited if it is a small share dividend. d. no entry is necessary if it is a large share dividend.
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
179.
A small share dividend is defined as a. less than 30% but greater than 25% of the corporation's issued shares. b. between 50% and 100% of the corporation's issued shares. c. more than 30% of the corporation's issued shares. d. less than 20–25% of the corporation's issued shares.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
12 - 32 Test Bank for Financial Accounting: IFRS Edition, 4e 180.
The per share amount normally assigned by the board of directors to a large share dividend is a. the market value of the shares on the date of declaration. b. the average price paid by shareholders on outstanding shares. c. the par or stated value of the shares. d. zero.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
181.
The per share amount normally assigned by the board of directors to a small share dividend is a. the market value of the shares on the date of declaration. b. the average price paid by shareholders on outstanding shares. c. the par or stated value of the shares. d. zero.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
182.
The effect a declaration and distribution of a share dividend has on the par value per share is a(an) a. increase. b. decrease. c. increase or decrease. d. no effect.
Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting
183.
The declaration of a small share dividend will a. increase share premium. b. change total equity. c. increase total liabilities. d. increase total assets.
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
184.
Which of the following show the proper effect of a share split and a share dividend? Item Share Split Share Dividend a. Total equity Increase Increase b. Total retained earnings Decrease Decrease c. Total par value (ordinary) Decrease Increase d. Par value per share Decrease No change
Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
185.
A share split a. may occur in the absence of retained earnings. b. will increase total equity. c. will increase the total par value of the shares. d. will have no effect on the par value per share of shares.
Ans: a, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 186.
12 - 33
Outstanding shares of the Colt Corporation included 20,000 ordinary shares with a €5 par and 5,000 shares of 5%, €10 par noncumulative preference shares. In 2019, Colt declared and paid dividends of €3,000. In 2020, Colt declared and paid dividends of €6,000. How much of the 2020 dividend was distributed to preference shareholders? a. €3,000 b. €3,500 c. €2,500 d. None of these answer choices are correct.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
187.
Outstanding shares of the Abel Corporation included 20,000 ordinary shares with a $5 par and 10,000 shares of 5%, $10 par noncumulative preference shares. In 2019, Abel declared and paid dividends of $6,000. In 2020, Abel declared and paid dividends of $12,000. How much of the 2020 dividend was distributed to preference shareholders? a. $7,000 b. $6,000 c. $5,000 d. None of these answer choices are correct.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
188.
On January 1, Castagno Corporation had 1,600,000 ordinary shares with a €10 par value outstanding. On March 31, the company declared a 15% share dividend. Market value was €15/share. As a result of this event, a. Castagno’s Share Premium–Ordinary account increased €1,200,000. b. Castagno’s total equity was unaffected. c. Castagno’s Share Dividends account increased €3,600,000. d. All of these answer choices are correct.
Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
189.
On January 1, Edmiston Corporation had 1,500,000 ordinary shares with a $10 par value outstanding. On March 31, the company declared a 20% share dividend. Market value was $15/share. As a result of this event, a. Edmiston’s Share Premium–Ordinary account increased $1,500,000. b. Edmiston’s total equity was unaffected. c. Edmiston’s Share Dividends account increased $4,500,000. d All of these answer choices are correct.
Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
190.
Sun Inc. has 5,000 shares of 5%, ¥1,000 par value, cumulative preference shares and 50,000 ordinary shares with a ¥10 par value outstanding at December 31, 2020. What is the annual dividend on the preference shares? a. ¥500 per share b. ¥250,000 in total c. ¥50,000 in total d. ¥5.00 per share
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
12 - 34 Test Bank for Financial Accounting: IFRS Edition, 4e 191.
Allstate, Inc., has 10,000 shares of 5%, €100 par value, noncumulative preference shares and 100,000 ordinary shares with a €1 par value outstanding at December 31, 2020. If the board of directors declares a €125,000 dividend, the a. preference shareholders will receive 1/10th of what the ordinary shareholders will receive. b. preference shareholders will receive the entire €125,000. c. €50,000 will be held as restricted retained earnings and paid out at some future date. d. preference shareholders will receive €50,000 and the ordinary shareholders will receive €75,000.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
192.
Archer, Inc has 10,000 shares of 4%, £100 par value, noncumulative preference shares and 40,000 ordinary shares with a £1 par value outstanding at December 31, 2020. There were no dividends declared in 2019. The board of directors declares and pays a £140,000 dividend in 2020. What is the amount of dividends received by the ordinary shareholders in 2020? a. £0 b. £60,000 c. £40,000 d. £100,000
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
193.
Luther Inc has 2,000 shares of 4%, $50 par value, cumulative preference shares and 100,000 ordinary shares with a $1 par value outstanding at December 31, 2019, and December 31, 2020. The board of directors declared and paid a $3,000 dividend in 2019. In 2020, $20,000 of dividends are declared and paid. What are the dividends received by the preference shareholders in 2020? a. $15,000 b. $10,000 c. $5,000 d. $4,000
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
194.
Anders, Inc has 5,000 shares of 5%, €100 par value, cumulative preference shares and 20,000 ordinary shares with a $1 par value outstanding at December 31, 2020. There were no dividends declared in 2018. The board of directors declares and pays a €55,000 dividend in 2019 and in 2020. What is the amount of dividends received by the ordinary shareholders in 2020? a. €30,000 b. €25,000 c. €55,000 d. €0
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 195.
12 - 35
Cuther Inc has 1,000 shares of 4%, £50 par value, cumulative preference shares and 50,000 ordinary shares with a £1 par value outstanding at December 31, 2019, and December 31, 2020. The board of directors declared and paid a £1,000 dividend in 2019. In 2020, £10,000 of dividends are declared and paid. What are the dividends received by the ordinary shareholders in 2020? a. £7,000 b. £5,000 c. £8,000 d. £2,000
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
196.
On January 1, Swanson Corporation had 120,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. Market value of the shares was €13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Cash Dividends for €54,000. b. credit to Cash for €234,000. c. credit to Ordinary Share Dividends Distributable for €180,000. d. debit to Ordinary Share Dividends Distributable for €180,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
197.
On January 1, Swanson Corporation had 120,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. Market value of the shares was €13 on March 17. The shares were distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for €180,000. b. debit to Ordinary Share Dividends Distributable for €180,000. c. credit to Share Premium–Ordinary for €54,000. d. debit to Cash Dividends for €54,000.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
198.
On January 1, Sandford Corporation had 160,000 ordinary shares with a $10 par value outstanding. On June 17, the company declared a 15% share dividend to shareholders of record on June 20. Market value of the shares was $15 on June 17. The entry to record the transaction of June 17 would include a a. debit to Cash Dividends for $360,000. b. credit to Cash for $360,000. c. credit to Ordinary Share Dividends Distributable for $360,000. d. credit to Ordinary Share Dividends Distributable for $240,000.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 36 Test Bank for Financial Accounting: IFRS Edition, 4e 199.
On January 1, Sanford Corporation had 160,000 ordinary shares with a $10 par value outstanding. On June 17, the company declared a 15% share dividend to shareholders of record on June 20. Market value of the shares was $15 on June 17. The shares were distributed on June 30. The entry to record the transaction of June 30 would include a a. credit to Share Capital–Ordinary for $240,000. b. debit to Ordinary Share Dividends Distributable for $360,000. c. credit to Share Premium–Ordinary for $120,000. d. debit to Cash Dividends for $120,000.
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
200.
Colson Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 5%, $100 par value cumulative preference share outstanding. It is one year in arrears on its preference shares. How much cash will Colson distribute to the ordinary shareholders? a. $100,000. b. $60,000. c. $130,000. d. None.
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
201.
Ludwick Company has retained earnings of €1,200,000 and total equity of €3,000,000. It has 300,000 ordinary shares with a €5 par value outstanding, which are currently selling for €30 per share. If Ludwick declares a 15% share dividend on its ordinary shares a. net income will decrease by €225,000. b. retained earnings will decrease by €225,000 and total equity will increase by €225,000. c. retained earnings will decrease by €1,350,000 and total equity will increase by €1,350,000. d. retained earnings will decrease by €1,350,000 and share capital and share premium will increase by €1,350,000.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
202.
On December 31, 2020, Springer, Inc. has 3,000 shares of 5% $100 par value cumulative preference shares and 60,000 ordinary shares with a $10 par value outstanding. On December 31, 2020, the directors declare a $20,000 cash dividend. The entry to record the declaration of the dividend would include a. a credit of $10,000 to Retained Earnings. b. a note in the financial statements that dividends of $5 per share are in arrears on preference shares for 2020. c. a debit of $20,000 to Share Capital–Ordinary. d. a credit of $20,000 to Dividends Payable.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 203.
12 - 37
Franklin Company declares a 10% ordinary share dividend when it has 50,000 ordinary shares with a €10 par value outstanding. If the market value of €24 per share is used, the amounts debited to Retained Earnings and credited to Share Premium–Ordinary are Retained Share Premium– Earnings Ordinary a. €50,000 €0 b. €120,000 €70,000 c. €120,000 €50,000 d. €50,000 €70,000
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
204.
Shannon Manufacturing declared a 10% share dividend when it had 350,000 ordinary shares with a €3 par value outstanding. The market price per share was €12 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to a. Retained Earnings for €105,000. b. Share Premium–Ordinary for €315,000. c. Share Capital–Ordinary for €420,000. d. Ordinary Share Dividends Distributable for €420,000.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
205.
On December 1, 2019, the Board of directors of Dew Laurintis Company declared an €.80 per share dividend payable on January 3, 2020 to shareholders of record on December 16. The company had 500,000 shares authorized and 225,000 shares issued and outstanding. The journal entry made on December 1, 2019 will a. reduce assets by €180,000. b. reduce equity by €180,000. c. increase expenses by €400,000. d. increase liabilities by €400,000.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
206.
On December 1, 2019, the Board of directors of Dew Laurintis Company declared an €.80 per share dividend payable on January 3, 2020 to shareholders of record on December 16. The company had 500,000 shares authorized and 225,000 shares issued and outstanding. The journal entry made on the declaration date will include a. a debit to Cash Dividends of €180,000. b. a credit to Cash of €180,000. c. a credit to Ordinary Share Dividends Distributable by €400,000. d. No entry is made on the declaration date.
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
12 - 38 Test Bank for Financial Accounting: IFRS Edition, 4e 207.
On December 1, 2019, the Board of directors of Dew Laurintis Company declared an €.80 per share dividend payable on January 3, 2020 to shareholders of record on December 16. The company had 500,000 shares authorized and 225,000 shares issued and outstanding. The journal entry made on January 3, 2020 will a. decrease assets and liabilities by €400,000. b. increase assets and decrease equity by €180,000. c. decrease assets and liabilities by €180,000. d. decrease assets and increase equity by €180,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
208.
EI Toro Manufacturing Inc. declared a 20% share dividend when it had 200,000 ordinary shares (€5 par value) outstanding. The market price per share was €8 on the declaration date. The entry to record the dividend declaration included a credit to a. Share Dividends of €320,000. b. Share Premium–Ordinary for €280,000. c. Share Capital–Ordinary for €320,000. d. Ordinary Share Dividends Distributable €200,000.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
209.
Jacquet Wholesale Merchandise Inc. had 80,000 shares of 6%, CHF20 par value preference shares and 60,000 shares of CHF25 par value ordinary shares outstanding throughout 2020. Assuming that total dividends declared in 2020 were CHF140,000 and that preference shares are not cumulative, ordinary shareholders should receive total 2020 dividends of a. CHF44,000. b. CHF92,000. c. CHF96,000. d. CHF140,000.
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
210.
Jacquet Wholesale Merchandise Inc. had 80,000 shares of 6%, CHF20 par value preference shares and 60,000 shares of CHF25 par value ordinary shares outstanding throughout 2020. Assuming that total dividends declared in 2020 were CHF368,000 and that the preference shares are cumulative with two years' dividends in arrears on December 31, 2020, the preference shareholders should receive total 2020 dividends totaling a. CHF80,000. b. CHF192,000. c. CHF288,000. d. CHF368,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 211.
12 - 39
Jacquet Wholesale Merchandise Inc. had 80,000 shares of 6%, CHF20 par value preference shares and 60,000 shares of CHF25 par value ordinary shares outstanding throughout 2020. Total dividends declared in 2020 were CHF140,000. The preference shares are cumulative. No dividends were paid in 2019. The ordinary shareholders should receive total 2020 dividends of a. CHF0. b. CHF44,000. c. CHF96,000. d. CHF192,000.
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
212.
Jacquet Wholesale Merchandise Inc. had 80,000 shares of 6%, CHF20 par value preference shares and 60,000 shares of CHF25 par value ordinary shares outstanding throughout 2020. Total dividends declared in 2020 were CHF60,000. The preference shares are cumulative and no dividends were paid in 2018 or 2019. The amount of dividends in arrears at December 31, 2020 is a. CHF36,000. b. CHF192,000. c. CHF228,000. d. CHF288,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
213.
Assuming that there are no dividends in arrears, how are total dividends allocated between ordinary shares and preference shares? a. Preference shareholders are paid their required annual dividend with the balance going to ordinary shareholders. b. On the basis of their relative par values. c. On the basis of their relative market values. d. Cannot be determined with the information given.
Ans: a, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
214.
If preference shares are cumulative, a. preference shareholders will not receive dividends. b. unpaid dividends will never be paid. c. unpaid dividends become dividends in arrears. d. the corporation has a liability for any unpaid dividends.
Ans: c, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
215.
Irwin, Inc. had 200,000 ordinary shares outstanding before a share split occurred, and 600,000 shares outstanding after the share split. The share split was a. 2-for-6. b. 1-for-3. c. 1-for-6. d. 3-for-1.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 40 Test Bank for Financial Accounting: IFRS Edition, 4e
Corporations: Organization, Share Transactions, and Equity 216.
12 - 41
The following selected amounts are available for Sanders Company. Retained earnings (beginning) Net loss Cash dividends declared Share dividends declared
$1,250 100 100 50
What is its ending retained earnings balance? a. $1,100 b. $1,150 c. $1,000 d. $1,050 Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
217.
A credit balance in retained earnings represents a. the amount of cash retained in the business. b. a claim on specific assets of the corporation. c. a claim on the aggregate assets of the corporation. d. the amount of equity exempted from the shareholders' claim on total assets.
Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
218.
A net loss a. occurs if operating expenses exceed cost of goods sold. b. is not closed to Retained Earnings if it would result in a debit balance. c. is closed to Retained Earnings even if it would result in a debit balance. d. is closed to the share premium account of the equity section of the statement of financial position.
Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
219.
Retained earnings are occasionally restricted a. to set aside cash for dividends. b. to keep the legal capital associated with share premium intact. c. for the cost of treasury shares. d. if preference dividends are in arrears.
Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
220.
The return on ordinary shareholders' equity is computed by dividing net income available to ordinary shareholders by a. ending total shareholders' equity. b. ending ordinary shareholders' equity. c. average total shareholders' equity. d. average ordinary shareholders' equity.
Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
12 - 42 Test Bank for Financial Accounting: IFRS Edition, 4e 221.
The return on ordinary shareholders’ equity is computed by dividing average ordinary shareholders’ equity into a. net income. b. net income less ordinary and preference dividends. c. net income less ordinary dividends. d. net income less preference dividends.
Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
222.
Lang Inc. reported net income of €180,000 during 2020 and paid dividends of €26,000 on ordinary shares. It also has 10,000 6%, €100 par value preference shares outstanding. Ordinary shareholders' equity was €1,200,000 on January 1, 2020, and €1,600,000 on December 31, 2020. The company's return on ordinary shareholders' equity for 2020 is: a. 9.6% b. 8.6% c. 11.0% d. 6.7%
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
223.
Harris Corporation had net income of €140,000 and paid dividends of €50,000 to ordinary shareholders and €20,000 to preference shareholders in 2020. Harris Corporation’s ordinary shareholders’ equity at the beginning and end of 2020 was €870,000 and €1,130,000, respectively. There are 100,000 weighted-average ordinary shares outstanding. Harris Corporation’s return on ordinary shareholders’ equity was a. 14%. b. 12%. c. 9%. d. 7%.
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
224.
Assume that all statement of financial position amounts for Remington Company represent average balance figures. Shareholders’ equity—ordinary $150,000 Total equity 200,000 Sales revenue 100,000 Net income 25,000 Number of ordinary shares 10,000 Ordinary share dividends 10,000 Preference share dividends 4,000 What is the return on ordinary shareholders’ equity ratio for Remington? a. 16.7% b. 14.0% c. 10.0% d. 7.3%
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity 225.
12 - 43
Wheeler Company reports the following amounts for 2020. Net income €110,000 Average shareholders’ equity 1,000,000 Preference dividends 26,000 Par value preference shares 200,000 The 2020 rate of return on ordinary shareholders’ equity is a. 13.8% b. 10.5% c. 11.0% d. 8.4%
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
226.
Ordinary share dividends distributable a. is a contra equity account. b. is a current liability. c. is reported as an addition to equity under Share capital–ordinary. d. reduces total equity.
Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
227.
Oxford Inc. was authorized to issue 200,000 £10 par value ordinary shares. As of December 31, 2020, the company had issued 88,000 shares at an average price of £22 per share. During 2020, the company felt that the shares were undervalued so it purchased 20,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 8,000 of the treasury shares for £25. Retained earnings was £3,316,000 at December 31, 2020. The amount of Share Premium reported on the December 31, 2020 statement of financial position is a. £560,000. b. £1,056,000. c. £1,112,000. d. £1,936,000.
Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
228.
Oxford Inc. was authorized to issue 200,000 £10 par value ordinary shares. As of December 31, 2020, the company had issued 88,000 shares at an average price of £22 per share. During 2020, the company felt that the shares were undervalued so it purchased 20,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 8,000 of the treasury shares for £25. Retained earnings was £3,316,000 at December 31, 2020. Total equity at December 31, 2020 is a. £4,892,000. b. £5,036,000. c. £5,092,000. d. £5,524,000.
Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 44 Test Bank for Financial Accounting: IFRS Edition, 4e 229.
Tang Inc. was authorized to issue 1,500,000 ¥1,000 par value ordinary shares. As of December 31, 2020, the company had issued 240,000 shares for proceeds of ¥594,000,000. During 2020, the company purchased 30,000 treasury shares at a total cost of ¥66,000,000. Later in the year, the company sold half of the treasury shares for ¥42,900,000. The balance in retained earnings at December 31, 2020 was ¥972,000,000. The amount of Share Premium reported on the December 31, 2020 statement of financial position is a. ¥9,900,000. b. ¥23,100,000. c. ¥354,000,000. d. ¥363,900,000.
Ans: d, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
230.
Tang Inc. was authorized to issue 1,500,000 ¥1,000 par value ordinary shares. As of December 31, 2020, the company had issued 240,000 shares for proceeds of ¥594,000,000. During 2020, the company purchased 30,000 treasury shares at a total cost of ¥66,000,000. Later in the year, the company sold half of the treasury shares for ¥42,900,000. The balance in retained earnings at December 31, 2020 was ¥972,000,000 Total equity at December 31, 2020 is a. ¥290,400,000. b. ¥1,542,900,000. c. ¥1,566,000,000. d. ¥1,599,000,000.
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
231.
Tang Inc. was authorized to issue 1,500,000 ¥1,000 par value ordinary shares. As of December 31, 2020, the company had issued 240,000 shares for proceeds of ¥594,000,000. During 2020, the company purchased 30,000 treasury shares at a total cost of ¥66,000,000. Later in the year, the company sold half of the treasury shares for ¥42,900,000. The balance in retained earnings at December 31, 2020 was ¥972,000,000 The balance in the Treasury Shares account reported on the December 31, 2020 statement of financial position is a. ¥9,900,000. b. ¥33,000,000. c. ¥42,900,000. d. ¥66,000,000.
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
232.
Van Luther Company had total ordinary equity of £8,650,000 at January 1, 2020 and £9,807,000 at December 31, 2020. The Company had net income for 2020 of £1,400,000 and paid total dividends of £360,000, including the annual preference dividend of £290,000. Van Luther's return on ordinary shareholders equity for 2020 is a. 10.6%. b. 12.0%. c. 11.3%. d. 15.2%.
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity
233.
12 - 45
A statement of changes in equity shows a. the names of each shareholder. b. how profits are distributed to the various classes of shareholders. c. the number of shares owned by each of the shareholders. d. the changes in each equity account and in total equity during the period.
Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
234. Book value per share is a. the equity an ordinary shareholder has in the net assets of the corporation from owning one share. b. the equity an ordinary shareholder has in the total assets of the corporation from owning one share. c. always equal to the market value of the shares. d. computed only for preference shareholders.
Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
235. Book value per share is computed by dividing total a. share capital by the number of ordinary shares outstanding. b. share capital by the number of ordinary shares issued. c. equity by the number of ordinary shares outstanding. d. equity by the number of ordinary shares issued.
Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
236.
Barr, Inc. reports ₤4,000,000 of share capital, and ₤6,000,000 of share premium on its statement of financial position. The number of ordinary shares issued and outstanding is 400,000 shares. The book value per share is a. ₤25. b. ₤15. c. ₤10. d. ₤.04.
Ans: a, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
237.
Which of the following is an incorrect statement about a corporation? a. A corporation is an entity separate and distinct from its owners. b. Creditors ordinarily have recourse only to corporate assets in satisfaction of their claims. c. A corporation may be formed in writing, orally, or implied. d. A corporation is subject to numerous government regulations.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
238.
Capital shares to which the charter has assigned a value per share is called a. par value shares. b. no-par value shares. c. stated value shares. d. assigned value shares.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12 - 46 Test Bank for Financial Accounting: IFRS Edition, 4e 239.
When ordinary shares are issued for non-cash assets, the assets should be recorded at a. only the fair value of the consideration given up. b. only the fair value of the consideration received. c. the book value of the ordinary shares issued. d. either the fair value of the consideration given up or the consideration received, whichever is more clearly evident.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
240.
When the selling price of treasury shares is greater than its cost, the company credits the difference to a. Gain on Sale of Treasury Shares. b. Share Premium–Treasury. c. Share Premium–Ordinary. d. Treasury Shares.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
241.
Sandwick Corporation was organized on January 1, 2020, with authorized capital of 750,000 ordinary shares with a $10 par value. During 2020, Sandwick issued 40,000 shares at $12 per share, purchased 4,000 treasury shares at $13 per share, and sold 4,000 treasury shares at $14 per share. What is the amount of total share premium at December 31, 2020? a. $0 b. $4,000 c. $80,000 d. $84,000
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
242.
The purchase of treasury shares a. decreases ordinary shares authorized. b. decreases ordinary shares issued. c. decreases ordinary shares outstanding. d. has no effect on ordinary shares outstanding.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
243.
Preference shareholders have a priority over ordinary shareholders as to a. dividends only. b. assets in the event of liquidation only. c. voting rights. d. both dividends and assets in the event of liquidation.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 244.
12 - 47
On January 2, 2017, Pacer Corporation issued 35,000 shares of 5% cumulative preference shares at $100 par value. On December 31, 2020, Pacer Corporation declared and paid its first dividend. What dividends are the preference shareholders entitled to receive in the current year before any distribution is made to ordinary shareholders? a. $0 b. $175,000 c. $525,000 d. $700,000
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
245.
Which of the following statements about a cash dividend is incorrect? a. The legality of a cash dividend depends on government laws. b. The legality of a dividend does not indicate a company's ability to pay a dividend. c. Dividends are not a liability until declared. d. Shareholders usually vote to determine the amount of income to be distributed in the form of a dividend.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
246.
The date a cash dividend becomes a binding legal obligation to a corporation is the a. declaration date. b. earnings date. c. payment date. d. record date.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
247.
Dillon Corporation splits its ordinary shares 2 for 1, when the market value is $30 per share. Prior to the split, Dillon had 50,000 ordinary shares with a $10 par value issued and outstanding. After the split, the par value of the shares a. remains the same. b. is reduced to $2 per share. c. is reduced to $5 per share. d. is reduced to $15 per share.
Ans: c, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
248.
Jennifer Company reports the following amounts for 2020: Net income Average shareholders' equity Preference dividends Par value preference shares
$ 155,000 1,000,000 35,000 200,000
The 2020 rate of return on ordinary shareholders' equity is a. 15.0%. b. 10.0%. c. 15.5%. d. 19.4%. Ans: a, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
12 - 48 Test Bank for Financial Accounting: IFRS Edition, 4e a
249. At December 31, the shareholders’ equity included Share capital–ordinary, $5 par value; 1,100,000 shares issued and 1,000,000 shares outstanding Share premium–ordinary Retained earnings Treasury shares, (100,000 shares) Total equity
$5,500,000 2,150,000 3,500,000 (700,000) $10,450,000
The book value per ordinary share is a. $9.50 b. $10.45 c. $11.15 d. $10.14 Ans: b, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity
12 - 49
BRIEF EXERCISES BE 250 Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or not applicable to the corporate form of business organization. A = Advantage D = Disadvantage N = Not Applicable Characteristics _____ 1. Separate legal entity _____ 2. Taxable entity resulting in additional taxes _____ 3. Continuous life _____ 4. Unlimited liability of owners _____ 5. Government regulations _____ 6. Separation of ownership and management _____ 7. Ability to acquire capital _____ 8. Ease of transfer of ownership Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 250 1. 2. 3. 4.
A D A N
(4 min.) 5. 6. 7. 8.
D D A A
BE 251 On July 6, XOT Corporation issued 2,000 ordinary shares with a €1.50 par. The market price of the shares on that date was €14 per share. Journalize the issuance of the shares. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 251 July 6
(3 min.)
Cash (2,000 × €14) ................................................................. Share Capital–Ordinary .................................................. Share Premium–Ordinary ..............................................
28,000 3,000 25,000
12 - 50 Test Bank for Financial Accounting: IFRS Edition, 4e BE 252 Donnelly Corporation is authorized to issue 1,000,000 ordinary shares with a $1 par value. During 2020, the company has the following share transactions. Jan. 15
Issued 500,000 ordinary shares at $7 per share.
Sept. 5
Purchased 30,000 ordinary shares for the treasury at $8 per share.
Instructions Journalize the transactions for Donnelly Corporation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 252 Jan. 15
Sept. 5
(5 min.)
Cash ..................................................................................... 3,500,000 Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................ Treasury Shares................................................................... Cash ............................................................................
500,000 3,000,000
240,000 240,000
BE 253 An inexperienced accountant for Duran Corporation made the following entries. July 1
Sept. 1
Cash ..................................................................................... Share Capital–Ordinary ............................................... (Issued 20,000 ordinary shares par value $6 per share)
170,000
Share Capital–Ordinary........................................................ Retained Earnings................................................................ Cash ............................................................................ (Purchased 4,000 shares issued on July 1 for the treasury at $15 per share)
36,000 24,000
170,000
60,000
Instructions On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 253 July 1
Sept. 1
(5 min.)
Cash ...................................................................................... Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................
170,000
Treasury Shares .................................................................... Cash ............................................................................
60,000
120,000 50,000 60,000
Corporations: Organization, Share Transactions, and Equity
12 - 51
BE 254 On September 5, Bertolli Corporation acquired 2,500 of its own $1 par ordinary shares for $24 per share. On October 15, 1,000 treasury shares are sold for $25 per share. Instructions Journalize the purchase and sale of the treasury shares assuming that the company uses the cost method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 254 Sept. 5 Oct. 15
(5 min.)
Treasury Shares (2,500 × $24) ............................................ Cash ............................................................................
60,000
Cash (1,000 × $25) .............................................................. Treasury Shares (1,000 × $24) ................................... Share Premium–Treasury ...........................................
25,000
60,000 24,000 1,000
BE 255 Warren Company had the following transactions. 1. Issued 6,000 ordinary shares with a stated value of €10 for €110,000. 2. Issued 3,000 preference shares with a $100 par value at €107 for cash. Instructions Prepare the journal entries to record the above share transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 255
(5 min.)
1. Cash................................................................................................. Share Capital–Ordinary .......................................................... Share Premium–Ordinary .......................................................
110,000
2. Cash................................................................................................. Share Capital–Preference ....................................................... Share Premium—Preference ..................................................
321,000
60,000 50,000 300,000 21,000
BE 256 On February 1, Burchess Corporation issued 4,000 preference shares with a $20 par value for $24 per share. Instructions Journalize the transaction. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 52 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 256 Feb. 1
(3 min.)
Cash ....................................................................................... Share Capital–Preference .............................................. Share Premium–Preference ........................................... (Issued 4,000 shares at $24 per share)
96,000 80,000 16,000
BE 257 On November 27, the board of directors of Henderson Company declared a $.30 per share dividend. The dividend is payable to shareholders of record on December 7 on December 24. Henderson has 25,500 ordinary shares with a $1 par outstanding at November 27. Journalize the entries needed on the declaration and payment dates. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 257 (4 min.) Nov. 27 Dec. 24
Cash Dividends .................................................................... Dividends Payable....................................................
7,650
Dividends Payable ............................................................... Cash .........................................................................
7,650
7,650 7,650
BE 258 On October 10, the board of directors of Pitcher Corporation declared a 15% share dividend. On October 10, the company had 10,000 ordinary shares with a $1 par issued and outstanding with a market price of $15 per share. The share dividend will be distributed on October 31 to shareholders of record on October 25. Journalize the entries needed for the declaration and distribution of the share dividend. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 258 (5 min.) Number of shares to be issued: 1,500 shares (small share dividend) Oct. 10
Oct. 31
Share Dividends (1,500 × $15) ............................................ Ordinary Share Dividends Distributable ................... Share Premium–Ordinary.........................................
22,500
Ordinary Share Dividends Distributable ............................... Share Capital–Ordinary ............................................
1,500
1,500 21,000 1,500
BE 259 Devons Company has 24,000 ordinary shares with a €1 par issued and outstanding. The company also has 2,000 shares of €100 par 4% cumulative preference shares outstanding. The company did not pay the preference dividends in 2019 or 2020. What amount of dividends must the company pay the preference shareholders in 2021 if they wish to pay the ordinary shareholders a dividend? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Corporations: Organization, Share Transactions, and Equity
12 - 53
Solution 259 (4 min.) Annual preference dividend: 2,000 × €100 × 4% = €8,000 Dividends for 2019, 2020 and 2021: €8,000 × 3 = €24,000 BE 260 On November 1, 2020, Huang Corporation’s equity section (in 000) is as follows: Share capital–ordinary, ¥10 par value Share premium–ordinary Retained earnings Total equity
¥600,000 180,000 200,000 ¥980,000
On November 1, Huang declares and distributes a 10% share dividend when the market value is ¥14 per share. Instructions Indicate the balances in the equity accounts after the share dividend has been distributed. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 260 (5 min.) Share Capital–Ordinary Share Premium–Ordinary Retained Earnings Total Equity
¥660,000* 204,000** 116,000*** ¥980,000
*¥600,000 + (60,000 × .10 × ¥10) **¥180,000 + (60,000 × .10 × ¥4) ***¥200,000 – (60,000 × .10 × ¥14) BE 261 Match each item/event pair below with the indicated change in the item. An individual classification may be used more than once, or not at all. For each dividend, assume that both declaration and payment or distribution has occurred. Classifications A. Item increases B. Item decreases C. Item is unchanged D. Direction of change cannot be determined
____ 1.
Item Par value per share
Event Share split
____ 2. ____ 3.
Total retained earnings Share premium
Share dividend Share dividend (small)
____ 4. ____ 5.
Total equity Total retained earnings
Restriction of retained earnings Cash dividend
12 - 54 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 261 (3 min.) 1. B 4. C 2 B 5. B 3. A BE 262 Identify which of the following items would be reported as additions (A) or deductions (D) in a Retained Earnings Statement. 1. Net Income 2. Net Loss 3. Cash Dividends 4. Share Dividends Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 262 (2 min.) 1. A 4. D 2. D 3. D BE 263 The balance in retained earnings on January 1, 2020, for Blakely Inc., was $650,000. During the year, the corporation paid cash dividends of $70,000 and distributed a share dividend of $20,000. Net income for 2020 was $110,000. Instructions Prepare the retained earnings statement for 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 263 (5 min.) BLAKELY INC. Retained Earnings Statement For the Year Ended December 31, 2020 Balance, January 1 Add: Net income Less: Cash dividends Share dividend Balance, December 31
$650,000 110,000 760,000 $70,000 20,000
90,000 $670,000
Corporations: Organization, Share Transactions, and Equity
12 - 55
BE 264 The following information is available for Ritter Corporation:
Average ordinary shareholders’ equity Average total shareholders’ equity Ordinary dividends declared and paid Preference dividends declared and paid Net income
2020 €1,500,000 2,000,000 72,000 30,000 300,000
2019 €1,000,000 1,500,000 50,000 30,000 250,000
Instructions Compute the return on ordinary shareholders’ equity for both years. Briefly comment on your findings. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 264 (5 min.) Return on ordinary shareholders’ equity :
2019
2020
€250,000 – €30,000 ————————— = 22% €1,000,000
€300,000 – €30,000 ————————— = 18% €1,500,000
Ritter’s return on ordinary shareholders’ equity ratio decreased to approximately 18% during 2020. Ritter’s earnings increased during 2020 by 20%, but its average ordinary shareholders’ equity increased by 50%, causing the return on ordinary shareholders’ equity to decline to 18%. a
BE 265
Bellingham Corporation has the following equity balances at December 31, 2020. Share Capital–Ordinary, £1 par Share Premium–Ordinary Retained Earnings Total
£5,000 24,500 62,500 £92,000
Calculate book value per share. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 265
(4 min.)
Number of shares outstanding: £5,000/£1 = 5,000 Book value per share: £92,000/5,000 = £18.40
12 - 56 Test Bank for Financial Accounting: IFRS Edition, 4e
EXERCISES Ex. 266 The following selected transactions pertain to Nesley Corporation: Jan.
3
Feb. 10
Issued 150,000 ordinary shares, €10 par value, for €22 per share. Issued 8,000 ordinary shares, €10 par value, in exchange for special purpose equipment. Nesley Corporation's ordinary shares are actively traded on the share exchange at €25 per share.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 266
(8–10 min.)
January 3 Cash ...................................................................................................... 3,300,000 Share Capital–Ordinary ............................................................... Share Premium–Ordinary ............................................................ (To record issuance of ordinary shares in excess of par) February 10 Equipment ............................................................................................. Share Capital–Ordinary ............................................................... Share Premium–Ordinary ............................................................ (To record issuance of shares for equipment)
1,500,000 1,800,000
200,000 80,000 120,000
Ex. 267 The corporate charter of Gregory Corporation allows the issuance of a maximum of 2,500,000 ordinary shares with a $1 par value. During its first three years of operation, Gregory issued 1,500,000 shares at $15 per share. It later acquired 30,000 treasury shares for $25 per share. Instructions Based on the above information, answer the following questions: (a) How many shares were authorized? (b) How many shares were issued? (c) How many shares are outstanding? (d) What is the balance of the Share Capital–Ordinary account? (e) What is the balance of the Treasury Shares account? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 267 (a) (b) (c) (d) (e)
(8–11 min.)
2,500,000 shares are authorized. 1,500,000 shares were issued. 1,470,000 shares are outstanding (1,500,000 issued less 30,000 in treasury). The balance of the Share Capital–Ordinary account is $1,500,000 ($1 × 1,500,000 shares = $1,500,000). The balance of the Treasury Shares account is $750,000 ($25 × 30,000 shares = $750,000).
Corporations: Organization, Share Transactions, and Equity
12 - 57
Ex. 268 Horner Corporation is authorized to issue 1,000,000 ordinary shares with a $5 par value. During 2020, its first year of operation, the company has the following share transactions. Jan. 1 Issued 500,000 ordinary shares at $7 per share. Jan. 15 Paid the government $2,000 for incorporation fees. Jan. 30 Attorneys for the company accepted 500 ordinary shares as payment for legal services rendered in helping the company incorporate. The legal services are estimated to have a value of $5,000. July 2 Issued 100,000 shares for land. The land had an asking price of $900,000. The stock is currently selling on a national exchange at $8 per share. Sept. 5 Purchased 15,000 shares for the treasury at $10 per share. Dec. 6 Sold 11,000 treasury shares at $11 per share. Instructions Journalize the transactions for Horner Corporation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 268 Jan.
1
Jan. 15 Jan. 30
July
2
Sept. 5 Dec.
6
(12–14 min.)
Cash ..................................................................................... 3,500,000 Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................ Organization Expense .......................................................... Cash ............................................................................
2,000
Organization Expense .......................................................... Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................
5,000
Land ..................................................................................... Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................
800,000
Treasury Shares................................................................... Cash ............................................................................
150,000
Cash ..................................................................................... Treasury Shares .......................................................... Share Premium–Treasury ..........................................
121,000
2,500,000 1,000,000 2,000 2,500 2,500 500,000 300,000 150,000 110,000 11,000
Ex. 269 Prepare the necessary journal entry for each of the following transactions for Renfro Corporation. (a) Issued 2,000 ordinary shares with a $5 par value for $16 per share. (b) Issued 5,000 shares for land advertised for sale at $80,000. Renfro's shares are actively traded at a market price of $15 per share. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 58 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 269
(5 min.)
(a) Cash (2,000 × $16)......................................................................... Share Capital–Ordinary........................................................ Share Premium–Ordinary ....................................................
32,000
(b) Land (5,000 × $15) ......................................................................... Share Capital–Ordinary........................................................ Share Premium–Ordinary ....................................................
75,000
10,000 22,000 25,000 50,000
Ex. 270 Randolph Corporation issued 9,000 ordinary shares. Instructions Prepare the entry for the issuance under the following assumptions. (a) The shares had a par value of $5 per share and were issued for a total of $65,000. (b) The shares had a par value of $5 per share and were issued to attorneys for services during in-corporation valued at $65,000. (c) The shares had a par value of $5 per share and were issued for land worth $65,000. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 270
(8–10 min.)
(a) Cash Share Capital–Ordinary (9,000 ´ $5) Share Premium–Ordinary (b) Organization Expense Share Capital–Ordinary (9,000 ´ $5) Share Premium–Ordinary (c) Land Share Capital–Ordinary (9,000 ´ $5) Share Premium–Ordinary
65,000 45,000 20,000 65,000 45,000 20,000 65,000 45,000 20,000
Ex. 271 1. Name at least three factors that influence the market value of shares. 2. Corporations acquire treasury shares for a variety of purposes. Name three reasons why treasury shares may be acquired by a corporation. Ans: N/A, LO: 1, 2, Bloom: C, Difficulty: Easy, Min: 9, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity Solution 271
12 - 59
(9–12 min.)
1. Factors that influence the market value of shares: (a) Anticipated future earnings of the company. (b) Expected dividend rate per share. (c) Current financial position. (d) Current state of the economy. (e) Current state of the securities market. 2. Reasons why a company may acquire treasury shares: (a) To reissue the shares to officers and employees under bonus and share compensation plans. (b) To increase trading of the company's shares in the securities market in the hopes of enhancing its market value. (c) To have additional shares available for use in the acquisition of other companies. (d) To reduce the number of shares outstanding and, thereby, increase earnings per share. Ex. 272 The following items were shown on the statement of financial position of Herman Corporation on December 31, 2020: Equity Share Capital–Ordinary, €5 par value, 360,000 shares authorized; ______ shares issued and ______ outstanding ................................. €1,650,000 Share Premium–Ordinary ...................................................................................... 165,000 Retained Earnings .............................................................................................. 750,000 Less: Treasury Shares (15,000 shares)............................................................. (180,000) Total Equity ............................................................................................. €2,385,000 Instructions Complete the following statements and show your computations. (a) The number of ordinary shares issued was _______________. (b) The number of ordinary shares outstanding was ____________. (c) The total sales price of the ordinary shares when issued was €____________. (d) The cost per treasury share was €_______________. (e) The average issue price of the ordinary shares was €______________. (f)
Assuming that 25% of the treasury shares are sold at €20 per share, the balance in the Treasury Shares account would be €_______________.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
12 - 60 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 272 (a)
(10–15 min.)
The number of ordinary shares issued was 330,000. €1,650,000 ÷ €5 par value = 330,000 shares issued.
(b)
The number of ordinary shares outstanding was 315,000. 330,000 issued less 15,000 in treasury = 315,000 shares outstanding
(c)
The total sales price of the ordinary shares when issued was €1,815,000. Share capital €1,650,000 Plus: share premium 165,000 Total €1,815,000
(d)
The cost per treasury share was € 12. €180,000 ÷ 15,000 = €12 per share.
(e)
The average issue price of the ordinary shares was €5.50. €1,815,000 ÷ 330,000 shares = €5.50 per share.
(f)
Assuming 25% of the treasury shares is sold at €20 per share, the balance in the Treasury Shares account would be €135,000. 11,250 shares × €12 = €135,000.
Ex. 273 The equity section of Linton Corporation at December 31 is as follows. LINTON CORPORATION Statement of Financial Position (partial) Equity Share capital–preference, cumulative, 10,000 shares authorized, 5,000 shares issued and outstanding Share capital–ordinary, no par, 750,000 shares authorized, 150,000 shares issued Retained earnings Less: Treasury shares (5,000 ordinary shares) Total equity
€ 250,000 1,500,000 2,050,000 (64,000) €3,736,000
Instructions From a review of the equity section, answer the following questions. (a) How many ordinary shares are outstanding? (b) Assuming there is a stated value, what is the stated value of the ordinary shares? (c) What is the par value of the preference shares? (d) If the annual dividend on preference shares is €10,000, what is the dividend rate on preference shares? (e) If dividends of €36,000 were in arrears on preference shares, what would be the balance in Retained Earnings? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity Solution 273
12 - 61
(4 min.)
(a) Ordinary shares outstanding is 145,000 shares. (Issued shares 150,000 less treasury shares 5,000.) (b) The stated value of ordinary shares is €10 per share. (Ordinary shares issued €1,500,000 ÷ 150,000 shares.) (c) The par value of preference shares is €50 per share. (Preference shares €250,000 ÷ 5,000 shares.) (d) The dividend rate is 4%, or (€10,000 ÷ €250,000). (e) The Retained Earnings balance is still €2,050,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements. Ex. 274 On January 1, 2020, the equity section of Lopez Corporation shows: Share capital–ordinary ($5 par value) $1,500,000; share premium–ordinary $1,000,000; and retained earnings $1,200,000. During the year, the following treasury share transactions occurred. Mar. 1 Purchased 30,000 shares for cash at $14 per share. July 1 Sold 6,000 treasury shares for cash at $17 per share. Sept. 1 Sold 5,000 treasury shares for cash at $13 per share. Instructions (a) Journalize the treasury share transactions. (b) Restate the entry for September 1, assuming the treasury shares were sold at $10 per share. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 274 (a) Mar. 1 July
1
(4 min.) Treasury Shares (30,000 ´ $14)…………………………….. 420,000 Cash…………………………………………….………..…
420,000
Cash (6,000 ´ $17)……………………………………………. 102,000 Treasury Shares (6,000 ´ $14)………………………… Share Premium–Treasury……………………………… (6,000 ´ $3)
Sept. 1 Cash (5,000 ´ $13) ……………………………………...…… Share Premium–Treasury (5,000 ´ $1)…………………… Treasury Shares (5,000 ´ $14)………………………
84,000 18,000
65,000 5,000 70,000
(b) Sept. 1 Cash (5,000 ´ $10) ……………………………………………. 50,000 Share Premium–Treasury…………………………………….. 18,000 Retained Earnings……………………………………………... 2,000 Treasury Shares (5,000 ´ $14)……………………… 70,000 Ex. 275 On May 1, Hite Corporation purchased 1,000 of its €10 par value ordinary shares at a cash price of €13/share. On July 15, 600 treasury shares were sold for cash at €15/share. Instructions Journalize the two transactions.
12 - 62 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 275
(5–7 min.)
May 1 Treasury Shares...................................................................... Cash ............................................................................
13,000
Jul. 15 Cash (600 × €15) .................................................................... Treasury Shares .......................................................... Share Premium–Treasury ...........................................
9,000
13,000 7,800 1,200
Ex. 276 Yunger Corporation has the following equity accounts on January 1, 2020: Share Capital–Ordinary, £10 par value ............................... £1,500,000 Share Premium–Ordinary .................................................... 200,000 Retained Earnings ............................................................... 500,000 Total Equity .................................................................... £2,200,000 The company uses the cost method to account for treasury share transactions. During 2020, the following treasury share transactions occurred: April August October
1 1 1
Purchased 9,000 shares at £16 per share. Sold 3,000 shares at £18 per share. Sold 3,000 shares at £15 per share.
Instructions (a)
Journalize the treasury share transactions for 2020.
(b)
Prepare the equity section of the statement of financial position for Yunger Corporation at December 31, 2020. Assume net income was £110,000 for 2020.
Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 276
(15–20 min.)
(a)
Treasury Shares .......................................................... Cash ................................................................... (To record purchase of treasury shares)
144,000
Cash ............................................................................ Treasury Shares (3,000 × £16) .......................... Share Premium–Treasury (3,000 × £2) .............. (To record sale of treasury shares)
54,000
Cash ............................................................................ Share Premium–Treasury (3,000 × £1)....................... Treasury Shares (3,000 × £16) .......................... (To record sale of treasury shares)
45,000 3,000
Apr. 1
Aug. 1
Oct. 1
(b)
144,000
48,000 6,000
48,000
Equity Share capital–ordinary, £10 par ........................................ Share premium–ordinary................................................... £200,000 Share premium–treasury................................................... 3,000
£1,500,000 203,000
Corporations: Organization, Share Transactions, and Equity Retained earnings £500,000 + £110,000) ......................... Less: Treasury shares (3,000 shares) ............................. Total equity ............................................................
12 - 63
610,000 (48,000) £2,265,000
Ex. 277 Agler Corporation purchased 4,000 of its €5 par value ordinary shares for a cash price of €12 per share. Two months later, Agler sold the treasury shares for a cash price of €10 per share. Instructions Prepare the journal entry to record the sale of the treasury shares assuming (a) No balance in Share Premium–Treasury. (b) A €5,000 balance in Share Premium–Treasury. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 277
(7–9 min.)
(a) Cash ............................................................................................... Retained Earnings [(€12 – €10) × 4,000] ....................................... Treasury Shares...................................................................
40,000 8,000
(b) Cash ............................................................................................... Share Premium–Treasury .............................................................. Retained Earnings .......................................................................... Treasury Shares................................................................... Ex. 278
40,000 5,000 3,000
48,000
48,000
An inexperienced accountant for Otto Corporation made the following entries. July 1
Cash ..................................................................................... 210,000 Share Capital–Ordinary ............................................... 210,000 (Issued 15,000 no-par ordinary shares, stated value $10 per share)
Sept. 1
Share Capital–Ordinary........................................................ 28,000 Retained Earnings................................................................ 6,000 Cash ............................................................................ 34,000 (Purchased 2,000 treasury shares (issued on July 1) at $17 per share)
Dec. 1
Cash ..................................................................................... Share Capital–Ordinary ............................................... Gain on Sale of Shares ............................................... (Sold 1,000 treasury shares at $20 per share)
20,000 14,000 6,000
Instructions (a) On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.) (b) Prepare the correcting entries that should be made to correct the accounts of Otto Corporation. (Do not reverse the original entry.) Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 64 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 278 (a) July 1
Sept. 1 Dec. 1
(b) July 1 Sept. 1
Dec. 1
(15–20 min.) Cash ............................................................................... Share Capital–Ordinary ......................................... Share Premium–Ordinary ......................................
210,000
Treasury Shares ............................................................. Cash ......................................................................
34,000
Cash ............................................................................... Treasury Shares .................................................... Share Premium–Treasury .....................................
20,000
Share Capital-Ordinary .................................................. Share Premium–Ordinary ......................................
60,000
Treasury Shares ............................................................. Share Capital–Ordinary ......................................... Retained Earnings .................................................
34,000
Share Capital–Ordinary .................................................. Gain on Sale of Shares .................................................. Treasury Shares .................................................... Share Premium–Treasury .....................................
14,000 6,000
150,000 60,000 34,000 17,000 3,000 60,000 28,000 6,000
17,000 3,000
Ex. 279 On January 1, 2020, Fairly Company issued 30,000 ordinary shares with a €2 par value for €150,000. On March 1, 2020, the company purchased 4,000 ordinary shares for €8 per share for the treasury. On June 1, 2020, 1,000 of the treasury shares are sold for €10 per share. On September 1, 2020, 2,000 treasury shares are sold at €6 per share. Instructions Journalize the share transactions of Fairly Company in 2020. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 279 Jan.
1
March 1 June 1
Sept. 1
(8–12 min.)
Cash ..................................................................................... Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................
150,000
Treasury Shares................................................................... Cash ............................................................................
32,000
Cash ..................................................................................... Treasury Shares .......................................................... Share Premium–Treasury ...........................................
10,000
Cash ..................................................................................... Share Premium–Treasury .................................................... Retained Earnings................................................................ Treasury Shares ..........................................................
12,000 2,000 2,000
60,000 90,000 32,000 8,000 2,000
16,000
Corporations: Organization, Share Transactions, and Equity
12 - 65
Ex. 280 Yount Company originally issued 30,000 ordinary shares with a $5 par for $180,000 on January 3, 2020. Yount purchased 1,500 treasury shares for $12,000 on November 2, 2020. On December 6, 2020, 600 treasury shares are sold for $6,000. Instructions Prepare journal entries to record these share transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 280 Jan.
Nov. Dec.
3
2 6
(9–13 min.)
Cash ..................................................................................... Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................
180,000
Treasury Shares................................................................... Cash ............................................................................
12,000
Cash ..................................................................................... Treasury Shares .......................................................... Share Premium–Treasury ...........................................
6,000
150,000 30,000 12,000 4,800 1,200
Ex. 281 The equity section of Ankiel Corporation's statement of financial position at December 31, 2019, appears below: Equity Share capital–ordinary, €10 par, 400,000 shares authorized, 250,000 shares issued Share premium–ordinary Retained earnings Total equity
€$2,500,000 1,200,000 600,000 €4,300,000
During 2020, the following share transactions occurred: Jan.
18
Issued 50,000 ordinary shares at €30 per share.
Aug. 20
Purchased 25,000 ordinary shares of Ankiel Corporation at €24 per share to be held in the treasury.
Nov.
Reissued 9,000 treasury shares for €28 per share.
5
Instructions (a) Prepare the journal entries to record the above share transactions. (b) Prepare the equity section of the statement of financial position for Ankiel Corporation at December 31, 2020. Assume that net income for the year was €100,000 and that no dividends were declared. Ans: N/A, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 66 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 281 (a) Jan. 18
Aug. 20
Nov. 5
(16–22 min.) Cash ............................................................................... 1,500,000 Share Capital–Ordinary ......................................... Share Premium–Ordinary ...................................... (To record issuance of 50,000 ordinary shares)
500,000 1,000,000
Treasury Shares ............................................................. 600,000 Cash ...................................................................... (To record purchase of 25,000 treasury shares at cost)
600,000
Cash ............................................................................... 252,000 Treasury Shares .................................................... Share Premium–Treasury ..................................... (To record sale of 9,000 treasury shares at €28 per share)
216,000 36,000
(b) Equity Share capital–ordinary, €10 par value, 400,000 shares authorized, 300,000 shares issued, and 284,000 shares outstanding Share premium–ordinary Share premium–treasury Retained earnings Less: Treasury shares (16,000 shares) Total equity
€3,000,000 €2,200,000 36,000
2,236,000 700,000 384,000 €5,552,000
Ex. 282 Tyler Corporation has 100,000 preference shares with a €40 par value authorized. During the year, it had the following transactions related to its preference shares. (a) Issued 30,000 shares at €55 per share. (b) Issued 10,000 shares for equipment having a €700,000 asking price. The shares had a fair value of €60 per share Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 282
(5–7 min.)
(a) Cash ............................................................................................... 1,650,000 Share Capital--Preference .................................................. Share Premium–Preference................................................. (b) Equipment (10,000 × €60) .............................................................. Share Capital--Preference .................................................. Share Premium–Preference.................................................
1,200,000 450,000
600,000 400,000 200,000
Corporations: Organization, Share Transactions, and Equity
12 - 67
Ex. 283 Carson Corporation has the following shares outstanding at December 31, 2020: 7% Preference shares, $100 par value, cumulative 15,000 shares issued and outstanding ....................................................
$1,500,000
Ordinary shares, no par, $10 stated value, 500,000 shares authorized, 350,000 shares issued and outstanding ..................................................
3,500,000
The preference shares were issued at $110 per share. The ordinary shares were issued at an average per share price of $16. Instructions Prepare a partial equity section of the statement of financial position at December 31, 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 283
(10–15 min.)
Equity Share capital–preference 7%, $100 par value, cumulative 15,000 shares issued and outstanding Share capital–ordinary, no par, $10 stated value, 500,000 shares authorized, 350,000 shares issued and outstanding Share premium—preference $ 150,000* Share premium—ordinary Total equity 2,100,000**
$1,500,000 3,500,000
2,250,000 $7,250,000 *15,000 shares × $10 = $150,000. **350,000 shares × $6 = $2,100,000. Ex. 284 In its first year of operations, Webber Corporation had the following transactions pertaining to its €20 par value preference shares. Feb. 1 Nov. 1
Issued 6,000 shares for cash at €41 per share. Issued 3,000 shares for cash at €44 per share.
Instructions (a) Journalize the transactions. (b) Indicate the amount to be reported for (1) preference shares, and (2) share premium— preference at the end of the year. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
12 - 68 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 284 (a) Feb. 1
Nov. 1
(8–12 min.) Cash ................................................................................ Share Capital–Preference ..................................... Share Premium–Preference .................................. (Issued 6,000 shares at €41 per share)
246,000
Cash ................................................................................ Share Capital–Preference ..................................... Share Premium––Preference ................................ (Issued 3,000 shares at €44 per share)
132,000
120,000 126,000
60,000 72,000
(b) (1) Preference shares: €120,000 + €60,000 = €180,000. (2) Share Premium—Preference €126,000 + €72,000 = $198,000. Ex. 285 Eby Corporation issued 200,000 shares of $20 par value, cumulative, 5% preference shares on January 1, 2018, for $4,800,000. In December 2020, Eby declared its first dividend of $800,000. Instructions (a) Prepare Eby's journal entry to record the issuance of the preference shares. (b) If the preference shares are cumulative, how much of the $800,000 would be paid to ordinary shareholders? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 285 (a)
(5-8 min.)
Cash …………………………………………….………..…….…….4,800,000 Share Capital–Preference (200,000 ´ $20) …….…….…… 4,000,000 Share Premium–Preference…….…….…….…….…….…… 800,000
(b) Total Dividend Less: Preference Share Dividend [($4,000,000 ´ 5%) ´ 3] Ordinary Share Dividends
$800,000 600,000 $200,000
Corporations: Organization, Share Transactions, and Equity
12 - 69
Ex. 286 The following equity accounts (in 000), arranged alphabetically, are in the ledger of Zhang Corporation at December 31, 2020. Retained Earnings Share Capital–Ordinary (¥5 stated value) Share Capital–Preference (8%, ¥100 par, noncumulative) Share Premium—Ordinary Share Premium–Preference Treasury Shares (10,000 shares)
¥1,334,000 2,200,000 500,000 800,000 290,000 110,000
Instructions Prepare the equity section of the statement of financial position at December 31, 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 286
(4-6 min.) ZHANG CORPORATION Partial Statement of Financial Position December 31, 2020
Equity 8% Share capital–preference, ¥100 par value, noncumulative, 5,000 shares issued Share capital–ordinary, no par, ¥5 stated value, 440,000 shares issued and 430,000 shares outstanding Share premium–preference Share premium–ordinary Retained earnings Less: Treasury shares (10,000 shares) Total equity
¥ 500,000
2,200,000 ¥290,000 800,000
1,090,000 1,334,000 110,000 ¥5,014,000
Ex. 287 Place each of the items listed below in the appropriate location in the equity section of a statement of financial position. Share capital–ordinary, $10 stated value Retained earnings Share capital–preference, 6% $100 par value Share premium—preference Share premium—ordinary Treasury shares Share premium–treasury Ans: N/A, LO: 4, Bloom: C, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
12 - 70 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 287
(6–9 min.)
6% Share capital–preference, $100 par value Share capital–ordinary, $10 stated value Share premium–preference Share premium–ordinary Share premium–treasury Retained earnings Less: Treasury shares Total equity Ex. 288 The equity section of Foley Corporation at December 31, 2019, included the following: 4% Share capital–preference, €100 par value, cumulative, 10,000 shares authorized, 8,000 shares issued and outstanding.......
€ 800,000
Share capital–ordinary, €10 par value, 250,000 shares authorized, 200,000 shares issued and outstanding .........................
2,000,000
Dividends were not declared on the preference shares in 2019 and are in arrears. On September 15, 2020, the board of directors of Foley Corporation declared dividends on the preference shares for 2019 and 2020, to shareholders of record on October 1, 2020, payable on October 15, 2020. On November 1, 2020, the board of directors declared a €.90 per share dividend on the ordinary shares, payable November 30, 2020, to shareholders of record on November 15, 2020. Instructions Prepare the journal entries that should be made by Foley Corporation on the dates indicated below: September 15, 2020 November 1, 2020 October 1, 2020 November 15, 2020 October 15, 2020 November 30, 2020 Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 288 (12–15 min.) 9/15/20
Cash Dividends (€800,000 × .04 × 2) .................................. Preference Dividends Payable .................................... (To record declaration of dividends in arrears and the current year's preference dividend)
64,000 64,000
10/1/20
(No entry required.)
10/15/20
Preference Dividends Payable ............................................. Cash ............................................................................ (To record payment of cash preference dividend)
64,000
Cash Dividends .................................................................... Ordinary Dividends Payable ........................................ (To record declaration of cash dividend on ordinary shares)
180,000
11/1/20
64,000
180,000
Corporations: Organization, Share Transactions, and Equity
12 - 71
Solution 288 (Cont.) 11/15/20
(No entry required.)
11/30/20
Ordinary Dividends Payable................................................. Cash ............................................................................ (To record payment of ordinary cash dividends)
180,000 180,000
Ex. 289 Richman Corporation has 120,000 ordinary shares with a €5 par value outstanding. It declared a 15% share dividend on June 1 when the market price per share was €12. The shares were issued on June 30. Instructions Prepare the necessary entries for the declaration and payment of the share dividend. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 289 (6–8 min.) June 1
June 30
Share Dividends (120,000 × .15 × €12) ............................... Ordinary Share Dividends Distributable ...................... Share Premium–Ordinary............................................
216,000
Ordinary Share Dividends Distributable ............................... Share Capital–Ordinary ...............................................
90,000
90,000 126,000 90,000
Ex. 290 Kenner Corporation's equity section at December 31, 2019 appears below: Equity Share capital–ordinary, $10 par, 60,000 shares outstanding Share premium–ordinary Retained earnings Total equity
$600,000 150,000 150,000 $900,000
On June 30, 2020, the board of directors of Kenner Corporation declared a 15% share dividend, payable on July 31, 2020, to shareholders of record on July 15, 2020. The fair value of Kenner Corporation's shares on June 30, 2020, was $15 per share. On December 1, 2020, the board of directors declared a 2 for 1 share split effective December 15, 2020. Kenner Corporation's shares were selling for $20 on December 1, 2020, before the share split was declared. The par value of the shares was adjusted. Net income for 2020 was $190,000 and there were no cash dividends declared. Instructions (a) Prepare the journal entries on the appropriate dates to record the share dividend and the share split. (b) Fill in the amount that would appear in the equity section for Kenner Corporation at December 31, 2020, for the following items: 1. Share capital–ordinary
$____________
2. Number of shares outstanding
_____________
12 - 72 Test Bank for Financial Accounting: IFRS Edition, 4e 3. Par value per share
$____________
Corporations: Organization, Share Transactions, and Equity Ex. 290
12 - 73
(Cont.)
4. Share premium
$____________
5. Retained earnings
$____________
6. Total equity
$____________
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 290 (12–16 min.) (a) 6/30/20
Share Dividends ............................................................. Ordinary Share Dividends Distributable ................ Share Premium–Ordinary ...................................... (To record declaration of 15% share dividend, 60,000 × 15% = 9,000 × $15 = $135,000)
7/15/20
(No entry required.)
7/31/20
Ordinary Share Dividends Distributable ......................... Share Capital–Ordinary ......................................... (To record issuance of 9,000 shares in a share dividend)
12/1/20
135,000 90,000 45,000
90,000 90,000
(No entry required.)
12/15/20 Memo: 138,000 ordinary shares outstanding $5 par value. (b)
1. 2. 3. 4. 5. 6.
Share capital–ordinary Number of shares outstanding Par value per share Share premium–ordinary Retained earnings Total equity
$ 690,000 138,000 $ 5 $ 195,000 $ 205,000 $1,090,000
Ex. 291 Derek Corporation was organized on January 1, 2019. During its first year, the corporation issued 40,000 preference shares with a €5 par value and 400,000 ordinary shares with a €1 par value. At December 31, the company declared the following cash dividends: 2019 2020 2021
€ 6,000 €30,000 €70,000
Instructions (a) Show the allocation of dividends to each class of shares, assuming the preference shares dividend is 5% and cumulative. (b) Journalize the declaration of the cash dividend at December 31, 2021 using the assumption of part (a).
12 - 74 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 291 (9–13 min.) (a) Preference 2019 € 6,000 2020 14,000 2021 10,000 (b)
Ordinary € -016,000 60,000
Total € 6,000 30,000 70,000
Cash Dividends ............................................................................. Preference Dividends Payable ............................................. Ordinary Dividends Payable.................................................
70,000 10,000 60,000
Ex. 292 On November 1, 2020, Norris Corporation's equity section is as follows: Share capital–ordinary, £10 par value Share premium–ordinary Retained earnings Total equity
£ 600,000 205,000 240,000 £1,045,000
On November 1, Norris declares and distributes a 20% share dividend when the market value is £13 per share. Instructions Indicate the balances in the equity accounts after the share dividend has been distributed. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 292 (3–5 min.) Share capital–ordinary Share premium–ordinary Retained earnings Total equity
£ 720,000 241,000 84,000 £1,045,000
Ex. 293 During 2020, Pine Corporation had the following transactions and events: 1. Issued par value preference shares for cash at par value. 2. Issued par value ordinary shares for cash at an amount greater than par value. 3. Completed a 2 for 1 share split in which the $10 par value ordinary shares were changed to $5 par value shares. 4. Declared a small share dividend when the market value was higher than the par value. 5. Declared a cash dividend. 6. Issued the ordinary shares required by the share dividend declaration in 4. above. 7. Issued par value ordinary shares for cash at par value. 8. Paid the cash dividend.
Corporations: Organization, Share Transactions, and Equity Ex. 293
12 - 75
(Cont.)
Instructions Indicate the effect(s) of each of the foregoing items on the subdivisions of equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect. Item
Share Capital
Share Premium
Retained Earnings
Ans: N/A, LO: 3, 4, Bloom: C, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 293 (8–12 min.)
Item 1. 2. 3. 4. 5. 6. 7. 8.
Share Capital I I NE I NE NE I NE
Share Premium NE I NE I NE NE NE NE
Retained Earnings NE NE NE D D NE NE NE
Ex. 294 The following information is available for Ellis Corporation: Share Capital–Ordinary (€5 par) Retained Earnings
€1,500,000 600,000
A 10% share dividend is declared and paid when the market value was €15 per share. Instructions Compute each of the following after the share dividend. (a) Total equity. (b) Number of shares outstanding. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 294 (6–8 min.) (a) Total equity = €2,100,000 (€1,500,000 + €600,000)* *or (€1,500,000 × 110%) + [(€15–€5) × 30,000] + [€600,000 – (30,000 × €15)] (b) Number of shares outstanding = 330,000 [(€1,500,000 ÷ €5) × 110%]
12 - 76 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 295 On January 1, 2020, Penton Corporation had $2,000,000 of $10 par value ordinary shares outstanding that were issued at par and retained earnings of $1,000,000. The company issued 200,000 ordinary shares at $13 per share on July 1. On December 15, the board of directors declared a 10% share dividend to shareholders of record on December 31, 2020, payable on January 15, 2021. The market value of Penton Corporation shares was $15 per share on December 15 and $16 per share on December 31. Net income for 2020 was $500,000. Instructions (1) Journalize the issuance of shares on July 1 and the declaration of the share dividend on December 15. (2) Prepare the equity section of the statement of financial position for Penton Corporation at December 31, 2020. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 295 (10–15 min.) (1) July
1 Cash ............................................................................... 2,600,000 Share Capital–Ordinary ...................................... Share Premium–Ordinary ...................................
Dec. 15 Share Dividends (40,000 × $15/sh)................................ Ordinary Share Dividends Distributable ............. Share Premium–Ordinary ...................................
2,000,000 600,000
600,000 400,000 200,000
($2,000,000 ÷ $10 = 200,000 + 200,000 = 400,000 shares × .10 = 40,000 shares (2) Equity Share capital–ordinary, $10 par value, 400,000 shares issued and outstanding Ordinary share dividends distributable Share premium–ordinary Retained earnings Total equity
$4,000,000 400,000 800,000 900,000 $6,100,000
Ex. 296 On January 1, 2020, Dolan Corporation had 60,000 ordinary shares with a €1 par value issued and outstanding. During the year, the following transactions occurred: Mar.
1
Issued 20,000 ordinary shares for €400,000.
June
1
Declared a cash dividend of €2 per share to shareholders of record on June 15.
June 30
Paid the €2 cash dividend.
Dec.
Purchased 4,000 ordinary shares for the treasury for €22 per share.
1
Dec. 15
Declared a cash dividend on outstanding shares of €2.25 per share to shareholders of record on December 31.
Instructions Prepare journal entries to record the above transactions.
Corporations: Organization, Share Transactions, and Equity
12 - 77
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 296 (12–17 min.) Mar. 1 Cash ..................................................................................... Share Capital–Ordinary ............................................... Share Premium–Ordinary............................................ June 1
June 30 Dec.
1
Dec. 15
400,000 20,000 380,000
Cash Dividends .................................................................... Dividends Payable....................................................... (80,000 × €2 = €160,000)
160,000
Dividends Payable ............................................................... Cash ............................................................................
160,000
Treasury Shares................................................................... Cash ............................................................................
88,000
Cash Dividends (76,000 × €2.25) ........................................ Dividends Payable.......................................................
171,000
160,000
160,000 88,000 171,000
Ex. 297 Reese Company reported retained earnings at December 31, 2019, of $330,000. Reese had 160,000 ordinary shares outstanding throughout 2020. The following transactions occurred during 2020. 1. Net income was $225,000. 2. A cash dividend of $0.50 per share was declared and paid. 3. A 10% share dividend was declared and distributed when the market price per share was $15 per share. Instructions Prepare a retained earnings statement for 2020. Ans: N/A, LO: 3,4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 297 REESE COMPANY Retained Earnings Statement For the Year Ended December 31, 2020 Balance, January 1, Add: Net income $ 80,0001 240,0002
Less: Cash dividends Share dividends Balance, December, 31 1
(160,000 X $.50/sh)
2
(160,000 X .10 X $15/sh)
$ 330,000 225,000 555,000 (320,000) $235,000
12 - 78 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 298 Harrington Company reported the following balances at December 31, 2019: share capital– ordinary €500,000; share premium–ordinary €100,000; retained earnings €250,000. During 2020, the following transactions affected equity. 1. 2. 3. 4.
Issued preference shares with a par value of €150,000 for €220,000. Purchased treasury shares (ordinary) for €30,000. Earned net income of €140,000. Declared and paid cash dividends of €75,000.
Instructions Prepare the equity section of Harrington Company's December 31, 2020, statement of financial position. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 298 HARRINGTON COMPANY Statement of Financial Position (Partial) December 31, 2020 Equity Share capital–preference Share capital–ordinary Share premium–preference Share premium–ordinary Retained earnings Less treasury shares Total equity *
€150,000 500,000 €70,000 100,000
170,000 315,000* (30,000) €1,105,000
€250,000 + €140,000 – €75,000
Ex. 299 On January 1, 2020, Vannon Corporation had Retained Earnings of £446,000. During the year, Vannon had the following selected transactions: 1. Declared share dividends of £40,000. 2. Declared cash dividends of £90,000. 3. A 2 for 1 share split involving the issuance of 200,000 ordinary shares with a £5 par value for 100,000 ordinary shares with a £10 par value. 4. Suffered a net loss of £70,000. Instructions Prepare a retained earnings statement for the year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity
12 - 79
Solution 299 (10 min.) VANNON CORPORATION Retained Earnings Statement For the Year Ended December 31, 2020 Balance, January 1, ............................................................................. Less: Net loss ..................................................................................... Less: Cash dividends ......................................................................... Share dividends ........................................................................ Balance, December 31 .........................................................................
£446,000 (70,000) 376,000 £90,000 40,000
(130,000) £246,000
Ex. 300 The following accounts appear in the ledger of Milroy Inc. after the books are closed at December 31, 2020 Share Capital–Preference, €100 par value, 6%, 10,000 shares authorized; 2,000 shares issued Share Capital–Ordinary, €1 par value, 500,000 shares authorized, 400,000 shares issued Ordinary Share Dividends Distributable Share Premium–Ordinary Retained Earnings Treasury Shares (10,000 ordinary shares) Share Premium–Preference
€200,000 400,000 80,000 650,000 950,000 85,000 310,000
Instructions Prepare the equity section at December 31, 2020, assuming that retained earnings is restricted for plant expansion in the amount of €200,000. Ans: N/A, LO: 4, Bloom: APP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 300 (15 min.) MILROY INC. December 31, 2020 Equity 6% share capital–preference, €100 par value, 10,000 shares authorized, 2,000 shares issued Share capital–ordinary, €1 par value, 500,000 shares authorized, 400,000 shares issued, 390,000 shares outstanding Ordinary share dividends distributable Share premium—preferred Share premium—ordinary Retained earnings (See note) Less: Treasury shares Total equity
€ 200,000 €400,000 80,000 310,000 650,000
480,000 960,000 950,000 (85,000) €2,505,000
Note: Retained earnings is restricted in the amount of €200,000 for plant expansion.
12 - 80 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 301 The following information is available for Wenger Corporation: Beginning ordinary shareholders' equity Dividends paid to ordinary shareholders Dividends paid to preference shareholders Ending ordinary shareholders' equity Net income
$700,000 50,000 30,000 800,000 165,000
Instructions Based on the preceding information, calculate return on ordinary shareholders' equity. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 301 (4 min.) $165,000 – $30,000 Return on ordinary shareholders' equity = ————————— = .18 $750,000* *($700,000 + $800,000) ÷ 2 Ex. 302 The following financial information is available for Duncan Corporation. 2020 2019 Average ordinary shareholders' equity €1,600,000 €1,200,000 Dividends paid to ordinary shareholders 50,000 30,000 Dividends paid to preference shareholders 20,000 20,000 Net income 244,000 170,000 Instructions Calculate return on ordinary shareholders' equity for 2020 and 2019. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 302 (5 min.) Return on ordinary shareholders' equity
2020 €244,000 - €20,000 = 14% €1,600,000
00
2019 €170,000 - €20,000 = 12.5% €1,200,000 0
Corporations: Organization, Share Transactions, and Equity a
12 - 81
Ex. 303
The following information is available for Gordon Corporation: Share capital–ordinary ($5 par) Share premium–ordinary Retained earnings Treasury shares Ordinary shares issued Ordinary shares outstanding
$550,000 200,000 180,000 70,000 110,000 100,000
Instructions Based on the preceding information, calculate the book value per share. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 303
(4 min.)
Book value per share = $8.60/sh. [$550,000 + $200,000 + $180,000 - $70,000] ÷ 100,000 shares Ex. 304 On December 31, 2020, Colaw Company reports the following amounts in its equity section: Share capital–ordinary €2,400,000 Share premium–ordinary 900,000 Retained earnings 1,780,000 Treasury shares 180,000 The ordinary shares have a stated value of €10 per share. One million ordinary shares are authorized and 40,000 shares are held in the treasury. Instructions Compute the book value per ordinary share Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 304
(5 min.)
Total equity Ordinary shares outstanding (240,000 – 40,000) Book value per share
€4,900,000 ÷ 200,000 €24.50
12 - 82 Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 305. A corporation has a separate __________________________ apart from its owners. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
306. The major advantages of the corporate form of organization include (1) limited _________________ of owners, (2) continuous ____________________ and (3) ease of transferring ___________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
307. Shareholders elect the _______________, who in turn hire the ______________ of the company who have day to day responsibility for running the corporation. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: None, AICPA PC: None, IMA: Business Economics
308. Shareholders generally have the right to share in corporate _______________ and in ______________ upon liquidation. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
309. Par value of shares represents the __________________ per share that must be retained in the business for the protection of corporate ___________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
310. If shares are issued in exchange for noncash assets, the assets should be valued at the ____________________ of the consideration ___________________ or the assets ____________________, whichever is more clearly evident. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
311. A corporation's own shares that have been reacquired by the corporation but not canceled are called ___________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
312. The _______________ feature of preference shares gives the preference shareholders the right to receive current-year dividends and unpaid prior-year dividends before ordinary shareholders receive any dividends. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
313. Preference shares have contractual provisions that give it a preference over ordinary shares as to ___________________ and to ___________________ in the event of liquidation. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
314.
Three important dates associated with dividends are the: (1)__________________, (2)__________________, and (3)__________________.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity 315.
12 - 83
The entry to record the declaration of a share dividend increases _______________, and decreases ________________.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
316.
Both a share split and a share dividend will _________________ the number of shares outstanding and have _________________ on total equity.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
317.
The return on ________________ shows how many euros of net income were earned for each euro invested by ordinary shareholders.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
318.
The return on ordinary shareholders’ equity is computed by dividing _____________ minus _______________ dividends by average ordinary shareholders’ equity.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Answers to Completion Statements 305. legal existence 306. liability, life, ownership rights 307. board of directors, officers 308. earnings, assets 309. legal capital, creditors 310. fair value, given up, received 311 treasury shares 312. cumulative 313. dividends, assets
314. declaration date, record date, payment date 315. Share Capital, Retained Earnings 316. increase, no effect 317. ordinary shareholders’ equity 318. net income, preference
12 - 84 Test Bank for Financial Accounting: IFRS Edition, 4e
MATCHING 319. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.
Share capital Retained earnings Par value shares Treasury shares Cumulative dividend Deficit
G. H. I. J. K. L.
Liquidating dividend Return on ordinary shareholders’ equity Cash dividend Declaration date Share dividend Share split
____ 1. Net income retained in the corporation. ____ 2. Shows how many currency units of net income were earned for each euro invested by the owners. ____ 3. Preference shareholders have a right to receive current and unpaid prior-year dividends before ordinary shareholders receive any dividends. ____ 4. The date the board of directors formally declares the dividend and announces it to shareholders. ____ 5. The issuance of additional shares to shareholders accompanied by a reduction in the par or stated value per share. ____ 6. Capital shares that have been assigned a value per share in the corporate charter. ____ 7. Cash paid into the corporation by shareholders in exchange for shares. ____ 8. A debit balance in retained earnings. ____ 9. Corporation's own shares that have been reacquired by the corporation but not retired. ____ 10. A pro rata distribution of the corporation's own shares to shareholders. ____ 11. A dividend declared out of share capital or share premium. ____ 12. A pro rata distribution of cash to shareholders.
Answers to Matching 1. 2. 3. 4. 5. 6.
B H E J L C
7. 8. 9. 10. 11. 12.
A F D K G I
Corporations: Organization, Share Transactions, and Equity
12 - 85
Ans: n/a, LO: 1-4, Bloom: K, Difficulty: Easy, Min: 7, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Interaction, IMA: Investment Decisions
SHORT-ANSWER ESSAY QUESTIONS S-A E 320 Identify at least six characteristics of the corporate form of business organization. Contrast each one with the partnership form of organization. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Research, AICPA PC: Communication, IMA: FSA
Solution 320 (a) (b) (c) (d)
Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital
(e) (f) (g) (h)
Continuous life Corporation management Government regulations Additional taxes
A partnership is not a separate legal entity because the act of any partner is binding on all other partners. A partnership has unlimited liability because each partner is personally and individually liable for all partnership liabilities. A partnership requires the approval of all the partners before ownership rights can be transferred. A partnership cannot acquire capital as easily as a corporation can. Investors are fearful of investing in a partnership because they then become liable for all partnership liabilities. The life of a corporation, which may be perpetual, is stated in the charter. The life of a partnership is dependent on the partners and any changes in the composition of the partnership. Corporations allow the owners (shareholders) to indirectly manage the corporation through the board of directors and the corporate officers. On the other hand, partners not only are the owners of their business but they also manage the daily operations. A partnership is not subject to as many regulations as a corporation. Many of these regulations are designed to protect the shareholders of the corporation who are not involved in the daily management of the company. Corporations must pay income taxes and the shareholders must pay taxes on the dividends received. Partners avoid this double taxation because they only have to pay taxes on the income reported on their personal income tax form. S-A E 321 Define par value, and discuss its significance in accounting. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 321 Par value is an arbitrary amount established for a share and printed on each share certificate. It represents the legal capital of the corporation and constitutes a minimum cushion that must remain for the protection of the corporate creditors. Par value is also used for the calculation of preference dividends. S-A E 322 Companies frequently issue both preference shares and ordinary shares. What are the major differences in the rights of shareholders between these two classes of shares? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
12 - 86 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 322 Ordinary shareholders have the right to vote on corporate actions that require shareholders approval while preference shareholders generally do not have voting rights. However, preference shareholders will receive (1) dividends and (2) assets in the event of liquidation prior to ordinary shareholders. Preference shareholders may also have a cumulative dividend feature or a participating dividend feature. Both of these features increase the amount of dividends paid to the preference shareholders. S-A E 323 The ultimate effect of incurring an expense is to reduce equity. The declaration of a cash dividend also reduces equity. Explain the difference between an expense and a cash dividend and explain why they have the same effect on equity. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 323 An expense is the cost of assets consumed or services used in the process of earning revenue. A cash dividend is part of the net income that is distributed to the shareholders. Thus, an expense is a cost incurred to earn net income while a cash dividend is a distribution to the shareholders of the net income earned. An expense and a cash dividend, however, both result in a decrease in equity, or more specifically, retained earnings. Expenses and cash dividends both decrease the amount of earned capital that is retained in the corporation. S-A E 324 A large share dividend and share split can frequently have the same effect on the market price of a corporation's shares. Explain how share dividends and share splits affect the market price of a corporation's shares. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 324 Share dividends and share splits both involve the issuance of additional shares to the shareholders. The market price of a corporation's shares is affected because of an increase in the shares’ marketability. A small share dividend does not result in a large increase in the number of shares outstanding and therefore will not increase the shares’ marketability. Thus, a small share dividend will have little effect on the market price per share. However, both a large share dividend and a share split will cause a large increase in the number of shares outstanding. This increase in the number of shares outstanding makes the shares marketable to a larger number of individuals. Consequently, the market price per share will decrease. S-A E 325 Why must a corporation have sufficient retained earnings before it may declare cash dividends? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Corporations: Organization, Share Transactions, and Equity
12 - 87
Solution 325 By definition, a dividend is the distribution of profits to the corporate owners. Accordingly, to pay a dividend that exceeds existing retained earnings is, in substance, to return a portion of the shareholders’ investment and in many jurisdictions is illegal. In addition, companies are frequently constrained by agreements with their lenders to pay dividends only from retained earnings. S-A E 326 (Ethics) Mark Ludwig, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its share price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Ludwig had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date. The other members of management called a meeting to determine what they should do. Dick Markley, the marketing manager, suggested that the company purchase a large number of treasury shares. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company's available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years. Required: 1. Is Mr. Markley's suggestion ethical? Explain. 2. Is it ethical to discontinue the cash dividend? Explain. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Investment Decisions
Solution 326 1. There is no definite answer as to whether Mr. Markley's suggestion is ethical. There are several points that might be made, supporting either premise. First, it is a large transaction being made in the absence of the CEO, and made entirely to boost share price. It is not clear what the long-term benefit to the company will be, even if it is successful. Thus, a student might argue that the large purchase of treasury shares, using up most of the available cash, might be unethical because of the potential damage done to the company, without a large enough potential reward. On the other hand, the company might benefit by keeping its share price high (and supposing that this purchase will enhance the share price) by being able to issue additional shares to finance future expansion. It is to be hoped that students can articulate the concept that legality of an action is not the only determinate of whether an action is ethical. 2. A company may discontinue its dividend at will. Holders of ordinary shares should know that they are not entitled to a dividend, even when one has been declared and paid every year. There is no expressed or implied contract to pay a dividend to holders of ordinary shares, and so the discontinuance of the dividend is ethical. However, the company may lose more in share price by discontinuing a long-standing dividend than it gains by its large purchase of treasury shares.
12 - 88 Test Bank for Financial Accounting: IFRS Edition, 4e S-A E 327 (Communication) As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Equity section of a recent statement of financial position. Required: Prepare a sentence or two explaining each major section: Share Capital, Share Premium, and Retained Earnings. You should try to be brief but clear. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector, AICPA FN: Research, AICPA PC: Communication, IMA: Business Economics
Solution 327 Share Capital: When investors invest in our company, they purchase ordinary shares. Part of the purchase price is shown in this section, and is called "par" value. Par value is a legal term, denoting the amount of money that the company must retain in order to satisfy creditors’ claims, if the company should become insolvent. Share Premium: The remainder of the amount paid by investors who purchase shares in our company is shown in this section. Thus, the Share Capital section and the Share Premium section together show the amount paid by investors to purchase shares. Retained Earnings: This shows the earnings that have been retained in the firm to finance future growth. The other earnings were paid to our shareholders as dividends.
Corporations: Organization, Share Transactions, and Equity
12 - 89
GAAP QUESTIONS 1. Under GAAP, a purchase by a company of its own shares is recorded by a. a decrease in accumulated comprehensive income. b. a decrease in retained earnings. c. an increase in Treasury Stock. d. All of these answer choices are correct. Ans: c, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
2. Which of the following is true? a. The accounting for treasury shares differs extensively between GAAP and IFRS. b. The IASB and FASB are presently studying how financial statement information should be presented. c. Share capital means total assets under IFRS. d. In the United States, the primary corporate shareholders are financial institutions. Ans: b, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
3. Under GAAP, the amount of capital received in excess of par value would be credited to a. Par value is not used under GAAP. b. Share Premium. c. Paid-in Capital in Excess of Par-Common Stock. d. Retained Earnings. Ans: c, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
4. Which of the following is false? a. Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its ordinary shares. b. Under GAAP, the income statement is presented in a one-or two-statement format. c. Under IFRS, companies cannot record gains on transactions involving their own shares. d. Under GAAP, companies cannot record gains on transactions involving their own shares. Ans: a, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
5. Which of the following does not represent a pair of GAAP/IFRS-comparable terms? a. Preferred stock/Preference shares. b. Common stock/Share capital. c. Treasury stock/Repurchase reserve. d. Additional paid-in capital/Share premium. Ans: c, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
6. The basic accounting for cash dividends and share dividends a. differs only for the accounting for share dividends between GAAP and IFRS. b. differs only for the accounting for cash dividends between GAAP and IFRS. c. is the same under IFRS and GAAP. d. is different under IFRS versus GAAP. Ans: c, LO: 7, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
CHAPTER 13 INVESTMENTS CHAPTER LEARNING OBJECTIVES 1. Explain how to account for debt investments. Companies record investments in debt securities when they purchase bonds, receive or accrue interest, and sell the bonds. They report gains or losses on the sale of bonds in the “Other income and expense" section of the income statement. 2. Explain how to account for share investments. Companies record investments in shares when they purchase the shares, receive dividends, and sell the shares. When ownership is less than 20%, the cost method is used. When ownership is between 20% and 50%, the equity method should be used. When ownership is more than 50%, companies prepare consolidated financial statements. When a company owns more than 50% of the shares of another company, it usually prepares consolidated financial statements. These statements indicate the magnitude and scope of operations of the companies under common control. 3. Indicate how debt and share investments are reported in financial statements. Investments in debt securities are classified as trading or held-for-collection securities for valuation and reporting purposes. Share investments are classified either as trading or nontrading. Share investments have no maturity date and therefore are never classified as held-for-collection. Trading securities are reported as current assets at fair value, with changes from cost reported in net income. Non-trading securities are also reported at fair value, with the changes from cost reported in other comprehensive income. Non-trading securities and held-for-collections securities are classified as short-term or long-term, depending on their expected future sale date. Short-term investments are securities that are (a) readily marketable and (b) intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments. *4. Describe the form and content of consolidated financial statements as well as how to prepare them. Consolidated financial statements are similar in form and content to the financial statements of an individual corporation. A consolidated statement of financial position shows the assets and liabilities controlled by the parent company. A consolidated income statement shows the results of operations of affiliated companies as though they are one economic unit. The worksheet for a consolidated statement of financial position contains columns for (a) the statement of financial position data for the separate entities, (b) intercompany eliminations, and (c) consolidated data.
13 - 2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
Corporations purchase investments in debt or share securities generally for one of two reasons.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
2.
A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
3.
The accounting for short-term debt investments and for long-term debt investments is similar.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
4.
When debt investments, are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the investments.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
5.
Debt investments are investments in government and corporation bonds.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
6.
The cost of debt investments includes brokerage fees and accrued interest.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
7.
Dividends received on share investments of less than 20% should be credited to the Share Investments account.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
8.
If an investor owns between 20% and 50% of an investee's ordinary shares, it is presumed that the investor has significant influence on the investee.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
9.
The Share Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in ordinary shares.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
10.
Under the equity method, the investment in ordinary shares is initially recorded at cost, and the Share Investments account is adjusted annually.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
11.
Under the equity method, the receipt of dividends from the investee company results in an increase in the Share Investments account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments 12.
13 - 3
If an investor owns 30% of the ordinary shares of a corporation, it is generally presumed that the investor cannot exert significant influence over the financial and operating activities of the business.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
13.
When an investor has significant influence but not control over an investee, the investee is referred to as an associate.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
14.
Under the equity method, the investor records its share of the associate's net income in the year in which it is earned.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
15.
Under the equity method, the investment account is increased by the investor's share of the associate's dividends.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
16.
A company that owns more than 50% of the ordinary shares of another entity is known as the parent company and usually prepares consolidated financial statements.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
17.
Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's ordinary shares.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
18.
Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
19.
Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
20.
The valuation of non-trading securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
21.
An unrealized gain or loss on trading securities is reported as a separate component of equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
22.
A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
For Instructor Use Only
13 - 4 23.
Test Bank for Financial Accounting: IFRS Edition, 4e If the fair value of a non-trading security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
24.
Non-trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
25.
Held-for-collection securities are debt securities that the investor has the intent and ability to hold to maturity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
26.
Companies close the Fair Value Adjustment–Trading account at the end of each reporting period.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
27.
Non-trading securities should always be reported at fair value and classified as current assets on the statement of financial position.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
28.
Because they are highly liquid, short-term investments are included as part of cash in the current assets section of the statement of cash flows.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
29.
Companies generally report long-term assets in a separate section immediately above current assets on the statement of financial position.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
30.
Unrealized gains and losses on non-trading debt securities are reported as a component of accumulated other comprehensive income on the statement of financial position.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
31.
To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
32.
An investment is readily marketable if it is management's intent to sell the investment.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting a
33.
When a parent company acquires a wholly owned subsidiary for an amount in excess of the book value of the net assets acquired, the excess is always allocated to goodwill.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Investments a
34.
13 - 5
A consolidated income statement will reflect only revenue and expense transactions between the consolidated entity and parties outside the affiliated group.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
35.
One of the reasons a corporation may purchase investments is that it has excess cash.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
36.
When recording bond interest, Interest Receivable is reported as a fixed asset in the statement of financial position.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
37.
Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
38.
Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
39.
The unrealized gain or loss on non-trading debt securities is reported in the income statement.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
40.
"Intent to convert" does not include an investment used as a resource that will be used whenever the need for cash arises.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
13 - 6
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 41.
Corporations often invest excess cash for short periods of time in each of the following except a. equity securities. b. highly liquid securities. c. low-risk securities. d. government securities.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
42.
Corporations invest in other companies for all of the following reasons except to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. increase trading of the other companies’ shares.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
43.
A typical investment to house excess cash until needed is a. shares of companies in a related industry. b. debt securities. c. low-risk, highly liquid securities. d. share securities.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
44.
A company may purchase a non-controlling interest in another firm in a related industry a. to house excess cash until needed. b. to generate earnings. c. for strategic reasons. d. for speculative reasons.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
45.
Pension funds and mutual funds regularly invest in debt and share securities to a. generate earnings. b. house excess cash until needed. c. meet strategic goals. d. control the company in which they invest.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
46.
Which of the following is not a true statement regarding short-term debt investments? a. The securities usually pay interest. b. Investments are frequently government or corporate bonds. c. This type of investment must be currently traded in the securities market. d. Debt investments are recorded at the price paid less brokerage fees.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Investments 47.
13 - 7
On January 1, 2020, Milton Company purchased at face value, a €1,000, 6% bond that pays interest each January 1. Milton Company has a calendar year end. The entry for the receipt of interest on January 1, 2021, is a. Cash ..................................................................................... 60 Interest Receivable...................................................... 60 b. Cash ..................................................................................... 60 Interest Revenue ......................................................... 60 c. Interest Receivable .............................................................. 30 Interest Revenue ......................................................... 30 d. Interest Receivable .............................................................. 60 Interest Revenue ......................................................... 60
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
48.
On January 1, 2020, Milton Company purchased at face value, a €1,000, 8% bond that pays interest each January 1. Milton Company has a calendar year-end. The adjusting entry on December 31, 2020, is a. not required. b. Cash ..................................................................................... 80 Interest Revenue ......................................................... 80 c. Interest Receivable .............................................................. 80 Interest Revenue ......................................................... 80 d. Interest Receivable .............................................................. 80 Debt Investments ........................................................ 80
Ans: c, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
49.
On January 1, 2020, Milton Company purchased at face value, a €1,000, 8% bond that pays interest each January 1. Milton Company has a calendar year-end. The entry for the receipt of interest on January 1, 2021 is a. Cash ..................................................................................... 80 Interest Revenue ......................................................... 80 b. Cash ..................................................................................... 40 Interest Receivable...................................................... 40 c. Cash ..................................................................................... 40 Interest Revenue ......................................................... 40 d. Cash ..................................................................................... 80 Interest Receivable...................................................... 80
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 8 50.
Test Bank for Financial Accounting: IFRS Edition, 4e On January 1, Barone Company purchased as a short-term investment a $1,000, 8% bond for $1,000. The bond pays interest each January 1. The bond is sold on April 1 for $1,125 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash ..................................................................................... 1,125 Debt Investments ........................................................ 1,125 b. Cash ..................................................................................... 1,145 Debt Investments ......................................................... 1,000 Gain on Sale of Debt Investments ............................... 125 Interest Revenue ......................................................... 20 c. Cash ..................................................................................... 1,145 Debt Investments ......................................................... 1,125 Interest Revenue ......................................................... 20 d. Cash ..................................................................................... 1,125 Debt Investments ......................................................... 1,000 Gain on Sale of Debt Investments ............................... 125
Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
51.
Which of the following is not a true statement about the accounting for debt investments? a. At acquisition, investments are recorded at cost. b. The cost includes any brokerage fees. c. Debt investments include investments in government and corporation bonds. d. The cost includes any accrued interest.
Ans: d, LO: 1, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
52.
The cost of debt investments includes each of the following except a. brokerage fees. b. commissions. c. accrued interest. d. the price paid.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
53.
If a short-term debt investment is sold, the Investment account is a. credited for the market value of the investment at the sale date. b. credited for the cost of the investment at the sale date. c. credited for the fair value of the investment at the sale date. d. debited for the cost of the bonds at the sale date.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
54.
In accounting for debt investments, entries are made for each of the following except the a. acquisition. b. interest revenue. c. sale. d. Entries are made for each of these items.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Investments 55.
13 - 9
Barr Company acquires 80, 10%, 5 year, €1,000 Community bonds on January 1, 2020 for €80,000. The journal entry to record this investment includes a debit to a. Debt Investments for €88,000. b. Debt Investments for €80,000. c. Cash for €80,000. d. Share Investments for €80,000.
Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
56.
Barr Company acquires 80, 10%, 5 year, €1,000 Community bonds on January 1, 2020 for €80,000. Assume Community pays interest each January 1. The journal entry at December 31, 2020 would include a credit to a. Interest Receivable for €8,000. b. Interest Revenue for €4,000. c. Interest Expense for €8,000. d. Interest Revenue for €8,000.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
57.
Barr Company acquires 80, 10%, 5 year, €1,000 Community bonds on January 1, 2020 for €80,000. If Barr sells all of its Community bonds for €78,000, what gain or loss is recognized? a. Gain of €10,000 b. Loss of €2,000 c. Gain of €2,000 d. Loss of €10,000
Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
58.
Winrow Co. purchased 50, 6% Johnston Company bonds for $50,000 cash. Interest is payable annually on January 1. The entry to record the January 1 annual interest receipt would include a a. debit to Interest Revenue for $3,000. b. credit to Interest Receivable for $3,000. c. credit to Interest Revenue for $3,000. d. credit to Debt Investments for $3,000.
Ans: b, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Winrow Co. purchased 50, 6% Johnston Company bonds for $50,000 cash. Interest is payable annually on January 1. The entry to record the December 31 interest accrual would include a a. debit to Interest Receivable for $3,000. b. debit to Interest Revenue for $3,000. c. credit to Interest Revenue for $1,500. d. debit to Debt Investments for $3,000.
Ans: a, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 10 Test Bank for Financial Accounting: IFRS Edition, 4e 60.
Tolan Co. purchased 90, 6% Irick Company bonds for $90,000 cash. Interest is payable annually on January 1. If 45 of the securities are sold on May 1 for $46,500 plus accrued interest, the entry would include a credit to Gain on Sale of Debt Investments for a. $3,000. b. $1,800. c. $3,300. d. $1,500.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
61.
On January 1, Burkett Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Interest Receivable ............................................................... 60 Interest Revenue ........................................................ 60 b. Debt Investments ................................................................. 30 Interest Revenue ........................................................ 30 c. Interest Receivable ............................................................... 30 Interest Revenue ........................................................ 30 d. Debt Investments ................................................................. 60 Interest Revenue ........................................................ 60
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
62.
On January 1, 2020, Bregeut Company, a calendar year corporation, purchased 600 of the CHF1,000 face value, 9% bonds of Clariant Incorporated, for CHF600,000. The bonds, which mature on January 1, 2025, pay interest annually on January 1. The entry on Bregeut's books to record the acquisition will include a. a credit to Bonds Payable for CHF600,000. b. a debit to Interest Receivable for CHF54,000. c. a credit to Interest Revenue for CHF27,000. d. a debit to Debt Investments for CHF600,000.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
63.
On January 1, 2020, Bregeut Company, a calendar year corporation, purchased 600 of the CHF1,000 face value, 9% bonds of Clariant Incorporated, for CHF600,000. The bonds, which mature on January 1, 2025, pay interest annually on January 1. On December, 2020, Bregeut will make an entry to a. record interest collected . b. accrue interest expense. c. recognize interest revenue. d. adjust the investment to fair value.
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments 64.
13 - 11
On January 1, 2020, Bregeut Company, a calendar year corporation, purchased 600 of the CHF1,000 face value, 9% bonds of Clariant Incorporated, for CHF600,000. The bonds, which mature on January 1, 2025, pay interest annually on January 1. The December 31, 2020 adjusting entry for the bonds on Bregeut’s books will include a. a credit to Interest Expense for CHF2,200. b. a debit to Cash for CHF54,000. c. a credit to Interest Receivable for CHF54,000. d. a credit to Interest Revenue for CHF54,000.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
65.
At December 31, 2019, EI Greco Company has an investment in 3,000 of the €1,000 8% bonds of Dublin Company with a carrying value of €3,000,000. The bonds, which mature on January 1, 2024, pay interest annually on January 1. After collecting the interest on January 1, 2020, E2I Greco sells the bonds for €3,330,000. EI Greco will recognize a. an unrealized loss of €240,000. b. a gain on the sale of debt investments for €330,000. c. interest revenue of €240,000. d. a loss on the sale of debt investments of €330,000.
Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
66.
Stine Co. purchased 60, 6% Kolaw Company bonds for $60,000 cash. Interest is payable annually on January 1. If 30 of the securities are sold on March 1 for $31,500 plus accrued interest the entry would include a credit to Gain on Sale of Debt Investments for a. $900. b. $600. c. $2,100. d. $1,500.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
67.
On January 1, Winston Company purchased as an investment a $1,000, 5% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Interest Receivable .............................................................. 50 Interest Revenue ........................................................ 50 b. Debt Investments ................................................................ 25 Interest Revenue ........................................................ 25 c. Interest Receivable .............................................................. 25 Interest Revenue ........................................................ 25 d. Debt Investments ................................................................ 50 Interest Revenue ........................................................ 50
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 12 Test Bank for Financial Accounting: IFRS Edition, 4e 68.
Huang Company owns 15,000 of the 50,000 outstanding ordinary shares of Xi Inc. The balance in the investment account at January 1, 2020 was ¥750,000,000. During 2020, Xi earned ¥1,200,000,000 and paid cash dividends of ¥960,000,000. The balance in the Investment in Xi account reported on Huang’s December 31, 2020 statement of financial position should be a. ¥1,110,000,000. b. ¥990,000,000. c. ¥822,000,000. d. ¥750,000,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
69.
Huang Company owns 15,000 of the 50,000 outstanding ordinary shares of Xi Inc. The balance in the investment account at January 1, 2020 ¥750,000,000. During 2020, Xi earned ¥1,200,000,000 and paid cash dividends of ¥960,000,000. Huang should report investment revenue for 2020 of a. ¥360,000,000. b. ¥288,000,000. c. ¥72,000,000. d. ¥0.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
70.
Desmond Corporation owns 3,500 of the 10,000 outstanding ordinary shares of Wetmore Corporation. During 2020, Wetmore earned £3,000,000 and paid cash dividends of £1,000,000. What balance should Desmond report on its December 31, 2020 statement of financial position for the investment account if the beginning of the year balance in the account was £4,000,000? a. £5,050,000. b. £4,000,000. c. £4,700,000. d. £6,000,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
71.
Desmond Corporation owns 3,500 of the 10,000 outstanding ordinary shares of Wetmore Corporation. During 2020, Wetmore earned £3,000,000 and paid cash dividends of £1,000,000. How much investment revenue should Desmond report in 2020? a. £1,000,000. b. £1,050,000. c. £700,000. d. £3,000,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments 72.
13 - 13
Elston Corporation sells 100 ordinary shares being held as an investment. The shares were acquired six months ago at a cost of $30 a share. Elston sold the shares for $40 a share. The entry to record the sale is a. Cash ..................................................................................... 3,000 Loss on Sale of Share Investments .................................... 1,000 Share Investments ..................................................... 4,000 b. Share Investments .............................................................. 4,000 Cash ........................................................................... 4,000 c. Cash ..................................................................................... 4,000 Gain on Sale of Share Investments ............................ 1,000 Share Investments ..................................................... 3,000 d. Cash ..................................................................................... 4,000 Share Investments ..................................................... 4,000
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73.
Greene Corporation sells 200 ordinary shares being held as an investment. The shares were acquired six months ago at a cost of $50 a share. Greene sold the shares for $40 a share. The entry to record the sale is a. Cash ..................................................................................... 8,000 Loss on Sale of Share Investments .................................... 2,000 Share Investments ..................................................... 10,000 b. Cash ..................................................................................... 10,000 Gain on Sale of Share Investments ............................ 2,000 Share Investments ..................................................... 8,000 c. Cash ..................................................................................... 8,000 Share Investments ..................................................... 8,000 d. Share Investments .............................................................. 8,000 Loss on Sale of Share Investments .................................... 2,000 Cash ............................................................................ 10,000
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
74.
Nagen Company had these transactions pertaining to share investments: Feb. 1 Purchased 2,000 shares of Horton Company (10%) for ₤34,000 cash. June 1 Received cash dividends of ₤2 per share on Horton shares. Oct. 1 Sold 800 Horton shares for ₤15,600. The entry to record the purchase of the Horton shares would include a a. credit to Share Investments for ₤34,000. b. credit to Cash for ₤30,000. c. debit to Share Investments for ₤34,000. d. debit to Investment Revenue for ₤4,000
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 14 Test Bank for Financial Accounting: IFRS Edition, 4e 75.
Nagen Company had these transactions pertaining to share investments: Feb. 1 Purchased 2,000 shares of Horton Company (10%) for ₤34,000 cash. June 1 Received cash dividends of ₤2 per share on Horton shares. Oct. 1 Sold 800 Horton shares for ₤15,600. The entry to record the receipt of the dividends on June 1 would include a a. debit to Share Investments for ₤4,000. b. credit to Dividend Revenue for ₤4,000. c. debit to Dividend Revenue for ₤4,000. d. credit to Share Investments for ₤4,000.
Ans: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
76.
Nagen Company had these transactions pertaining to share investments: Feb. 1 Purchased 2,000 shares of Horton Company (10%) for ₤34,000 cash. June 1 Received cash dividends of ₤2 per share on Horton shares. Oct. 1 Sold 800 Horton shares for ₤.15,600. The entry to record the sale of the shares would include a a. debit to Cash for ₤13,600. b. credit to Gain on Sale of Share Investments for ₤3,600. c. debit to Share Investments for ₤13,600. d. credit to Gain on Sale of Share Investments for ₤2,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
77.
Mouns Company owns 40% interest in the shares of Darian Corporation. During the year, Darian pays $20,000 in dividends to Mouns, and reports $100,000 in net income. Mouns Company’s investment in Darian will increase Mouns’ net income by a. $20,000. b. $40,000. c. $32,000. d. $8,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
78.
Nance Company owns 40% interest in the shares of Finley Corporation. During the year, Finley pays $25,000 in dividends, and reports $100,000 in net income. Nance Company’s investment in Finley will increase by a. $25,000. b. $40,000. c. $32,000. d. $30,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments 79.
13 - 15
On January 1, 2020 Garner Corporation purchased 30% of the ordinary shares outstanding of Landon Corporation for $500,000. During 2020, Landon Corporation reported net income of $200,000 and paid cash dividends of $100,000. The balance of the Share Investments—Landon account on the books of Garner Corporation at December 31, 2020 is a. $500,000. b. $600,000. c. $700,000. d. $530,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
80.
Osaka Co. acquired a 10% interest in Chen Corp. on December 31, 2019 for HK$5,670,000. During 2020, Chen had net income of HK$3,600,000 and paid cash dividends of HK$900,000. Osaka's 2020 income statement will report a. dividend income of HK$90,000. b. investment income of HK$270,000. c. investment income of HK$360,000. d. cannot be determined from the information given.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
81.
In accounting for share investments between 20% and 50%, the _______ method is used. a. consolidated statements b. controlling interest c. cost d. equity
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
82.
When a company holds shares of several different corporations, the group of securities is identified as a(n) a. affiliated investment. b. consolidated portfolio. c. investment portfolio. d. controlling interest.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
83
Beneteau Corporation purchased 30,000 ordinary shares of La Brea Corporation for €40 per share on January 2, 2020. During 2020, La Brea Corporation had 100,000 shares of ordinary shares outstanding, paid cash dividends of €120,000, and reported net income of €400,000. Beneteau Corporation should report revenue from this investment for 2020 in the amount of a. €36,000. b. €84,000. c. €120,000. d. €132,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 16 Test Bank for Financial Accounting: IFRS Edition, 4e 84.
Carlin Corporation sells 600 ordinary shares being held as a short-term investment. The shares were acquired six months ago at a cost of $50 a share. Carlin sold the shares for $40 a share. The entry to record the sale is a. Cash ..................................................................................... 24,000 Loss on Sale of Share Investments ...................................... 6,000 Share Investments ....................................................... 30,000 b. Cash ..................................................................................... 30,000 Gain on Sale of Share Investments ............................. 6,000 Share Investments ....................................................... 24,000 c. Cash ..................................................................................... 24,000 Share Investments ....................................................... 24,000 d. Share Investments................................................................ 24,000 Loss on Sale of Share Investments ...................................... 6,000 Cash ............................................................................ 30,000
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
85.
For accounting purposes, the method used to account for long-term investments in ordinary shares is determined by a. the amount paid for the shares by the investor. b. the extent of an investor's influence on the operating and financial affairs of the investee. c. whether the shares has paid dividends in past years. d. whether the acquisition of the shares by the investor was "friendly" or "hostile."
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
86.
If an investor owns less than 20% of the ordinary shares of another corporation as a longterm investment, a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
If the cost method is used to account for a long-term investment in ordinary shares, dividends received should be a. credited to the Share Investments account. b. credited to the Dividend Revenue account. c. debited to the Share Investments account. d. recorded only when 20% or more of the shares are owned.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
88.
If 10% of the ordinary shares of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is a. the cost method. b. the equity method. c. the preparation of consolidated financial statements. d. determined by agreement with whomever owns the remaining 90% of the shares.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investments 89.
13 - 17
The cost method of accounting for long-term investments in shares should be employed when the a. investor owns more than 50% of the investee's shares. b. investor has significant influence on the investee and the shares held by the investor are marketable equity securities. c. fair value of the shares held is greater than their historical cost. d. investor's influence on the investee is insignificant.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90.
When an investor owns between 20% and 50% of the ordinary shares of a corporation, it is generally presumed that the investor a. has insignificant influence on the investee and that the cost method should be used to account for the investment. b. should apply the cost method in accounting for the investment. c. will prepare consolidated financial statements. d. has significant influence on the investee and that the equity method should be used to account for the investment.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
91.
Under the equity method of accounting for long-term investments in ordinary shares, when a dividend is received from the investee company, a. the Dividend Revenue account is credited. b. the Share Investments account is increased. c. the Share Investments account is decreased. d. no entry is necessary.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
92.
On January 1, 2020, Daley Corporation purchased 30% of the ordinary shares outstanding of King Corporation for $1,000,000. During 2020, King Corporation reported net income of $400,000 and paid cash dividends of $200,000. The balance of the Share Investments—King account on the books of Daley Corporation at December 31, 2020 is a. $1,000,000. b. $1,060,000. c. $1,120,000. d. $940,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
93.
Under the equity method, the Share Investments account is increased when the a. investee company reports net income. b. investee company pays a dividend. c. investee company reports a loss. d. share investment is sold at a gain.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
94.
Revenue is recognized when cash dividends are received under a. the controlling interest method. b. the cost method. c. the equity method. d. both the cost and equity methods.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
13 - 18 Test Bank for Financial Accounting: IFRS Edition, 4e 95.
Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? a. b. c. d.
% of Investor Ownership Less than 20% Between 20%-50% More than 50% Between 20%-50%
Presumed Influence Short-term Significant Long-term Controlling
Ans: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
96.
Which of the following is the correct matching concerning the appropriate accounting for long-term share investments? a. b. c. d.
% of Investor Ownership Less than 20% Between 20%–50% More than 50% Between 20%–50%
Accounting Guidelines Cost method Cost method Cost or equity method Consolidated financial statements
Ans: a, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
If the cost method is used to account for a long-term investment in ordinary shares, a. it is presumed that the investor has significant influence on the investee. b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor. c. net income of the investee is not considered earned by the investor until dividends are declared by the investee. d. the Investment account may be, at times, greater than the acquisition cost.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98.
If a company acquires a 40% ordinary share interest in another company, a. the equity method is usually applicable. b. all influence is classified as controlling. c. the cost method is usually applicable. d. the ability to exert significant influence over the activities of the investee does not exist.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
99.
If an ordinary share investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other income and expense section of the income statement. d. contributes to gross profit on the income statement.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
100.
If the equity method is being used, cash dividends received a. are credited to Dividend Revenue. b. require no entry because investee net income has already been recorded at the proper proportion on the investor's books. c. are credited to the Share Investments account. d. are credited to the Revenue from Share Investments account.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Investments 101.
13 - 19
If the equity method is being used, the Revenue from Share Investments account is a. just another name for a Dividend Revenue account. b. credited when dividends are declared by the investee. c. credited when net income is reported by the investee. d. debited when dividends are declared by the investee.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
102.
Under the equity method, the Share Investments account is credited when the a. investee reports net income. b. investee reports a net loss. c. investment is originally acquired. d. investee reports net income and when the investment is originally acquired.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
103.
On August 1, Dogwood Company buys 2,000 ordinary shares of XYZ Company for $61,200 cash. On December 1, the share investments are sold for $72,000 in cash. Which of the following are the correct journal entries to record for the purchase and sale of the shares? a. Aug. 1 Cash ...................................................... 61,200 Share Investments........................... 61,200 Dec. 1 Cash ...................................................... 72,000 Share Investments........................... 61,200 Gain on Sale of Share Investments 10,800 b.
Aug. 1 Dec. 1
c.
Aug. 1 Dec. 1
d.
Aug. 1 Dec. 1
Share Investments ................................ Cash ................................................ Cash ...................................................... Share Investments........................... Gain on Sale of Share Investments
61,200
Share Investments ................................ Cash ................................................ Share Investments ................................ Cash ................................................ Loss on Sale of Share Investments
61,200
Cash ...................................................... Share Investments........................... Share Investments ................................ Cash ................................................ Gain on Sale of Share Investments
61,200
61,200 72,000 61,200 10,800 61,200 72,000 61,200 10,800 61,200 72,000 61,200 10,800
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 20 Test Bank for Financial Accounting: IFRS Edition, 4e 104.
Lanier industries owns 30% of McCoy Company. For the current year, McCoy reports net income of $500,000 and declares and pays a $120,000 cash dividend. Which of the following correctly presents the journal entries to record Lanier's equity in McCoy's net income and the receipt of dividends from McCoy? a. Dec. 31 Share Investments .................................. 150,000 Revenue from Share Investments ..... 150,000 Dec. 31 Cash ........................................................ 36,000 Share Investments ............................. 36,000 b. Dec. 31 Share Investments ................................... 150,000 Revenue from Share Investments ..... 150,000 Dec. 31 Cash ........................................................ 120,000 Share Investments ............................ 120,000 c. Dec. 31 Share Investments ................................... 114,000 Revenue from Share Investments ..... 114,000 d. Dec. 31 Revenue from Share Investments ........... 150,000 Share Investments ............................. 150,000 Dec. 31 Share Investments ................................... 36,000 Cash .................................................. 36,000
Ans: a, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
105.
On January 1, 2020, Bartley Corp. paid $2,250,000 for 100,000 ordinary shares of Oak Company, which represents 40% of Oak's outstanding shares. Oak reported net income of $500,000 and paid cash dividends of $150,000 during 2020. Bartley should report the investment in Oak Company on its December 31, 2020, statement of financial position at: a. $2,250,000 b. $2,110,000 c. $2,310,000 d. $2,390,000
Ans: d, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
106.
Dobson Inc. earns €1,350,000 and pays cash dividends of €450,000 during 2020. Cornwell Corporation owns 70,000 of the 210,000 outstanding shares of Dobson. What amount should Cornwell show in the investment account at December 31, 2020 if the beginning of the year balance in the account was €120,000? a. €420,000 b. €300,000 c. €450,000 d. €600,000
Ans: a, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
107.
Dobson Inc. earns €1,350,000 and pays cash dividends of €450,000 during 2020. Cornwell Corporation owns 70,000 of the 210,000 outstanding shares of Dobson. How much revenue from investment should Cornwell report in 2020? a. €150,000 b. €300,000 c. €450,000 d. €600,000
Ans: c, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Investments 108.
13 - 21
On January 1, 2020, Duvall Industries acquired a 25% interest in Florida Corporation through the purchase of 12,000 ordinary shares of Florida Corporation for $960,000. During 2020, Florida Corp. paid $240,000 in dividends and reported a net loss of $360,000. Duvall is able to exert significant influence on Florida. However, Duvall mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Duvall's investment using the equity method?
a. b. c. d.
Investment Account $360,000 $810,000 $870,000 $870,000
Net Earnings (loss) ($120,000) ($90,000) ($90,000) ($30,000)
Ans: b, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
109.
Consolidated financial statements are prepared when a company owns _________ of the ordinary shares of another company. a. less than 20% b. between 20% and 50% c. less than 50% d. more than 50%
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
110.
The company whose shares are owned by the parent company is called the a. controlled company. b. subsidiary company. c. investee company. d. sibling company.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
111.
A company that owns more than 50% of the ordinary shares of another company is known as the a. charge company. b. subsidiary company. c. parent company. d. management company.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
112.
If one company owns more than 50% of the ordinary shares of another company, a. the cost method should be used to account for the investment. b. a partnership exists. c. a parent-subsidiary relationship exists. d. the company whose shares are owned must be liquidated.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
When a company owns more than 50% of the ordinary shares of another company, a. affiliated financial statements are prepared. b. consolidated financial statements are prepared. c. controlling financial statements are prepared. d. significant financial statements are prepared.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
13 - 22 Test Bank for Financial Accounting: IFRS Edition, 4e 114.
All of the following are true regarding an investing company which holds more than 50% of the ordinary shares of an investee except a. the investee is known as an affiliate. b. the investor has a controlling interest in the investee. c. the investor is known as the parent company. d. consolidated financial statements are generally required.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
115.
At the beginning of 2020, Trichet Inc. purchased a 27% stake in the ordinary shares of Papandreou Company at a cost of €6,000,000. After applying the equity method, the Investment in Papandreou account has a balance of €6,030,000. At December 31, 2020 the fair value of the investment is €6,195,000. Which of the following values is acceptable for Trichet to report for the investment in its December 31, 2020 statement of financial position? I. €6,000,000 II. €6,030,000 III. €6,195,000 a. I, II, or III. b. I or II only. c. II only. d. II or III only.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
Held-for-collection securities are valued at a. original cost. b. amortized cost. c. fair value. d. lower of cost or fair value.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
117.
Which of the following is not true regarding the Fair Value Adjustment – Trading account? a. It is a valuation allowance account. b. It allows the investment account to maintain a record of the investment cost. c. It should have a credit balance. d. Its balance is carried forward to future accounting periods.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
118.
All of the following are not true regarding the Fair Value Adjustment – Trading account except a. the account is only adjusted at the end of the accounting period. b. a debit balance in the account is subtracted from the cost of the investments so that the investments are reported at fair value. c. the account is adjusted for the difference between the investments’ fair value and cost. d. if the total cost of the securities is greater than the total fair value, the account will be credited.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investments 119.
13 - 23
The fair value adjustment for trading securities a. is reported as an increase to net income when the fair value of investments is greater than cost. b. is reported as other comprehensive income. c. is reported as an unrealized gain or loss on the statement of changes in equity. d. is only allowed when the fair value of investments is less than cost.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120.
The fair value adjustment for non-trading securities a. is reported as an increase to net income when the fair value of investments is greater than cost. b. is prohibited because these securities must be reported at cost. c. is reported as a component of accumulated other comprehensive income on the statement of financial position. d. is only allowed when the fair value of investments is less than cost.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
A year-end analysis of Valencia Inc.'s equity securities portfolio acquired in 2020 shows the following totals at December 31, 2020 for trading and non-trading securities:
Aggregate cost Aggregate fair value
Trading Securities €1,800,000 1,400,000
Non-Trading Securities €2,200,000 1,900,000
What amount of unrealized holding loss should Valencia report in its 2020 income statement? a. €0. b. €100,000. c. €300,000. d. €400,000. Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122.
At December 31, 2020, Jantzen Corp. had the following trading securities purchased during 2020, its first year of operation:
Security A B Totals
Fair Cost Value CHF 850,000 CHF 700,000 150,000 200,000 CHF1,000,000 CHF 900,000
Unrealized Gain (Loss) CHF(150,000) 50,000 CHF(100,000)
How will the fair value adjustments for 2020 impact the year's net income? a. an unrealized holding loss will decrease net income by CHF150,000. b. an unrealized holding gain will increase net income by CHF50,000. c. an unrealized holding loss will decrease net income by CHF100,000. d. unrealized holding gains and losses on trading securities do not impact net income. Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
13 - 24 Test Bank for Financial Accounting: IFRS Edition, 4e 123.
At December 31, 2020, Greystone Corp. had the following non-trading securities that were purchased during 2020, its first year of operation:
Security A B Totals
Cost £ 170,000 195,000 £ 365,000
Fair Value £ 180,000 170,000 £ 350,000
Unrealized Gain (Loss) £ (10,000) 25,000 £ (15,000)
How will the fair value adjustments for 2020 impact the year's net income? a. an unrealized holding loss will decrease net income by £10,000. b. an unrealized holding gain will increase net income by £25,000. c. an unrealized holding loss will decrease net income £15,000. d. unrealized holding gains and losses on non-trading securities do not impact net income. Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
124.
On December 31, 2019, Patel Co. purchased equity securities as trading securities. Pertinent data are as follows: Security A B C
Cost Rs1,864,000 936,000 1,376,000
Fair Value At 12/31/20 Rs2,064,000 1,016,000 956,000
The journal entry to record the fair value adjustment at December 31, 2020 will include a. a debit to Fair Value Adjustment-Trading for Rs280,000. b. a debit to Unrealized Loss – Equity for Rs140,000. c. a debit to Unrealized Loss – Income for Rs140,000. d. a credit to Unrealized Gain – Income for Rs280,000. Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
125.
Changes from cost are reported as part of net income for a. non-trading securities. b. held-for-collection securities. c. debt securities. d. trading securities.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
126.
Short-term investments are listed on the statement of financial position immediately above a. cash. b. inventory. c. accounts receivable. d. prepaid expenses.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investments 127.
13 - 25
Short-term share investments should be valued on the statement of financial position at a. the lower of cost or fair value. b. the higher of cost or fair value. c. cost. d. fair value.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
128.
In recognizing a decline in the fair value of short-term share investments, an unrealized loss account is debited because a. management intends to realize this loss in the near future. b. the securities have not been sold. c. the share market is volatile. d. management cannot determine the exact amount of the loss in value.
Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
The Fair Value Adjustment account a. is set up for each security in the company's portfolio. b. relates to the entire portfolio of securities held by the company. c. is closed at the end of each accounting period. d. appears on the income statement as Other income and expense.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
130.
The Fair Value Adjustment account is called a(n) a. offset account. b. adjustment account. c. valuation account. d. opposite account.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
131.
Reporting investments at fair value is a. applicable to share securities only. b. applicable to debt securities only. c. applicable to both debt and share securities. d. a conservative approach because only losses are recognized.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
132.
Foley Corporation's trading securities portfolio at the end of the year is as follows: Security Ordinary Share A Ordinary Share B
Cost ₤10,000 9,000 ₤ 19,000
Fair Value ₤12,000 5,000 ₤17,000
At the end of the year, Foley Corporation should a. set up a Fair Value Adjustment account for Share B. b. set up a Fair Value Adjustment account for the portfolio. c. recognize an Unrealized Gain or Loss—Income for ₤4,000. d. report a loss on the income statement for ₤4,000 under "Other income and expense." Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
13 - 26 Test Bank for Financial Accounting: IFRS Edition, 4e 133.
Foley Corporation's trading securities portfolio at the end of the year is as follows: Security Ordinary Share A Ordinary Share B
Cost ₤10,000 9,000 ₤19,000
Fair Value ₤12,000 5,000 ₤17,000
Foley subsequently sells Share B for ₤12,000. What entry is made to record the sale? a. Cash ..................................................................................... 12,000 Share Investments ....................................................... 12,000 b. Cash ..................................................................................... 12,000 Fair Value Adjustment ................................................. 3,000 Share Investments ....................................................... 9,000 c. Cash ..................................................................................... 12,000 Share Investments ....................................................... 9,000 Gain on Sale of Share Investments ............................. 3,000 d. Cash ..................................................................................... 12,000 Share Investments ....................................................... 5,000 Gain on Sale of Share Investments ............................. 7,000 Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
134.
Which of the following would not be reported under "Other income and expense" on the income statement? a. Unrealized gain on non-trading securities b. Dividend revenue c. Interest revenue d. Gain on sale of short-term debt investments
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
135.
The balance in the Unrealized Loss—Equity account will a. appear on the statement of financial position as a contra asset. b. appear on the income statement under Other income and expense. c. appear as a component of other comprehensive income in the comprehensive income statement. d. not be shown on the financial statements until the securities are sold.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
136.
If the cost of an non-trading security exceeds its fair value by $40,000, the entry to recognize the loss a. is not required since the share prices will likely rebound in the long run. b. will show a debit to an expense account. c. will show a credit to a contra-asset account that appears in the equity section of the statement of financial position. d. will show a debit to an unrealized loss account that is reported as other comprehensive income in the comprehensive income statement.
Ans: d, LO: 3, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments 137.
13 - 27
The statement of financial position presentation of accumulated other comprehensive income is similar to the statement presentation of a. treasury shares. b. bonds payable. c. allowance for doubtful accounts. d. prepaid expenses.
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
138.
At the end of its first year, the trading securities portfolio consisted of the following ordinary shares. Cost Fair Value Able Corporation $ 46,400 $ 50,000 Benes Inc. 60,000 53,800 Cole Corporation 80,000 76,000 $186,400 $179,800 The unrealized loss to be recognized under the fair value method is a. $6,200. b. $10,200. c. $6,600. d. $4,000.
Ans: c, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
139.
At the end of its first year, the trading securities portfolio consisted of the following ordinary shares. Cost Fair Value Able Corporation $ 46,400 $ 50,000 Benes Inc. 60,000 53,800 Cole Corporation 80,000 76,000 $186,400 $179,800 In the following year, the Benes ordinary shares are sold for cash proceeds of $58,000. The gain or loss to be recognized on the sale is a a. gain of $4,200. b. loss of $2,000. c. gain of $2,200. d. loss of $400.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
140.
At the end of the first year of operations, the total cost of the trading securities portfolio is $240,000. Total fair value is $250,000. The financial statements should show a. an addition to an asset of $10,000 and a realized gain of $10,000. b. an addition to an asset of $10,000 and an unrealized gain of $10,000 in the equity section. c. an addition to an asset of $10,000 in the current assets section and an unrealized gain of $10,000 in “Other income and expense.” d. an addition to an asset of $10,000 in the current assets section and a realized gain of $10,000 in “Other income and expense.”
Ans: c, LO: 3, Bloom: K, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
13 - 28 Test Bank for Financial Accounting: IFRS Edition, 4e 141.
Noell Corp. has share capital of $3,000,000, retained earnings of $3,000,000, unrealized gains on trading securities of $100,000 and unrealized losses on non-trading securities of $200,000. What is the total amount of its equity? a. $5,800,000 b. $6,000,000 c. $5,900,000 d. $6,100,000
Ans: a, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
142.
Cost and fair value data for the trading securities of Clifford Company at December 31, 2020, are $100,000 and $84,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value? a. Dec. 31 b. Dec. 31 c. Dec. 31 d. Dec. 31
Unrealized Loss¾Income .................... Trading Securities .........................
16,000
Unrealized Gain¾Income ..................... Trading Securities ..........................
16,000
Unrealized Loss¾Income ..................... Fair Value Adjustment¾Trading ....
16,000
Fair Value Adjustment - Trading ........... Unrealized Gain-Income ................
16,000
16,000 16,000 16,000 16,000
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
143.
At December 31, 2020, the trading securities for Mayfair, Inc. are as follows: Security X Y Z
Cost $180,000 300,000 64,000
Fair Value $184,000 290,000 56,000
Mayfair should report the following amount related to the securities in its 2020 income statement: a. $4,000 gain b. $14,000 realized loss. c. $14,000 unrealized loss. d. $18,000 unrealized loss. Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Investments 144.
13 - 29
At December 31, 2020, Gregson Inc. has these data on its security investments: Security Trading Non-trading
Cost $ 280,000 274,000
Fair Value 12/31/20 $344,000 250,000
If the non-trading securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value? a. b.
c.
d.
Securities ........................................................ Unrealized Gain¾Income ........................
40,000
Unrealized Loss¾Income ................................ Securities ........................................................... Unrealized Gain¾Income ........................
24,000 4,000
Fair Value Adjustment¾Trading ...................... Unrealized Gain¾Income ........................ Unrealized Gain or Loss¾Equity ..................... Fair Value Adjustment¾Non-Trading ......
64,000
Unrealized Gain¾Income ................................ Fair Value Adjustment¾Trading .............. Fair Value Adjustment¾Non-Trading ............... Unrealized Gain or Loss¾Equity ..............
64,000
40,000
64,000 64,000 24,000 24,000 64,000 24,000 24,000
Ans: c, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
145.
All of the following statements about short-term investments are true except a. Short-term investments are also called marketable securities b. Trading securities are always classified as short-term investments. c. Short-term investments are listed below accounts receivable in the current asset section of the statement of financial position. d. Short-term assets must be readily marketable.
Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
146.
Non-trading securities are classified as a. short-term investments only. b. long-term investments only. c. either short-term or long-term investments. d. current assets only.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
147.
Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
13 - 30 Test Bank for Financial Accounting: IFRS Edition, 4e 148.
An unrealized gain or loss on non-trading securities is reported as a component of other comprehensive income a. because this discloses to the financial statement user the gain or loss that would result if the securities were sold at fair value. b. because this treatment reduces the volatility of net income due to fluctuations in value. c. in a line item either called "Reserves" or "Unrealized Gain or Loss." d. All of these answer choices are correct.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
149. Balances which must be eliminated in preparing a consolidated statement of financial position include all of the following except a. the parent's Investment in Subsidiary account. b. the book values of the subsidiary's assets. c. the subsidiary's equity accounts. d. intercompany receivables and payables.
Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a
150. The equity account balances of Shiram Company and its 100% owned subsidiary, Bombay Inc. at December 31, 2020 are as follows: Account Share capital Retained earnings
Shiram Rs9,192,000 5,808,000
Bombay Rs6,330,000 2,130,000
The consolidation worksheet eliminations at December 31, 2020 will include: a. a debit to Share Capital – Shiram for Rs9,192,000. b. a credit to Retained Earnings – Shiram for Rs5,808,000. c. a debit to Share Capital – Bombay for Rs6,330,000. d. a credit to Retained Earnings – Bombay for Rs2,130,000. Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
151. Wellington Company purchased 100% of the ordinary shares of Royal Company on December 31, 2020. The cost of the investment was equal to the book value of the subsidiary's net assets. Selected account balances from the separate statements of financial position of Wellington and Royal on December 31, 2020 are as follows Account Plant assets, net Investment in Royal Share capital Retained earnings
Wellington £3,105,000 10,665,000 8,055,000 16,815,000
Royal £3,165,000 – 7,665,000 3,000,000
The amount of plant assets, net reported on the consolidation statement of financial position at December 31, 2020 is a. £3,105,000. b. £3,165,000. c. £6,270,000. d. cannot be determined from the information given. Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Investments a
13 - 31
152. Wellington Company purchased 100% of the ordinary shares of Royal Company on December 31, 2020. The cost of the investment was equal to the book value of the subsidiary's net assets. Selected account balances from the separate statements of financial position of Wellington and Royal on December 31, 2020 are as follows Account Plant assets, net Investment in Royal Share capital Retained earnings
Wellington £3,105,000 10,665,000 8,055,000 16,815,000
Royal £3,165,000 – 7,665,000 3,000,000
The consolidation worksheet eliminations at December 31, 2020 will include a. a debit to Royal's plant assets, net account for £3,165,000. b. a credit to Wellington's Investment in Royal account for £10,665,000. c. a debit to Wellington's Share Capital account for £8,055,000. d. a credit to Royal's Share Capital account for £7,665,000. Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
153. Wellington Company purchased 100% of the ordinary shares of Royal Company on December 31, 2020. The cost of the investment was equal to the book value of the subsidiary's net assets. Selected account balances from the separate statements of financial position of Wellington and Royal on December 31, 2020 are as follows: Account Plant assets, net Investment in Royal Share capital Retained earnings
Wellington £3,105,000 10,665,000 8,055,000 16,815,000
Royal £3,165,000 – 7,665,000 3,000,000
The amount of equity reported on the consolidation statement of financial position at December 31, 2020 is a. £19,815,000. b. £24,870,000. c. £35,535,000. d. cannot be determined from the information given. Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
13 - 32 Test Bank for Financial Accounting: IFRS Edition, 4e *154. Daniel Corporation acquired 100% of the ordinary shares of Tysen Company for €1,400,000. On the date of acquisition, Tysen Company’s equity consisted of: Share Capital, €700,000; Retained Earnings, €540,000. The intercompany elimination to be made on a worksheet to prepare a consolidated statement of financial position is a. Share Capital─Tysen .......................................................... 700,000 Retained Earnings─Tysen ................................................... 540,000 Investment in Tysen Shares ....................................... 1,240,000 b. Investment in Tysen Shares ................................................ 1,400,000 Cash ........................................................................... 1,400,000 c. Share Capital─Daniel .......................................................... 700,000 Retained Earnings─Daniel .................................................. 540,000 Goodwill ............................................................................... 160,000 Investment in Tysen Shares ....................................... 1,400,000 d. Share Capital─Tysen .......................................................... 700,000 Retained Earnings─Tysen ................................................... 540,000 Excess of Cost Over Book Value of Subsidiary .................. 160,000 Investment in Tysen Shares ........................................ 1,400,000 Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
*155. If a parent company acquires a wholly owned subsidiary at an amount greater than the fair value of the net assets, the excess should be a. allocated to expense on the date of acquisition. b. allocated to identifiable assets to the extent of their fair values, with any remainder allocated to goodwill. c. allocated to goodwill, with any remainder allocated to the identifiable assets. d. set up as a liability to the controlling interest. Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
*156. The consolidated worksheet shows Excess of Cost Over Book Value of Subsidiary of $210,000. Management of the parent company determines that the market values for the subsidiary company plant assets are $90,000 higher than book values. In the consolidated statement of financial position, goodwill will be reported at a. $210,000. b. $120,000. c. $90,000. d. $0. Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
*157. A consolidated income statement will show a. revenue and expense transactions between the consolidated entity and parties outside the affiliated group. b. only the parent company’s net income. c. only the income of partially owned subsidiaries. d. only the income of wholly owned subsidiaries. Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investments
13 - 33
*158. When preparing a consolidated income statement, a. only the revenues and expenses of the parent company are presented. b. the income from partially owned subsidiaries is excluded. c. all revenue and expense transactions between the parent and subsidiaries must be eliminated. d. intercompany transactions between affiliated companies do not have to be eliminated. Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
159. Wu Inc. Purchased 100% of the ordinary shares of Lee Inc. on December 31, 2020. The cost of the investment exceeded the book value of the subsidiary's net assets by HK$200,000. The fair value of Lee’s plant assets at December 31, 2020 is HK$10,255,000. Selected account balances from the separate statements of financial position of Wu and Royal on December on December 31, 2020 are as follows: Account Plant assets, net Investment in Lee Share capital Retained earnings
Wu Inc. HK$12,435,000 13,755,000 12,685,000 15,605,000
Lee Inc. HK$10,055,000 – 12,555,000 1,000,000
The amount of plant assets, net reported on the consolidation statement of financial position at December 31, 2020 is a. HK$22,690,000. b. HK$22,490,000. c. HK$12,635,000. d. HK$12,435,000. Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
160.
Which of the following reasons best explains why a company that experiences seasonal fluctuations in sales may purchase investments in debt or share securities? a. The company may have excess cash. b. The company may generate a significant portion of its earnings from investment income. c. The company may invest for the strategic reason of establishing a presence in a related industry. d. The company may invest for speculative reasons to increase the value in pension funds.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
161.
When bonds are sold, the gain or loss on sale is the difference between the a. sales price and the cost of the bonds. b. net proceeds and the cost of the bonds. c. sales price and the market value of the bonds. d. net proceeds and the market value of the bonds.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
162.
Debt investments are recorded at the a. face value of the bonds purchased. b. face value of the bonds purchased plus interest. c. price paid for the bonds plus interest. d. price paid for the bonds plus brokerage fees. For Instructor Use Only
13 - 34 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
163.
Under the equity method, the investor records dividends received by crediting a. Dividend Revenue. b. Investment Income. c. Revenue from Share Investments. d. Share Investments.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
164.
A company that acquires less than 20% ownership interest in another company should account for the share investment in that company using a. the cost method. b. the equity method. c. the significant method. d. consolidated financial statements.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
165.
The equity method of accounting for an investment in the ordinary shares of another company should be used by the investor when the investment a. is composed of ordinary shares and it is the investor's intent to vote the ordinary shares. b. ensures a source of supply of raw materials for the investor. c. enables the investor to exercise significant influence over the investee. d. is obtained by an exchange of shares for shares.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
166.
On January 2, Groneman Corporation acquired 30% of the outstanding ordinary shares of Coulson Company for $580,000. For the year ended December 31, Coulson reported net income of $90,000 and paid cash dividends of $30,000 on its shares. At December 31, the carrying value of Groneman's investment in Coulson under the equity method is a. $571,000. b. $580,000. c. $607,000. d. $598,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
167.
An unrealized loss on non-trading securities is a. reported under Other income and expense in the income statement. b. not closed-out at the end of the accounting period. c. reported as a component of other comprehensive income. d. deducted from the cost of the investment.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
168.
Securities bought and held primarily for sale in the near term to generate income on shortterm price differences are a. trading securities. b. non-trading securities. c. never-sell securities. d. held-for-collection securities.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investments 169.
13 - 35
Short-term investments are a. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is shorter. b. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is longer. c. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is longer. d. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is shorter.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
170.
Short-term investments are securities held by a company that are a. readily marketable. b. intended to be converted into cash within the next year. c. readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer. d. readily marketable and intended to be held until maturity.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
BRIEF EXERCISES BE 171 On January 14, Blackwell Corporation purchased 20, 11%, €1,000 Eastman Company bonds for €20,000, On November 30, the company sold 10 of the Eastman Company bonds for €10,900. Prepare journal entries for the purchase and sale of the Eastman Company bonds. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 171
(5 min.)
Jan. 14 Debt Investments .................................................................... Cash ...............................................................................
20,000
Nov. 30 Cash ....................................................................................... Debt Investments (€20,000 × 1/2) .................................. Gain on Sale of Debt Investments .................................
10,900
20,000 10,000 900
BE 172 On January 2, Westies Company purchased 30, 10%, $1,000 Boswell Company bonds for $30,000 cash, Interest is payable annually on January 1. On December 31, the company made the necessary adjusting entry for the Boswell Company bonds. Journalize the entries to record the purchase of the bonds and the accrual of the interest. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 172 Jan. 2
(4 min.)
Debt Investments ................................................................. Cash ............................................................................... For Instructor Use Only
30,000 30,000
13 - 36 Test Bank for Financial Accounting: IFRS Edition, 4e Dec. 31
Interest Receivable ($30,000 × 10%) ................................... Interest Revenue ............................................................
3,000 3,000
BE 173 On April 25, Donnoly Company buys 4,200 ordinary shares of Carpenter for ₤84,000. On October 31, Donnoly sells 600 shares of Carpenter for ₤15,000. Prepare journal entries for the purchase and sale of the Carpenter shares. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 173
(5 min.)
April 25 Share Investments .................................................................. Cash ...............................................................................
84,000
Oct. 31 Cash ....................................................................................... Share Investments (₤84,000 × 600/4,200) ..................... Gain on Sale of Share Investments ................................
15,000
84,000 12,000 3,000
BE 174 On January 1, Kingman Corporation purchased a 40% equity in Lewis Company for $360,000. At December 31, Lewis declared and paid a $40,000 cash dividend and reported net income of $98,000. Prepare the necessary journal entries for Kingman Corporation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 174
(5 min.)
Jan. 1 Share Investments .................................................................. Cash ...............................................................................
360,000
Dec. 31 Cash ($40,000 × .40)............................................................... Share Investments ..........................................................
16,000
Share Investments ($98,000 × .40) ......................................... Revenue from Share Investments ..................................
39,200
360,000 16,000 39,200
BE 175 Stein Company had the following transactions pertaining to its short-term share investments. Jan.
1
Purchased 600 ordinary shares of Pine Company for $7,050 cash.
June
1
Received cash dividends of $0.60 per share on the Pine Company shares.
Sept. 15
Sold 300 shares of Pine Company for $3,600 less brokerage fees of $200.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments Solution 175 Jan.
1
June 1 Sept. 15
13 - 37
(5 min.)
Share Investments .............................................................. Cash .........................................................................
7,050
Cash (600 × $0.60) ............................................................. Dividend Revenue ....................................................
360
Cash ($3,600 – $200) ......................................................... Loss on Sale of Share Investments .................................... Share Investments ................................................... [300 × ($7,050 ÷ 600)]
3,400 125
7,050 360
3,525
BE 176 On January 1, 2020, Nott Company purchased 5,000 ordinary shares of Ace Company for $300,000. Nott’s investment represents 30 percent of the total outstanding shares of Ace. During 2020, Ace paid total dividends of $100,000 and reported net income of $250,000. What revenue does Nott report related to this investment and what is the amount to be reported as the Investment in Ace at December 31? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 176
(5 min.)
Revenue for 2020 ($250,000 x .30)
$75,000
Balance in Investment account Purchase price Less dividend receipt ($100,000 × .30) Plus investment revenue ($250,000 × .30) Ending balance Investment in Ace
$300,000 – 30,000 + 75,000 $345,000
BE 177 At January 1, 2020, the trading securities portfolio held by the Darin Corporation consisted of the following investments: 1. 2,000 ordinary shares of Tanner purchased for ₤42 per share. 2. 1,500 ordinary shares of Lester purchased for ₤50 per share. At December 31, 2020, the fair values per share were Tanner ₤36 and Lester ₤54. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2020. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2020. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
13 - 38 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 177 (a)
(b)
(6 min.)
Security Tanner Lester Totals Dec. 31
Cost ₤ 84,000 75,000 ₤159,000
Fair Value ₤ 72,000 81,000 ₤153,000
(2,000 × ₤36) (1,500 × ₤54)
Unrealized Loss—Income ........................................... Fair Value Adjustment—Trading .......................
6,000 6,000
BE 178 At December 31, 2020, the trading securities for Carter Company are as follows: Security X Y
Cost $17,000 34,000 $51,000
Fair Value $20,000 33,000 $53,000
Prepare the adjusting entry at December 31, 2020, to report the securities at fair value. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 178
(3 min.)
Fair Value Adjustment—Trading ($53,000 – $51,000)........................... Unrealized Gain—Income .............................................................
2,000 2,000
BE 179 At January 1, 2020, Gulfport Corporation held one non-trading security: 1,500 ordinary shares of Netblaster purchased for €40 per share. At December 31, 2020, the fair value per share for Netblaster was €44. Prepare the adjusting entry to report the portfolio at fair value at December 31, 2020. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 179 Dec. 31
(3 min.)
Fair Value Adjustment—Non-trading ................................ [1,500 × (€44 – €40)] = €6,000 Unrealized Gain or Loss—Equity ............................
6,000 6,000
BE 180 Terra Firma Company has the following data at December 31, 2020 for its securities: Securities Non-trading Trading
Cost ₤35,000 45,000
Fair Value ₤38,000 40,000
Prepare the adjusting entry to report the securities at fair value at December 31, 2020.
Investments
13 - 39
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 180 Dec. 31
(5 min.)
Fair Value Adjustment—Non-trading ................................ Unrealized Gain or Loss—Equity .............................
3,000
Unrealized Loss—Income ................................................. Fair Value Adjustment—Trading ..............................
5,000
3,000 5,000
EXERCISES Ex. 181 Milner Corporation had the following transactions pertaining to debt investments. Jan. 1
Purchased 80, 8%, $1,000 Welch Company bonds for €80,000.
July 1
Sold 20 Welch Company bonds for €23,400.
Instructions Prepare journal entries for the purchase and sale of the Welch Company bonds. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 181 Jan. 1 July 1
(7 min.)
Debt Investments .................................................................... Cash ...............................................................................
80,000
Cash ....................................................................................... Debt Investments (€80,000 × 1/4) .................................. Gain on Sale of Debt Investments .................................
23,400
80,000 20,000 3,400
Ex. 182 Glaser Company had the following transactions pertaining to debt securities held as a short-term investment. 2020 Jan. 1 Purchased 40, 8%, $1,000 Adcock Company bonds for $40,000 cash. Interest is payable annually on January 1. Dec. 31 Accrued the annual interest on Adcock Company bonds. 2021 Jan. 1
Received the accrued interest and sold 30 Adcock Company bonds for $32,000.
Instructions (a) Journalize the transactions. (b) Prepare the adjusting entry for the accrual of interest on December 31, 2020. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 40 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 182 2020 (a) Jan. 1
(10–15 min.) Debt Investments............................................................ Cash ......................................................................
40,000
Cash ............................................................................... Interest Receivable ................................................
3,200
Cash ($32,000) ............................................................... Debt Investments ................................................... Gain on Sale of Debt Investments ........................ ($32,000 – $30,000 = $2,000)
32,000
(b) Interest Receivable ........................................................................ Interest Revenue ($10,000 × 8%) ........................................... Ex. 183
3,200
40,000
2021 Jan. 1 Jan. 1
3,200 30,000 2,000
3,200
Patrick Company purchased 50 Issac Company 8%, 10-year, €1,000 bonds on January 1, 2020, for €50,000. The bonds pay interest annually. On January 1, 2021, after receipt of interest, Patrick Company sold 30 of the bonds for €29,500. Instructions Prepare the journal entries to record the transactions described above. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 183 Jan. 1, 2020
(10-14 min.) Debt Investments............................................................ Cash ......................................................................
50,000
Dec. 31, 2020 Interest Receivable (€50,000 ´ 8%) ............................... Interest Revenue ...................................................
4,000
Jan. 1, 2021
Cash ............................................................................... Interest Receivable ................................................
4,000
Cash ............................................................................... Loss On Sale of Debt Investments ................................. Debt Investments (30/50 ´ €50,000) .....................
29,500 500
Jan. 1, 2021
50,000 4,000 4,000
30,000
Ex. 184 The following transactions were made by Waite Company. Assume all investments are short-term and are readily marketable. June
2
Purchased 300 ordinary shares of Dolen Corporation for $45 per share.
July
1
Purchased 200 Oslo Corporation bonds for $220,000.
30
Received a cash dividend of $2 per share from Dolen Corporation.
Sept. 15
Sold 90 shares of Dolen Corporation for $50 per share.
Dec. 31
Received semiannual interest check for $11,000 from Oslo Corporation.
31
Received a cash dividend of $2 per share from Dolen Corporation.
Investments Ex. 184
13 - 41
(Cont.)
Instructions Journalize the transactions. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 184 June
2
(12–17 min.)
Share Investments .............................................................. Cash ......................................................................... (To record purchase of 300 shares of Dolen Corporation)
13,500
Debt Investments ................................................................ Cash ......................................................................... (To record purchase of 200 Oslo Corporation bonds) Solution 184 (Cont.)
220,000
July
1
30
Sept. 15
Dec. 31
31
13,500
220,000
Cash ................................................................................... Dividend Revenue .................................................... (To record receipt of cash dividend)
600
Cash ................................................................................... Share Investments ................................................... Gain on Sale of Share Investments.......................... (To record sale of Dolen Corporation shares)
4,500
Cash ................................................................................... Interest Revenue ...................................................... (To record receipt of interest on Oslo Corporation bonds)
11,000
Cash ................................................................................... Dividend Revenue .................................................... (To record receipt of cash dividend)
420
600
4,050 450
11,000
420
Ex. 185 On April 1, Smith Company buys 3,000 ordinary shares of Porter for $60,900. On October 1, Smith sells 1,000 shares of Porter for $22,500. Instructions Prepare journal entries for the purchase and sale of the Porter ordinary shares. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 185 Apr. 1 Oct. 1
(7 min.)
Share Investments .................................................................. Cash ...............................................................................
60,900
Cash ....................................................................................... Share Investments ($60,900 × 1/3) ................................ Gain on Sale of Share Investments ...............................
22,500
For Instructor Use Only
60,900 20,300 2,200
13 - 42 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 186 Stone Company had the following transactions pertaining to short-term investments in equity securities. Jan.
1
Purchased 1,000 ordinary shares of Quayle Company for $9,750 cash.
June
1
Received cash dividends of $.50 per share on Quayle Company shares.
Sept. 15
Sold 400 ordinary shares of Quayle Company for $2,400.
Dec.
Received cash dividends of $.50 per share on Quayle Company shares.
1
Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 186
(10–15 min.)
(a) Jan.
Share Investments ........................................................ Cash .....................................................................
9,750
Cash (1,000 × $.50) ...................................................... Dividend Revenue ................................................
500
Cash .......................................................................... Loss on Sale of Share Investments .............................. Share Investments ............................................... [400 × ($9,750 ÷ 1,000)]
2,400 1,500
Cash (600 × $.50) ......................................................... Dividend Revenue ................................................
300
1
June 1 Sept. 15
Dec.
1
9,750 500
3,900
300
(b) Dividend Revenue and Loss on Sale of Share Investments are reported under Other income and expense on the income statement. Ex. 187 Trent Corporation's statement of financial position at December 31, 2019, showed the following: Short-term investments, at fair value
€46,500
Trent Corporation's trading securities portfolio of investments consisted of the following at December 31, 2019: Security Carey Ordinary Shares Adler Preference Shares Hill Ordinary Shares
Number of Shares 200 400 300
Cost €30,000 6,000 9,000 €45,000
During 2020, the following transactions took place: Feb. 5 Mar. 30 Sept. 9
Sold 50 ordinary shares of Carey for €8,000. Purchased 25 ordinary shares of Hill for €950. Purchased 50 ordinary shares of Hill for €2,000.
Investments Ex. 187
13 - 43
(Cont.)
At year end on December 31, 2020, the fair values per share were: Fair Value Per Share Carey Ordinary Shares €158.00 Adler Preference Shares €14.00 Hill Ordinary Shares €26.00 Instructions (a) Prepare the journal entries to record the 2020 share transactions. (b) On December 31, 2020, prepare any adjusting entry that might be necessary relative to the trading securities portfolio. (c) Show how the share investments will appear on Trent Corporation's statement of financial position at December 31, 2020. Ans: N/A, LO: 2, 3, Bloom: AN, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 187
(15–20 min.)
(a)
Cash ............................................................................ Share Investments [(50 ÷ 200) × €30,000)] ........ Gain on Sale of Share Investments .................... (To record sale of 50 ordinary shares of Carey)
8,000
Share Investments ...................................................... Cash ................................................................... (To record purchase of 25 ordinary shares of Hill)
950
Share Investments ...................................................... Cash ................................................................... (To record purchase of 50 ordinary shares of Hill) Security Number of Shares Cost Carey Ordinary Shares 150 €22,500 Adler Preference Shares 400 6,000 Hill Ordinary Shares 375 11,950 €40,450
2,000
Unrealized Loss—Income [(€40,450 – €39,050) + €1,500*] ......... Fair Value Adjustment—Trading ..........................................
2,900
Feb.
5
Mar. 30
Sept. 9 (b)
7,500 500
950
2,000 Fair Value €23,700 5,600 9,750 €39,050 2,900
*(€46,500 fair value – €45,000 cost) (c)
Short-term investments, at fair value
€39,050
Ex. 188 On January 5, 2020, Reiley Company purchased the following share securities as a long-term investment: 300 ordinary shares Holle Corporation for $4,200. 500 ordinary shares Wood Corporation for $10,000. 600 ordinary shares Kiley Corporation for $19,800.
For Instructor Use Only
13 - 44 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 188
(Cont.)
Assume that Reiley Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments. On June 30, 2020, Reiley Company received the following cash dividends: Holle Corporation ......................................... Wood Corporation ........................................ Kiley Corporation ..........................................
$2.00 per share $1.00 per share $1.50 per share
On November 15, 2020, Reiley Company sold 200 shares of Kiley Corporation for $7,500. On December 31, 2020, the fair value of the securities held by Reiley Company is as follows: Holle Corporation ordinary shares Wood Corporation ordinary shares Kiley Corporation ordinary shares
Per Share $10 16 32
Instructions Prepare the appropriate journal entries that Reiley Company should make on the following dates: January 5, 2020 June 30, 2020 November 15, 2020 December 31, 2020 Ans: N/A, LO: 2, 3, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 188
(20–25 min.)
January 5, 2020 Share Investments ........................................................................ 34,000 Cash ..................................................................................... (To record purchase of share securities as a long-term investment) June 30, 2020 Cash .............................................................................................. Dividend Revenue ................................................................ (To record cash dividends received)
34,000
2,000* 2,000
*300 × $2 = $600; 500 × $1 = $500; and 600 × $1.50 = $900. November 15, 2020 Cash .............................................................................................. Share Investments................................................................ Gain on Sale of Share Investments ...................................... (To record sale of 200 ordinary shares of Kiley Corporation) December 31, 2020 Unrealized Loss—Equity ............................................................... Fair Value Adjustment—Non-Trading................................... (To value long-term investments at fair value)
7,500 6,600 900
3,600 3,600
Investments Solution 188.
13 - 45
(Cont.) Investment Portfolio
Security Holle Corporation Wood Corporation Kiley Corporation Total
Shares 300 500 400
Cost $ 4,200 10,000 13,200 $27,400
Fair Value $ 3,000 8,000 12,800 $23,800
Ex. 189 Rosen Company purchased 35,000 ordinary shares of Polo Corporation as a long-term investment for ₤770,000. During the year, Polo Corporation reported net income of ₤300,000 and paid dividends of ₤100,000. Instructions (a) Assuming that the 35,000 shares represent a 15% interest in Polo Corporation: 1. Prepare the journal entry to record the investment in Polo. 2. Prepare any entries that Rosen Company should make in accounting for its investment in Polo during the year. 3. What is the balance of the Share Investments account on Rosen Company's books at the end of the year? (b)
Repeat requirement (a) above except assume that the 35,000 shares represent a 25% interest in Polo Corporation.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 189 (a)
(16–21 min.)
Cost Method 1. Share Investments .................................................................. Cash ............................................................................... (To record purchase of 35,000 shares of Polo Corporation) 2. Cash ........................................................................................ Dividend Revenue .......................................................... [(To record dividends received); ₤100,000 × 15% = ₤15,000]
770,000 770,000
15,000 15,000
3. The Share Investments account balance at the end of the year is ₤770,000. (b)
Equity Method 1. Share Investments .................................................................. Cash ............................................................................... (To record purchase of 35,000 shares of Polo Corporation)
For Instructor Use Only
770,000 770,000
13 - 46 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 189
(Cont.)
2. Share Investments .................................................................. Revenue from Share Investments .................................. (To record 25% equity in Polo's net income) ₤300,000 × 25% = ₤75,000
75,000
Cash ........................................................................................ Share Investments.......................................................... [(To record dividends received); ₤100,000 × 25% = ₤25,000]
25,000
75,000
25,000
3. The Share Investments account balance at the end of the year is ₤820,000 (₤770,000 + ₤75,000 – ₤25,000). Ex. 190 On January 1, Lance Corporation purchased a 30% equity in Sloan Company for $140,000. At December 31, Sloan declared and paid a $40,000 cash dividend and reported net income of $100,000. Instructions Prepare the necessary journal entries for Lance Corporation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 190 Jan. 1
(7–9 min.)
Share Investments .................................................................. Cash ...............................................................................
140,000
Dec. 31 Cash ($40,000 × .30)............................................................... Share Investments..........................................................
12,000
Share Investments ($100,000 × .30) ....................................... Revenue from Share Investments ..................................
30,000
140,000 12,000 30,000
Ex. 191 Information pertaining to long-term share investments in 2020 by Tate Corporation follows: Acquired 10% of the 250,000 ordinary shares of of Barkly Company at a total cost of $8 per share on January 1, 2020. On July 1, Barkly Company declared and paid a cash dividend of $2 per share. On December 31, Barkly's reported net income was $654,000 for the year. Obtained significant influence over Tolan Company by buying 25% of Tolan's 100,000 outstanding shares at a total cost of $22 per share on January 1, 2020. On June 15, Tolan Company declared and paid a cash dividend of $1.50 per share. On December 31, Tolan's reported net income was $280,000. Instructions Prepare all necessary journal entries for 2020 for Tate Corporation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments Solution 191 Jan.
Jan.
1
1
June 15 July
1
Dec. 31
(15–20 min.)
Share Investments ............................................................... Cash ............................................................................ (250,000 × 10% × $8 = $200,000)
200,000
Share Investments ............................................................... Cash ............................................................................ (25% × 100,000 × $22 = $550,000)
550,000
Cash (25,000 × $1.50) ......................................................... Share Investments ......................................................
37,500
Cash (25,000 × $2) .............................................................. Dividend Revenue .......................................................
50,000
Solution 191
13 - 47
200,000
550,000
37,500 50,000
(Cont.)
Share Investments ............................................................... Revenue from Share Investments ............................... ($280,000 × 25% = $70,000)
70,000 70,000
Ex. 192 On February 1, Milo Company purchased 1,000 ordinary shares (2% ownership) of Werth Company for $32 per share. On March 20, Milo Company sold 200 shares of Werth for $5,800, Milo received a dividend of $1.00 per share on April 25. On June 15, Milo sold 300 shares of Werth for $10,200. Instructions Prepare the journal entries to record the transactions described above. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 192 (10–13 min) February 1 Share Investments ........................................................ Cash (1,000 ´ $32) ................................................
32,000
March 20 Cash .............................................................................. Loss on Sale of Share Investments ............................... Share Investments ($32,000 ´ 200/1,000) ..............
5,800 600
April 25 Cash (800 ´ $1.00) ........................................................ Dividend Revenue ...................................................
800
June 15 Cash ............................................................................ Share Investments ($32,000 ´ 300/1,000) .............. Gain on Sale of Share Investments ........................
10,200
For Instructor Use Only
32,000
6,400
800
9,600 600
13 - 48 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 193 On January 1 Jett Corporation purchased a 30% equity in Dexter Corporation for €220,000. At December 31 Dexter declared and paid a €60,000 cash dividend and reported net income of €200,000. Instructions (a) Journalize the transactions. (b) Determine the amount to be reported as an investment in Dexter at December 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 193 (8–10 min.) (a)
Jan.
1
Dec. 31 31
(b)
Share Investments ............................... Cash................................................
220,000
Cash (€60,000 ´ 30%) ......................... Share Investments .......................... Share Investments................................. Revenue from Share Investments (€200,000 ´ 30%) ...........................
18,000
Investment in Dexter, January 1 Less: Dividend received Plus: Share of reported income Investment in Dexter, December 31
220,000 18,000 60,000 60,000 €220,000 (18,000) 60,000 €262,000
Ex. 194 Presented below are two independent situations. 1.
2.
Grand Cosmetics acquired 10% of the 200,000 ordinary shares of Cey Fashion at a total cost of $12 per share on March 18, 2020. On June 30, Cey declared and paid a $60,000 dividend. On December 31, Cey reported net income of $110,000 for the year. At December 31, the market price of Cey Fashion was $15 per share. The shares are classified as non-trading. Unruh, Inc., obtained significant influence over Olsen Corporation by buying 25% of Olsen's 40,000 outstanding ordinary shares at a total cost of $7 per share on January 1, 2020. On June 15, Olsen declared and paid a cash dividend of $30,000. On December 31, Olsen reported a net income of $80,000 for the year.
Instructions Prepare all the necessary journal entries for 2020 for (a) Grand Cosmetics and (b) Unruh, Inc. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Investments
13 - 49
Solution 194 (10–14 min.) (a)
2020 Mar. 18 June 30 Dec. 31
(b)
Jan. 1 June 15 Dec. 31
Share Investments .................................. Cash (200,000 ´ 10% ´ $12) ............
240,000
Cash ......................................................... Dividend Revenue ($60,000 ´ 10%)..
6,000
Fair Value Adjustment—Non-trading ......... Unrealized Gain or Loss—Equity. ($300,000 – $240,000) ........................
60,000
Share Investments ................................... Cash (40,000 ´ 25% ´ $7) ..................
70,000
Cash .......................................................... Share Investments ($30,000 ´ 25%) ...
7,500
Share Investments ..................................... Revenue from Share Investments ($80,000 ´ 25%) .............................
20,000
240,000 6,000
60,000 70,000 7,500
20,000
Ex. 195 At December 31, 2020, the non-trading securities for Milner, Inc. are as follows. Security X Y Z
Cost $27,500 12,500 23,000 $63,000
Fair Value $23,000 14,000 19,000 $ 56,000
Instructions (a) Prepare the adjusting entry at December 31, 2020, to report the securities at fair value. (b) Show the statement of financial position and income statement presentation at December 31, 2020, after adjustment to fair value. The securities are considered to be a long-term investment. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 195 (5-8 min) (a) (b)
Dec. 31
Unrealized Gain or Loss—Equity ....................... Fair Value Adjustment—Non-trading ......
7,000 7,000
Statement of Financial Position Investments Investments in shares of less than 20% owned companies, at fair value .....................................................
$56,000
Equity Less: Accumulated other comprehensive loss .....................................................................................
$ (7,000)
For Instructor Use Only
13 - 50 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 196 At December 31, 2020, the trading securities for Carter Company are as follows: Security A B
Cost $25,000 46,000 $71,000
Fair Value $28,000 40,000 $68,000
Instructions Prepare the adjusting entry at December 31, 2020, to report the securities at fair value. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 196
(3 min.)
Unrealized Loss—Income ...................................................................... Fair Value Adjustment—Trading ($71,000 – $68,000) ..................
3,000 3,000
Ex. 197 Price Corporation has the following trading securities portfolio of share investments as of December 31, 2020. Security A B C
Cost $19,000 22,000 34,000 $75,000
Fair Value $16,000 26,000 31,000 $73,000
On January 22, 2021, Price Corporation sold security C for $30,000. Instructions (a) Prepare the adjusting entry for Price Corporation on December 31, 2020, to report the portfolio at fair value. (b) Indicate the statement of financial position and income statement presentation of the fair value data for Price Corporation at December 31, 2020. (c) Prepare the journal entry for the 2021 sale. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 197
(12–17 min.)
(a)
2020 Unrealized Loss—Income ............................................. Fair Value Adjustment—Trading ..........................
Dec. 31 (b)
2,000 2,000
On the statement of financial position, the short-term investments are reported in the current assets section as follows: Current Assets Short-term Investments, at fair value $73,000 The unrealized loss account is reported under Other income and expense in the income statement.
Investments Solution 197
(Cont.)
(c)
2021 Cash ............................................................................. Loss on Sale of Share Investments .............................. Share Investments ...............................................
Jan. 22
13 - 51
30,000 4,000 34,000
Ex. 198 The following information is available for Clooney Corporation's non-trading securities at December 31, 2020. Security X Y
Cost €35,000 22,000 €57,000
Fair Value €33,000 28,000 €61,000
Instructions Prepare the adjusting entry to record the securities at fair value at December 31, 2020. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 198
(3 min.)
Fair Value Adjustment—Non-Trading .................................................... Unrealized Gain or Loss—Equity ...............................................
4,000 4,000
Ex. 199 At January 1, 2020, the non-trading securities portfolio held by Howe Corporation consisted of the following investments: 1. 2,500 ordinary shares of Nyland purchased for $42 per share. 2. 1,500 ordinary shares of Gregg purchased for $60 per share. At December 31, 2020, the fair values per share were Nyland $36 and Nyland $66. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2020. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2020. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 199 (a)
(b)
Security Nyland Gregg Totals Dec. 31
(8–10 min.) Cost $105,000 90,000 $195,000
Fair Value $ 90,000 99,000 $189,000
(2,500 × $36) (1,500 × $66)
Unrealized Loss—Equity ............................................. Fair Value Adjustment—Non-Trading ..............
For Instructor Use Only
6,000 6,000
13 - 52 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 200 Weaver Company has the following data at December 31, 2020 for its securities. Securities Trading Non-Trading
Cost $90,000 75,000
Fair Value $93,000 71,000
Instructions (a) Prepare the adjusting entries to report the securities at fair value. (b) Indicate the statement presentation of the related unrealized gain (loss) accounts for each class of securities. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 200 a)
(b)
(7–9 min.)
Fair Value Adjustment—Trading ................................................... Unrealized Gain—Income ....................................................
3,000
Unrealized Gain or Loss—Equity .................................................. Fair Value Adjustment—Non-Trading...................................
4,000
3,000 4,000
Unrealized Gain—Income: Income Statement under other income and expense Unrealized Gain or Loss—Equity: Statement of Financial Position, section as part of accumulated other comprehensive income equity
*Ex. 201 On January 2, 2020, Parr Company purchased 100% of the ordinary shares of Sneed Company for $420,000. The fair value of Sneed Company’s assets and liabilities are equal to their book values except that land has a fair value of $120,000 and buildings have a fair value of $260,000. Instructions (a) Complete the worksheet below for preparing a consolidated statement of financial position. You may add accounts to the worksheet if necessary. (b) Prepare a consolidated statement of financial position for Parr Company and Subsidiary on January 2, 2020. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
PARR COMPANY AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position January 2, 2020 (Acquisition Date)
Assets Land Buildings (net) Investment in Sneed ordinary shares Current assets Totals
Parr Company
Sneed Company
50,000 150,000
80,000 170,000
420,000 30,000
40,000
650,000
290,000
Eliminations Debits Credits
Consolidated Data
Investments Ex. 201
13 - 53
(Cont.)
Liabilities and Equity Share capital—Parr Share capital—Sneed Retained earnings—Parr Retained earnings—Sneed Current liabilities
370,000 200,000 240,000
Totals
40,000
60,000 30,000
650,000
290,000
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 201 (17 – 22 min.) (a)
PARR COMPANY AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position January 2, 2020 (Acquisition Date)
Assets Land Buildings (net) Investment in Sneed ordinary shares Current assets Excess of cost over book value of subsidiary Totals Liabilities and Equity Share capital—Parr Share capital—Sneed Retained earnings—Parr Retained earnings—Sneed Current liabilities Totals
Parr Company
Sneed Company
Eliminations Debits Credits
50,000 150,000
80,000 170,000
40,000 90,000
420,000 30,000
40,000
170,000 410,000 420,000 70,000
30,000 650,000
30,000 680,000
290,000
370,000
370,000 200,000
200,000
240,000 40,000 650,000
Consolidated Data
240,000 60,000 30,000 290,000
60,000 420,000
For Instructor Use Only
420,000
70,000 680,000
13 - 54 Test Bank for Financial Accounting: IFRS Edition, 4e *Solution 201
(Cont.)
(b)
PARR COMPANY AND SUBSIDIARY Consolidated Statement of Financial Position January 2, 2020 Assets
Goodwill Land Buildings (net) Current assets
$ 30,000 170,000 410,000 70,000 $ 680,000 Liabilities and Equity
Equity Share capital-ordinary Retained earnings Current liabilities
$ 370,000 240,000
$ 610,000 70,000 $680,000
*Ex. 202 On January 2, 2020, Pine Company purchased 100% of the outstanding common shares of Seely Company for $520,000. Any excess of cost over the book value of the net assets of Seely company should first be allocated to land $55,000, and Buildings $40,000 and any remainder to Goodwill. Instructions (a) Complete the following worksheet below for preparing a consolidated statement of financial position on the date of acquisition. You may add accounts to the worksheet that may be necessary. (b) Prepare a consolidated statement of financial position for Pine Company and Subsidiary on January 2, 2020. PINE COMPANY AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position January 2, 2020 (Acquisition Date)
Assets Land Buildings (net) Investment in Seely ordinary shares Current assets Totals Liabilities and Equity Share capital—Pine Share capital—Seely Retained earnings—Pine Retained earnings—Seely Current liabilities Totals
Pine Company
Seely Company
20,000 150,000
150,000 250,000
520,000 120,000
70,000
810,000
470,000
500,000 270,000 250,000 60,000
130,000 70,000
810,000
470,000
Eliminations Debits Credits
Consolidated Data
Investments
13 - 55
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 17, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
13 - 56 Test Bank for Financial Accounting: IFRS Edition, 4e *Solution 202 (17 – 22 min.) (a)
PINE COMPANY AND SUBSIDIARY Worksheet—Consolidated Statement of Financial Position January 2, 2020 (Acquisition Date)
Assets Land Buildings (net) Investment in Seely ordinary shares Current assets Excess of cost over book value of subsidiary Totals Liabilities and Equity Share capital—Pine Share capital—Seely Retained earnings—Pine Retained earnings—Seely Current liabilities Totals (b)
Pine Company
Seely Company
Eliminations Debits Credits
20,000 150,000
150,000 250,000
55,000 40,000
520,000 120,000
70,000
225,000 440,000 520,000 190,000
25,000 810,000
25,000 880,000
470,000
500,000
500,000 270,000
270,000
250,000 60,000 810,000
Consolidated Data
250,000 130,000 70,000 470,000
130,000 520,000
520,000
130,000 880,000
PINE COMPANY AND SUBSIDIARY Consolidated Statement of Financial Position January 2, 2020 Assets
Goodwill Land Buildings (net) Current assets
$ 25,000 225,000 440,000 190,000 $880,000 Liabilities and Equity
Equity Share capital-ordinary Retained earnings Current liabilities
$ 500,000 250,000
$750,000 130,000 $880,000
Investments
13 - 57
*Ex. 203 The separate statements of financial position of Platt Company and its wholly owned subsidiary, Speer Company, as of the date of acquisition are shown below: Consolidated Assets Platt Speer Data Equipment (net) $ 300,000 $ 486,000 Investment in Speer Co. 810,000 Inventory 100,000 300,000 Accounts Receivable 240,000 283,000 Cash 170,000 57,000 Totals $1,620,000 $1,126,000 Liabilities and Equity Share Capital-Ordinary Retained Earnings Bonds Payable Accounts Payable Totals
1,000,000 250,000 120,000 250,000 $1,620,000
630,000 180,000 150,000 166,000 $1,126,000
Instructions Provide the amount that should appear in the Consolidated Data column for each of the selected accounts. If the account should not appear in the Consolidated Data column, indicate "None." Assume that all accounts have normal balances and that Speer Company shares were acquired for cash at a price equal to its book value. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 203 (15 – 20 min.) Assets Equipment (net) Investment in Speer Co. Inventory Accounts Receivable Cash Totals
Platt $ 300,000 810,000 100,000 240,000 170,000 1,620,000
Speer $ 486,000 300,000 283,000 57,000 1,126,000
Consolidated Data $ 786,000 None 400,000 523,000 227,000 1,936,000
Liabilities and Equity Share Capital-Ordinary Retained Earnings Bonds Payable Accounts Payable Totals
1,000,000 250,000 120,000 250,000 1,620,000
630,000 180,000 150,000 166,000 1,126,000
1,000,000 250,000 270,000 416,000 1,936,000
For Instructor Use Only
13 - 58 Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 204. Debt investments are investments in government and _____________ bonds. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
205. Cost of debt investments includes the price paid plus ______________ Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
206. When an investor owns between 20% and 50% of the ordinary shares of a corporation, it is generally presumed that the investor has _______________ influence over the investee and therefore, the appropriate method of accounting for this type of investment is the _______________ method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
207. Under the cost method, dividends received from an investee company are credited to the_______________ account, whereas under the equity method, dividends received from an investee company are credited to the _______________ account. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
208. At the beginning of the year, Grant Corporation acquired 15% of Ernst Company ordinary shares for $300,000. Ernst Company reported net income for the year of $75,000 and paid $25,000 cash dividends during the year. The balance of the Share Investments account on the books of Grant Corporation at the end of the year should be $___________. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
209. A company that owns more than 50% of the ordinary shares of another company is known as the ______________ company and _____________ financial statements are usually prepared. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
210. _______________ securities are held with the intent of selling them sometime in the future. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
211. Fair Value Adjustment is a valuation ______________ account which is ______________ to (from) the cost of the investments. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
212. At the end of an accounting period, if the fair value of the trading securities portfolio is less than its cost, then the company should recognize an ______________ which is reported on the _________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Investments
13 - 59
213. An unrealized loss on trading securities is reported under Other ____________________ on the income statement. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
214. An unrealized gain or loss on non-trading securities is reported as a component of _________________ on the comprehensive income statement. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
215. Short-term investments are securities that are _____________ and ______________ to be converted into cash within the next year or operating cycle, whichever is longer. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 204. corporate 205. brokerage fees 206. significant, equity 207. Dividend Revenue, Share Investments 208. 300,000 209. parent, consolidated
210. 211. 212. 213. 214. 215.
For Instructor Use Only
Non-trading allowance, added (subtracted) unrealized loss, income statement income and expense other comprehensive income readily marketable, intended
13 - 60 Test Bank for Financial Accounting: IFRS Edition, 4e
MATCHING 216.
Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Non-trading securities Subsidiary company Equity method Accumulated other comprehensive income Fair value
F. G. H. I. J.
Consolidated financial statements Controlling interest Fair Value Adjustment Parent company Long-term investments
____ 1. Valuation allowance account. ____ 2. Amount for which a security could be sold. ____ 3. Ownership of more than 50% of another company's ordinary shares. ____ 4. Securities that may be sold in the future. ____ 5. Investments that are not readily marketable and not intended to be converted into cash within the next year. ____ 6. Financial statements that present the total assets and liabilities controlled by the parent and the total revenues and expenses of the subsidiary companies. ____ 7. The Share Investments account is adjusted for net income and dividends received. ____ 8. A company that owns more than 50% of the ordinary shares of another entity. ____ 9. Company whose shares are owned by the parent company. ____ 10. An account that is reported in the equity section. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
H E G A J
6. 7. 8. 9. 10.
F C I B D
Investments
13 - 61
SHORT-ANSWER ESSAY QUESTIONS S-A E 217 Distinguish between the cost and equity methods of accounting for investments in equity securities. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Reporting
Solution 217 Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding gain or loss is recognized and included in income (trading security) or as a separate component of equity (non-trading security). Under the equity method, the investment is originally recorded and reported at cost; subsequently, the investment account is adjusted during each period for the investor's share of the earnings or losses of the investee. The investor's share of the investee's earnings is recognized in the earnings of the investor. Dividends received from the investee are reductions in the carrying amount of the investment. S-A E 218 A consolidated statement of financial position reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why all the individual items appearing on the separate statement of financial positions of each of the affiliated companies cannot be added together to arrive at a consolidated total for each item. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 218 A consolidated statement of financial position does not include transactions that occurred between the affiliated companies (intercompany transactions). The inclusion of intercompany transactions would cause the assets, liabilities, and equity accounts to all be overstated in the consolidated statement of financial position. Thus, the individual items appearing on the separate statement of financial positions cannot simply be added together. S-A E 219 What purposes are served by reporting Unrealized Gains (Losses)—Equity as part of accumulated other comprehensive income? Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 219 Reporting Unrealized Gains (Losses)—Equity as accumulated other comprehensive income serves two important purposes: (1) it reduces the volatility of net income due to fluctuations in fair value, and (2) it still informs the financial statement user of the gain or loss that would occur if the securities were sold at fair value. S-A E 220 The Fair Value Adjustment account is a statement of financial position account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of. For Instructor Use Only
13 - 62 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 220
The Fair Value Adjustment account is a valuation allowance account for short-term and long-term investments. The Fair Value Adjustment account is increased when the difference between the investment portfolio’s fair value and cost increases. When specific securities are sold, the Fair Value Adjustment account is ignored because the account relates to the entire portfolio and not the specific securities. S-A E 221 When a year-end adjustment is made to reduce the trading securities portfolio to fair value, what effect, if any, will the adjustment have on the statement of financial position and the income statement? Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 221 The unrealized loss would be reported in the Other income and expense section of the income statement and the assets on the statement of financial position would be decreased by a credit balance in the Fair Value Adjustment—Trading account. S-A E 222 (Ethics) Greyhound Stables, Inc. operates several dog racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for Greyhound are received from April through October. These funds are usually invested in short-term, very liquid investments, such as ordinary shares and bonds. Among the shares purchased last year, was Servitronics, a company specializing in automatic vending equipment. The company decided not to sell its Servitronics shares at the end of last year, and has purchased more of the shares this year. The company intends to continue to purchase shares until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as short-term until the takeover is accomplished, so that less attention will be directed to it. (Presently, Greyhound has no long-term investment in shares at all.) Required: 1. Is it ethical for Greyhound to attempt to take over another company? Explain. 2. Is it ethical for Greyhound to leave its investment in the short-term investment category? Explain. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Industry/Sector, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Investments
13 - 63
Solution 222 1. Yes, Greyhound may attempt to "take over" or purchase another company. The means that it uses to accomplish its goal must be ethical, and certainly building up a portfolio of the shares in question is ethical. Unethical takeovers are those in which a company is purchased for its assets and "harvested," leaving employees without jobs, and possibly irreparably damaging a community. 2. It is not ethical for the company to leave the shares in the short-term category if it no longer meets the criterion for a short-term investment. It would depend upon whether the company was serious in its intention to purchase a controlling interest in Servitronics. Since there is no evidence to the contrary, it appears that Greyhound's investment should be classified as longterm. S-A E 223 (Communication) Sue Garner is the daughter of Fred Garner, the founder and president of Big Sky Enterprises. She has been working in various departments during school vacations throughout high school. She burst into the accounting department excitedly one morning. She said that the share price of several of the firm's non-trading securities are up, and that her father said that the company had made over $10,000 because of this jump in share prices. She asks to see how the increase is recorded. It is a very busy time in the accounting department, and so her question is deferred. Required: Prepare a brief note to answer Sue's question. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
For Instructor Use Only
13 - 64 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 223 This communication can be informal, but it should contain the key elements of the answer. Dear Sue, Yesterday, you asked to see how we recorded the $10,000 that the company had "earned" because of the jump in the price of some of the shares we hold. Since we were finishing month-end closing, we couldn't answer your question right away. The basic answer to your question is that we don't record those earnings. The change in share price is kind of like having the value of your house or car change. You don't get any money unless you sell the house or the car. It's the same with those investments. We record changes in the value only when we sell the shares and at the year end. We would record the difference between the amount we paid originally and the amount we received on the sale as a gain or a loss. Again, I'm sorry we couldn't ask you to stay yesterday. Stop by again sometime (any time except month end!) (signed)
Investments
13 - 65
GAAP QUESTIONS 1. The following asset is not considered a financial asset under both GAAP and IFRS a. inventories. b. held-for-collection securities. c. equity securities. d. trading securities. Ans: a, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
2. Under GAAP, the equity method of accounting for long-term investments in ordinary shares should be used when the investor has significant influence over an investee and owns a. less than 20% of the investee’s ordinary shares. b. more than 50% of the investee’s ordinary shares. c. 30% or more the investee’s ordinary shares. d. between 20% and 50% of the investee’s ordinary shares. Ans: d, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
3. At the end of the first year of operations, the total cost of the trading investments portfolio is $140,000. Total fair value is $125,000. The financial statements under GAAP should show a. a reduction in the carrying value of the asset $15,000 in current assets and a realized loss of $15,000 in other expenses and losses. b. a reduction in the carrying value of the asset $15,000 in current assets and an unrealized loss of $15,000 in other comprehensive income. c. a reduction in the carrying value of the asset of $15,000 in current assets and an unrealized loss of $15,000 in the equity section of the balance sheet. d. a reduction in the carrying value of the asset of $15,000 in current assets and unrealized loss of $15,000 in other expenses and losses. Ans: d, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
4. Under GAAP, unrealized gains on non-trading share investments should a. be reported as other comprehensive income. b. not be reported on the income statement or statement of financial position. c. be reported as other gains on the income statement as part of net income. d. be reported as other revenues and gains in the income statement as part of net income. Ans: a, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
5. Under GAAP, the unrealized loss on trading investments should be reported a. directly to equity bypassing the income statement. b. as part of other comprehensive loss not affecting net income. c. on the income statement reducing net income. d. as part of other comprehensive loss reducing net income. Ans: c, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
CHAPTER 14 STATEMENT OF CASH FLOWS CHAPTER LEARNING OBJECTIVES 1. Discuss the usefulness and format of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period. Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and non-current asset items. Financing activities involve cash flows resulting from changes in non-current liability and equity items. 2. Prepare a statement of cash flows using the indirect method. The preparation of a statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in non-current asset and liability accounts and record as investing and financing activities, or disclose as non-cash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the statement of financial position to make sure the amounts agree. 3. Analyze the statement of cash flows. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of additional dividends or for expansion. a
4. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in non-current asset and liability accounts and record as investing and financing activities, or disclose as non-cash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the statement of financial position to make sure the amounts agree. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities.
a
5. Use the T-account approach to prepare a statement of cash flows. To use T-accounts to prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for operating, investing, and financing activities; (2) prepare smaller T-accounts for all other noncash accounts; (3) insert beginning and ending balances for all accounts; and (4) follow the steps in illustration 14B.1 entering debit and credit amounts as needed.
14 - 2
Test Bank for Financial Accounting: IFRS Edition, 4e
TRUE-FALSE STATEMENTS 1.
The statement of cash flows is a required statement that must be prepared along with an income statement, statement of financial position, and retained earnings statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
2.
For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
3.
A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
4.
A statement of cash flows indicates the sources and uses of cash during a period.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
5.
A statement of cash flows should help investors and creditors assess the entity’s ability to generate future income.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
6.
The information in a statement of cash flows helps investors and creditors assess the company’s ability to pay dividends and meet obligations.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
7.
Financial statement readers can determine future investing and financing transactions by examining a company’s statement of cash flows.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
8.
In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
9.
Non-cash investing and financing activities must be reported in the body of a statement of cash flows.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
10.
The statement of cash flows classifies cash receipts and payments as operating, nonoperating, and financial activities.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
11.
The sale of land for cash would be classified as a cash inflow from an investing activity.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
12.
Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income. For Instructor Use Only
Statement of Cash Flows
14 - 3
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
13.
The receipt of dividends from non-current investments must be classified as a cash inflow from investing activities.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
14.
The payment of interest on bonds payable can be classified as a cash outflow from operating activities.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
15.
Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16.
The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
17.
All major financing and investing activities affect cash.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA
18.
Cash provided by operations is generally equal to operating income.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
19.
Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
20.
Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
21.
A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
22.
In preparing a statement of cash flows, an increase in the Share Capital and Treasury Shares accounts during a period would be investing activities.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
23.
Cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
24.
Free cash flow equals cash provided by operations less capital expenditures and cash dividends.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
For Instructor Use Only
14 - 4
Test Bank for Financial Accounting: IFRS Edition, 4e
For Instructor Use Only
Statement of Cash Flows a
25.
14 - 5
Operating expenses + an increase in prepaid expenses – a decrease in accrued expenses payable = cash payments for operating expenses.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
26.
During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable increased by $4,000; therefore, the cash paid for income taxes was $26,000.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
27.
During a period, cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
28.
The change in cash is equal to the change in liabilities less the change in equity plus the change in non-cash assets.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
29.
Analysis of the changes in all of the non-cash statement of financial position accounts will explain the change in the cash account.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
30.
In the T-account approach, the change in cash equals the change in liabilities + the change in equity less the change in Non-cash assets.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
31.
The statement of cash flows classifies cash receipts and cash payments into two categories: operating activities and nonoperating activities.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
32.
Financing activities include the obtaining of cash from issuing debt and repaying the amounts borrowed.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
33.
The adjusted trial balance is the only item needed to prepare the statement of cash flows.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
34.
Under the indirect method, retained earnings is adjusted for items that affected reported net income but did not affect cash.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
35.
Under the direct method, the formula for computing cash collections from customers is sales revenues plus the increase in accounts receivable or minus the decrease in accounts receivable.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
36.
Under the T-account approach, net income is posted as a debit to the operating section of the Cash T-account and a credit Retained Earnings.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
14 - 6
Test Bank for Financial Accounting: IFRS Edition, 4e
MULTIPLE CHOICE QUESTIONS 37.
The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
The statement of cash flows a. must be prepared on a daily basis. b. summarizes the operating, financing, and investing activities of an entity. c. is another name for the income statement. d. is a special section of the income statement.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
Which one of the following items is not generally used in preparing a statement of cash flows? a. Adjusted trial balance b. Comparative statements of financial position c. Current income statement d. Additional information
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
40.
The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the cash receipts and cash payments during a period. d. facilitate banking relationships.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
41.
By examining the statement of cash flows, investors can make predictions of the a. amounts of future cash flows. b. timing of future cash flows. c. uncertainty of future cash flows. d. All of these answer choices are correct.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42.
In addition to the three basic financial statements, which of the following is also a required financial statement? a. the "Cash Budget" b. the Statement of Cash Flows c. the Statement of Cash Inflows and Outflows d. the "Cash Reconciliation"
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows 43.
14 - 7
The statement of cash flows will not report the a. amount of checks outstanding at the end of the period. b. sources of cash in the current period. c. uses of cash in the current period. d. change in the cash balance for the current period.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44.
The statement of cash flows reports each of the following except a. cash receipts from operating activities. b. cash payments from investing activities. c. the net change in cash. d. cash sales.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
45.
Each of the following are particularly interested in the statement of cash flows except a. creditors. b. employees. c. shareholders. d. government agencies.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
46.
Lending money and collecting the loans are a. operating activities. b. investing activities. c. financing activities. d. Non-cash investing and financing activities.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
47.
The best measure of a company's ability to generate sufficient cash to continue as a going concern is net cash provided by a. financing activities. b. investing activities. c. operating activities. d. processing activities.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
48.
The acquisition of land by issuing ordinary shares is a. a non-cash transaction which is not reported in the body of a statement of cash flows. b. a cash transaction and would be reported in the body of a statement of cash flows. c. a non-cash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing. b. operating, financing, and investing. c. financing, operating, and investing. d. financing, investing, and operating.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 8 50.
Test Bank for Financial Accounting: IFRS Edition, 4e Financing activities include a. lending money. b. acquiring investments. c. issuing debt. d. acquiring non-current assets.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51.
Investing activities include a. collecting cash on loans made. b. obtaining cash from creditors. c. obtaining capital from owners. d. repaying money previously borrowed.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
Generally, the most important category on the statement of cash flows is cash flows from a. operating activities. b. investing activities. c. financing activities. d. significant non-cash activities.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53.
The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
Cash receipts from interest and dividends are classified as a. financing activities. b. investing activities. c. either operating or investing activities. d. either financing or investing activities.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
55.
Each of the following is an example of a significant non-cash activity except a. conversion of bonds into ordinary shares. b. exchanges of plant assets. c. issuance of debt to purchase assets. d. share dividends.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows 56.
14 - 9
If a company has both an inflow and outflow of cash related to property, plant, and equipment, the a. two cash effects can be netted and presented as one item in the investing activities section. b. cash inflow and cash outflow should be reported separately in the investing activities section. c. two cash effects can be netted and presented as one item in the financing activities section. d. cash inflow and cash outflow should be reported separately in the financing activities section.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
57.
Of the items below, the one that appears first on the statement of cash flows is a. non-cash investing and financing activities. b. net increase (decrease) in cash. c. cash at the end of the period. d. cash at the beginning of the period.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
58.
Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account b. Collection of an accounts receivable c. Sale of treasury shares d. Exercise of the call option on bonds payable
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
59.
Significant non-cash transactions would not include a. conversion of bonds into ordinary shares. b. asset acquisition through bond issuance. c. treasury share acquisition. d. exchange of plant assets.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
60.
In preparing a statement of cash flows, a conversion of bonds into ordinary shares will be reported in a. the financing section. b. the operating section. c. a separate note or supplementary schedule to the financial statements. d. the equity section.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
61.
Indicate where the transaction of paying income taxes would appear, if at all, on the statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 10 Test Bank for Financial Accounting: IFRS Edition, 4e 62.
Indicate where the transaction of issuing ordinary shares for cash would appear, if at all, on the indirect statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
63.
Indicate where the transaction of purchasing land for cash would appear, if at all, on the indirect statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
64.
Indicate where the transaction of purchasing land and a building with a mortgage would appear, if at all, on the indirect statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
65.
Joy Elle’s Vegetable Market had the following transactions during 2020: 1. Issued $100,000 of par value ordinary shares for cash. 2. Repaid a 6 year note payable in the amount of $44,000. 3. Acquired land by issuing ordinary shares of par value $200,000. 4. Declared and paid a cash dividend of $4,000. 5. Sold a non-current investment (cost $84,000) for cash of $12,000. 6. Acquired an investment in IBM shares for cash of $24,000. What is the net cash provided by financing activities? a. $52,000 b. $100,000 c. $56,000 d. $36,000
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
66.
Joy Elle’s Vegetable Market had the following transactions during 2020: 1. Issued $100,000 of par value ordinary shares for cash. 2. Repaid a 6 year note payable in the amount of $44,000. 3. Acquired land by issuing ordinary shares of par value $200,000. 4. Declared and paid a cash dividend of $4,000. 5. Sold a non-current investment (cost $84,000) for cash of $12,000. 6. Acquired an investment in IBM shares for cash of $24,000. What is the net cash provided by investing activities? a. $24,000 b. $64,000 c. ($12,000) d. $12,000
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows 67.
14 - 11
Miller Company purchased treasury shares with a cost of $15,000 during 2020. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $956,000. Cash flows from financing activities for 2020 total a. $936,000 net cash inflow. b. $951,000 net cash inflow. c. $956,000 net cash outflow. d. $921,000 net cash inflow.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
68.
Cline Company issued ordinary shares for proceeds of $492,000 during 2020. The company paid dividends of $66,000 and issued a non-current note payable for $90,000 in exchange for equipment during the year. The company also purchased treasury shares that had a cost of $14,000. The financing section of the statement of cash flows will report net cash inflows of a. $412,000. b. $524,000. c. $426,000. d. $478,000.
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
69.
In Gentry Company, land decreased $360,000 because of a cash sale for $360,000, the equipment account increased $80,000 as a result of a cash purchase, and Bonds Payable increased $260,000 from issuance for cash at face value. The net cash provided by investing activities is a. $360,000. b. $540,000. c. $280,000. d. $260,000.
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
70.
Accounts receivable arising from sales to customers amounted to ¥800,000 and ¥700,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was ¥3,100,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. ¥3,100,000. b. ¥3,200,000. c. ¥3,800,000. d. ¥3,000,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
71.
Accounts receivable arising from sales to customers amounted to ¥350,000 and ¥400,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was ¥2,200,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. ¥2,200,000. b. ¥2,250,000. c. ¥2,550,000. d. ¥2,150,000. For Instructor Use Only
14 - 12 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows 72.
14 - 13
Wilton Company reported net income of $80,000 for the year. During the year, accounts receivable decreased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a. $70,000. b. $95,000. c. $79,000. d. $75,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
73.
Buster Company reported a net loss of $12,000 for the year ended December 31, 2020. During the year, accounts receivable increased $28,000, inventory decreased $20,000, accounts payable decreased by $40,000, and depreciation expense of $20,000 was recorded. During 2020, operating activities a. used net cash of $40,000. b. used net cash of $56,000. c. provided net cash of $56,000. d. provided net cash of $36,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
74.
The net income reported on the income statement for the current year was ¥2,950,000. Depreciation recorded on plant assets was ¥380,000. Accounts receivable and inventories increased by ¥20,000 and ¥80,000, respectively. Prepaid expenses and accounts payable decreased by ¥10,000 and ¥110,000 respectively. How much cash was provided by operating activities? a. ¥2,750,000 b. ¥3,130,000 c. ¥2,950,000 d. ¥3,290,000
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
75.
The net income reported on the income statement for the current year was ¥3,200,000. Depreciation was ¥500,000. Account receivable and inventories decreased by ¥100,000 and ¥300,000, respectively. Prepaid expenses and accounts payable increased, respectively, by ¥10,000 and ¥80,000. How much cash was provided by operating activities? a. ¥3,810,000 b. ¥4,170,000 c. ¥4,010,000 d. ¥4,090,000
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
76.
If a gain of $25,000 is incurred in selling (for cash) office equipment having a book value of $200,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $175,000. b. $225,000. c. $200,000. d. $25,000.
Ans: b, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 14 Test Bank for Financial Accounting: IFRS Edition, 4e 77.
If a loss of $35,000 is incurred in selling (for cash) office equipment having a book value of $140,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $105,000. b. $140,000. c. $175,000. d. $35,000.
Ans: a, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
78.
Harbor Company reported net income of $90,000 for the year ended December 31, 2020. During the year, inventories decreased by $12,000, accounts payable decreased by $18,000, depreciation expense was $20,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 2020 using the indirect method was a. $149,000. b. $95,000. c. $107,000. d. $85,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
79.
The third (final) step in preparing the statement of cash flows is to a. analyze changes in non-current asset and liability accounts. b. compare the net change in cash with the change in the cash account reported on the statement of financial position. c. determine net cash provided by operating activities. d. list the non-cash activities.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
80.
Which one of the following items is not necessary in preparing a statement of cash flows? a. Determine the change in cash b. Determine the cash provided by operations c. Determine cash from financing and investing activities d. Determine the cash in all bank accounts
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
If accounts receivable have increased during the period, a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis.
Ans: b, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
82.
If accounts payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis.
Ans: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
Statement of Cash Flows 83.
14 - 15
Which one of the following affects cash during a period? a. Recording depreciation expense b. Declaration of a cash dividend c. Write-off of an uncollectible account receivable d. Payment of an accounts payable
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
84.
In calculating cash flows from operating activities using the indirect method, a gain on the disposal of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
85.
Meyer Company reported net income of €95,000 for the year. During the year, accounts receivable increased by €7,000, accounts payable decreased by €3,000 and depreciation expense of €5,000 was recorded. Net cash provided by operating activities for the year is a. €90,000. b. €110,000. c. €94,000. d. €95,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
86.
Flynn Company reported a net loss of $50,000 for the year ended December 31, 2020. During the year, accounts receivable decreased $25,000, inventory increased $40,000, accounts payable increased by $50,000, and depreciation expense of $25,000 was recorded. During 2020, operating activities a. used net cash of $10,000. b. used net cash of $40,000. c. provided net cash of $10,000. d. provided net cash of $40,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87.
Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. working capital method. d. cost-benefit method.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
88.
In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
For Instructor Use Only
14 - 16 Test Bank for Financial Accounting: IFRS Edition, 4e 89.
Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. causes cash to increase. c. causes cash to decrease. d. is added to net income.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
90.
In developing the cash flows from operating activities, most companies a. use the direct method. b. use the indirect method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91.
Each of the following is added to net income in computing net cash provided by operating activities except. a. amortization expense. b. an increase in accrued expenses payable. c. a gain on disposal of equipment. d. a decrease in inventory.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
92.
Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense b. An increase in accounts receivable c. An increase in accounts payable d. A decrease in prepaid expenses
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
93.
Which of the following would be added to net income using the indirect method? a. An increase in accounts receivable b. An increase in prepaid expenses c. Depreciation expense d. A decrease in accounts payable
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94.
Which of the following would not be an adjustment to net income using the indirect method? a. Depreciation Expense b. An increase in Prepaid Insurance c. Amortization Expense d. An increase in Land
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
95.
In calculating cash flows from operating activities using the indirect method, a loss on the disposal of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows 96.
14 - 17
Which of the following adjustments to convert net income to net cash provided by operating activities is correct? a. b. c. d.
Accounts Receivable Prepaid Expenses Inventory Taxes Payable
Add to Net Income increase increase decrease decrease
Deduct from Net Income decrease decrease increase increase
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
97.
Which of the following adjustments to convert net income to net cash provided by operating activities is incorrect? a. b. c. d.
Accounts Receivable Prepaid Expenses Inventory Accounts Payable
Add to Net Income decrease increase decrease increase
Deduct from Net Income increase decrease increase decrease
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98.
Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income? a. Gain on Disposal of Equipment b. Depreciation Expense c. Patent Amortization Expense d. Depletion Expense
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
99.
Using the indirect method, if equipment is sold at a gain, the a. sale proceeds received are deducted in the operating activities section. b. sale proceeds received are added in the operating activities section. c. amount of the gain is added in the operating activities section. d. amount of the gain is deducted in the operating activities section.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
100.
A company had net income of ¥2,400,000. Depreciation expense is ¥260,000. During the year, Accounts Receivable and Inventory increased ¥150,000 and ¥400,000, respectively. Prepaid Expenses and Accounts Payable decreased ¥20,000 and ¥40,000, respectively. There was also a loss on the sale of equipment of ¥30,000. How much cash was provided by operating activities? a. ¥2,060,000 b. ¥2,120,000 c. ¥2,960,000 d. ¥3,080,000
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
101.
On the statement of cash flows using the indirect method, patent amortization expense will a. be added to net income in the operating section. b. be deducted from net income in the operating section. c. appear as an inflow of cash in the investing section. d. appear as an outflow of cash in the investing section.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 18 Test Bank for Financial Accounting: IFRS Edition, 4e 102.
The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant non-cash activity section. b. operating activities section. c. investing activities section. d. financing activities section.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103.
Land acquired from the issuance of ordinary shares is reported a. as a financing activity. b. as an investing activity. c. as an operating activity. d. in a separate note or supplementary schedule to the financial statements.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
In Rooney Company, Treasury Shares increased $30,000 from a cash purchase, and Retained Earnings increased $120,000 as a result of net income of $186,000 and cash dividends paid of $66,000. Net cash used by financing activities is: a. $30,000. b. $66,000. c. $150,000. d. $96,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
105.
In Wallace Company, net income is $340,000. If accounts receivable increased $140,000 and accounts payable decreased $40,000, net cash provided by operating activities using the indirect method is: a. $160,000. b. $240,000. c. $440,000. d. $520,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
106.
In Shannon Company, there was an increase in the land account during the year of $48,000. Analysis reveals that the change resulted from a cash sale of land at a cost of $150,000, and a cash purchase of land for $198,000. In the statement of cash flows, the change in the land account should be reported in the investment section: a. as a net purchase of land, $48,000. b. only as a purchase of land $198,000. c. as a purchase of land $198,000 and a sale of land $150,000. d. only as a sale of land $150,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows 107.
14 - 19
The following data are available for Springer Corporation. Net income ₤380,000 Depreciation expense 60,000 Dividends paid 90,000 Gain on disposal of land 15,000 Decrease in accounts receivable 30,000 Decrease in accounts payable 45,000 Net cash provided by operating activities is: a. ₤320,000. b. ₤410,000. c. ₤440,000. d. ₤500,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
The following data are available for Nichols Corporation. Sale of land $400,000 Sale of equipment 200,000 Issuance of ordinary shares 280,000 Purchase of equipment 120,000 Payment of cash dividends 240,000 Net cash provided by investing activities is: a. $480,000. b. $520,000. c. $600,000. d. $760,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
109.
The following data are available for Cole Company. Increase in accounts payable $280,000 Increase in bonds payable 600,000 Sale of investments 300,000 Issuance of ordinary shares 420,000 Payment of cash dividends 210,000 Net cash provided by financing activities is: a. $630,000. b. $810,000. c. $1,120,000. d. $1,190,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
110.
If $525,000 of bonds are issued during the year but $210,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $315,000. b. net decrease in cash of $315,000. c. increase in cash of $525,000 and a decrease in cash of $210,000. d. net gain on retirement of bonds of $315,000. For Instructor Use Only
14 - 20 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: c, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows? a. Payment of a cash dividend during the period. b. Net income for the period. c. Neither payment of a cash dividend during the period nor net income for the period. d. Both payment of a cash dividend during the period and net income for the period.
Ans: a, LO: 2, 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
The statement of cash flows a. is prepared instead of an income statement under IFRS. b. is used to assess an entity's ability to pay dividends and meet obligations. c. is prepared from comparative income statements. d. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement.
Ans: b, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
113.
In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of a. the adjusted trial balance. b. the current period's statement of financial position. c. a comparative statement of financial position. d. a comparative income statement.
Ans: c, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
114.
To determine the net cash provided (used) by operating activities, it is necessary to analyze a. the current year's income statement. b. a comparative statement of financial position. c. additional information. d. All of these answer choices are correct.
Ans: d, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
115.
Which of the following would not be needed to determine net cash provided by operating activities? a. Depreciation expense b. Change in accounts receivable c. Payment of cash dividends d. Change in prepaid expenses
Ans: c, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116.
When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section.
Ans: c, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
117.
The statement of cash flows will not provide insight into a. why dividends were not increased. b. whether cash flow is greater than net income. c. the exact proceeds of a future bond issue. For Instructor Use Only
Statement of Cash Flows
14 - 21
d. how the retirement of debt was accomplished. Ans: c, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
14 - 22 Test Bank for Financial Accounting: IFRS Edition, 4e 118.
Which of the following transactions would not be classified as a financing activity? a. Purchase of treasury shares b. Payment of dividends c. Issuance of bonds at a discount d. Purchase of a long-term investment in bonds
Ans: d, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
119.
A measure that describes the cash remaining from operations after adjustment for capital expenditures and dividends paid is a. adjusted cash from operations. b. cash provided by operations. c. free cash flow. d. net cash provided by operating activities.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120.
Free cash flow equals cash provided by a. operations less capital expenditures and cash dividends paid. b. operations less cash dividends paid. c. investing activities less capital expenditures and cash dividends paid. d. operations less capital expenditures.
Ans: a, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121.
LF’s Pest Control Products has the following information available: Net Income Cash Provided by Operations Cash Sales Capital Expenditures Dividends Paid
$30,000 40,000 65,000 11,000 3,000
What is LF’s free cash flow? a. $37,000 b. $29,000 c. $26,000 d. $16,000 Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
122.
During 2020, Klugman Industries reported cash provided by operations of €1,185,000, cash used in investing of €1,372,000, and cash used in financing of €180,000. In addition, cash spent for fixed assets during the period was €552,000. No dividends were paid. Based on this information, what was Klugman's free cash flow? a. (€187,000) b. €2,185,000 c. €633,000 d. (€919,000)
Ans: c, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
123.
Under the T-account approach, the change in cash is equal to the change in liabilities: a. less the change in equity and the change in Non-cash asset. b. Plus the change in equity and the change in Non-cash assets. c. Plus the change in equity less the change in Non-cash assets. d. less the change in equity plus the change in Non-cash assets. For Instructor Use Only
Statement of Cash Flows
14 - 23
Ans: c, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 24 Test Bank for Financial Accounting: IFRS Edition, 4e a
124. The first adjustment under the T-account approach is to post: a. Net income as a debit to the operating section of the Cash T-account. b. depreciation expense as a debit to the operating section of cash. c. any gains or losses on the sale of property, plant, and equipment. d. each of the changes to the Non-cash current asset and current liability accounts.
Ans: a, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
125. Bent Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $230,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $230,000. b. $245,000. c. $255,000. d. $215,000.
Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
126. During 2020, Unruh Company had $160,000 in cash sales and $1,700,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2019 and 2020, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2020? a. $1,668,000 b. $1,892,000 c. $1,860,000 d. $1,828,000
Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
127. Marsh Company has other operating expenses of $320,000. There has been an increase in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 lower than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Marsh's cash payments for operating expenses? a. $308,000 b. $312,000 c. $280,000 d. $360,000
Ans: d, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
128. In the Roswell Corporation, cash receipts from customers were $255,000, cash payments for operating expenses were $170,000, and one-third of the company's $10,500 income taxes were paid during the year. Net cash provided by operating activities is: a. $85,000. b. $74,500. c. $81,500. d. $78,000.
Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows a
14 - 25
129. Each of the following would be reported under operating activities except cash receipts a. from sales of goods. b. from sales of investments. c. of interest on loans. d. of dividends from investments.
Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
130. Which of the following statements concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling net income to net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for external reporting purposes.
Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
131. Carter Company reports the following: Inventory Accounts Payable
End of Year $25,000 30,000
Beginning of Year $40,000 10,000
If cost of goods sold for the year is $280,000, the amount of cash paid to suppliers is a. $285,000. b. $275,000. c. $245,000. d. $313,000. Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
132. During the year, Salaries and Wages Payable decreased by ¥60,000. If Salaries and Wages Expense amounted to ¥1,950,000 for the year, the cash paid to employees (including deductions from gross pay) is a. ¥2,010,000. b. ¥1,950,000. c. ¥1,890,000. d. ¥2,070,000.
Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
133. Gary Company reports a $15,000 increase in inventory and a $5,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $200,000. The cash payments made to suppliers were a. $200,000. b. $210,000. c. $180,000. d. $195,000.
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
14 - 26 Test Bank for Financial Accounting: IFRS Edition, 4e a
134. Rader Company had credit sales of $850,000. The beginning accounts receivable balance was $40,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period? a. $950,000 b. $850,000 c. $750,000 d. $890,000
Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
135. Haden Inc. had cash sales of $300,000 and credit sales of $1,290,000. The accounts receivable balance increased $15,000 during the year. How much cash did Haden receive from its customers during the year? a. $1,575,000 b. $1,605,000 c. $1,275,000 d. $1,305,000
Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
136. Utley Company had purchases of $330,000. The comparative statement of financial posititon analysis revealed a $10,000 decrease in inventory and a $20,000 increase in accounts payable. What were Utley's cash payments to suppliers? a. $310,000 b. $300,000 c. $340,000 d. $360,000
Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
137. Tatum Company had an increase in inventory of $40,000. The cost of goods sold was $90,000. There was a $5,000 decrease in accounts payable from the prior period. What were Tatum's cash payments to suppliers? a. $135,000 b. $85,000 c. $125,000 d. $95,000
Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
138. Which of the following items does not appear in the statement of cash flows under the direct method? a. Cash payments to suppliers b. Cash collections from customers c. Depreciation Expense d. Cash from the sale of equipment
Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows a
14 - 27
139. Largo Company has other operating expenses of $110,000. There has been a decrease in prepaid expenses of $4,000 during the year, and accrued liabilities are $6,000 larger than in the prior period. What were Largo's cash payments for operating expenses? a. $112,000 b. $108,000 c. $100,000 d. $110,000
Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
140. Dobson Corporation shows income tax expense of $95,000. There has been a $5,000 decrease in federal income taxes payable and a $7,000 increase in local income taxes payable during the year. What was Dobson's cash payment for income taxes? a. $95,000 b. $93,000 c. $90,000 d. $97,000
Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
141. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method? a. Cash receipts from customers b. Cash paid for income taxes c. Gain on disposal of equipment d. Cash paid to employees
Ans: c, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
142. The cost of goods sold during the year was ¥2,550,000. Merchandise inventory decreased by ¥60,000 during the year and accounts payable decreased by ¥30,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total a. ¥2,580,000. b. ¥2,520,000. c. ¥2,460,000. d. ¥2,640,000.
Ans: b, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
143. The first step in preparing the statement of cash flows under the T-account approach is to a. prepare a large Cash T-account with sections for operating, investing, and financing activities. b. prepare T-accounts for all non-cash accounts. c. insert beginning and ending balances for all accounts. d. post net income as a debit to the operating section of the cash T-account.
Ans: a, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
144. Under the T-account approach, each of the following appear as a debit in the cash account except, a. a gain on disposal of plant assets. b. depreciation expense. c. a decrease in accounts receivable. d. an increase in accounts payable. For Instructor Use Only
14 - 28 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: a, LO: 6, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
145. Which of the following would appear as a credit in the Cash account in the T-account approach, a. Depreciation expense. b. An increase in inventory. c. Loss on disposal of plant assets. d. An increase in accounts payable.
Ans: b, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
146.
Which of the following steps is not required in preparing the statement of cash flows? a. Determine the net change in cash. b. Determine the net cash provided by operating activities. c. Determine cash from investing and financing activities. d. Determine the change in current assets.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
147.
Financing activities involve a. lending money to other entities and collecting on those loans. b. cash receipts from sales of goods and services. c. acquiring and disposing of productive long-lived assets. d. non-current liability and equity items.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
148.
The information to prepare the statement of cash flows usually comes from each of the following except a. the comparative statement of financial position. b. the retained earnings statement. c. additional information. d. the current income statement.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
149.
The statement of cash flows is prepared from all of the following except a. the adjusted trial balance. b. comparative statement of financial position. c. selected transaction data. d. the current income statement.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
150.
The information in a statement of cash flows will not help investors to assess the entity's ability to a. generate future cash flows. b. obtain favorable borrowing terms at a bank. c. pay dividends. d. pay its obligations when they become due.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
151.
In converting net income to net cash provided by operating activities, under the indirect method a. decreases in accounts receivable and increases in prepaid expenses are added. b. decreases in inventory and increases in accrued liabilities are added. c. decreases in accounts payable and decreases in inventory are deducted. For Instructor Use Only
Statement of Cash Flows
14 - 29
d. increases in accounts receivable and increases in accrued liabilities are deducted. Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 30 Test Bank for Financial Accounting: IFRS Edition, 4e 152.
In the Freyfogle Company, land decreased $135,000 because of a cash sale for $135,000, the equipment account increased $30,000 as a result of a cash purchase, and Bonds Payable increased $120,000 from an issuance for cash at face value. The net cash provided by investing activities is a. $135,000. b. $225,000. c. $105,000. d. $90,000.
Ans: c, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
153. Under the T-account approach, the cash account shows a debit for a. a gain on disposal of plant assets. b. a decrease in accounts payable. c. depreciation expense. d. an increase in accounts receivable.
Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
154. Bainbridge Company uses the direct method in determining net cash provided by operating activities. The income statement shows income tax expense $80,000. Income taxes payable were $25,000 at the beginning of the year and $18,000 at the end of the year. Cash payments for income taxes are a. $73,000. b. $80,000. c. $87,000. d. $98,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
155. Cribbets Company uses the direct method in determining net cash provided by operating activities, During the year, operating expenses were $350,000, prepaid expenses increased $20,000, and accrued expenses payable increased $30,000. Cash payments for operating expenses were a. $300,000. b. $400,000. c. $360,000. d. $340,000.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows
14 - 31
BRIEF EXERCISES BE 156 Selected transactions for the Eldon Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Collected accounts receivable. Declared and paid dividends on ordinary shares. Sold long-term investments for cash. Issued ordinary shares for equipment. Repaid five year note payable. Paid employee wages. Converted bonds payable to ordinary shares. Acquired long-term investment with cash. Sold buildings and equipment for cash. Sold merchandise to customers.
Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 156 1. 2. 3. 4. 5.
(a) (c) (b) (d) (c)
(5 min.)
Operating activity Financing activity Investing activity Noncash activity Financing activity
6. 7. 8. 9. 10.
(a) (d) (b) (b) (a)
Operating activity Noncash activity Investing activity Investing activity Operating activity
BE 157 Bertucci Company had net income of $184,000 in 2020. Depreciation expense for the year is $55,000. During the year, Accounts Receivable increased $7,000 and Prepaid Expenses decreased $1,000. The company also sold equipment at a loss of $2,000. Instructions Calculate net cash flows from operating activities using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 157
(5 min.)
Net Income Add: Depreciation Loss on disposal of equipment Decrease in Prepaid Expenses Deduct: Increase in Accounts Receivable Net cash flows from operating activities
$184,000 55,000 2,000 1,000 (7,000) $235,000
For Instructor Use Only
14 - 32 Test Bank for Financial Accounting: IFRS Edition, 4e BE 158 During 2020, Baxter Company sold a building with a book value of $145,000 for proceeds of $162,000. The company also sold long-term investments for proceeds of $35,000. The company purchased land and a new building for $320,000 by signing a non-current note payable. No other transactions impacted non-current asset accounts during 2020. Instructions Compute net cash flows from investing activities. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 158
(3 min.)
Net cash flows from investing = $162,000 + $35,000 = $197,000 BE 159 Mover Company issued ordinary shares for proceeds of €24,000 during 2020. The company paid dividends of €2,000. The company also issued a non-current note payable for €30,000 in exchange for equipment during the year. The company sold treasury shares that had a cost of €2,000 for €4,000. Instructions Compute net cash flows from financing activities. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 159
(3 min.)
Net cash flows from financing activities = €24,000 - €2,000 + €4,000 = €26,000 BE 160 At January 1, 2020, Bergman Enterprises reported a balance in the Equipment account of $45,000. During the year the company purchased equipment with a cost of $60,000 and sold equipment with a book value of $30,000. The company reported a loss on the disposal of equipment of $6,000. Assume the indirect method is used. Instructions Determine what amount will be reported in (a) the operating activities section and (b) the investing activities section with regard to the purchase and sale of equipment. Ans: N/A, LO: 2, Bloom: K, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 160
(3 min.)
(a) Loss on Disposal of Equipment, $6,000 (b) Proceeds from the Sale of Equipment, $24,000 ($30,000 – $6,000) Purchase of Equipment, ($60,000)
For Instructor Use Only
Statement of Cash Flows
14 - 33
BE 161 Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Increase in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Increase in accrued liabilities Increase in income taxes payable Depreciation expense Loss on disposal of investment Gain on disposal of equipment Amortization expense
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 161 1. 2. 3. 4. 5.
D D A D A
(5 min.) 6. 7. 8. 9. 10.
A A A D A
BE 162 Dutton Company prepared the tabulation below at December 31, 2020. Net Income ..............................................................................................................
$255,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $25,000 ......................................................................
______
Decrease in accounts receivable, $40,000 .....................................................
______
Increase in inventory, $12,000 ........................................................................
______
Decrease in accounts payable, $8,600 ...........................................................
______
Increase in income taxes payable, $1,500......................................................
______
Loss on disposal of land, $5,000 ....................................................................
______
Net cash provided by operating activities .......................................................
______
For Instructor Use Only
14 - 34 Test Bank for Financial Accounting: IFRS Edition, 4e BE 162
(Cont.)
Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 162
(6 min.)
Net Income ..............................................................................................................
$255,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense..................................................................................... Decrease in accounts receivable ................................................................... Increase in inventory ...................................................................................... Decrease in accounts payable ....................................................................... Increase in income taxes payable .................................................................. Loss on disposal of land ................................................................................. Net cash provided (used) by operating activities ...................................
25,000 40,000 (12,000) (8,600) 1,500 5,000 $305,900
BE 163 Daimler Enterprises reported cash flow from operations of $292,000. The company made capital expenditures of $112,000 and paid dividends of $34,000. Instructions Compute free cash flow. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 163
(3 min.)
Free cash flow = $292,000 - $112,000 - $34,000 = $146,000 a
BE 164
Schick Company reported cost of goods sold of €192,000 on its 2020 income statement. The company’s beginning inventory was €35,000. The ending inventory was valued at €40,000. The Accounts Payable balance at January 1 was €25,000. The December 31 balance in Accounts Payable was €22,000. Instructions Compute cash payments to suppliers. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 164
(5 min.)
Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers
€192,000 5,000 197,000 3,000 €200,000
For Instructor Use Only
Statement of Cash Flows a
14 - 35
BE 165
Hiller Company had total operating expenses of $155,000 in 2020, which included depreciation expense of $35,000. Also during 2020, prepaid expenses decreased by $9,000 and accrued expenses increased by $7,500. Instructions Calculate the amount of cash payments for operating expenses in 2020 using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 165
(4 min.)
Operating expenses ............................................................. Less: Noncash depreciation expense .................................. Decrease in prepaid expenses ............................................ Increase in accrued liabilities ............................................... Cash payments for operating expenses ..............................
$155,000 (35,000) (9,000) (7,500) $ 103,500
EXERCISES Ex. 166 Classify each of the following as a(n): A. Operating Activity B. Investing Activity C. Financing Activity _____ 1
Issuance of bonds.
_____ 2. Sale of equipment. _____ 3. Amortization expense. _____ 4. Purchase of treasury shares. _____ 5. Receipt of dividends on investment. _____ 6. Purchase of land. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 166 1. C 2. B 3. A
(3 min.) 4. C 5. A 6. B
For Instructor Use Only
14 - 36 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 167 Selected transactions of Eller Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Ordinary shares are sold for cash above par value. Bonds payable are issued for cash at a discount. Interest receivable on a current note receivable is collected. Land is sold for cash at book value. Accounts payable are paid in cash. Equipment is purchased by signing a 3-year, 10% note payable. Cash dividends on ordinary shares are declared and paid. 100 shares of XYZ ordinary shares are purchased for cash. Merchandise is sold to customers for cash. Bonds payable are converted into ordinary shares.
Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a non-cash investing and financing activity. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 167 1. 2. 3. 4. 5.
(c) (c) (a) (b) (a)
(8–11 min.)
Financing activity Financing activity Operating activity Investing activity Operating activity
6. 7. 8. 9. 10.
(d) (c) (b) (a) (d)
Noncash activity Financing activity Investing activity Operating activity Noncash activity
Ex. 168 (a) Identify the alternatives for presenting significant non-cash activities in financial statements. (b) Give three or four examples of significant non-cash transactions. Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 168
(8–12 min.)
(a)
Significant non-cash transactions may appear in either a separate note or supplementary schedule under the heading "Non-cash investing and financing activities."
(b)
1. 2. 3. 4.
Issuance of shares for assets Issuance of shares to liquidate debt Issuance of bonds or notes for assets Non-cash exchanges of property, plant, and equipment
For Instructor Use Only
Statement of Cash Flows
14 - 37
Ex. 169 The following information is available for Snider Company: Receipts from customers ₤210,000 Dividends from share investments 3,000 Proceeds from sale of equipment 18,000 Proceeds from issuance of shares 90,000 Payments for goods 100,000 Payments for operating expenses 75,000 Interest paid 5,000 Taxes paid 4,000 Dividends paid 20,000 Instructions Based on the preceding information, compute the net cash provided by operating activities. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 169
(7 min.)
Receipts from customers Dividends from share investments
₤210,000 3,000 213,000
Payments for goods ₤100,000 Payments for operating expenses 75,000 Interest paid 5,000 Taxes paid 4,000 Net cash provided by operating activities
184,000 ₤ 29,000
Ex. 170 Pierce Company reported net income of $160,000 for the current year. Depreciation recorded on buildings and equipment amounted to $80,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: Prepaid expenses Inventories Accounts receivable Cash Accounts payable Income taxes payable
End of Year $ 9,500 55,000 24,000 20,000 12,000 1,600
Beginning of Year $ 5,000 65,000 32,000 15,000 18,000 1,200
Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
14 - 38 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 170
(10–15 min.)
Net income ........................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense.................................................................................. Decrease in accounts receivable ................................................................ Decrease in inventories ............................................................................... Increase in prepaid expenses ..................................................................... Decrease in accounts payable .................................................................... Increase in income taxes payable ............................................................... Net cash provided by operating activities ....................................................
$160,000 80,000 8,000 10,000 (4,500) (6,000) 400 $247,900
Ex. 171 Neal Company reported net income of $160,000. For 2020, depreciation was $40,000, and the company reported a gain on disposal of investments of $10,000. Accounts receivable increased $25,000 and accounts payable decreased $20,000. Instructions Compute net cash provided by operating activities using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 6, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 171
(6 min.)
Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense Gain on disposal of investments Increase in accounts receivable Decrease in accounts payable Net cash provided by operating activities
$160,000 $40,000 (10,000) (25,000) (20,000)
(15,000) $145,000
Ex. 172 When a statement of cash flows is prepared, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows. Code Cash Flows From Operating Activities Add to Net Income Deduct from Net Income Cash Flows From Investing Activities Cash Flows From Financing Activities
A D IA FA Category
1.
Ordinary shares are issued for cash at an amount above par value.
_____
2.
Inventory increased during the period.
_____
3.
Depreciation expense recorded for the period.
_____
4.
Building was purchased for cash.
_____
5.
Bonds payable were acquired and retired at their carrying value.
_____
6.
Accounts payable decreased during the period.
_____
For Instructor Use Only
Statement of Cash Flows Ex. 172
14 - 39
(Cont.)
7.
Prepaid expenses decreased during the period.
_____
8.
Treasury shares were acquired for cash.
_____
9.
Land is sold for cash at an amount equal to book value.
_____
10.
Patent amortization expense recorded for a period.
_____
Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 172 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
(8–12 min.)
Ordinary shares are issued for cash at an amount above par value. Inventory increased during the period. Depreciation expense recorded for the period. Building was purchased for cash. Bonds payable were acquired and retired at their carrying value. Accounts payable decreased during the period. Prepaid expenses decreased during the period. Treasury shares were acquired for cash. Land is sold for cash at an amount equal to book value. Patent amortization expense recorded for a period.
Category FA D A IA FA D A FA IA A
Ex. 173 A comparative statement of financial position for Mann Company appears below: MANN COMPANY Comparative Statement of Financial Position Dec. 31, 2020
Dec. 31, 2019
€ 60,000 (20,000) -06,000 25,000 18,000 33,000 €122,000
€32,000 (14,000) 18,000 9,000 18,000 14,000 10,000 €87,000
€ 40,000 28,000 37,000 17,000 €122,000
€23,000 10,000 47,000 7,000 €87,000
Assets Equipment Accumulated depreciation—equipment Long-term investments Prepaid expenses Inventory Accounts receivable Cash Total assets Equity and Liabilities Share capital-ordinary Retained earnings Bonds payable Accounts payable Total equity and liabilities
For Instructor Use Only
14 - 40 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 173 (Cont.) Additional information: 1. Net income for the year ending December 31, 2020 was €33,000. 2. Cash dividends of €15,000 were declared and paid during the year. 3. Long-term investments that had a cost of €18,000 were sold for €14,000. 4. Sales for 2020 were €120,000. Instructions Prepare a statement of cash flows for the year ended December 31, 2020, using the indirect method. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 173
(25–30 min.) MANN COMPANY Statement of Cash Flows For the Year Ended December 31, 2020
Cash flows from operating activities Net income .................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................................... Loss on disposal of long-term investments .......................... Increase in accounts receivable .......................................... Decrease in prepaid expenses ............................................ Increase in inventories ......................................................... Increase in accounts payable .............................................. Net cash provided by operating activities ............................ Cash flows from investing activities Sale of long-term investments ...................................................... Purchase of equipment ................................................................ Net cash used by investing activities ................................... Cash flows from financing activities Issuance of ordinary shares ......................................................... Retirement of bonds payable ....................................................... Payment of cash dividends .......................................................... Net cash used by financing activities .................................. Net increase in cash .............................................................................. Cash at beginning of period .................................................................. Cash at end of period ............................................................................
For Instructor Use Only
€33,000 € 6,000 4,000 (4,000) 3,000 (7,000) 10,000
12,000 45,000
14,000 (28,000) (14,000) 17,000 (10,000) (15,000) (8,000) 23,000 10,000 €33,000
Statement of Cash Flows
14 - 41
Ex. 174 A comparative statement of financial position for Hartman Corporation is presented below: HARTMAN CORPORATION Comparative statement of financial position Dec. 31, 2020 Assets Land 18,000 Equipment 70,000 Accumulated depreciation (20,000) Prepaid insurance 25,000 Accounts receivable (net) 80,000 Cash 36,000 Total Assets $209,000
Dec 31, 2019 40,000 60,000 (13,000) 17,000 60,000 31,000 $195,000
Equity and Liabilities Share capital-ordinary Retained earnings Bonds payable Accounts payable Total equity and liabilities
$140,000 31,000 27,000 11,000 $209,000
$115,000 55,000 19,000 6,000 $195,000
Additional information: 1. Net loss for 2020 is $15,000. 2. Cash dividends of $9,000 were declared and paid in 2020. 3. Land was sold for cash at a loss of $7,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $12,000 of bonds were retired during the year at carrying (book) value. 6. Equipment was acquired for ordinary shares. The fair value of the shares at the time of the exchange was $25,000. Instructions Prepare a statement of cash flows for the year ended 2020, using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 22, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
14 - 42 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 174
(22–27 min.)
HARTMAN CORPORATION Statement of Cash Flows For the Year Ended December 31, 2020 ——————————————————————————————————————————— Cash flows from operating activities Net loss ......................................................................................... $(15,000) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation (a) ................................................................... $17,000 Loss on disposal of land (b) ................................................ 7,000 Increase in accounts receivable .......................................... (20,000) Increase in prepaid insurance ............................................. (8,000) Increase in accounts payable .............................................. 5,000 1,000 Net cash used by operating activities .................................. (14,000) Cash flows from investing activities Proceeds from the sale of land (b) ............................................... 15,000 Proceeds from the sale of equipment ........................................... 5,000 Net cash provided by investing activities ............................. 20,000 Cash flows from financing activities Retirement of bonds payable ....................................................... (12,000) Issuance of bonds payable ........................................................... 20,000 Payment of dividends ................................................................... (9,000) Net cash used by financing activities .................................. (1,000) Increase in cash .................................................................................... 5,000 Cash at beginning of period .................................................................. 31,000 Cash at end of period ............................................................................ $36,000 Note xx Non-cash investing and financing activities Purchase of equipment through issuance of ordinary shares ...... Solution 174
(cont.)
(a) Accumulated Depreciation 12/31/19 Accumulated Depreciation 12/31/20 Difference Add: Accumulated depreciation on equipment sold Depreciation expense
$13,000 20,000 7,000 10,000 $17,000
(b)
$22,000 (7,000) $15,000
Cost of land sold Less: Loss on disposal of land Proceeds from sale of land
For Instructor Use Only
$25,000
Statement of Cash Flows
14 - 43
Ex. 175 The following information is available for Greer Corporation for the year ended December 31, 2020: Collection of principal on non-current loan to a supplier Acquisition of equipment for cash Proceeds from the sale of long-term investment at book value Issuance of ordinary shares for cash Depreciation expense Redemption of bonds payable at carrying (book) value Payment of cash dividends Net income Purchase of land by issuing bonds payable
$15,000 10,000 27,000 20,000 35,000 24,000 14,000 30,000 40,000
In addition, the following information is available from the comparative statements of financial position for Greer at the end of 2019 and 2020: Prepaid insurance Accounts receivable (net) Cash Total current assets
Dec 31, 2020 $ 17,000 20,000 87,000 $124,000
Dec 31, 2019 $13,000 15,000 14,000 $42,000
Accounts payable Salaries and wages payable Total current liabilities
$ 25,000 4,000 $ 29,000
$19,000 7,000 $26,000
Instructions Prepare Greer's statement of cash flows for the year ended December 31, 2020 using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 22, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 175
(22–27 min.)
GREER CORPORATION Statement of Cash Flows For the Year Ended December 31, 2020 ——————————————————————————————————————————— Cash flows from operating activities Net income .................................................................................... $30,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation ......................................................................... $35,000 Increase in accounts receivable ........................................... (5,000) Increase in prepaid insurance .............................................. (4,000) Increase in accounts payable............................................... 6,000 Decrease in salaries and wages payable............................. (3,000) 29,000 Net cash provided by operating activities............................. 59,000
For Instructor Use Only
14 - 44 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 175
(Cont.)
Cash flows from investing activities Collection of long-term loan........................................................... Proceeds from the sale of investments ......................................... Purchase of equipment ................................................................. Net cash provided by investing activities .............................. Cash flows from financing activities Issuance of ordinary shares .......................................................... Redemption of bonds .................................................................... Payment of dividends .................................................................... Net cash used by financing activities ................................... Increase in cash ..................................................................................... Cash at beginning of period ................................................................... Cash at end of period .............................................................................
15,000 27,000 (10,000) 32,000 20,000 (24,000) (14,000) (18,000) 73,000 14,000 $87,000
Note xx Non-cash investing and financing activities Purchase of land by issuing bonds................................................
$40,000
Ex. 176 Trent Company prepared the tabulation below at December 31, 2020. Net Income .............................................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, €43,000...................................................................... Increase in accounts receivable, €50,000 ...................................................... Decrease in inventory, €13,000...................................................................... Amortization of patent, €4,000 ....................................................................... Increase in accounts payable, €5,600 ............................................................ Decrease in interest receivable, €7,000 ......................................................... Increase in prepaid expenses, €6,000 ........................................................... Decrease in income taxes payable, €1,500 ................................................... Gain on disposal of land, €5,000 .................................................................... Net cash provided (used) by operating activities............................................
€350,000 ______ ______ ______ ______ ______ ______ ______ ______ ______ ______
Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 176
(10–14 min.)
Net Income .............................................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense..................................................................................... Increase in accounts receivable ..................................................................... Decrease in inventory..................................................................................... Amortization of patent .................................................................................... Increase in accounts payable ......................................................................... For Instructor Use Only
€350,000 43,000 (50,000) 13,000 4,000 5,600
Statement of Cash Flows Decrease in interest receivable.......................................................................
For Instructor Use Only
14 - 45 7,000
14 - 46 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 176
(Cont.)
Increase in prepaid expenses ........................................................................ Decrease in income taxes payable ................................................................ Gain on disposal of land ................................................................................. Net cash provided (used) by operating activities ...................................
(6,000) (1,500) (5,000) €360,100
Ex. 177 The current sections of Robertson Inc.'s statement of financial position at December 31, 2019 and 2020, are presented here. Robertson's net income for 2020 was $203,000. Depreciation expense was $29,000. 2020 2019 Current assets Prepaid expenses $ 27,000 $ 22,000 Inventory 153,000 172,000 Accounts receivable 105,000 99,000 Cash 115,000 89,000 Total current assets $400,000 $382,000 Current liabilities Accrued expenses payable Accounts payable Total current liabilities
$ 15,000 85,000 $100,000
$ 5,000 92,000 $ 97,000
Instructions Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2020, using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177
(15 min.)
ROBERTSON INC. Partial Statement of Cash Flows For the Year Ended December 31, 2020 _____________________________________________________________________________ Cash flows from operating activities Net income ...................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .......................................... Decrease in inventory .......................................... Increase in accrued expenses payable ............... Increase in prepaid expenses .............................. Decrease in accounts payable ............................ Increase in accounts receivable .......................... Net cash provided by operating activities ............ For Instructor Use Only
$203,000
$29,000 19,000 10,000 (5,000) (7,000) (6,000)
40,000 $243,000
Statement of Cash Flows
14 - 47
Ex. 178 Wintz Company reported net income of $275,000 for 2020. Wintz also reported depreciation expense of $45,000 and a loss of $13,000 on the sale of equipment. The comparative statement of financial position shows a decrease in accounts receivable of $15,000 for the year, a $17,000 increase in accounts payable, and a $6,000 decrease in prepaid expenses. Instructions Prepare the operating activities section of the statement of cash flows for 2020. Use the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 178
(15 min.)
WINTZ COMPANY Partial Statement of Cash Flows For the Year Ended December 31, 2020 _____________________________________________________________________________ Cash flows from operating activities Net income ....................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .......................................... Loss on disposal of equipment ............................. Decrease in accounts receivable ......................... Decrease in prepaid expenses ............................. Increase in accounts payable ............................... Net cash provided by operating activities .............
$275,000
$45,000 13,000 15,000 6,000 17,000
96,000 $371,000
Ex. 179 The three accounts shown below appear in the general ledger of Glaus Corp. during 2020. Equipment Date Jan. 1 July 31 Sept. 2 Nov. 10
Date Jan. 1 Nov. 10 Dec. 31
Debit Balance Purchase of equipment Cost of equipment constructed Cost of equipment sold
Credit
70,000 58,000 50,000
Accumulated Depreciation—Equipment Debit Credit Balance Accumulated depreciation on equipment sold Depreciation for year
30,000
For Instructor Use Only
21,000
Balance 160,000 230,000 288,000 238,000
Balance 71,000 41,000 62,000
14 - 48 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 179
(Cont.) Earnings
Date Jan. 1 Aug. 23 Dec. 31
Debit Balance Dividends (cash) Net income
Credit
14,000 52,000
Balance 105,000 91,000 143,000
Instructions From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale of equipment was $5,000. (Hint: Cost of equipment constructed is reported in the investing activities section as a decrease in cash of $58,000.) Ans: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 179
(20 min.)
GLAUS CORP Partial Statement of Cash Flows For the Year Ended December 31, 2020 _____________________________________________________________________________ Cash flows from operating activities Net income ............................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .............................................. Loss on disposal of equipment ................................. Net cash provided by operating activities................................................................. Cash flows from investing activities Sale of equipment .................................................... Purchase of equipment ............................................ Construction of equipment ....................................... Net cash used by investing activities ..................
$52,000
$ 21,000 5,000
78,000 15,000* (70,000) (58,000) (113,000)
Cash flows from financing activities Payment of cash dividends .................................
*
Cost of equipment sold ....................................................... Accumulated depreciation .................................................... Book value ........................................................................... Loss on sale of equipment ................................................... Cash proceeds ..................................................................... For Instructor Use Only
26,000
(14,000)
$ 50,000 (30,000) 20,000 (5,000) $ 15,000
Statement of Cash Flows
14 - 49
Ex. 180 Powell Corporation's comparative statements of financial position are presented below. POWELL CORPORATION Comparative Statement of Financial Position December 31 2020 Land €18,000 Buildings 70,000 Accumulated depreciation-buildings (15,000) Accounts receivable 18,200 Cash 21,570 Total €112,770
2019 €26,000 70,000 (10,000) 23,400 10,700 €120,100
Share capital-ordinary Retained earnings Accounts payable Total
€69,000 20,000 31,100 €120,100
€75,000 25,400 12,370 €112,770
Additional information: 1. Net income was €27,900. Dividends declared and paid were €22,500. 2. All other changes in non-current account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for €5,900. Instruction (a) Prepare a statement of cash flows for 2020 using the indirect method. (b) Compute free cash flow. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 180
(20 min.)
(a)
POWELL CORPORATION Statement of Cash Flows For the Year Ended December 31, 2020 _____________________________________________________________________________ Cash flows from operating activities Net income ......................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .......................................... Loss on disposal of land ....................................... Decrease in accounts receivable .......................... Decrease in accounts payable ............................. Net cash provided by operating activities ........................
For Instructor Use Only
€27,900
€ 5,000 2,100 5,200 (18,730)
(6,430) 21,470
14 - 50 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 180 (Cont.) Cash flows from investing activities Sale of land ...................................................................... Cash flows from financing activities Issuance of ordinary shares ............................................. Payment of dividends ...................................................... Net cash used by financing activities ...............................
5,900 € 6,000 (22,500) (16,500)
Net increase in cash ..................................................................... Cash at beginning of period ......................................................... Cash at end of period ................................................................... (b)
10,870 10,700 € 21,570
Free cash flow = €21,570 – €22,500 = (€930).
Ex. 181 Newman Corporation's comparative statements of financial position are presented below. NEWMAN CORPORATION Comparative Statement of Financial Position December 31 2020 Equipment $ 60,000 Accumulated depreciation (14,000) Investments 25,000 Accounts receivable 25,200 Cash 12,200 Total $108,400
2019 $ 70,000 (10,000) 16,000 22,300 17,700 $116,000
Share capital-ordinary Retained earnings Bonds payable Accounts payable Total
$ 45,000 29,900 30,000 11,100 $116,000
$ 50,000 33,800 10,000 14,600 $108,400
Additional information: 1. Net income was $19,300. Dividends declared and paid were $15,400. 2. Equipment which cost $10,000 and had accumulated depreciation of $2,200 was sold for $3,800. 3. All other changes in non-current account balances had a direct effect on cash flows, except the change in accumulated depreciation. Instruction (a) Prepare a statement of cash flows for 2020 using the indirect method. (b) Compute free cash flow. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows Solution 181
14 - 51
(20 min.)
(a)
NEWMAN CORPORATION Statement of Cash Flows For the Year Ended December 31, 2020 _____________________________________________________________________________ Cash flows from operating activities Net income ..................................................................... Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .......................................... Loss on disposal of equipment ............................. Increase in accounts payable ............................... Increase in accounts receivable ........................... Net cash provided by operating activities........................
$19,300
$ 6,200* 4,000** 3,500 (2,900)
Cash flows from investing activities Sale of equipment ........................................................... Purchase of investments ................................................. Net cash used by investing activities ..............................
3,800 (9,000)
Cash flows from financing activities Issuance of ordinary shares ............................................ Retirement of bonds ........................................................ Payment of dividends ...................................................... Net cash used by financing activities ..............................
5,000 (20,000) (15,400)
Net decrease in cash ................................................................... Cash at beginning of period ......................................................... Cash at end of period .................................................................. *[$14,000 – ($10,000 – $2,200)]
10,800 30,100
(5,200)
(30,400) (5,500) 17,700 $ 12,200
**[3,800 – ($10,000 – $2,200)]
(b) $30,100 – $0 – $15,400 = $14,700 a
Ex. 182
The following information is available for Yates Corporation: Capital expenditures Cash dividends Cash provided by operations Net income Sales revenue
$115,000 65,000 200,000 130,000 600,000
Instructions Compute Yates Corporation's free cash flow. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
14 - 52 Test Bank for Financial Accounting: IFRS Edition, 4e a
Solution 182
(3 min.)
Free cash flow = $20,000 ($200,000 – $115,000 – $65,000) a
Ex. 183
Dolan Company's income statement showed revenues of $250,000 and operating expenses of $160,000. Accounts receivable decreased by $60,000 and accounts payable increased by $40,000 during the year. Instructions Compute (a) cash receipts from customers and (b) cash payments for operating expenses using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 183
(5 min.)
(a)
Cash receipts from customers = $310,000 ($250,000 + $60,000)
(b)
Cash payments for operating expenses = $120,000 ($160,000 – $40,000)
a
Ex. 184
Banner Company had total operating expenses of €180,000 in 2020, which included Depreciation Expense of €25,000. Also, during 2020, prepaid expenses increased by €5,000 and accrued expenses decreased by €6,700. Instructions Calculate the amount of cash payments for operating expenses in 2020 using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 184
(5–8 min.)
Operating expenses ............................................................. Less: Non-cash depreciation expense ................................. Add: Increase in prepaid expenses ...................................... Add: Decrease in accrued liabilities ..................................... Cash payments for operating expenses............................... a
€180,000 (25,000) 5,000 6,700 €166,700
Ex. 185
The general ledger of Lopez Company provides the following information: Accounts Receivable Inventory Accounts Payable
End of Year $ 55,000 310,000 40,000
Beginning of Year $ 94,000 210,000 65,000
The company's net sales for the year was $2,400,000 and cost of goods sold amounted to $1,600,000. Instructions Compute the following: (a) Cash receipts from customers. (b) Cash payments to suppliers. For Instructor Use Only
Statement of Cash Flows
14 - 53
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
Solution 185
(a)
Cash receipts from customers Sales + Decrease in Accounts Receivable $2,400,000 + $39,000 = $2,439,000
Solution 185 (b)
(8–12 min.)
(Cont.)
Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Less: Ending inventory Cost of goods sold
$ 210,000 ? ? 310,000 $1,600,000
$210,000 + Purchases – $310,000 = $1,600,000 Purchases = $1,700,000 Amount of cash payments to suppliers = Purchases + Decrease in accounts payable = $1,700,000 + $25,000 = $1,725,000 a
Ex. 186
The income statement of Redman Inc. for the year ended December 31, 2020, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income
$600,000 360,000 240,000 60,000 $180,000
Redman's statement of financial position contained the following comparative data at December 31: 2020 $65,000 40,000 6,000
Accounts receivable Accounts payable Income taxes payable
2019 $40,000 55,000 3,000
Redman has no depreciable assets. Accounts payable pertains to operating expenses. Instructions Prepare the operating activities section of the statement of cash flows using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 9, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
14 - 54 Test Bank for Financial Accounting: IFRS Edition, 4e a
Solution 186
(9–14 min.) REDMAN INC. Statement of Cash Flows For the Year Ended December 31, 2020
Cash flows from operating activities Cash receipts from customers ($600,000 – $25,000) Cash payments: For operating expenses ($360,000 + $15,000) For income taxes ($60,000 – $3,000) Net cash provided by operating activities a
$575,000 $375,000 57,000
432,000 $143,000
Ex. 187
The income statement of Falcone Company is shown below: FALCONE COMPANY Income Statement For the Year Ended December 31, 2020 Sales revenue Cost of goods sold Gross profit Operating expenses Selling expenses Administrative expenses Depreciation expense Amortization expense Net income
$8,000,000 5,400,000 2,600,000 $500,000 700,000 90,000 30,000
1,320,000 $1,280,000
Additional information: 1. Accounts receivable increased $300,000 during the year. 2. Inventory increased $250,000 during the year. 3. Prepaid expenses increased $200,000 during the year. 4. Accounts payable to merchandise suppliers increased $150,000 during the year. 5. Accrued expenses payable increased $160,000 during the year. Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2020, for Falcone Company, using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 187
(15–20 min.) FALCONE COMPANY Statement of Cash Flows For the Year Ended December 31, 2020
Cash flows from operating activities Cash receipts from customers Cash payments: To suppliers For operating expenses
$7,700,000 (1) $5,500,000 (2) 1,240,000 (3) For Instructor Use Only
6,740,000
Statement of Cash Flows Net cash provided by operations a
Solution 187
$ 960,000
(Cont.)
(1)
Sales revenue Deduct: Increase in accounts receivable Cash receipts from customers
$8,000,000 300,000 $7,700,000
(2)
Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers
$5,400,000 250,000 5,650,000 150,000 $5,500,000
(3)
Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses
a
14 - 55
$1,200,000 200,000 (160,000) $1,240,000
Ex. 188
The financial statements of Meenan Company appear below: MEENAN COMPANY Comparative Statement of Financial Position December 31 2020 Assets Property, plant, and equipment Accumulated depreciation Inventory Accounts receivable Cash Total
2019
€ 50,000 (20,000) 30,000 21,000 43,000 €124,000
€ 78,000 (24,000) 15,000 34,000 23,000 €126,000
€ 41,000 46,000 7,000 17,000 13,000 €124,000
€ 24,000 38,000 33,000 23,000 8,000 €126,000
Equity and Liabilities Share capital-ordinary Retained earnings Bonds payable Accounts payable Income taxes payable Total
MEENAN COMPANY Income Statement For the Year Ended December 31, 2020 Sales revenue Cost of goods sold Gross profit Operating expenses Income from operations Interest expense
€400,000 280,000 120,000 56,000 64,000 4,000 For Instructor Use Only
14 - 56 Test Bank for Financial Accounting: IFRS Edition, 4e Income before income taxes Income tax expense Net income Ex. 188
60,000 18,000 € 42,000
(Cont.)
The following additional data were provided: 1. Dividends declared and paid were €34,000. 2. During the year, equipment was sold for €15,000 cash. This equipment cost €28,000 originally and had a book value of €15,000 at the time of sale. 3. All depreciation expense is in the operating expenses. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers. 6. All operating expenses except for depreciation were paid in cash. Instructions Prepare a statement of cash flows for Meenan Company using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 22, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting a
Solution 188
(22–28 min.) MEENAN COMPANY Statement of Cash Flows For the Year Ended December 31, 2020
Cash flows from operating activities Cash receipts from customers (€400,000 + €13,000) Cash payments: To suppliers For operating expenses For interest expense For income taxes (€18,000 – €5,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment Net cash provided by investing activities Cash flows from financing activities Redemption of bonds payable Issuance of ordinary shares Payment of cash dividend Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period
€413,000 €301,000 (1) 47,000 (2) 4,000 13,000 15,000 15,000 (26,000) 17,000 (34,000) (43,000) 20,000 23,000 € 43,000
(1)
Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers
€280,000 15,000 295,000 6,000 €301,000
(2)
Operating expenses Less: Depreciation expense Cash payments for operating expenses
€56,000 (9,000)* €47,000
For Instructor Use Only
365,000 48,000
Statement of Cash Flows *€24,000 – €13,000 = €11,000 balance in accumulated depreciation after sale. Ending balance, €20,000 – €11,000 = €9,000 depreciation expense.
For Instructor Use Only
14 - 57
14 - 58 Test Bank for Financial Accounting: IFRS Edition, 4e +
Ex. 189
Condensed financial data of Popler Company appear below: POPLER COMPANY Comparative Statements of Financial Position December 31 2020 Assets Plant assets Accumulated depreciation Investments Prepaid expenses Inventories Accounts receivable Cash Total
2019
$315,000 (65,000) 90,000 19,000 120,000 85,000 71,000 $635,000
$250,000 (60,000) 75,000 25,000 132,000 53,000 35,000 $510,000
$245,000 138,000 130,000 93,000 29,000 $635,000
$170,000 81,000 160,000 75,000 24,000 $510,000
Equity and Liabilities Share capital-ordinary Retained earnings Bonds payable Accounts payable Accrued expenses payable Total
POPLER COMPANY Income Statement For the Year Ended December 31, 2020 Sales revenue Less: Cost of goods sold Operating expenses (excluding depreciation) Interest expense Depreciation expense Income taxes Loss on sale of plant assets Net income
$470,000 $280,000 60,000 18,000 17,000 15,000 3,000
393,000 $ 77,000
Additional information: 1. New plant assets costing $90,000 were purchased for cash in 2020. 2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000. 3. Bonds with a face value of $30,000 were converted into $30,000 of ordinary shares. 4. A cash dividend of $20,000 was declared and paid during the year. 5. Accounts payable pertain to merchandise purchases. Instructions Prepare a statement of cash flows for the year using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 25, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows a
Solution 189
14 - 59
(25–30 min.) POPLER COMPANY Statement of Cash Flows For the Year Ended December 31, 2020
Cash flows from operating activities Cash receipts from customers ($470,000 – $32,000) Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities Purchase of investments Purchase of plant assets Sale of plant assets Net cash used by investing activities Cash flows from financing activities Issuance of ordinary shares Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period
$438,000 $250,000 (1) 49,000 (2) 15,000 18,000
332,000 106,000
(15,000) (90,000) 10,000 (95,000) 45,000 (20,000) 25,000 36,000 35,000 $ 71,000
Note xx Non-cash investing and financing activities Conversion of bonds payable into ordinary shares
a
$ 30,000
(1)
Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers
$280,000 (12,000) 268,000 (18,000) $250,000
(2)
Operating expenses Deduct: Decrease in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses
$60,000 (6,000) (5,000) $49,000
Ex. 190
The income statement for Javier Company showed cost of goods sold of $95,000 and operating expenses of $50,000. The comparative statement of financial position for the year show that inventory decreased $3,000, prepaid expenses increased $7,000, accounts payable increased $4,000, and accrued expenses payable decreased $5,000. Instructions Compute (a) cash payments to suppliers and (b) cash payments for operating expenses using the direct method. For Instructor Use Only
14 - 60 Test Bank for Financial Accounting: IFRS Edition, 4e Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For Instructor Use Only
Statement of Cash Flows a
Solution 190
14 - 61
(5 min.)
(a) Cash payments to suppliers = $88,000 ($95,000 – $3,000 – $4,000) (b) Cash payments for operating expenses = $62,000 ($50,000 + $7,000 + $5,000)
COMPLETION STATEMENTS 191. A statement of cash flows summarizes the operating, ____________, and ___________ activities of an entity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
192. The cash effects of selling goods and services appears in the ______________ activities section of a statement of cash flows. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
193. The operating activities section of the statement of cash flows may be prepared using the ______________ method or the ______________ method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
194. Net income from operations is generally not the same as cash provided from operations because revenues and expenses are recognized in the income statement on the ______________ basis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
195. Using the indirect approach, non-cash charges in the income statement are ______________ to net income and non-cash credits are ______________ to compute cash provided by operations. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
196. If accounts receivable increase during a period, revenues on an accrual basis are ______________ than revenues on a cash basis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
197. The sale of equipment at less than its book value is a(n) ______________ of cash that is reported in the ______________ activities section. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
198. Free _______________ equals cash provided by operations less capital expenditures and cash dividends. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
199. Under the direct method, noncash charges, such as depreciation, are _______________ in the statement of cash flows.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting a
200. Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash ________________________ and cash _________________________.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 62 Test Bank for Financial Accounting: IFRS Edition, 4e a
201. Cost of goods sold for the year amounted to $130,000, and during the year, accounts payable ______________ by $8,000 and inventory ______________ by $7,000 resulting in cash paid to suppliers of $115,000.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA a
202. In computing cash payments for operating expenses, a decrease in prepaid expenses is ______________ and an increase in accrued expenses payable is ______________ to (from) operating expenses, exclusive of depreciation.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a
203. In computing cash payments for income taxes, a decrease in income taxes payable is ______________ to (from) income tax expense.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Completion Statements 191. investing, financing 192. operating 193. indirect, direct (or vice versa) 194. accrual 195. added, deducted 196. higher (greater) 197. inflow, investing
198. cash flow 199. not reported a 200. receipts from customers, payments to suppliers a 201. increased, decreased a 202. deducted, deducted a 203. added a
MATCHING Set 1 — Indirect Method 204. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method. A. B. C. D. E. F. G.
Added to net income Deducted from net income Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity
____
1. Decrease in accounts payable during a period
____
2. Declaration and payment of a cash dividend.
____
3. Loss on disposal of land.
____
4. Decrease in accounts receivable during a period.
____
5. Redemption of bonds for cash.
____
6. Proceeds from sale of equipment at book value.
____
7. Issuance of ordinary shares for cash. For Instructor Use Only
Statement of Cash Flows Set 1
(Cont.)
____
8. Purchase of a building for cash.
____
9. Acquisition of land in exchange for ordinary shares.
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____ 10. Increase in inventory during a period. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
B E A A E
6. 7. 8. 9. 10.
D F C G B
Set 2 — Direct Method a
205. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method. A. B. C. D. E. F. G. H. I. J.
Added in determining cash receipts from customers Deducted in determining cash receipts from customers Added in determining cash payments to suppliers Deducted in determining cash payments to suppliers Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Is not shown
____ 1. Decrease in accounts payable during a period. ____ 2. Declaration and payment of a cash dividend. ____ 3. Decrease in accounts receivable during a period. ____ 4. Depreciation expense. ____ 5. Conversion of bonds payable into ordinary shares. ____ 6. Decrease in inventory during a period. ____ 7. Sale of equipment for cash at book value. ____ 8. Issuance of preference shares for cash. ____ 9. Purchase of land for cash. ____ 10. Loss on disposal of a plant asset. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
14 - 64 Test Bank for Financial Accounting: IFRS Edition, 4e
Answers to Matching 1. 2. 3. 4. 5.
C G A J I
6. 7. 8. 9. 10.
D F H E J
SHORT-ANSWER ESSAY QUESTIONS S-A E 206 Why is the statement of cash flows useful? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 206 The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company's ability to generate future cash flows, (2) the company's ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash investing and financing transactions during the period. S-A E 207 Distinguish among the three types of activities reported in the statement of cash flows The three activities are: Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 207 Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) acquiring and disposing of investments and property, plant, and equipment and (b) lending money and collecting the loans. Financing activities include: (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from shareholders, repurchasing shares, and paying them dividends. S-A E 208 The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
For Instructor Use Only
Statement of Cash Flows
14 - 65
Solution 208 The information used to prepare the statement of cash flows usually comes from three sources. These sources are (1) comparative statement of financial position, (2) current income statement, and (3) additional information. The accrual basis of accounting requires that revenues be recorded when earned and that expenses be recorded when incurred. Thus, net income may include earned revenues for which cash has not yet been collected and include incurred expenses which have not yet been paid for in cash. These non-cash revenues and non-cash expenses do not affect the cash balance. Therefore, the non-cash revenues and non-cash expenses must be eliminated to determine the net cash provided by operating activities. S-A E 209 Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same information about the net cash flows from operating activities. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 209 The indirect method (or reconciliation method) starts with net income and converts it to the net cash provided by operating activities. There are two types of adjustments: (1) changes in current assets and current liabilities and (2) non-cash charges and credits. For example, an increase in accounts receivable is deducted from net income and an increase in accounts payable is added to net income. Similarly, a non-cash charge for depreciation expense is added to net income. The adjustments are the difference between net income and the net cash provided by operating activities. Under the direct method, net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis. Within the operating activities section, only major classes of operating cash receipts and cash payments are reported. The classes include cash receipts from customers and cash payments to suppliers. The difference between these major classes is the net cash provided by operating activities. S-A E 210 How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
Solution 210 A net loss means that accrual-based expenses exceeded accrual-based revenues for the period. However, if you eliminate the effect of (add back) such non-cash expenses as depreciation and amortization, it is possible to have produced a positive net cash flow from operations. Increasing payables (not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales) this period would also cause cash flow to be higher than related net income or loss.
For Instructor Use Only
14 - 66 Test Bank for Financial Accounting: IFRS Edition, 4e S-A E 211 (Ethics) Flint Hills Company's most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter's performance was better. Ed Gray, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers. Mike Cane, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures. Required: 1. Were Ed Gray's actions ethical? Explain. 2. Were Mike Cane's actions ethical? Explain. 3. Were the company president's actions ethical? Explain. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 211 1. There is a valid question as to whether Ed Gray's actions are ethical or not. Either answer could be considered correct. On the one hand, he was probably within his legal rights to reclassify the workers. He also might be commended for allowing more workers to have a job than was previously the case. On the other hand, however, he has removed a very real benefit from the former full-time workers, and he has done it fairly arbitrarily. He may have harmed morale, and harmed the company if the workers quit and new workers have to be hired. 2. Mike Cane's actions all appear to be ethical. 3. The company president may have placed undue pressure on the employees to show better results. The managers may feel that they need to sacrifice the long-term goals of the firm for short-term benefits. S-A E 212
(Communication)
You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using IFRS. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you present a schedule of predicted cash sources and cash needs at the end of each week for the following week. Ken Harmon, the company's president, has asked whether a statement of cash flows would also be useful. Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics
For Instructor Use Only
Statement of Cash Flows Solution 212
TO:
Ken Harmon
FROM: Nancy Jenks RE:
Statement of Cash Flows vs. Cash Sources and Needs
You asked whether a Statement of Cash Flows would be useful, in addition to the Cash Sources and Needs statement. In my opinion, the statement of cash flows would be extremely useful. It gives different information than the Cash Sources and Needs does. A Statement of Cash Flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds. It is a summary of our performance. The Cash Sources and Needs statement, on the other hand, is a prediction of the cash we will need and the source from which it will be obtained. One is our plan, the other is our result. Please let me know if you'd like more details about the Statement of Cash Flows. (signed)
For Instructor Use Only
14 - 67
14 - 68 Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP QUESTIONS 1. Under GAAP interest paid can be reported as a. only an operating element. b. a financing element or an operating element. c. a financing element or an investing element. d. only a financing element. Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA: None, IMA: Reporting
2. GAAP requires that non-cash items a. be treated in a fashion similar to cash equivalents. b. do not need to be reported. c. be disclosed in the notes to the financial statements. d. be reported in the section to which they relate, that is, a non-cash investing activity would be reported in the investing section. Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA: None, IMA: Reporting
3. Under GAAP a. dividends paid can be either an operating or investing item. b. dividends received can be either an operating or investing item. c. the income statement uses the headings operating, investing, and financing. d. taxes are always treated as an operating item. Ans: D, LO: 6, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA: None, IMA: Reporting
For Instructor Use Only
CHAPTER 15 FINANCIAL STATEMENT ANALYSIS CHAPTER LEARNING OBJECTIVES 1. Apply horizontal analysis and vertical analysis to financial statements. There are three bases of comparison: (1) Intracompany, which compares an item or financial relationship with other data within a company. (2) Industry, which compares company data with industry averages. (3) Intercompany, which compares an item or financial relationship of a company with data of one or more competing companies. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. Vertical analysis is a technique that expresses each item within a financial statement in terms of a percentage of a relevant total or a base amount. 2. Analyze a company’s performance using ratio analysis. The formula and purpose of each ratio is presented in Illustration 15–26. 3. Apply the concept of sustainable income. Sustainable income analysis is useful in evaluating a company’s performance. Sustainable income is the most likely level of income to be obtained by the company in the future. Discontinued operations and other comprehensive income are presented on the statement of comprehensive income to highlight their unusual nature.Items below income from continuing operations must be presented net of tax.
TRUE-FALSE STATEMENTS 1.
Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
2.
Calculating financial ratios is a financial reporting requirement under IFRS.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
3.
Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
4.
Analysis of financial statements is enhanced with the use of comparative data.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
5.
Comparisons of company data with industry averages can provide some insight into the company's relative position in the industry.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
6.
Vertical and horizontal analyses are concerned with the format used to prepare financial statements.
15 - 2
Test Bank for Financial Accounting: IFRS Edition, 4e
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
Horizontal analysis is a technique for evaluating a financial statement item in the current year compared to other items in the current year.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
9.
Another name for trend analysis is horizontal analysis.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
10.
If a company has sales revenue of $110 in 2019 and $154 in 2020, the percentage increase in sales revenue from 2019 to 2020 is 140%.
Ans: F, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
11.
In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
12.
Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
13.
Vertical analysis is a more sophisticated analytical tool than horizontal analysis.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
14.
Vertical analysis is useful in making comparisons of companies of different sizes.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
15.
Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
16.
Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of net sales must be 90%.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
17.
In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
18.
A ratio can be expressed as a percentage, a rate, or a proportion.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
For Instructor Use Only
Financial Statement Analysis 19.
15 - 3
A solvency ratio measures the income or operating success of an enterprise for a given period of time.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
20.
The current ratio is a measure of all the ratios calculated for the current year.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
21.
Inventory turnover measures the number of times on average the inventory was sold during the period.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
22.
Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
23.
The return on total assets will be greater than the return on ordinary shareholders' equity if the company has been successful in trading on the equity at a gain.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement
24.
From a creditor's point of view, the higher the debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Investment Decisions
25.
A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement
26.
Using borrowed money to increase the return on ordinary shareholders' equity is called "trading on the equity."
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
27.
When the disposal of a significant component occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
Companies report most changes in accounting principle under other income and expense.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
15 - 4 29.
Test Bank for Financial Accounting: IFRS Edition, 4e Comprehensive income includes all changes in equity during a period except those resulting from investments by shareholders and distributions to shareholders.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
30.
Other comprehensive income is not included in net income and is recorded as a direct adjustment to equity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
32.
A percentage change can be computed only if the base amount is zero or positive.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
33.
In vertical analysis, the base amount in an income statement is usually net sales.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
34.
Profitability ratios measure the ability of the enterprise to survive over a long period of time.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35.
The days in inventory is computed by multiplying inventory turnover by 365.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36.
The presentation of the accumulated other comprehensive loss is similar to the presentation of the cost of treasury shares in the equity section.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
Financial Statement Analysis
15 - 5
MULTIPLE CHOICE QUESTIONS 37.
Which one of the following is primarily interested in the liquidity of a company? a. Government agencies b. Shareholders c. Long-term creditors d. Short-term creditors
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
38.
Which one of the following is not a characteristic generally evaluated in analyzing financial statements? a. Liquidity b. Profitability c. Marketability d. Solvency
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
39.
In analyzing the financial statements of a company, a single item on the financial statements a. should be reported in bold-face type. b. is more meaningful if compared to other financial information. c. is significant only if it is large. d. should be accompanied by a footnote.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
40.
Short-term creditors are usually most interested in evaluating a. solvency. b. liquidity. c. marketability. d. profitability.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
41.
Long-term creditors are usually most interested in evaluating a. liquidity and solvency. b. solvency and marketability. c. liquidity and profitability. d. profitability and solvency.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
42.
Shareholders are most interested in evaluating a. liquidity and solvency. b. profitability and solvency. c. liquidity and profitability. d. marketability and solvency.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 6 43.
Test Bank for Financial Accounting: IFRS Edition, 4e A shareholder is interested in the ability of a firm to a. pay consistent dividends. b. appreciate in share price. c. survive over a long period. d. All of these answer choices are correct.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
44.
Comparisons of financial data made within a company are called a. intracompany comparisons. b. interior comparisons. c. intercompany comparisons. d. intramural comparisons.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45.
A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data is a. common size analysis. b. horizontal analysis. c. ratio analysis. d. vertical analysis.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46.
Which one of the following is not a tool in financial statement analysis? a. Horizontal analysis b. Circular analysis c. Vertical analysis d. Ratio analysis
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
47.
In analyzing financial statements, horizontal analysis is a a. requirement. b. tool. c. principle. d. theory.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
48.
Horizontal analysis is also called a. linear analysis. b. vertical analysis. c. trend analysis. d. common size analysis.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
49.
Vertical analysis is also known as a. perpendicular analysis. b. common size analysis. c. trend analysis. d. straight-line analysis.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 50.
15 - 7
In ratio analysis, the ratios are never expressed as a a. rate. b. variable. c. percentage. d. simple proportion.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
51.
The formula for horizontal analysis of changes since the base period is the current year amount a. divided by the base year amount. b. minus the base year amount divided by the base year amount. c. minus the base year amount divided by the current year amount. d. plus the base year amount divided by the base year amount.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
52.
Horizontal analysis evaluates a series of financial statement data over a period of time a. that has been arranged from the highest number to the lowest number. b. that has been arranged from the lowest number to the highest number. c. to determine which items are in error. d. to determine the amount and/or percentage increase or decrease that has taken place.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
53.
Horizontal analysis evaluates financial statement data a. within a period of time. b. over a period of time. c. on a certain date. d. as it may appear in the future.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
54.
Assume the following sales data for a company: 2022 2021 2020 2019
€1,600,000 1,280,000 1,120,000 1,000,000
If 2019 is the base year, what is the percentage increase in sales from 2019 to 2021? a. 60% b. 128% c. 28% d. 78% Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
55.
Comparative statements of financial position are usually prepared for a. one year. b. two years. c. three years. d. four years.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
15 - 8
56.
Test Bank for Financial Accounting: IFRS Edition, 4e
Horizontal analysis is appropriately performed a. only on the income statement. b. only on the statement of financial position. c. only on the statement of retained earnings. d. on all three of the major financial statements.
Ans: d, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
57.
A horizontal analysis performed on a statement of retained earnings would not show a percentage change in a. dividends declared. b. net income. c. expenses. d. beginning retained earnings.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
58.
Under which of the following cases may a percentage change be computed? a. The trend of the balances is decreasing but all balances are positive. b. There is no balance in the base year. c. There is a positive balance in the base year and a negative balance in the subsequent year. d. There is a negative balance in the base year and a positive balance in the subsequent year.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
59.
Assume the following sales data for a company: 2021 2020 2019
€945,000 877,500 675,000
If 2019 is the base year, what is the percentage increase in sales from 2019 to 2020? a. 77% b. 30% c. 40% d. 71% Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
60.
Assume the following cost of goods sold data for a company: 2021 €1,704,000 2020 1,400,000 2019 1,200,000 If 2019 is the base year, what is the percentage increase in cost of goods sold from 2019 to 2021? a. 70% b. 42% c. 86% d. 117%
Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 61.
15 - 9
Blanco, Inc. has the following income statement (in millions): BLANCO, INC. Income Statement For the Year Ended December 31, 2020 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income
$300 180 120 45 $ 75
Using vertical analysis, what percentage is assigned to Cost of Goods Sold? a. 60% b. 40% c. 100% d. None of these answer choices are correct. Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
62.
Blanco, Inc. has the following income statement (in millions): BLANCO, INC. Income Statement For the Year Ended December 31, 2020 Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income
$300 180 120 45 $ 75
Using vertical analysis, what percentage is assigned to Net Income? a. 400% b. 40% c. 25% d. None of these answer choices are correct. Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
63.
Vertical analysis is also called a. common size analysis. b. horizontal analysis. c. ratio analysis. d. trend analysis.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
64.
Vertical analysis is a technique which expresses each item within a financial statement a. in dollars and cents. b. in terms of a percentage of the item in the previous year. c. in terms of a percent of a base amount. d. starting with the highest value down to the lowest value.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 10 Test Bank for Financial Accounting: IFRS Edition, 4e 65.
In common size analysis, a. a base amount is required. b. a base amount is optional. c. the same base is used across all financial statements analyzed. d. the results of the horizontal analysis are necessary inputs for performing the analysis.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
66.
In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total equity and liabilities. d. prepaid expenses.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
67.
In performing a vertical analysis, the base for sales revenue on the income statement is a. net sales. b. sales revenue. c. net income. d. cost of goods available for sale.
Ans: a, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
68.
In performing a vertical analysis, the base for sales returns and allowances is a. sales revenue. b. sales discounts. c. net sales. d. total revenues.
Ans: c, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
69.
In performing a vertical analysis, the base for cost of goods sold is a. total selling expenses. b. net sales. c. total revenues. d. total expenses.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
70.
Each of the following is a liquidity ratio except the a. acid-test ratio. b. current ratio. c. debt to total assets ratio. d. inventory turnover.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
71.
A ratio calculated in the analysis of financial statements a. expresses a mathematical relationship between two numbers. b. shows the percentage increase from one year to another. c. restates all items on a financial statement in terms of dollars of the same purchasing power. d. is meaningful only if the numerator is greater than the denominator.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis
72.
15 - 11
A liquidity ratio measures the a. income or operating success of an enterprise over a period of time. b. ability of the enterprise to survive over a long period of time. c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. d. number of times interest is earned.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
73.
The current ratio is a. calculated by dividing current liabilities by current assets. b. used to evaluate a company's liquidity and short-term debt paying ability. c. used to evaluate a company's solvency and long-term debt paying ability. d. calculated by subtracting current liabilities from current assets.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
74.
The acid-test (quick) ratio a. is used to quickly determine a company's solvency and long-term debt paying ability. b. relates cash, short-term investments, and net receivables to current liabilities. c. is calculated by taking one item from the income statement and one item from the statement of financial position. d. is the same as the current ratio except it is rounded to the nearest whole percent.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
75.
Walker Clothing Store had a balance in the Accounts Receivable account of $437,500 at the beginning of the year and a balance of $500,000 at the end of the year. Net credit sales during the year amounted to $3,000,000. The average collection period of the receivables in terms of days was a. 53 days. b. 365 days. c. 60 days. d. 57 days.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
76.
Parr Hardware Store had net credit sales of $8,500,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $760,000, respectively. The accounts receivable turnover was a. 7.4 times. b. 5.9 times. c. 11.2 times. d. 12.5 times.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
15 - 12 Test Bank for Financial Accounting: IFRS Edition, 4e 77.
Waters Department Store had net credit sales of €24,000,000 and cost of goods sold of €15,000,000 for the year. The average inventory for the year amounted to €2,000,000. Inventory turnover for the year is a. 12 times. b. 15 times. c. 7.5 times. d. 6 times.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
78.
Waters Department Store had net credit sales of €24,000,000 and cost of goods sold of €15,000,000 for the year. The average inventory for the year amounted to €2,000,000. The average number of days in inventory during the year was a. 60.8 days. b. 48.7 days. c. 30.4 days. d. 24.3 days.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
79.
Each of the following is included in computing the acid-test ratio except a. cash. b. inventory. c. receivables. d. short-term investments.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
80.
Which one of the following would not be considered a liquidity ratio? a. Current ratio b. Inventory turnover c. Acid-test ratio d. Return on assets
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
81.
Asset turnover measures a. how often a company replaces its assets. b. how efficiently a company uses its assets to generate sales. c. the portion of the assets that have been financed by creditors. d. the overall rate of return on assets.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
82.
Profit margin is calculated by dividing a. sales revenue by cost of goods sold. b. gross profit by net sales. c. net income by equity. d. net income by net sales.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 83.
15 - 13
Silas Corporation had net income of $240,000 and paid dividends to ordinary shareholders of $40,000 in 2020. The weighted average number of shares outstanding in 2020 was 60,000 shares. Silas Corporation's ordinary shares are selling for $76 per share on the New York Stock Exchange. Silas Corporation's price-earnings ratio is a. 3.2 times. b. 19 times. c. 22.8 times. d. 12.7 times.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
84.
Silas Corporation had net income of $240,000 and paid dividends to ordinary shareholders of $40,000 in 2020. The weighted average number of shares outstanding in 2020 was 60,000 shares. Silas Corporation's ordinary shares are selling for $76 per share on the New York Stock Exchange. Silas Corporation's payout ratio for 2020 is a. $0.71 per share. b 25%. c. 16.7%. d. 8%.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
85.
Farr Company reported the following on its income statement: Income before income taxes Income tax expense Net income
$600,000 150,000 $450,000
An analysis of the income statement revealed that interest expense was $60,000. Farr Company's times interest earned was a. 11 times. b. 10 times. c. 8.5 times. d. 7.5 times. Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
86.
The debt to total assets ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
87.
Trading on the equity (leverage) refers to the a. amount of working capital. b. amount of capital provided by owners. c. use of borrowed money to increase the return to owners. d. number of times interest is earned.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 14 Test Bank for Financial Accounting: IFRS Edition, 4e 88.
The current assets of Kile Company are $160,000. The current liabilities are $100,000. The current ratio expressed as a proportion is a. 160%. b. 1.6 : 1 c. .63: 1 d. $160,000 ÷ $100,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
89.
The current ratio may also be referred to as the a. short run ratio. b. acid-test ratio. c. working capital ratio. d. contemporary ratio.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
90.
A weakness of the current ratio is a. the difficulty of the calculation. b. that it doesn't take into account the composition of the current assets. c. that it is rarely used by sophisticated analysts. d. that it can be expressed as a percentage, as a rate, or as a proportion.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
91.
A supplier to a company would be most interested in the company’s a. asset turnover. b. profit margin. c. current ratio. d. earnings per share.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
92.
Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? a. Current ratio b. Acid-test ratio c. Asset turnover d. Accounts receivable turnover
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
93.
Ratios are used as tools in financial analysis a. instead of horizontal and vertical analyses. b. because they may provide information that is not apparent from inspection of the individual components of the ratio. c. because even single ratios by themselves are quite meaningful. d. because they are prescribed by IFRS.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 94.
15 - 15
The ratios that are used to determine a company's short-term debt paying ability are a. asset turnover, times interest earned, current ratio, and accounts receivable turnover. b. times interest earned, inventory turnover, current ratio, and accounts receivable turnover. c. times interest earned, acid-test ratio, current ratio, and inventory turnover. d. current ratio, acid-test ratio, accounts receivable turnover, and inventory turnover.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
95.
A measure of the percentage of each dollar of sales that results in net income is a. profit margin. b. return on assets. c. return on ordinary shareholders' equity. d. earnings per share.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
96.
Baden Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of Baden Company's working capital? a. No effect b. $75,000 increase c. $150,000 increase d. $75,000 decrease
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
97.
Baden Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Baden Company's current ratio? a. The ratio remained unchanged. b. The change in the current ratio cannot be determined. c. The ratio decreased. d. The ratio increased.
Ans: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
98.
If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will always a. increase. b. decrease. c. stay the same. d. equal zero.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
99.
The acid-test ratio a. is a quick calculation of an approximation of the current ratio. b. does not include all current liabilities in the calculation. c. does not include inventory as part of the numerator. d. does include prepaid expenses as part of the numerator.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 16 Test Bank for Financial Accounting: IFRS Edition, 4e 100.
If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing Collection of Receivable a. Increase No effect b. Increase Increase c. Decrease No effect d. Decrease Decrease
Ans: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
101.
A company has an accounts receivable turnover of 10 times. The average net accounts receivable during the period are ¥700,000,000. What is the amount of net credit sales for the period? a. ¥70,000,000 b. ¥7,000,000,000 c. ¥700,000,000 d. Cannot be determined from the information given
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
102.
If the average collection period is 50 days, what is the accounts receivable turnover? a. 6.6 times b. 7.3 times c. 3.7 times d. None of these answer choices are correct.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
103.
A general rule to use in assessing the average collection period is that a. it should not exceed 30 days. b. it can be any length as long as the customer continues to buy merchandise. c. it should not greatly exceed the discount period. d. it should not greatly exceed the credit term period.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
104.
Inventory turnover is calculated by dividing a. cost of goods sold by the ending inventory. b. cost of goods sold by the beginning inventory. c. cost of goods sold by the average inventory. d. average inventory by cost of goods sold.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
105.
A company has an average inventory on hand of ¥80,000,000 and the days in inventory is 73 days. What is the cost of goods sold? a. ¥400,000,000 b. ¥5,840,000,000 c. ¥800,000,000 d. ¥2,920,000,000
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 106.
15 - 17
A successful grocery store would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
107.
An aircraft company would most likely have a. a high inventory turnover. b. low profit margin. c. high volume. d. a low inventory turnover.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
108.
Net sales are $6,000,000, beginning total assets are $2,800,000, and the asset turnover is 3.0 times. What is the ending total asset balance? a. $2,000,000 b. $1,200,000 c. $2,800,000 d. $3,200,000
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
109.
Earnings per share is calculated a. only for ordinary shares. b. only for preference shares. c. for ordinary and preference shares. d. only for treasury shares.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
110.
Which of the following is not a profitability ratio? a. Payout ratio b. Profit margin c. Times interest earned d. Return on ordinary shareholders' equity
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
111.
Times interest earned is also called the a. money multiplier. b. interest coverage ratio. c. coupon coverage ratio. d. premium ratio.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 18 Test Bank for Financial Accounting: IFRS Edition, 4e 112.
The ratio that uses weighted average ordinary shares outstanding in the denominator is the a. price-earnings ratio. b. return on ordinary shareholders' equity. c. earnings per share. d. payout ratio.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
113.
Net income does not appear in the numerator of the a. profit margin. b. return on assets. c. return on ordinary shareholders' equity. d. payout ratio.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
114.
Gold Clothing Store had a balance in the Accounts Receivable account of ₤920,000 at the beginning of the year and a balance of ₤980,000 at the end of the year. Net credit sales during the year amounted to ₤9,500,000. The accounts receivable turnover was a. 10.0 times. b. 10.3 times. c. 9.7 times. d. 10.5 times.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
115.
Gold Clothing Store had a balance in the Accounts Receivable account of ₤920,000 at the beginning of the year and a balance of ₤980,000 at the end of the year. Net credit sales during the year amounted to ₤9,500,000. The average collection period of the receivables in terms of days was a. 37.6 days. b. 36.5 days. c. 35.4 days. d. 34.8 days.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
116.
Dooley Corporation had net income of $200,000 and paid dividends to ordinary shareholders of $40,000 in 2020. The weighted average number of shares outstanding in 2020 was 50,000 shares. Dooley Corporation's ordinary shares are selling for $30 per share. Dooley Corporation's price-earnings ratio is a. 6 times. b. 7.5 times. c. 4 times. d. 9.4 times.
Ans: b, LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 117.
15 - 19
Dooley Corporation had net income of $200,000 and paid dividends to ordinary shareholders of $40,000 in 2020. The weighted average number of shares outstanding in 2020 was 50,000 shares. Dooley Corporation's ordinary shares are selling for $30 per share on the New York Stock Exchange. Dooley Corporation's payout ratio for 2020 is a. $4 per share. b. 20%. c. 25%. d. 10%.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
118.
Tate Company reported the following on its income statement: Income before income taxes $600,000 Income tax expense 150,000 Net income $450,000 An analysis of the income statement revealed that interest expense was $75,000. Tate Company's times interest earned was a. 8 times. b. 9 times. c. 7 times. d. 6 times.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
119.
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
$ 160,000 95,000 50,000 $305,000 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
For Instructor Use Only
15 - 20 Test Bank for Financial Accounting: IFRS Edition, 4e MC 119.
(Cont.)
What is the current ratio for Soho? a. 1.90 b. 1.50 c. 1.30 d. 0.53 Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
120.
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
$ 160,000 95,000 50,000 $305,000 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
What is the accounts receivable turnover for Soho? a. 2.5 times b. 2.2 times c. 4.0 times d. 1.8 times Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 121.
15 - 21
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
$ 160,000 95,000 50,000 $305,000 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
What is the inventory turnover for Soho? a. 6 times b. 3.3 times c. 2.7 times d. .17 times Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
122.
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
For Instructor Use Only
$ 160,000 95,000 50,000 $305,000
15 - 22 Test Bank for Financial Accounting: IFRS Edition, 4e MC 122.
(Cont.) Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
What is the return on assets for Soho? a. 7.9% b. 15.7% c. 17.8% d. 39.3% Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
123.
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
$ 160,000 95,000 50,000 $305,000 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
For Instructor Use Only
Financial Statement Analysis
15 - 23
MC 123. (Cont.) What is the profit margin for Soho? a. 45.0% b. 44.4% c. 20.0% d. 17.7% Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
124.
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
$ 160,000 95,000 50,000 $305,000 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
What is the return on ordinary shareholders’ equity for Soho? a. 15.0% b. 6.7% c. 33.8% d. 75.0% Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
15 - 24 Test Bank for Financial Accounting: IFRS Edition, 4e 125.
The following information pertains to Soho Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
$ 210,000 20,000 30,000 45,000 $305,000 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
$ 160,000 95,000 50,000 $305,000 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 120,000 66,000 54,000 30,000 $ 24,000
Number of ordinary shares Market price of ordinary shares Dividends per share
6,000 $20 .50
What is the price-earnings ratio for Soho? a. 5.0 times b. 2.5 times c. 10 times d. 2.0 times Ans: a, LO: 2, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
126.
The following information pertains to Cheng Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands except per share items. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
¥ 215,000 27,000 30,000 40,500 ¥312,500 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
For Instructor Use Only
¥ 177,500 75,000 60,000 ¥312,500
Financial Statement Analysis MC 126.
15 - 25
(Cont.) Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
¥ 90,000 40,000 50,000 30,000 ¥ 20,000
Number of ordinary shares Market price of ordinary shares Dividends per share
5,000 ¥20 1.00
What is the return on assets for Cheng? a. 16.0% b. 9.3% c. 6.4% d. 12.8% Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
127.
The following information pertains to Cheng Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands except per share items. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
¥ 215,000 27,000 30,000 40,500 ¥312,500 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
¥ 177,500 75,000 60,000 ¥312,500 Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
¥ 90,000 40,000 50,000 30,000 ¥ 20,000
Number of ordinary shares Market price of ordinary shares Dividends per share
5,000 ¥20 1.00
What is the profit margin for Cheng? a. 55.6% b. 45.0% c. 40.0% d. 22.2% Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
15 - 26 Test Bank for Financial Accounting: IFRS Edition, 4e 128.
The following information pertains to Cheng Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands except per share items. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
¥ 215,000 27,000 30,000 40,500 ¥312,500 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
¥ 177,500 75,000 60,000 ¥312,500 Income Statement
Sales Cost of goods sold Gross margin Operating expenses Net income
¥ 90,000 40,000 50,000 30,000 ¥ 20,000
Number of ordinary shares Market price of ordinary shares Dividends per share
5,000 ¥20 1.00
What is the return on ordinary shareholders’ equity for Cheng? a. 22.5% b. 11.3% c. 28.2% d. 50.7% Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
129.
The following information pertains to Cheng Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands except per share items. Assets
Property, plant and equipment Inventory Accounts receivable (net) Cash and short-term investments Total Assets
¥ 215,000 27,000 30,000 40,500 ¥312,500 Equity and Liabilities
Shareholders’ equity—ordinary Non-current liabilities Current liabilities Total Equity and Liabilities
For Instructor Use Only
¥ 177,500 75,000 60,000 ¥312,500
Financial Statement Analysis MC 129.
15 - 27
(Cont.) Income Statement
Sales revenue Cost of goods sold Gross margin Operating expenses Net income
¥ 90,000 40,000 50,000 30,000 ¥ 20,000
Number of ordinary shares Market price of ordinary shares Dividends per share
5,000 ¥20 1.00
What is the price-earnings ratio for Cheng? a. 4.5 times b. 4.0 times c. 2.0 times d. 5.0 times Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
130.
The following information is available for Charles Company:
Accounts receivable Inventory Net credit sales Cost of goods sold Net income
2020 $ 460,000 340,000 2,160,000 1,630,000 300,000
2019 $ 500,000 420,000 1,400,000 1,060,000 170,000
The accounts receivable turnover for 2020 is a. 4.3 times. b. 4.7 times. c. 4.5 times. d. 2.9 times. Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
131.
The following information is available for Charles Company:
Accounts receivable Inventory Net credit sales Cost of goods sold Net income
2020 $ 460,000 340,000 2,160,000 1,630,000 300,000
2019 $ 500,000 420,000 1,400,000 1,060,000 170,000
The inventory turnover for 2020 is a. 5.7 times. b. 4.3 times. c. 3.9 times. d. 6.3 times. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
15 - 28 Test Bank for Financial Accounting: IFRS Edition, 4e 132.
The following amounts were taken from the financial statements of Palmer Company:
2020 Total assets $800,000 Net sales 720,000 Gross profit 352,000 Net income 126,000 Weighted average number of ordinary shares outstanding 90,000 Market price of ordinary shares $35
2019 $1,000,000 650,000 320,000 117,000 90,000 $39
The return on assets for 2020 is a. 16%. b. 14%. c. 44%. d. 39%. Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
133.
The following amounts were taken from the financial statements of Palmer Company:
2020 Total assets $800,000 Net sales 720,000 Gross profit 352,000 Net income 126,000 Weighted average number of ordinary shares outstanding 90,000 Market price of ordinary shares $35
2019 $1,000,000 650,000 320,000 117,000 90,000 $39
The profit margin for 2020 is a. 49%. b. 12%. c. 18%. d. 16%. Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
134.
The following amounts were taken from the financial statements of Palmer Company:
2020 Total assets $800,000 Net sales 720,000 Gross profit 352,000 Net income 126,000 Weighted average number of ordinary shares outstanding 90,000 Market price of ordinary shares $35
2019 $1,000,000 650,000 320,000 117,000 90,000 $39
The price-earnings ratio for 2019 is a. 30 times. b. 25 times. c. 4 times. d. 3 times. Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 135.
15 - 29
Miley Corporation had net income of €300,000 and paid dividends to ordinary shareholders of €40,000 in 2020. The weighted average number of shares outstanding in 2020 was 60,000 shares. Miley Corporation's ordinary shares are selling for €35 per share. Miley Corporation's price-earnings ratio is a. 6 times. b. 7 times. c. 14 times. d. 8 times.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
136.
Miley Corporation had net income of €300,000 and paid dividends to ordinary shareholders of €40,000 in 2020. The weighted average number of shares outstanding in 2020 was 60,000 shares. Miley Corporation's ordinary shares are selling for €35 per share on the New York Stock Exchange. Miley Corporation's payout ratio for 2020 is a. 12%. b. 13%. c. 7.5%. d. $4.33 per share.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
137.
The following financial statement information is available for Houser Corporation: 2020 2019 Inventory $ 44,000 $ 43,000 Current assets 80,000 106,000 Total assets 432,000 358,000 Current liabilities 25,000 36,000 Total liabilities 102,000 88,000 The current ratio for 2020 is a. .31:1. b. 3.2:1. c. .1.5:1. d. 4.2:1.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
138.
The following financial statement information is available for Jackson Corporation: 2020 2019 Net sales $780,000 $697,000 Cost of goods sold 406,000 377,000 Net income 120,000 80,000 Tax expense 48,000 29,000 Interest expense 14,000 14,000 The profit margin for 2020 is a. 15.4%. b. 47.9%. c. 32.1%. d. 13.5%.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
15 - 30 Test Bank for Financial Accounting: IFRS Edition, 4e 139.
The following financial statement information is available for Howard Corporation: 2020 2019 Shareholders' equity-ordinary $350,000 $270,000 Net sales 784,000 697,000 Cost of goods sold 406,000 377,000 Net income 115,000 80,000 Tax expense 48,000 29,000 Interest expense 14,000 14,000 Dividends paid to preference shareholders 24,000 20,000 Dividends paid to ordinary shareholders 15,000 10,000 The return on ordinary shareholders’ equity for 2020 is a. 26.0%. b. 37.1%. c. 28.6%. d. 29.4%.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
140.
The following financial statement information is available for Barrett Corporation: 2020 2019 Net income $115,000 $ 80,000 Tax expense 30,000 29,000 Interest expense 18,000 14,000 Dividends paid to preference shareholders 22,000 20,000 Dividends paid to ordinary shareholders 15,000 10,000 The times interest earned for 2020 is a. 7.4 times. b. 6.4 times. c. 9.1 times. d. 7.8 times.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
141.
Davis Corporation reported net income $58,000, net sales $500,000, and average assets $800,000 for 2020. The 2020 profit margin was a. 5.8%. b. 11.6%. c. 62.5%. d. 160%.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 142.
15 - 31
Gomez Company reports the following amounts for 2020: Net income € 160,000 Average shareholders’ equity 2,000,000 Preference dividends 45,000 Par value preference shares 250,000 The 2020 return on ordinary shareholders’ equity is a. 5.8%. b. 6.6%. c. 8.0%. d. 9.1%.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
143.
Giambi Corporation had beginning inventory $100,000, cost of goods sold €750,000, and ending inventory €150,000. What was Giambi's inventory turnover? a. 3 times. b. 6.0 times. c. 7.5 times. d. 5 times.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
144.
In 2020 Jackson Corporation reported income from operations €190,000, interest expense €60,000, and income tax expense €40,000. Jackson’s times interest earned was a. 4.2 times. b. 3.8 times. c. 3.2 times. d. 4.8 times.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
145.
Rasmus Company has income from continuing operations before taxes of $450,000 and a discontinued operations loss of $100,000. If the income tax rate is 30% on all items, the income statement should show income from continuing operations and a discontinued operations loss, respectively, of a. $450,000 and ($100,000) b. $315,000 and ($30,000) c. $315,000 and ($70,000) d. $135,000 and ($30,000)
Ans: c, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
146.
All of the following statements regarding changes in accounting principle are true except a. most changes in accounting principle are retroactively reported. b. changes in accounting principle are allowed when new principles are preferable to old ones. c. most changes in accounting principle only affect the financial statements of current periods when the principle change takes place. d. consistency is one of the biggest concerns when a change in accounting principle is undertaken.
Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 32 Test Bank for Financial Accounting: IFRS Edition, 4e 147.
Ester’s Bunny Barn has experienced a €90,000 loss due to discontinuing one of its divisions. Assuming that the company’s tax rate is 30%, what amount will be reported for this loss on the income statement? a. €90,000 b. €63,000 c. €27,000 d. €81,000
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
148.
Wenger Company reported income from continuing operations before taxes of $1,600,000 and a discontinued operations loss of $400,000. Assume that the company’s tax rate is 30%. What amounts will be reported on the income statement for income from continuing operations and a discontinued operations loss, respectively? a. $1,120,000 and $400,000 b. $1,120,000 and $280,000 c. $1,320,000 and $400,000 d. $1,320,000 and $280,000
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
149.
Kandy Kane Corporation has income from continuing operations before taxes of $1,600,000 and a discontinued operations gain of $400,000. If the income tax rate is 25% on all items, the income statement should show income from continuing operations and a discontinued operations gain, respectively, of a. $1,300,000 and $400,000. b. $1,300,000 and $300,000. c. $1,200,000 and $400,000. d. $1,200,000 and $300,000.
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
150.
Hardy Inc. has an investment in non-trading securities of €180,000. This investment experienced an unrealized loss of €15,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be a. no effect. b. €180,000 increase. c. €63,000 decrease. d. €9,750 decrease.
Ans: d, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
151.
The disposal of a significant component of a business is called a. a change in accounting principle. b. a non-operations item. c. an other expense. d. discontinued operations.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 152.
15 - 33
ABC Company reports income from continuing operations before taxes of $2,700,000 and had a discontinued operations loss of $900,000. If the tax rate is 30%, the a. income from continuing operations is $2,160,000. b. discontinued operations loss would be reported on the income statement at $900,000. c. income from continuing operations is $1,890,000. d. discontinued operations loss will be reported at $270,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
153.
Evers, Inc. disposes of an unprofitable division of its business. The operation of the division suffered a $800,000 loss in the year of disposal. The loss on disposal of the division was $400,000. If the tax rate is 30%, and income before income taxes was $5,000,000, a. the income tax expense on the income before discontinued operations is $1,144,000. b. the income from continuing operations is $3,500,000. c. net income is $3,800,000. d. the losses from discontinued operations are reported net of income taxes at $600,000.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
154.
The discontinued operations section of the income statement refers to a. discontinuance of a product line. b. the income or loss on products that have been completed and sold. c. obsolete equipment and discontinued inventory items. d. the disposal of a significant component of a business.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
155.
A loss on the write down of obsolete inventory should be reported as a. "other income and expense." b. part of discontinued operations. c. an operating expense. d. part of gross profit.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
156.
Other comprehensive income includes each of the following except a. unrealized gains on non-trading securities. b. unrealized losses on non-trading securities. c. unrealized losses on trading securities. d. All of these choices are included in other comprehensive income.
Ans: d, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
157.
Comparisons can be made on each of the following bases except a. industry averages. b. intercompany basis. c. intracompany basis. d. All of these answer choices are basis for comparison.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 34 Test Bank for Financial Accounting: IFRS Edition, 4e 158.
Comparisons of data within a company are an example of which one of the following comparative bases? a. Industry averages b. Intercompany c. Intracompany d. Interregional
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
159.
Silva Corporation reported net sales of $500,000, $700,000, and $900,000 in the years 2019, 2020, and 2021 respectively. If 2019 is the base year, what is the trend percentage for 2021? a. 129% b. 140% c. 167% d. 180%
Ans: d, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
160.
In vertical analysis, the base amount for each income statement item is a. gross profit. b. net income. c. net sales. d. sales.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
161.
When performing vertical analysis, the base amount for administrative expenses is generally a. administrative expenses in a previous year. b. net sales. c. gross profit. d. fixed assets.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
162.
Ratios that measure the short-term ability of the company to pay its maturing obligations are a. liquidity ratios. b. profitability ratios. c. solvency ratios. d. trend ratios.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
163.
What type of ratios best measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash? a. Leverage b. Solvency c. Profitability d. Liquidity
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis 164.
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The acid-test ratio is also known as the a. current ratio. b. quick ratio. c. fast ratio. d. times interest earned ratio.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
165.
The debt to total assets ratio a. is a solvency ratio. b. is computed by dividing total assets by total debt. c. measures the total assets provided by shareholders. d. is a profitability ratio.
Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
166.
Patrick, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,260,000 are sold for $900,000. Operating income from January 1 to June 30 for the division amounted to $150,000. Ignoring income taxes, what total amount should be reported on Patrick’s income statement for the current year under the caption, Discontinued Operations? a. $150,000 b. $210,000 loss c. $360,000 loss d. $510,000
Ans: b, LO: 3, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
167.
When there has been a change in accounting principle, a. the old principle should be used in reporting the results of operations for the current year. b. the cumulative effect of the change should be reported in the current year’s income statement. c. the change should be reported retroactively. d. the new principle should be used in reporting the results of operations of the current year, but there is no change to prior years.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
For Instructor Use Only
15 - 36 Test Bank for Financial Accounting: IFRS Edition, 4e
BRIEF EXERCISES BE 168 The following items were taken from the financial statements of Horace, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit
2021 $355,000 214,000 $141,000
2020 $340,000 202,000 $138,000
2019 $300,000 186,000 $114,000
Instructions Compute the following for each of the above time periods. a. The amount and percentage change from 2019 to 2020. b. The amount and percentage change from 2020 to 2021. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 168
(6 min.)
Item
2021 $ 15,000 12,000 3,000
Net Sales Cost of Goods Sold Gross Profit
Percent 4.4 5.9 2.2
2020 $___ Percent 40,000 13.3 16,000 8.6 24,000 21.1
BE 169 If Parthenon Company had net income of €540,000 in 2020 and it experienced a 25% increase in net income over 2019, what was its 2019 net income? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 169
(4 min.)
Net Income
2020 €540,000
2019 X
Increase 25%
€540,000 - X X .25X = €540,000 – X 1.25X = €540,000 X = €432,000 .25 =
BE 170 Horizontal analysis (trend analysis) percentages for Watson Company’s sales, cost of goods sold, and expenses are listed here. Horizontal Analysis Sales revenue Cost of goods sold Expenses
2021 98.2% 102.5 108.6
2020 104.8% 98.0 96.4
For Instructor Use Only
2019 100.0% 100.0 100.0
Financial Statement Analysis
15 - 37
BE 170 (Cont.) Instructions Explain whether Watson’s net income increased, decreased, or remained unchanged over the 3year period. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 170
(5 min.)
Comparing the percentages presented results in the following conclusions: The net income for Watson increased in 2020 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2021 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. BE 171 Using the following operating data for Steiner Corporation, illustrate horizontal analysis. Net sales Cost of goods sold Operating expenses Net income
2021 $350,000 240,000 80,000 30,000
2020 $320,000 180,000 100,000 40,000
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 171
(5 min.)
Net sales Cost of goods sold Operating expenses Net income
2021 109% 133% 80% 75%
2020_ 100% 100% 100% 100%
BE 172 Using the following operating data for Steiner Corporation, prepare a schedule showing a vertical analysis for 2021. Net sales Cost of goods sold Operating expenses Net income
2021 $350,000 240,000 80,000 30,000
2020 $320,000 180,000 100,000 40,000
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 172
(4 min.)
Net sales Cost of goods sold Gross profit Operating expenses Net income
Amount $350,000 240,000 110,000 80,000 $ 30,000
Percent 100.0% 68.6% 31.4% 22.8% 8.6%
For Instructor Use Only
15 - 38 Test Bank for Financial Accounting: IFRS Edition, 4e BE 173 Using these data from the comparative statement of financial position of Luca Company, perform vertical analysis. December 31, 2021 € 780,000 510,000 3, 500,000
Inventory Accounts receivable Total assets
December 31, 2020 € 600,000 400,000 3,000,000
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 173
(6 min.) Dec. 31, 2021 Amount Percentage* € 780,000 22% 510,000 15% 3,500,000 100.0%
Inventory Accounts receivable Total assets * €780,000 = .22 €3,500,000
** €600,000 = .20 €3,000,000
€510,000 = .15 €3,500,000
€400,000 = .13 €3,000,000
Dec. 31, 2020 Amount Percentage** € 600,000 20% 400,000 13% 3,000,000 100.0%
BE 174 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio (L), a profitability ratio (P), or a solvency ratio (S). ____ 1. Times interest earned ____ 2. Asset turnover ____ 3. Accounts receivable turnover ____ 4. Debt to assets ratio ____ 5. Current ratio ____ 6. Payout ratio Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 174 1. 2. 3. 4. 5. 6.
(3 min.)
S P L S L P
For Instructor Use Only
Financial Statement Analysis
15 - 39
BE 175 Selected financial statement data for Meyer Company are presented below. 12/31/20 $ 75,000 60,000 15,000 10,000 110,000
Inventories Accounts receivable Short-term investments Cash Total current liabilities Instructions Compute the following ratios at December 31, 2020: (a) Current ratio. (b) Acid-test ratio.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 175
(3 min.)
(a) Current ratio = 1.45:1 ($160,000 ÷ $110,000) (b) Acid-test ratio = .77:1 ($85,000 ÷ $110,000) BE 176 Breaktown Company had net income of $152,000 and net sales of $625,000 in 2020. The company’s total assets for 2016/2020 averaged $4,000,000. Its ordinary shareholders’ equity for the period averaged $2,340,000. Calculate (a) profit margin, (b) return on assets, and (c) return on ordinary shareholders’ equity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 176
(5 min.)
(a) Profit margin = $152,000 ÷ $625,000 = 24% (b) Return on assets = $152,000 ÷ $4,000,000 = 3.8% (c) Return on ordinary shareholders’ equity = $152,000 ÷ $2,340,000 = 6.5% BE 177 Berman Company reported the following financial information: Accounts receivable Net credit sales
12/31/21 $ 320,000 2,100,000
12/31/20 $ 360,000 2,420,000
Compute (a) the accounts receivable turnover and (b) the average collection period for 2021. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 177
(3 min.)
(a) Accounts receivable turnover = $2,100,000 ÷ $340,000 = 6.2 times (b) Average collection period = 365 ÷ 6.2 = 59 days
For Instructor Use Only
15 - 40 Test Bank for Financial Accounting: IFRS Edition, 4e BE 178 Prepare a partial income statement, beginning with income before income taxes using the following information for Simpson Corporation for the fiscal year ended December 31, 2020: Sales revenue $800,000 Loss from discontinued operations 100,000 Operating expenses 180,000 Cost of goods sold 500,000 Loss on disposal of land 25,000 Simpson Corporation is subject to a 30% income tax rate. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 178
(5 min.) SIMPSON CORPORATION Partial Income Statement For the Year Ended December 31, 2020
Income before income taxes ($800,000 – $500,000 – $180,000 – $25,000) $95,000 Income tax expense ($95,000 × 30%) 28,500 Income from continuing operations 66,500 Loss from discontinued operations, net of $30,000 tax savings ($100,000 × 30%) (70,000) Net income (loss) ($3,500)
EXERCISES Ex. 179 Selected financial information for Bradley Corporation is presented below. Current assets Non-current liabilities Retained earnings
December 31, 2021 $ 60,000 100,000 115,000
December 31, 2020 $ 50,000 80,000 100,000
Instructions Prepare a schedule showing a horizontal analysis for 2021 using 2020 as the base year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 179
(10 min.)
Current assets Non-current liabilities Retained earnings
2021 $ 60,000 100,000 115,000
2020 $ 50,000 80,000 100,000
Increase (Decrease) Amount Percentage $ 10,000 20% 20,000 25% 15,000 15%
For Instructor Use Only
Financial Statement Analysis
15 - 41
Ex. 180 Comparative information taken from the Wells Company financial statements is shown below: (a) (b) (c) (d) (e) (f)
2020 € 20,000 182,000 30,000 44,000 960,000 170,000
Notes receivable Accounts receivable Retained earnings Income taxes payable Sales Operating expenses
2019 € -0140,000 (40,000) 20,000 750,000 200,000
Instructions Using horizontal analysis, show the percentage change from 2019 to 2020 with 2019 as the base year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 180 (a) (b) (c) (d) (e) (f)
(8–12 min.)
Base year is zero. Not possible to compute. €42,000 ÷ €140,000 = 30% increase Base year is negative. Not possible to compute. €24,000 ÷ €20,000 = 120% increase €210,000 ÷ €750,000 = 28% increase €30,000 ÷ €200,000 = 15% decrease
Ex. 181 Flynn Corporation had net income of €6,000,000 in 2019. Using 2019 as the base year, net income decreased by 70% in 2020 and increased by 140% in 2021. Instructions Compute the net income reported by Flynn Corporation for 2020 and 2021. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 181
(6–9 min.)
2020: X ÷ €6,000,000 = 70% X = €6,000,000 × .70 = €4,200,000 The decrease is €4,200,000; therefore net income for 2020 is €1,800,000. 2021: X ÷ €6,000,000 = 140% X = €6,000,000 × 1.40 X = €8,400,000 The net income for 2021 is €14,400,000 (€6,000,000 + €8,400,000).
For Instructor Use Only
15 - 42 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 182 The following items were taken from the financial statements of Ritz, Inc., over a four-year period: Item Net Sales Cost of Goods Sold Gross Profit
2021 €750,000 540,000 €210,000
2020 €650,000 460,000 €190,000
2019 €600,000 420,000 €180,000
2018 €500,000 400,000 €100,000
Instructions Using horizontal analysis and 2018 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 182
(10–15 min.)
Item Net Sales Cost of Goods Sold Gross Profit
2021 150% 135% 210%
2020 130% 115% 190%
2019 120% 105% 180%
2018 100% 100% 100%
The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing which could be unfavorable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favorable, increasing trend. Ex. 183 The comparative statements of financial position of Haley Company appears below: HALEY COMPANY Comparative Statements of Financial Position December 31, ——————————————————————————————————————————— Assets 2020 2019 Plant assets ........................................................................................... $ 640 $ 500 Current assets ....................................................................................... 360 300 Total assets ........................................................................................... $1,000 $ 800 Equity and liabilities Share capital – ordinary ......................................................................... Retained earnings ................................................................................. Non-current liabilities.............................................................................. Current liabilities .................................................................................... Total equity and liabilities .................................................................
$ 350 260 240 150 $1,000
$ 280 240 160 120 $ 800
Instructions (a) Using horizontal analysis, show the percentage change for each statement of financial position item using 2019 as a base year. (b) Using vertical analysis, prepare a common size comparative statement of financial position. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
Financial Statement Analysis Solution 183
15 - 43
(14–19 min.) HALEY COMPANY Comparative Statements of Financial Position December 31,
Assets Plant assets Current assets Total assets
2020 $ 640 360 $1,000
(b) Percent 64% 36 100%
2019 $500 300 $800
(b) Percent 62% 38 100%
(a) Percent 28% 20% 25%
Equity and liabilities Share capital – ordinary Retained earnings Non-current liabilities Current liabilities Total equity and liabilities
$ 350 260 240 150 $1,000
35% 26 24 15 100%
$280 240 160 120 $800
35% 30 20 15 100%
25% 8% 50% 25% 25%
Ex. 184 Using the following selected items from the comparative statements of financial position of Anders Company, illustrate horizontal and vertical analysis. Inventory Accounts Receivable Total Assets
December 31, 2020 $ 1,053,000 900,000 4,000,000
December 31, 2019 $ 780,000 600,000 2,500,000
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 184
(10–15 min.) HORIZONTAL ANALYSIS
Inventory Accounts Receivable Total Assets
December 31, 2020 135% 150% 160%
December 31, 2019 100% 100% 100%
VERTICAL ANALYSIS Inventory Accounts Receivable Total Assets
December 31, 2020 26.3% 22.5% 100%
December 31, 2019 31.2% 24% 100%
For Instructor Use Only
15 - 44 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 185 The comparative condensed statements of financial position of Bailey Corporation are presented below. BAILEY CORPORATION Comparative Condensed Statements of Financial Position December 31 Assets Property, plant, and equipment (net) Intangibles Current assets Total assets Equity and liabilities Shareholders' equity Non-current liabilities Current liabilities Total equity and liabilities
2020
2019
$ 94,500 33,500 70,000 $198,000
$ 90,000 40,000 80,000 $210,000
$ 16,200 141,000 40,800 $198,000
$ 12,000 150,000 48,000 $210,000
Instructions (a) Prepare a horizontal analysis of the statements of financial position data for Bailey Corporation using 2019 as a base. (b) Prepare a vertical analysis of the statements of financial position data for Bailey Corporation in columnar form for 2020. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 185
(20–25 min.)
(a)
BAILEY CORPORATION Condensed Statements of Financial Position December 31 ——————————————————————————————————————————— Percentage Increase Change 2020 2019 (Decrease) from 2019 Assets Property, plant, & equipment (net) $ 94,500 $ 90,000 $ 4,500 5.0% Intangibles 33,500 40,000 (6,500) (16.3%) Current assets 70,000 80,000 (10,000) (12.5%) Total assets $198,000 $210,000 $(12,000) (5.7%) Equity and liabilities Shareholders' equity Non-current liabilities Current liabilities Total equity and liabilities
$ 16,200
$ 12,000
$ 4,200
35.0%
141,000 40,800 $198,000
150,000 48,000 $210,000
(9,000) (7,200) $(12,000)
(6.0%) (15.0%) (5.7%)
For Instructor Use Only
Financial Statement Analysis
15 - 45
Solution 185 (Cont.) (b)
BAILEY CORPORATION Condensed Statements of Financial Position December 31, 2020 ——————————————————————————————————————————— Amount
Percent
Assets Property, plant, and equipment (net) Intangibles Current assets Total assets
$ 94,500 33,500 70,000 $198,000
47.7% 16.9% 35.4% 100.0%
Equity and liabilities Shareholders' equity Non-current liabilities Current liabilities Total equity and liabilities
$ 16,200 141,000 40,800 $198,000
8.2% 71.2% 20.6% 100.0%
Ex. 186 The comparative condensed income statements of Moran Corporation are shown below. MORAN CORPORATION Comparative Condensed Income Statements For the Years Ended December 31 Net sales Cost of goods sold Gross profit Operating expenses Net income
2020 $620,000 450,000 170,000 54,000 $ 116,000
2019 $500,000 400,000 100,000 40,000 $ 60,000
Instructions (a) Prepare a horizontal analysis of the income statement data for Moran Corporation using 2019 as a base. (Show the amounts of increase or decrease.) (b) Prepare a vertical analysis of the income statement data for Moran Corporation in columnar form for both years. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
15 - 46 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 186
(20–25 min.)
(a)
MORAN CORPORATION Condensed Income Statements For the Years Ended December 31 ——————————————————————————————————————————— Increase or (Decrease) During 2019 2020 2019 Amount Percentage Net sales $620,000 $500,000 $120,000 24.0% Cost of goods sold 450,000 400,000 50,000 12.5% Gross profit 170,000 100,000 70,000 70.0% Operating expenses 54,000 40,000 14,000 35.0% Net income $ 116,000 $ 60,000 $ 56,000 93.3% (b)
MORAN CORPORATION Condensed Income Statements For the Years Ended December 31 ——————————————————————————————————————————— 2020 2019 Amount Percentage Amount Percentage Net sales $620,000 100.0% $500,000 100.0% Cost of goods sold 450,000 72.6% 400,000 80.0% Gross profit 170,000 27.4% 100,000 20.0% Operating expenses 54,000 8.7% 40,000 8.0% Net income $ 116,000 18.7% $ 60,000 12.0% Ex. 187 Operating data for Manning Corporation are presented below. Net sales Cost of goods sold Operating expenses Net income
2020 $600,000 320,000 130,000 150,000
Instructions Prepare a schedule showing a vertical analysis for 2020. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 187
(10 min.)
Net sales Cost of goods sold Gross profit Operating expenses Net income
Amount $600,000 320,000 280,000 130,000 $ 150,000
Percent 100% 53% 47% 22% 25%
For Instructor Use Only
Financial Statement Analysis
15 - 47
Ex. 188 The following information (in 000) was taken from the financial statements of Lei Company: Gross profit ......................................................................... Income before income taxes ................................................ Net income ........................................................................... Net income as a percentage of net sales.............................
2020 ¥750,000 280,000 200,000 8%
2019 ¥840,000 230,000 216,000 9%
Instructions (a) Compute the net sales for each year. (b) Compute the cost of goods sold in dollars and as a percentage of net sales for each year. (c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses). Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 188 (a)
(12–15 min.)
To calculate net sales, divide the net income by the percentage of net income to net sales. Net Sales
2020 ¥200,000 ÷ 8% = ¥2,500,000
2019 ¥216,000 ÷ 9% = ¥2,400,000
(b) Using the net sales information from (a) and the gross profits given, it is possible to calculate the cost of goods sold. Net sales Less: Gross profit Cost of goods sold % of net sales (c) Gross profit Less: Income before income taxes Operating Expenses % of net sales
2020 ¥2,500,000 750,000 ¥1,750,000
2019 ¥2,400,000 840,000 ¥1,560,000
70%
65%
2020 ¥750,000 280,000 ¥470,000
2019 ¥840,000 230,000 ¥610,000
18.8%
25.4%
Ex. 189 Selected financial statement data for Morton Company are presented below. Inventories Accounts receivable (net) Short-term investments Cash Total current liabilities
December 31, 2020 $ 85,000 100,000 25,000 20,000 100,000
For Instructor Use Only
December 31, 2019 $65,000 80,000 18,000 30,000 90,000
15 - 48 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 189 (Cont.) During 2020, net sales were $810,000, and cost of goods sold was $615,000. Instructions Compute the following ratios at December 31, 2020: (a) Current. (b) Acid-test. (c) Accounts receivable turnover. (d) Inventory turnover. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 189 (a) (b) (c) (d)
(10 min.)
Current = 2.3:1 ($230,000 ÷ $100,000) Acid-test = 1.45:1 ($145,000 ÷ $100,000) Accounts receivable turnover = 9 times $810,000 ÷ [($100,000 + $80,000) ÷ 2] Inventory turnover = 8.2 times [$615,000 ÷ ($85,000 + $65,000) ÷ 2]
Ex. 190 Selected information from the comparative financial statements of Fryman Company for the year ended December 31, appears below: 2020 2019 Inventory € 140,000 €160,000 Accounts receivable (net) 180,000 200,000 Total assets 1,200,000 800,000 Non-current liabilities 340,000 300,000 Current liabilities 140,000 110,000 Net credit sales 1,520,000 1,200,000 Cost of goods sold 750,000 630,000 Interest expense 40,000 25,000 Income tax expense 60,000 29,000 Net income 160,000 85,000 Instructions Answer the following questions relating to the year ended December 31, 2020. Show computations. 1. Inventory turnover for 2020 is __________. 2. Times interest earned in 2020 is __________. 3. The debt to total assets ratio for 2020 is __________. 4. Accounts receivable turnover for 2020 is __________. 5. Return on assets for 2020 is __________. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis Solution 190
15 - 49
(9–14 min.) €750,000 ———————————— = 5 times. (€140,000 + €160,000) ÷ 2
1. Inventory turnover for 2020 is 5 times.
2. Times interest earned in 2020 is 6.5 times.
€160,000 + €60,000 + €40,000 —————————————— = 6.5 times. €40,000
3. The debt to total assets ratio for 2020 is 40%.
€140,000 + €340,000 —————————— = 40%. €1,200,000
4. Accounts receivable turnover for 2020 is 8 times.
5. Return on assets for 2020 is 16%.
€1,520,000 ———————————— = 8 times. (€180,000 + €200,000) ÷ 2
€160,000 ————————————— = 16%. (€1,200,000 + €800,000) ÷ 2
Ex. 191 The financial statements of Grogan Company appear below: GROGAN COMPANY Comparative Statements of Financial Position December 31, ——————————————————————————————————————————— Assets 2020 2019 Property, plant and equipment (net) ................................................ $260,000 $300,000 Inventory .......................................................................................... 50,000 70,000 Accounts receivable (net) ................................................................ 50,000 30,000 Short-term investments .................................................................... 15,000 60,000 Cash ................................................................................................ 25,000 40,000 Total assets ............................................................................... $400,000 $500,000 Equity and liabilities Share capital – ordinary ................................................................... $150,000 Retained earnings............................................................................ 110,000 Bonds payable ................................................................................. 80,000 Accounts payable ............................................................................ 20,000 Short-term notes payable ................................................................ 40,000 Total equity and liabilities .......................................................... $400,000
For Instructor Use Only
$150,000 70,000 160,000 30,000 90,000 $500,000
15 - 50 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 191 (cont.) GROGAN COMPANY Income Statement For the Year Ended December 31, 2020 Net sales .......................................................................................... Cost of goods sold ........................................................................... Gross profit....................................................................................... Operating expenses ......................................................................... Income from operations ................................................................... Interest expense............................................................................... Income before income taxes ............................................................ Income tax expense ......................................................................... Net income .......................................................................................
$400,000 240,000 160,000 42,000 118,000 18,000 100,000 30,000 $ 70,000
Additional information: a. Cash dividends of $23,000 were declared and paid in 2020. b. Weighted-average number of ordinary shares outstanding during 2020 was 30,000 shares. c. Market value of ordinary shares on December 31, 2020, was $21 per share. Instructions Using the financial statements and additional information, compute the following ratios for Grogan Company for 2020. Show all computations. Computations 1.
Current ratio _________.
2.
Return on ordinary shareholders' equity _________.
3.
Price-earnings ratio _________.
4.
Acid-test ratio _________.
5.
Accounts receivable turnover _________.
6.
Times interest earned _________.
7.
Profit margin _________.
8.
Days in inventory _________.
9.
Payout ratio _________.
10.
Return on assets _________.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis Solution 191
15 - 51
(15–20 min.)
1.
Current ratio 2.3:1.
$140,000 ———— = 2.3 $60,000
2.
Return on ordinary shareholders' equity 29.2%.
$70,000 ———————————— = .292 ($260,000 + $220,000) ÷ 2
3.
Price-earnings ratio 9 times.
$70,000 EPS = ———— = $2.33; 30,000 $21 ——— = 9 times $2.33
4.
Acid-test ratio 1.5:1.
$90,000 ———— = 1.5:1 $60,000
5.
Accounts receivable turnover 10 times.
$400,000 ——————————— = 10 ($50,000 + $30,000) ÷ 2
6.
Times interest earned 6.6 times.
$70,000 + $30,000 + $18,000 ————————————— = 6.6 $18,000
7.
Profit margin 17.5%.
$70,000 ———— = .175 $400,000
8.
Days in inventory 91.3 days.
Inventory turnover = $240,000 ——————————— = 4.0; ($50,000 + $70,000) ÷ 2 365 days ———— = 91.3 4.0
9.
Payout ratio 32.9%.
$23,000 ———— = .329 $70,000
10.
Return on assets 15.6%.
$70,000 ———————————— = .156 ($400,000 + $500,000) ÷ 2
For Instructor Use Only
15 - 52 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 192 The following ratios have been computed for Morgan Company for 2020. Profit margin Times interest earned Accounts receivable turnover Acid-test ratio Current ratio Debt to total assets ratio
12.5% 8 times 4 times 2:1 3:1 20%
Morgan Company’s 2020 financial statements with missing information follow: MORGAN COMPANY Comparative Statements of Financial Position December 31, ——————————————————————————————————————————— Assets 2020 2019 Property, plant, and equipment (net).......................................... $ 200,000 $ 160,000 Inventory .................................................................................... ? (8) 50,000 Accounts receivable (net)........................................................... ? (6) 40,000 Short-term Investments .............................................................. 10,000 25,000 Cash ........................................................................................... 30,000 45,000 Total assets ........................................................................ $ ? (9) $320,000 Equity and liabilities Share capital – ordinary ............................................................. $ 220,000 Retained earnings ...................................................................... 60,000 Bonds payable ........................................................................... ? (10) Accounts payable ....................................................................... ? (7) Short-term notes payable ........................................................... 40,000 Total equity and liabilities ................................................... $ ? (11)
$ 200,000 35,000 20,000 30,000 35,000 $320,000
MORGAN COMPANY Income Statement For the Year Ended December 31, 2020 ——————————————————————————————————————————— Net sales .................................................................................... $200,000 Cost of goods sold ..................................................................... 75,000 Gross profit................................................................................. 125,000 Expenses: Depreciation expense .......................................................... $ ? (5) Selling expenses .................................................................. 8,000 Administrative expenses ...................................................... 12,000 Income from operations.................................................. ? (4) Interest expense ................................................................... 5,000 Income before income taxes ...................................................... ? (2) Income tax expense ............................................................. ? (3) Net income ................................................................................. $ ? (1)
For Instructor Use Only
Financial Statement Analysis
15 - 53
Ex. 192 (Cont.) Instructions Use the above ratios and information from the Morgan Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 35, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 192
(35–45 min.)
MORGAN COMPANY Comparative Statements of Financial Position December 31, ——————————————————————————————————————————— Assets 2020 2019 Property, plant, and equipment (net) ................................... $ 200,000 $ 160,000 Inventory .............................................................................. 50,000 (8) 50,000 Accounts receivable (net) .................................................... 60,000 (6) 40,000 Short – term investments ..................................................... 10,000 25,000 Cash .................................................................................... 30,000 45,000 Total assets .................................................................. $350,000 (9) $320,000 Equity and liabilities Share capital – ordinary ....................................................... Retained earnings................................................................ Bonds payable ..................................................................... Accounts payable ................................................................ Short-term notes payable .................................................... Total equity and liabilities ............................................
$ 220,000 60,000 20,000 (10) 10,000 (7) 40,000 $350,000 (11)
$ 200,000 35,000 20,000 30,000 35,000 $320,000
MORGAN COMPANY Income Statement For the Year Ended December 31, 2020 ——————————————————————————————————————————— Net sales .............................................................................. $200,000 Cost of goods sold ............................................................... 75,000 Gross profit .......................................................................... 125,000 Expenses Depreciation expense .................................................... $65,000 (5) Selling expenses ............................................................ 8,000 Administrative expenses ................................................ 12,000 85,000 Income from operations ....................................................... 40,000 (4) Interest expense .................................................................. 5,000 Income before income taxes ................................................ 35,000 (2) Income tax expense............................................................. 10,000 (3) Net income ........................................................................... $ 25,000 (1) (1)
Net income = $25,000 ($200,000 × 12.5%).
For Instructor Use Only
15 - 54 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 192 (cont.) (2) Income before income taxes = $35,000. Let X = Income before income taxes and interest expense. X ——— = 8 times $5,000 X = $40,000 $40,000 – $5,000 = $35,000 (3)
Income tax expense = $10,000 ($35,000 – $25,000).
(4)
Income from operations = $40,000 ($35,000 + $5,000).
(5)
Depreciation expense = $65,000
(6)
Accounts receivable (net) = $60,000. Let X = Average accounts receivable. $200,000 ———— = 4 times X 4X = $200,000. X = $50,000.
[$85,000 – ($8,000 + $12,000)].
Let Y = Accounts receivable at 12/31/20. $40,000 + Y —————— = $50,000 2 $40,000 + Y = $100,000 Y = $60,000 (7) Accounts payable = $10,000. Let X = Current liabilities. $30,000 + $10,000 + $60,000 ————————————— = 2 X 2X = $100,000 X = $50,000 $50,000 – $40,000 = $10,000 (8) Inventory = $50,000 Let X = Total current assets X ———— = 3 $50,000 X = $150,000 $150,000 – ($30,000 + $10,000 + $60,000) = $50,000 (9) Total assets = $350,000
($30,000 + $10,000 + $60,000 + $50,000 + $200,000)
For Instructor Use Only
Financial Statement Analysis Solution 192
15 - 55
(cont.)
(10) Bonds payable = $20,000 Let X = Total debt X ———— = 20% $350,000 X = $70,000 $70,000 – ($10,000 + $40,000) = $20,000 (11) Total equity and liabilities = $350,000; same as total assets—see (9) above. Ex. 193 Selected data for Nancy's Store appear below. 2020 €640,000 525,000 64,000 65,000 90,000
Net sales Cost of goods sold Net income Inventory at end of year Accounts receivable at end of year
2019 €520,000 400,000 35,000 85,000 70,000
Instructions Compute the following for 2020: (a) Profit margin. (b) Inventory turnover. (c) Accounts receivable turnover. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 193
(6–10 min.)
(a)
Profit margin = Net income ÷ Net sales = €64,000 ÷ €640,000 = 10%
(b)
Inventory turnover = Cost of goods sold ÷ Average inventory = €525,000 ÷ [(€65,000 + €85,000) ÷ 2] = 7 times
(c)
Accounts receivable turnover = Net credit sales ÷ Average accounts receivable = €640,000 ÷ [(€90,000 + €70,000) ÷ 2] = €640,000 ÷ €80,000 = 8 times
For Instructor Use Only
15 - 56 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 194 Selected financial statement data for Holmes Company are presented below. Net sales Cost of goods sold Interest expense Net income Total assets (ending) Total ordinary shareholders' equity (ending)
$1,200,000 700,000 10,000 180,000 850,000 650,000
Total assets at the beginning of the year were $750,000; total ordinary shareholders' equity was $550,000 at the beginning of the period. Instructions Compute each of the following: (a) Asset turnover (b) Profit margin (c) Return on assets (d) Return on ordinary shareholders' equity Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 194 (a) (b) (c) (d)
(10 min.)
Asset turnover = 1.5 $1,200,000 ÷ [($750,000 + $850,000) ÷ 2] Profit margin = 15% ($180,000 ÷ $1,200,000) Return on assets = 22.5% $180,000 ÷ [($750,000 + $850,000) ÷ 2] Return on ordinary shareholders' equity = 30% $180,000 ÷ [($550,000 + $650,000) ÷ 2]
Ex. 195 Winter Corporation has issued ordinary shares only. The company has been successful and the gross profit is 20% of sales. The information shown below was taken from the company's financial statements. Beginning inventory Purchases Ending inventory Average accounts receivable Average ordinary shareholders' equity Sales revenue (all on credit) Net income
$ 482,000 5,636,000 ? 700,000 3,500,000 7,000,000 525,000
Instructions Compute the following: (a) Accounts receivable turnover and the average collection period. (b) Inventory turnover and the days in inventory. (c) Return on ordinary shareholders' equity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis Solution 195 (a)
(13–18 min.)
Accounts receivable turnover
= = =
Average collection period
= = =
(b)
15 - 57
Credit sales ————————————— Average accounts receivable $7,000,000 ÷ $700,000 10 times
365 days ————————— Accounts Receivable turnover 365 ÷ 10 times 36.5 days
Inventory turnover = Cost of goods sold ÷ Average inventory First calculate ending inventory. Beginning Inventory $ 482,000 + Purchases 5,636,000 – Cost of Goods Sold (5,600,000)* Ending Inventory $ 518,000 *Since the gross profit ratio is 20%, the cost of goods sold ratio is 80%. 80% × $7,000,000 (net sales) = $5,600,000. Ending Inventory = $518,000 (per above) Average Inventory = ($482,000 + $518,000) ÷ 2 = $500,000 Inventory Turnover = $5,600,000 ÷ $500,000 = 11.2 times Days in Inventory = 365 days ÷ 11.2 times = 32.6 days
(c)
Net income Return on ordinary shareholders' equity = ————————————————— Average ordinary shareholders' equity $525,000 ÷ $3,500,000 = 15%
Ex. 196 Boyle Corporation had the following comparative current assets and current liabilities: Dec. 31, 2020 Dec. 31, 2019 Current assets Prepaid expenses $ 35,000 $ 20,000 Inventory 110,000 90,000 Accounts receivable 55,000 95,000 Short-term investments 40,000 10,000 Cash 20,000 30,000 Total current assets $260,000 $245,000 Current liabilities Accounts payable $140,000 $110,000 Salaries and wages payable 40,000 30,000 Income tax payable 20,000 15,000 Total current liabilities $200,000 $155,000 During 2020, credit sales and cost of goods sold were $600,000 and $350,000, respectively.
For Instructor Use Only
15 - 58 Test Bank for Financial Accounting: IFRS Edition, 4e Ex.196
(Cont.)
Instructions Compute the following liquidity measures for 2020: 1. Current ratio. 2. Working capital. 3. Acid-test ratio. 4. Accounts receivable turnover. 5. Inventory turnover. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 196
(10–15 min.)
1. Current ratio = Current assets ÷ Current liabilities = $260,000 ÷ $200,000 = 1.3 : 1 2. Working capital = $260,000 – $200,000 = $60,000 Cash + Short-term investments + Accounts receivable 3. Acid-test ratio = ———————————————————————— Current liabilities $20,000 + $40,000 + $55,000 = ————————————— = .58 : 1 $200,000 4. Accounts receivable turnover
=
Net credit sales ————————————— Average accounts receivable
=
$600,000 ———— = $75,000
8 times
Cost of goods sold 5. Inventory turnover = ————————— Average inventory $350,000 = ———— = 3.5 times $100,000 Ex. 197 Selected data from Oates Company are presented below: Total assets Average assets Net income Net sales Average ordinary shareholders' equity
$1,600,000 1,750,000 175,000 1,225,000 1,000,000
Instructions Calculate the profitability ratios that can be computed from the above information. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis Solution 197
15 - 59
(9–13 min.)
With the information provided, the profitability ratios that can be calculated are as follows: 1. Profit margin = Net income ÷ Net sales = $175,000 ÷ $1,225,000 = 14.3% 2. Asset turnover = Net sales ÷ Average assets = $1,225,000 ÷ $1,750,000 = 70% 3. Return on assets = Net income ÷ Average assets = $175,000 ÷ $1,750,000 = 10% Net income 4. Return on ordinary shareholders' equity = ————————————————— Average ordinary shareholders' equity = $175,000 ÷ $1,000,000 = 17.5% Ex. 198 The following data are taken from the financial statements of Doyle Company: Monthly average accounts receivable Net sales on account Terms for all sales are 2/10, n/30
2020 ₤ 520,000 5,460,000
2019 ₤ 500,000 4,500,000
Instructions (a) Compute the accounts receivable turnover and the average collection period for both years. (b) What conclusion can an analyst draw about the management of the accounts receivable? Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 198
(8–12 min.)
(a) Accounts receivable turnover
Average collection period
2020
2019
₤5,460,000 ————— 520,000
₤4,500,000 ————— 500,000
10.5 times
9.0 times
365 days ————– 10.5 times
365 days ———— 9.0 times
34.8 days
40.6 days
For Instructor Use Only
15 - 60 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 198 (b)
(Cont.)
The accounts receivable are turning faster in 2020 than they did in 2019. There is still a problem since the normal credit period is 30 days, and the average collection period for both years exceeds this target. Therefore, improvement in the management of the accounts receivable would appear to be desirable.
Ex. 199 State the effect of the following transactions on the current ratio. Use increase, decrease, or no effect for your answer. (a) Collection of an accounts receivable. (b) Declaration of cash dividends. (c) Additional shares are sold for cash. (d) Short-term investments are purchased for cash. (e) Equipment is purchased for cash. (f) Inventory purchases are made for cash. (g) Accounts payable are paid. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 199 (a) (b) (c) (d) (e) (f) (g)
(7–11 min.)
no effect decrease increase no effect decrease no effect increase
Ex. 200 The statement of financial position for Farley Corporation at the end of the current year indicates the following: Bonds payable, 7% .............................................................. 6% Share capital – preference, $100 par............................. Share capital – ordinary, $10 par .........................................
$4,000,000 1,000,000 2,000,000
Income before income taxes was $1,120,000 and income taxes expense for the current year amounted to $336,000. Cash dividends paid on ordinary shares were $300,000, and the ordinary shares were selling for $45 per share at the end of the year. There were no ownership changes during the year. Instructions Determine each of the following: (a) times interest earned. (b) earnings per share. (c) price-earnings ratio. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
For Instructor Use Only
Financial Statement Analysis Solution 200 (a)
15 - 61
(9–14 min.)
Times interest earned =
Income before income taxes and interest expense —————————————————————— Interest expense
$1,120,000 + $280,000 —————————— = 5 times $280,000 (b)
Net income – Preference dividends Earnings per share = ————————————————————— Weighted average ordinary shares outstanding $784,000 – $60,000 ————————— = $3.62 per share 200,000 shares
(c)
Market price per share Price-earnings ratio = —————————— Earnings per share $45.00 ——— = 12.4 $3.62
Ex. 201 The income statement for Dibble Company for the year ended December 31, 2020 appears below. Sales revenue Cost of goods sold Gross profit Expenses Net income
$610,000 380,000 230,000 170,000* $ 60,000
*Includes $20,000 of interest expense and $22,000 of income tax expense. Additional information: 1. Ordinary shares outstanding on January 1, 2020 were 40,000 shares. On July 1, 2020, 10,000 more shares were issued. 2. The market price of Dibble's shares was $12 at the end of 2020. 3. Cash dividends of $30,000 were paid, $6,000 of which were paid to preference shareholders. Instructions Compute the following ratios for 2020: (a) earnings per share. (b) price-earnings ratio. (c) times interest earned. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
For Instructor Use Only
15 - 62 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 201 (a)
(8–13 min.)
Earnings per share $60,000 – $6,000 $54,000 —————————— = ———— = $1.20 [40,000 + (10,000 ÷ 2)] 45,000
(b)
Price-earnings ratio $12.00 ——— = 10 times 1.20
(c)
Times interest earned $60,000 + $20,000 + $22,000 ————————————— = 5.1 times $20,000
Ex. 202 Selected comparative statement data for Willingham Products Company are presented below. All statement of financial position data are as of December 31. 2020 €750,000 480,000 7,000 55,000 120,000 85,000 600,000 430,000
Net sales Cost of goods sold Interest expense Net income Accounts receivable Inventory Total assets Total ordinary shareholders' equity
2019 €720,000 440,000 5,000 42,000 100,000 75,000 500,000 320,000
Instructions Compute the following ratios for 2020: (a) Profit margin. (b) Asset turnover. (c) Return on assets. (d) Return on ordinary shareholders' equity. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 202
(8–13 min.)
(a) Profit margin (b) Asset turnover
(c) Return on assets
€55,000 = 7.3% €750,000 €750,000 = 1.4 times é €500,000 + €600,000 ù êë úû 2
€55,000 = 10% €550,000
For Instructor Use Only
Financial Statement Analysis Solution 202
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(Cont.) $55,000 = 14.7% é $320,000 + $430,000 ù êë úû 2
(d) Return on ordinary shareholders' equity
Ex. 203 Santo Corporation experienced a fire on December 31, 2020, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances. December 31, 2020 $ 30,000 84,000 200,000 50,000 30,000 400,000 130,000
Cash Accounts receivables (net) Inventory Accounts payable Notes payable Share capital – ordinary, $100 par Retained earnings
December 31, 2019 $ 10,000 126,000 180,000 90,000 60,000 400,000 101,000
Additional information: 1. The inventory turnover is 5 times 2. The return on ordinary shareholders' equity is 18%. The company had no share premium. 3. The accounts receivable turnover is 9.4 times. 4. The return on assets is 16%. 5. Total assets at December 31, 2019, were $585,000. Instructions Compute the following for Santo Corporation. (a) Cost of goods sold for 2020. (b) Net sales (credit) for 2020. (c) Net income for 2020. (d) Total assets at December 31, 2020. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 203
(8–13 min.)
Cost of goods sold é $200,000 + $180,000 ù ê ú 2 ë û 5 X $190,000 = Cost of goods sold Cost of goods sold = $950,000.
(a) Inventory turnover = 5 =
(b) Accounts receivable turnover =9.4 =
Net sales(credit) é $84,000 + $126,000 ù ê ú 2 ë û
9.4 X $105,000 = Net sales (credit) = $987,000
For Instructor Use Only
15 - 64 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 203
(Cont.)
(c) Return on ordinary shareholders' equity = 18% = Net income é $400,000 + $130,000 + $400,000 + $101,000 ù ê ú 2 ë û .18 X $515,500 = Net income = $92,790
(d) Return on assets = 16% = Average assets =
$92,790[see(c) above] Average assets
$92,790 = $579,938 .16
Total assets(Dec.31, 2020) + $585,000 = $579,938 2
Total assets (Dec. 31, 2020) = ($579,938 X 2) – $585,000 = $574,876 Ex. 204 For its fiscal year ending October 31, 2020, Conrad Corporation reported the following partial data Income before income taxes $ 700,000 Income tax expense (30% x 450,000) 135,000 Income from continuing operations 565,000 Loss from discontinued operations 250,000 Net income $ 315,000 The income tax rate is 30% on all items. Instructions Prepare a correct income statement, beginning with income before income taxes. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 204
(5–8 min.)
CONRAD CORPORATION Partial Income Statement For the Year Ended October 31, 2020 ——————————————————————————————————————————— Income before income taxes ...................................................................... $700,000 Income tax expense ($700,000 x 30%)...................................................... 210,000 Income from continuing operations ............................................................ 490,000 Loss from discontinued operations, net of $75,000 ................................... tax savings ($250,000 x 30%) .............................................................. 175,000 Net income ................................................................................................. $315,000
For Instructor Use Only
Financial Statement Analysis
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Ex. 205 Gumble Corporation had income from continuing operations of $300,000 for the year ended December 31, 2020. It also had a loss of $60,000 (before income taxes) on discontinuance of a division. Gumble is subject to income taxes at a 30% tax rate. Instructions Prepare a partial income statement, beginning with income from continuing operations. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 205
(6–9 min.)
Income from continuing operations Discontinued operations Loss on discontinued division, net of $18,000 income tax savings Net income
$300,000 42,000 $258,000
Ex. 206 Winfrey Corporation gathered the following information for the fiscal year ended December 31, 2020: Sales revenue $1,400,000 Discontinued operations loss 140,000 Selling and administrative expenses 160,000 Cost of goods sold 900,000 Loss on sale of equipment 40,000 Winfrey Corporation is subject to a 30% income tax rate. Instructions Prepare a partial income statement, beginning with income before income taxes. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 206
(8–12 min.) WINFREY CORPORATION Partial Income Statement For the Fiscal Year Ended December 31, 2020
Income before income taxes ($1,400,000 – $900,000 – $160,000 – $40,000) Income tax expense ($300,000 × 30%) Income from continuing operations Discontinued operations loss, net of $42,000 tax saving ($140,000 × 30%) Net income
For Instructor Use Only
$300,000 90,000 210,000 98,000 $112,000
15 - 66 Test Bank for Financial Accounting: IFRS Edition, 4e Ex. 207 Windsor Corporation had the information listed below available in preparing an income statement for the year ended December 31, 2020. All amounts are before income taxes. Assume a 30% income tax rate for all items. Sales revenue ₤ 600,000 Income from operation of discontinued cement division ₤ 100,000 Loss from disposal of cement division ₤ (60,000) Operating expenses ₤ 125,000 Gain on disposal of equipment ₤ 65,000 Cost of goods sold ₤ 360,000 Instructions Prepare an income statement in good form which takes into account intraperiod income tax allocation. Ignore EPS computations. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 17, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 207
(14–18 min.)
WINDSOR CORPORATION Income Statement or the Year Ended December 31, 2020 ——————————————————————————————————————————— Sales revenue ................................................................................... Cost of goods sold ............................................................................ Gross profit........................................................................................ Operating expenses .......................................................................... Income from operations .................................................................... Other income and expense Gain on disposal of equipment ................................................. Income before income taxes ............................................................. Income taxes ..................................................................................... Income from continuing operations ................................................... Discontinued operations Income from operation of discontinued cement division, net of ₤30,000 income taxes .................................... Loss from disposal of cement division, net of ₤18,000 income tax savings ......................................... Net income ........................................................................................
For Instructor Use Only
₤600,000 360,000 240,000 125,000 115,000 65,000 180,000 54,000 126,000 ₤70,000 (42,000)
28,000 ₤154,000
Financial Statement Analysis
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Ex. 208 Milton Company has income from continuing operations of $480,000 for the year ended December 31, 2020. It also has the following items (before considering income taxes): (1)
A gain of $70,000 on the discontinuance of a major division.
(2)
A correction of an error in last year's financial statement that resulted in a $90,000 overstatement of 2019 net income.
Assume all items are subject to income taxes at a 30% tax rate. Instructions Prepare an income statement, beginning with income from continuing operations. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 208
(8–12 min.) MILTON COMPANY Partial Income Statement For the Year Ended December 31, 2020
Income from continuing operations .............................................................. Discontinued operations Gain on discontinued division, net of $21,000 income taxes .............. Net income..........................................................................................
For Instructor Use Only
$480,000 49,000 $ 529,000
15 - 68 Test Bank for Financial Accounting: IFRS Edition, 4e
COMPLETION STATEMENTS 209. In analyzing and interpreting financial statement information, three major characteristics are generally evaluated: (1)____________, (2)_____________, and (3)_____________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
210. ______________ analysis, also called trend analysis, is a technique for evaluating a percentage increase or decrease for a financial statement item over a period of time. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
211. Expressing each item within a financial statement as a percentage of a base amount is called ______________ analysis. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
212. The ratios used in evaluating a company's liquidity and short-term debt paying ability that complement each other are the ______________ ratio and the ______________ ratio. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
213. The accounts receivable turnover is calculated by dividing _________________ by average ___________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
214. If inventory turnover is 10 times, and the average inventory was $400,000, the cost of goods sold during the year was $______________ and the days in inventory was ______________ days. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
215. Hansen Corporation had net income for the year of $200,000 and a profit margin of 25%. If total average assets were $400,000, the asset turnover was ____________ times. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
216. The ______________ ratio measures the percentage of earnings distributed in the form of cash dividends. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
217. The lower the ______________ to ______________ ratio, the more equity "buffer" there is available to the creditors. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
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Financial Statement Analysis
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218. Times interest earned is calculated by dividing _____________ before _______________ and ________________ by interest expense. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
219. Discontinued operations refers to the disposal of a ______________ of a business. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
220. A change in inventory methods during the year would be classified as a change in __________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 209. 210. 211. 212. 213. 214. 215.
liquidity, profitability, solvency Horizontal vertical (common size) current, acid-test (quick) net credit sales, net accounts receivable 4,000,000, 36.5 2
216. 217. 218. 219. 220.
payout debt, total assets income, income taxes, interest expense significant component accounting principle
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15 - 70 Test Bank for Financial Accounting: IFRS Edition, 4e
MATCHING SET A 221. For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S =
Liquidity ratio Profitability ratio Solvency ratio
____ 1. Price-earnings ratio ____ 2. Asset turnover ____ 3. Accounts receivable turnover ____ 4. Earnings per share ____ 5. Payout ratio ____ 6. Current ratio ____ 7. Acid-test ratio ____ 8. Debt to total assets ratio ____ 9. Times interest earned ____ 10. Inventory turnover Ans: N/A, LO: 2, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Matching P
1. Price-earnings ratio
P
2. Asset turnover
L
3. Accounts receivable turnover
P
4. Earnings per share
P
5. Payout ratio
L
6. Current ratio
L
7. Acid-test ratio
S
8. Debt to total assets ratio
S
9. Times interest earned
L 10.
Inventory turnover For Instructor Use Only
Financial Statement Analysis
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SET B 222. Match the ratios with the appropriate ratio computation by entering the appropriate letter in the space provided. A. Current ratio B. Acid-test ratio C. Profit margin D. Asset turnover E. Price-earnings ratio
F. Times interest earned G. Inventory turnover H. Average collection period I. Days in inventory J. Payout ratio
Cost of goods sold ____ 1. ————————— Average inventory Net income ____ 2. ————— Net sales Cash dividends ____ 3. ——————— Net income Net sales ____ 4. ——————— Average assets Current assets ____ 5. ———————— Current liabilities 365 days ____ 6. ————————————— Accounts receivable turnover Market price per share ____ 7. —————————————— Earnings per share 365 days ____ 8. ———————— Inventory turnover Income before income taxes and interest expense ____ 9. —————————————————————— Interest expense Cash + short-term investments + receivables (net) ____ 10. ——————————————————————— Current liabilities Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
For Instructor Use Only
15 - 72 Test Bank for Financial Accounting: IFRS Edition, 4e
Answers to Matching 1. 2. 3. 4. 5.
G C J D A
6. 7. 8. 9. 10.
H E I F B
SHORT-ANSWER ESSAY QUESTIONS S-A E 223 Horizontal and vertical analyses are analytical tools frequently used to analyze financial statements. What type of information or insights can be obtained by using these two techniques? Explain how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or competitive companies. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 223 Horizontal analysis allows an analyst to develop a picture of current trends in a company's operations. The analyst can see whether the accounts are increasing or decreasing and how large these changes actually are. Vertical analysis allows an analyst to evaluate financial statement items within a single financial statement. This technique helps the analyst to evaluate the relative size of the financial statement items and how the items relate to the financial statement as a whole. An example would be if current liabilities were a very large percentage of total equity and liabilities. Both techniques allow the company to evaluate their performance and position relative to their competitors and their industry as a whole. For example, the company could evaluate its current trend in sales and see how favorably its sales performance compared to the sales performance of other companies in the industry. Another example would be comparing the relative size of noncurrent liabilities or retained earnings. This would show which companies have taken on a large amount of debt and which companies have invested in themselves. S-A E 224 Eric Harden, the CEO of Mystical Products, is a successful entrepreneur but a poor student of accounting. He asks you to explain to him, in a memo, the bases of comparison for ratio analysis. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
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Financial Statement Analysis
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Solution 224 To: Eric Harden From: Student name Re: Bases of Comparison for Ratio Analysis There are three bases of comparison for ratio analysis. They include: Intra-company: This basis compares a ratio for the current year to the same ratio for one or more prior years. Inter-company: This basis compares a ratio for one company with the same ratio for one or more competing companies. Industry averages: This basis compares a ratio for a company with the industry average for the same ratio. (Signed)
S-A E 225 What do the following classes of ratios measure? (a) (c) Solvency ratios.
Liquidity ratios. (b)
Profitability ratios.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 225 (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c) Solvency ratios measure the ability of the company to survive over a long period of time. S-A E 226 (a) What is meant by trading on the equity? (b) How would you determine the profitability of trading on the equity? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 226 (a) Trading on the equity means that the company has borrowed money at a lower rate of interest than it is able to earn by using the borrowed money. Simply stated, it is using money supplied by nonowners to increase the return to the owners. (b) A comparison of the return on total assets with the rate of interest paid for borrowed money indicates the profitability of trading on the equity. S-A E 227 Why is it important to report discontinued operations separately from income from continuing operations? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
For Instructor Use Only
15 - 74 Test Bank for Financial Accounting: IFRS Edition, 4e Solution 227 Discontinued operations refers to the disposal of a significant component of the business such as the stopping of an entire activity or eliminating a major class of customers. It is important to report discontinued operations separately from continuing operations because the discontinued component will not affect future income statements. S-A E 228 (Ethics) A trusted employee of Wilderness Tours was caught in the act of embezzling funds. He confessed to earlier embezzlements, but retracted the confession on the advice of his attorney. Over the course of the most recent quarter, it has been determined that $20,000 was embezzled. Wilderness Tours has suffered adverse publicity in the recent past because of serious injury to five tourists that occurred during a two week "Winter Wilds Adventure" tour. The company has therefore decided to avoid publicity and has agreed to drop all charges against the embezzling employee. In return, the employee has agreed to a notation of "Terminated—Not to be Rehired" to be appended to his personnel file. Required: 1. Who are the stakeholders in the decision not to prosecute? 2. Was it ethical for the company to decide not to prosecute? Explain. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 228 1. The stakeholders include • The embezzling employee • The other employees • Company management • Other companies who might hire the embezzling employee 2. The company was certainly within its legal rights not to prosecute the embezzling employee. However, the decision not to prosecute may not be ethical. First, it does not serve public justice. The embezzling employee could find a job elsewhere, and harm someone else financially. Second, to the extent that other employees know of the act and of the decision, morale may be harmed. The decision is also not the best one for the employee. Having never been forced to face the consequences of his dishonest acts, he is not deterred from (and may even feel encouraged to) commit similar acts in the future. The one argument that would support the premise that the decision was ethical is that the public disclosure would cause harm greater than that caused by keeping silent. Even this argument lacks force, because it implies a lack of moral courageousness.
For Instructor Use Only
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S-A E 229 (Communication) Kwik Express specializes in the overnight transportation of medical equipment and laboratory specimens. The company has selected the following information from its most recent annual report to be the subject of an immediate press release. • The financial statements are being released. • Net income this year was $2.1 million. Last year's net income had been $2.0 million. • The current ratio has changed to 2:1 from last year's 1.5:1 • The debt/total assets ratio has changed to 4:5 from last year's 3:5 • The company expanded its truck fleet substantially by purchasing ten new delivery vans. The company already had twelve delivery vans. • The company is now the largest medical courier in the mid-Atlantic region. Required: Prepare a brief press release incorporating the information above. Include all information. Think carefully which information (if any) is good news for the company, and which (if any) is bad news. Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 229 Press Release Kwik Express released its financial statements today, disclosing a 5% increase in earnings, to $2.1 million from $2 million last year. The company also improved its short-term liquidity. Its current ratio improved to 2:1 from last year's 1.5:1. Part of the improved performance is no doubt due to the addition of ten new delivery vans to its fleet, allowing it to become the largest medical courier in the mid-Atlantic region. The purchase of the vans, however, caused the debt/total asset ratio to decline. There are now $4 of debt for every $5 in assets, while last year, there were only $3 of debt to $5 in assets.
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15 - 76 Test Bank for Financial Accounting: IFRS Edition, 4e
GAAP QUESTIONS 1. The basic tools of financial analysis are the same under both GAAP and IFRS except that a. accounting for changes in estimates is the same as under IFRS. b. the current ratio cannot be computed because current liabilities are often reported before current assets in GAAP statements of position. c. vertical analysis cannot be done under GAAP. d. horizontal analysis cannot be done because the format of the statements is sometimes different. Ans: A, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2. Under GAAP a. the reporting of discontinued items is different than IFRS. b. the basic objective of the income statement is different than under IFRS. c. the reporting of changes in accounting principles is different than under IFRS. d. None of these answer choices are correct. Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
3. Presentation of comprehensive income must be reported under GAAP in a. a statement of comprehensive income. b. the notes to the financial statements. c. the income statement ending with net income. d. the statement of stockholders' equity. Ans: A, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
For Instructor Use Only