TEST BANK for Financial and Managerial Accounting The Basis for Business Decisions, 19 Edition. by R by StudyGuide

APPENDIX B: PROBLEM MATERIAL 1)

Explain what is meant by the "time value of money." Provide examples.

Explain how compound interest applies to the time value of money.

3) Required: Use Table PV–1 and Table FA–1 to determine the answers to the following. (A) How much must be invested now for 5 periods at 6% to amount to $15,000? (B) How much is $3,000 invested now at 8% in 8 periods worth? (C) How much is $25,000 compounded semi-annually at 12% for 4 years?

4) Joan is 60 years old and wishes to retire. She needs to have $48,000 a year plus her social security to live in the style she is accustomed to. She would like to have enough money in her retirement account, which earns 5% compounded annually, to support her for the next 20 years. Required: How much must be in the fund if she takes the first payment at year-end?

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5) Powers Company wishes to issue $2,000,000 of 8%, 10-year bonds that pay interest semi-annually. The current market rate is 12%. Required: What amount should the bonds sell for?

6) Sam Rivers has $3,000 to invest. He must decide whether to invest this money for five years at 10% compounded semi-annually or at 12% compounded annually. Required: Which option should he select?

7) Barbara wants to purchase a car. Required: How long will it take Barbara to accumulate $23,265 to buy a car if she invests $15,000 at 5%?

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8) On January 1, Year 1, Paul Corporation purchases equipment. As full payment for this equipment, Paul issues a $90,000 installment note payable, due in three annual installments of $30,000, beginning on December 31, Year 1. This note makes no mention of interest charges. Assume that a realistic interest annual rate for financing equipment over a three-year period currently is 10%. Required: (A) Compute the present value of the installment note. (B) Complete the amortization table shown below to allocate the amount of each installment payment between interest expense and reduction in the principal amount of this obligation. (Round your calculations to whole numbers.) Payment Date

Annual Payment

Interest Expense

Reduction in Unpaid Balance

Unpaid Balance

Issuance December 31, Year 1 December 31, Year 2 December 31, Year 3

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9) On January 1, Year 1, Assembly Line Manufacturing uses a capital/Type A lease to finance the transfer of a large piece of machinery to Sansa Company. The terms of the lease calls for Sansa to make six annual payments of $100,000 beginning December 31, Year 1. The lease payments include an interest charge of 10% per year. At the end of the 6-year lease, title to the machinery will pass to Sansa at no additional cost. Required: (A) Compute the present value of the lease payments. (B) What is the amount of the sales revenue that will be recognized by Assembly Line Manufacturing on January 1, Year 1? (C) What is the amount of interest revenue that will be recognized by Assembly Line Manufacturing on December 31, Year 1? (D) What is the cost of the building that is recorded by Sansa Company on January 1, Year 1? (E) What is the amount of the liability that will be recorded by Sansa Company on January 1, Year 1? (F) What is the amount of interest expense that will be recognized by Sansa Company on December 31, Year 1?

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Answer Key Test name: Appendix B - Problem material

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Student name:__________ 1) If you invested $21,000 at 5% on your 20th birthday how much would you have on your 40th birthday? A) $55,713.00 B) $64,131.90 C) $69,438.50 D) $53,065.95

2) If you invested $10,000 at 6% on your 20 th birthday how much would you have on your 40 th birthday? A) $32,070.00 B) $31,180.00 C) $36,785.59 D) $12,158.12

3) If I invest $42,000 today for 8 years and it grows to $90,048, what rate of interest have I received? A) 8% B) 16% C) 10% D) 20%

4) If I invest $50,000 today for 5 years and it grows to $80,550, what rate of interest have I received?

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A) 5% B) 6% C) 10% D) 12%

5) How much must I invest today in order to have $18,000 in 2 years assuming 15% interest compounded annually? A) $13,608.00 B) $2,400.00 C) $21,226.42 D) $15,264.00

6) How much must I invest today in order to have $25,000 in 5 years assuming 12% interest compounded annually? A) $14,175.00 B) $15,888.00 C) $18,681.50 D) $17.624.00

7) Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in two years. She estimates the trip will cost $3,100. How much must she invest now at 5.0% to accumulate enough for you to take this trip? A) $3,417.80 B) $2,811.80 C) $5,623.60 D) $3,100.00

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8) Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in three years. She estimates the trip will cost $4,000. How much must she invest now at 5% to accumulate enough for you to take this trip? A) $3,287.72 B) $3,456.00 C) $4,499.44 D) $3,161.24

9) A scholarship fund has $75,000 to invest now to provide scholarships to high school students. They want to have at least $150,000 in 9 years. What rate of interest must they invest this money at to reach their goal? A) 7% B) 8% C) 10% D) 11%

10) If I invest $525 at the end of each year for five years at 15%, how much will I have at the end of the five years? A) $1,079.40 B) $3,539.55 C) $5,397.00 D) $1,721.57

11) If I invest $100 at the end of each year for four years at 6% how much will I have at the end of the fourth year?

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A) $421.24 B) $437.50 C) $563.71 D) $432.95

12) The difference between the present value and the future value of a sum of money depends upon: A) The rate of interest. B) The length of time. C) The rate of interest and the length of time. D) Neither the rate of interest nor the length of time.

13)

The future value of an annuity is: A) Always more than the present value. B) Always less than the present value. C) Equal to the present value. D) Double the present value.

14)

The present value of an investment is:

A) The amount an investor would pay today to receive a certain amount in the future. B) The amount an investor would pay today plus the interest the investor would expect to receive a certain amount in the future. C) The amount an investor would pay today less the interest the investor requires. D) 90% of the future value of an investment.

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15) Judy Bright has just won the lottery. She can elect to receive her winnings in equal payments of $200,000 a year for the next ten years on December 31 or to receive $2,000,000 immediately. If the current interest rate is 6%, which choice will provide the highest amount? A) Receiving $2,000,000 immediately. B) Taking equal payments for 10 years. C) It does not matter since either choice provides the same amount. D) Refusing to accept the winnings since it is not enough.

16) To determine the present value of a single amount to be received or paid at a future time you need to know all of the following except: A) The interest rate or discount rate. B) The number of periods. C) The future value. D) The time between periods.

17) To determine the amount to be deposited in a bank today to grow to $5,000 three years from now at 7%, which table should be used? A) Present value of $1. B) Future value of $1. C) Present value of an annuity of $1. D) No table is required; just multiply $5,000 by 1.07 (or 1 + 7%).

18) Anthony Driver wants to buy a new car in 4 years. He knows that he can earn 10% interest compounded semi-annually. How much must he deposit now in order to have $26,000 at the end of 4 years?

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A) $21,390.20 B) $17,602.00 C) $38,413.96 D) $31.603.26

19)

Compound interest: A) Is interest only on the principal amount for several years. B) Is interest on the principal and previously earned interest. C) Is interest only on previous interest excluding the principal. D) Is equal to simple interest received for several years.

20)

Financial instruments do not include: A) Contracts that call for receipts or payment of cash. B) Equity investment in another business. C) Cash. D) Tangible assets.

21)

Financial instruments are recorded at: A) Future values. B) Present values plus interest. C) Present values less interest. D) Present values.

22)

A note that does not include an interest rate should be recorded at:

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A) Its face amount if the difference between face and present value is material. B) Its present value if the difference between face and present value is material. C) Its face amount at all times. D) Its present value at all times.

23) Joe Notsosmart invested $10,000 at 8% simple interest for 5 years. How much more would he have received if he had received compound interest annually at the same rate? A) $4,000 B) $4,693 C) $690 D) $400

24)

The present value of a cash amount: A) Is always less than the future value. B) Is always more than the future value. C) Is the same as the future value. D) Has no relationship to the future value because of inherent uncertainties.

25) If you receive $12,000 as a gift and invest it at 30% compounded semi-annually, how much will you have at the end of two years? A) $15,276.00 B) $20,988.00 C) $12,000.00 D) $6,861.06

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26) If you receive $20,000 as a gift and invest it at 12% compounded semi-annually, how much will you have at the end of three years? A) $32,020.60 B) $28,380.00 C) $22,497.20 D) $14,027.60

27)

The time value of money is based on the idea that: A) The value of money in the future equals the interest received in the present. B) The value of money in the future will be greater than an amount available today. C) The value of money at present over some length of time will be reduced by inflation. D) The future value of money will become the current value as time passes.

28) Belle invests $200 at the end of each year in a savings account that pays 5% annually. How much will Belle have at the end of 5 years? A) $1,000.00 B) $1,105.20 C) $1,077.50 D) $1,082.37

29) A future amount is the dollar amount to which a present value will ______________ over time.

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A) diminish B) accumulate C) disappear D) maintain

30) Future value is the amount that must be invested today at a specific interest rate to receive a particular amount at some future date. ⊚ ⊚

true false

31) The present value of an ordinary annuity is the amount that equal payments made at the end of successive equal periods is worth today. ⊚ ⊚

32)

The future value of an investment gradually increases toward the present amount. ⊚ ⊚

33)

true false

Compounding interest assumes the interest on an investment is reinvested. ⊚ ⊚

true false

34) Discounting a future amount of a cash receipt will determine the present value of that receipt.

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⊚ ⊚

true false

35) The lower the discount rate of an investment, the lower the present value of the investment. ⊚ ⊚

true false

36) An annuity may provide equal amounts to an investor at fixed periods of time over the life of an investment. ⊚ ⊚

37)

true false

The market price of a bond is equal to its present value. ⊚ ⊚

true false

38) An ordinary annuity of $1 is a series of payments of $1 made at the beginning of each of a specified number of periods. ⊚ ⊚

39)

true false

A rate of interest can be expressed as an annual rate. ⊚ ⊚

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true false

40) The difference between a present value and a related future amount depends on (1) the interest rate and (2) the period of time over which the present value accumulates. ⊚ ⊚

true false

41) The obligation for deferred income taxes is the only long-term liability that is not reported at its present value. ⊚ ⊚

true false

42) As the discount rate required by an investor increases, the present value of an investment decreases. ⊚ ⊚

true false

43) The present value of a single amount can only be calculated through the application of complex calculations. ⊚ ⊚

true false

44) To find the future amount of a present value greater than $1, simply multiply the present value by the factor obtained from the table. ⊚ ⊚

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true false

45) The future amount of an ordinary annuity of payments greater than $1 is calculated by multiplying the periodic payment by the related factor from the future value of an ordinary annuity table. ⊚ ⊚

true false

46) The present value of a single amount is calculated by multiplying the future amount by the related factor from the present value of $1 table. ⊚ ⊚

true false

47) The present value of an annuity is calculated by multiplying the periodic cash flows by the related factor from the future value of an ordinary annuity table. ⊚ ⊚

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true false

Answer Key Test name: Appendix B 1) A 2) A 3) C 4) C 5) A 6) A 7) B 8) B 9) B 10) B 11) B 12) C 13) A 14) A 15) A 16) D 17) A 18) B 19) B 20) D 21) D 22) B 23) C 24) A 25) B 26) B Version 1

27) B 28) B 29) B 30) FALSE 31) TRUE 32) FALSE 33) TRUE 34) TRUE 35) FALSE 36) TRUE 37) TRUE 38) FALSE 39) TRUE 40) TRUE 41) TRUE 42) TRUE 43) FALSE 44) TRUE 45) TRUE 46) TRUE 47) FALSE

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APPENDIX C: PROBLEM MATERIAL 1) A and B are partners. A has $50,000 in his capital account and B has $75,000 at the beginning of the year. A receives a salary of $15,000 and B receives $12,000. Each partner receives 5% of the beginning balance of their capital accounts. The remainder is split 45% to A and 55% to B. Net income for the year was $125,000. Required: What is the amount of each capital account at year-end?

2) C, D, and E are partners. C has $25,000 in her capital account. D has $35,000 in hers, and E has $45,000. Each gets a salary allowance of $15,000. C gets 10% interest on the beginning balance in the capital account, D gets 12%, and E gets 14%. The remainder is divided 20% to C, 35% to E, and 45% to E. Required: What is the balance in the capital account at the end of the year if net income was $80,000?

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3) Grey, Dailey, and Sanders have formed a partnership. Net income for the first year amounted to $50,400. The partnership agreement states that Grey will receive a salary of $10,000, Dailey will receive $15,000, and Sanders will receive $20,000. They each have capital accounts of $30,000, $40,000, and $50,000 respectively. The contract calls for interest of 12% of the beginning capital balances for each partner. Any profit or loss will be split equally. Required: How much income will each partner receive?

4) The retained earnings account of Company XYZ has a balance of $350,000 at the end of Year 1. At the end of Year 2, the following information is available: Cash Dividends Declared Common Stock Net Income Dividends Payable

$ 37,000 45,000 200,000 175,000 45,000

Required: What is the amount of retained earnings at the end of Year 2?

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5) Listed below are several accounting terms introduced in this section. Sole proprietorship Firm Mutual agency Limited partnership Paid-in-capital Corporation The New York Stock Exchange The SEC Closely held corporation Publicly traded corporation Required: Each of the following statements may (or may not) describe one of these accounting terms. In the space provided, indicate the term described, or enter "none" if the statement does not correctly describe any of the terms. _________(A) An unincorporated business owned by one person. _________(B) An example of an organized securities market. _________(C) The right of each partner to negotiate binding contracts. _________(D) The total earnings of a corporation less dividends paid out. _________(E) Investments by the owners of a corporation. _________(F) A partnership where one or more partners are not personally liable for the debts of the partnership. _________(G) An organization that serves the professional needs of a CPA. _________(H) A business that is responsible for its own debts and which pays income taxes on its earnings. _________(I) An unincorporated business owned by two or more people. _________(J) A corporation whose shares are not publicly traded.

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6) X Corporation had a net income of $375,000 in Year 2. The Board of Directors declared a dividend of $0.25 a share on the 150,000 shares outstanding on December 13 to be paid on December 23, Year 2. Retained earnings were $630,000 on January 01, Year 2. Required: (A) Prepare the journal entries for the declaration of the dividends and for the payment of these dividends. (B) Prepare a Statement of Retained Earnings for the year ending December 31, Year 2.

7) Stewart and Brooke form a partnership. Stewart invests $80,000 and Brooke invests $120,000. If there are any profits or losses they will share them as follows: ● They will each receive a salary of $25,000. ● Any remaining amount will be allocated ¾ to Brooke and ¼ to Stewart. Required: (1) If the partnership income for the year is $115,000, what amount will be allocated to Brooke? (2) If the partnership income for the year is $125,000, what amount will be allocated to Stewart? (3) If the partnership income for the year is $45,000, what amount will be allocated to Stewart and what amount to Brooke?

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8) On January 1, Year 1, Sue and Al form a partnership named Alliance Partners. Sue invests $20,000 and Al invests $25,000. In the first year, the partnership earns $60,000. Sue withdraws $7,500 and Al withdraws $12,000. Each receives a salary of $15,000 and the remainder is divided 60% to Al and 40% to Sue. Required: Prepare a statement of partners’ equity for the year ending December 31, Year 1.

Michael’s Taxi Service issues 1,000 share of capital stock in exchange for $20,000 cash.

Required: Prepare the journal entry for the issuance of the capital stock.

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Answer Key Test name: Appendix C - Problem material

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Student name:__________ 1) The net income of a sole proprietorship should compensate the owner for all of the following except: A) Personal service. B) The income taxes paid by the owner. C) Capital invested by the owner. D) The risk taken by the owner.

Which of the following is a characteristic of a corporation? A) Mutual agency B) Stockholder liability for business debts C) Indefinite existence D) Taxable at individual rates

3) The adjusting entry to recognize income taxes due on a profit of $100,000 and a tax rate of 40% is: Account Title (A)

Income Tax Expense

Debit 40,000

Income Tax Payable (B)

Income Tax Payable

40,000 40,000

Income Tax Expense (C)

Net Income

40,000 40,000

Taxable Income (D)

Credit

40,000

Only when taxes are paid is an entry required

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A) A Above. B) B Above. C) C Above. D) D Above.

Retained Earnings represents:

A) The profits of the company. B) The investments of the owners. C) The profits of the company plus the investments of the owners. D) The earnings that have been retained in the corporation to be used for various purposes that benefit the stockholders.

The journal entry when a dividend is declared for $150,000 would be: Account Title

(A)

Retained Earnings

Debit 150,000

Dividends Payable (B)

Dividends

150,000 150,000

Cash (C)

Dividends

150,000 150,000

Dividends Payable (D)

Retained Earnings Dividends

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Credit

150,000 150,000 150,000

A) A Above. B) B Above. C) C Above. D) D Above.

"Double taxation" means: A) A corporation must pay double the amount of tax that an unincorporated business

pays. B) A corporation pays taxes to the federal government and to the state government. C) The corporation pays tax on its income and the stockholders pay tax on their dividends. D) The corporation pays tax on its income and the officers of the corporation pay tax on their salaries.

In a sole proprietorship the balance in the Income Summary account is closed to: A) Retained earnings. B) Capital. C) Drawing. D) Net Income.

Assets contributed to a partnership by a partner would be recorded at: A) Historical cost. B) Fair market value. C) Cost less depreciation. D) Potential value.

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Payments to a partner for services provided to the partnership: A) Are not recorded. B) Are recorded as salaries expense. C) Are recorded directly in the partner’s capital account. D) Are recorded in the partner’s drawing account.

10)

Which of the following is a characteristic of a corporation? A) Declaration of a dividend by the stockholders B) Appointment of officers by the stockholders C) Transferability of shares of stock D) Unlimited liability

11)

Net income in a partnership may not be distributed to the partners: A) As a salary allowance. B) As interest on beginning capital. C) In a fixed ratio. D) In the form of dividends.

12)

In order to form a corporation, the corporation must obtain a charter from: A) The federal government. B) A state government. C) The Securities and Exchange Commission. D) The stockholders of the corporation.

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13)

The Board of Directors of a corporation: A) Is not responsible for hiring other professional managers. B) Does not decide whether profits will be distributed to stockholders. C) Makes major policy decisions. D) Is made up of members of a government agency.

14)

Paid-in Capital refers to: A) The lifetime earnings of the corporation. B) The amount invested by stockholders. C) Net income less dividends. D) The amount in excess of the par value of the stock.

15)

In terms of the tax status of a partnership:

A) Income is taxable to the partnership. B) The partnership must file an information return indicating the amount of partnership income passed through to the general partner. C) The partnership must file an information return indicating the amount of partnership income passed through to each partner. D) Income taxes are not an obligation of each partner since a partnership does not pay tax.

16) When deciding the form of organization of a new business the factors to consider would be all of the following except:

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A) The need to raise large amounts of capital. B) The need for continuity in business operations. C) The potential profits of the organization. D) The personal liabilities of the owners.

17)

When a corporation declares a dividend: A) Assets decrease, liabilities increase. B) Retained earnings increase, liabilities increase. C) Liabilities increase, retained earnings decrease. D) Retained earnings decrease, assets increase.

18) Sally Smythe enters into a partnership by contributing the following: Cash $14,000; Accounts Receivable $3,500; Machinery which cost $2,000 and has a fair market value of $1,125; and accounts payable of $2,200. What amount will be recorded in her capital account? A) $18,625 B) $16,425 C) $19,500 D) $17,300

19)

Sally Smythe enters into a partnership by contributing the following:

Cash $15,000; Accounts Receivable $4,500; Machinery which cost $3,000 and has a fair market value of $2,125; and accounts payable of $1,200. What amount will be recorded in her capital account?

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A) $21,625 B) $20,425 C) $22,500 D) $21,300

20) Partner A earns $64,000 from a partnership. Partner B earns $53,000 but withdraws only $45,000. How much must Partner B report in his income tax return as income? A) $45,000 B) $53,000 C) $117,000 D) $109,000

21) Partner A earns $68,000 from a partnership. Partner B earns $57,000 but withdraws only $49,000. How much must Partner B report in his income tax return as income? A) $49,000 B) $57,000 C) $125,000 D) $117,000

22) on:

When evaluating the liquidity of a proprietorship, creditors will likely base their decision

A) The business's ability to generate a profit. B) Previous debts of the business. C) The financial strength of the owner. D) The total assets owned by the business.

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23)

When evaluating the liquidity of a partnership, creditors will likely base their decision on: A) The business's ability to generate a profit. B) Previous debts of the business. C) The total assets owned by the business. D) The financial strength of the owners.

24) John's Metalworks Incorporated recently issued 10,000 shares of stock in exchange for $100,000. Metalworks' journal entry to record this transaction included: A) A debit to Capital Stock for $10,000. B) A debit to Cash for $100,000. C) A credit to Capital Stock for $10,000. D) A credit to Cash for $100,000.

25)

An S corporation may have a maximum of __________ stockholders. A) 25 B) 65 C) 100 D) 75

26)

Limited personal liability is a characteristic of a sole proprietorship. ⊚ ⊚

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true false

27) The ability of a sole proprietorship to pay its debts may be determined by the financial strength of the owner. ⊚ ⊚

true false

28) The assets of a partnership belong jointly to all the partners while the assets of a sole proprietorship belong to the proprietorship. ⊚ ⊚

29)

A partnership has a limited life and each partner has unlimited personal liability. ⊚ ⊚

30) will.

true false

Mutual agency refers to the ability of each partner to withdraw cash and other assets at

⊚ ⊚

true false

31) In a limited liability partnership, a partner has unlimited liability for his own actions and limited liability for the actions of his partners. ⊚ ⊚

true false

32) The salaries paid to partners are shown as an expense on the income statement while the salary taken by a sole proprietor is debited to a drawing account.

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⊚ ⊚

true false

33) A corporation is a legal entity that may enter into contracts, may sue or be sued, and is responsible for its own debts. ⊚ ⊚

true false

34) Every stockholder in a corporation will have a drawing account that will be closed to retained earnings during the closing process. ⊚ ⊚

true false

35) A corporation, like a partnership, must file a corporate income tax return and pay tax on its earnings. ⊚ ⊚

true false

36) Stockholders of an S corporation pay taxes on their share of the corporate net income whether they receive it or not. ⊚ ⊚

37)

true false

Retained earnings are a fund of cash the business has earned from profitable operations. ⊚ ⊚

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true false

38) The adjusting entry to record income taxes in an unprofitable period would debit Income Tax Payable and credit Income Tax Expense. ⊚ ⊚

true false

39) When a corporation receives cash or other assets from its owners in a sale of capital stock, it records these investment transactions by increasing Retained Earnings. ⊚ ⊚

true false

40) The entry to record the issuance of 100 shares of capital stock in exchange for $1,000 cash includes a debit to Capital Stock. ⊚ ⊚

true false

41) When closing Income Summary, assuming the corporation had net income for the accounting period, the account Retained Earnings is credited. ⊚ ⊚

true false

42) Closely held corporations have the same ability to qualify for credit sources as publicly traded corporations. ⊚ ⊚

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true false

43)

Shareholders report and pay income tax on dividends received from a corporation. ⊚ ⊚

true false

44) Personal liability of the owners for any business debts is an important consideration when selecting an appropriate form of business organization. ⊚ ⊚

45) cost.

true false

When a sole proprietorship incorporates, the assets of the new business are recorded at ⊚ ⊚

true false

46) Regardless of whether partners in a partnership work in the company, each partner is allocated an equal share of profits. ⊚ ⊚

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true false

Answer Key Test name: Appendix C 1) B 2) C 3) A 4) D 5) C 6) C 7) B 8) B 9) D 10) C 11) D 12) B 13) C 14) B 15) C 16) C 17) C 18) B 19) B 20) B 21) B 22) C 23) D 24) B 25) D 26) FALSE Version 1

27) TRUE 28) FALSE 29) TRUE 30) FALSE 31) TRUE 32) FALSE 33) TRUE 34) FALSE 35) FALSE 36) TRUE 37) FALSE 38) TRUE 39) FALSE 40) FALSE 41) TRUE 42) FALSE 43) TRUE 44) TRUE 45) FALSE 46) FALSE

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CHAPTER 1: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine accounting terms introduced in this chapter:AuditReturn of investmentReturn on investmentGenerally acceptedaccounting principlesBalance sheetIncome statementInternal control structureManagement accountingStatement of cash flowsEach of the following statements may (or may not) describe one of these terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. More than one statement may describe a single term.(A) The repayment to an investor of the amount originally invested in an enterprise.(B) An independent examination of financial statements designed to determine their fairness in relation to generally accepted accounting principles.(C) The accounting standards and concepts used in the preparation of financial statements.(D) A system of measures designed to assure management that all aspects of the business are operating according to plan.(E) A listing of assets, liabilities, and stockholders' equity as of a specific date.(F) The payment of an amount for using another's money.(G) An activity statement that shows the details of the company's activities involving cash during a period of time.

2) Listed below are eight accounting terms.Management AccountingAccounting SystemFinancial AccountingInternal ControlsFinancial PositionFinancial StatementsResults of OperationsFinancial ReportingEach of the following statements may (or may not) describe one of these terms. In the space provided, indicate the accounting term described or answer "None" if the statement does not accurately describe any of the terms. (A) Information describing the financial resources, obligations, and activities of an economic entity. (B) An entity's financial resources and obligations at a point in time.(C) Accounting information intended specifically to assist company's management.(D) The personnel, procedures, and technology used by an organization to develop accounting information and to communicate this information to decision makers.(E) An entity's financial activities over a period of time.(F) Measures used by an organization to guard against errors, waste, and fraud and to assure the reliability of accounting information.(G) A plan of financial operations for some future period.(H) A written assertion identifying, measuring, and communicating financial information about an economic entity.

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3) Listed below are seven accounting organizations introduced in this chapter:Financial Accounting Standards BoardPublic Company Accounting Oversight BoardInternal Revenue ServiceAmerican Accounting AssociationInstitute of Internal AuditorsSecurities and Exchange CommissionInstitute of Management AccountantsEach of the following statements may (or may not) describe one of these organizations. In the space provided, indicate the organization described or answer "None" if the statement does not accurately describe any of the organizations.(A) Private organization most directly involved in the development and issuance of accounting standards(B) Government agency that regulates financial reporting by publicly-held companies(C) Organization dedicated to the advancement of accounting education and research(D) International organization dedicated to the advancement of internal auditing(E) Organization that develops formal standards for auditing in the United States(F) Organization most involved with the ethical conduct of the accountants working within a company(G) A governmental agency that handles income tax returns of individuals and businesses and performs an audit function to verify the data presented

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4) Listed below are seven accounting organizations introduced in this chapter:American Accounting AssociationAmerican Institute of CPAsInternal Revenue ServiceFinancial Accounting Standards BoardSecurities and Exchange CommissionInstitute of Internal AuditorsInstitute of Management AccountantsInternational Accounting Standards BoardEach of the following statements may (or may not) describe one of these organizations. In the space provided, indicate the accounting organization described, or answer "None" if the statement does not correctly describe any of the organizations.(A) Private sector organization that establishes accounting standards.(B) A professional organization that establishes standards for the conduct of professional services other than audits.(C) A government organization that establishes financial reporting requirements for publicly-held companies in the United States.(D) A federal government agency that audits many other agencies of the federal government and reports its findings to Congress.(E) A professional organization dedicated to the improvement of accounting education, research, and practice.(F) A professional organization that influences the concepts and ethical practice of management accounting.(G) A professional organization that establishes global accounting standards.

List seven groups that would typically use financial information.

Briefly describe the balance sheet, the income statement, and the statement of cash flows.

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7) List and briefly describe the objectives of financial reporting beginning with the most general and ending with the most specific.

8) Explain one way in which the characteristics of financial and management accounting information differ.

What are the two things that make up a company’s cash flow prospects?

10) List the three financial statements that are used to communicate financial accounting information to interested external parties.

11) Provide a brief example to illustrate that externally reported financial accounting information must be based in part on estimates, judgments, and assumptions.

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12) (A) What is meant by the phrase "generally accepted accounting principles"?(B) Give the names of three organizations that currently play an active role in the development of accounting principles in the United States.

13) Briefly explain how generally accepted accounting principles (GAAP) enhance the integrity of financial accounting information.

14) List and describe the six articles of the AICPA Code of Professional Conduct that guide members in performing their professional responsibilities.

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Answer Key Test name: Chapter 01 Test Bank (Problem Material) 1) (A) Return of investment(B) Audit(C) Generally accepted accounting principles(D) Internal control structure(E) Balance sheet(F) Return on investment(G) Statement of cash flows 2) (A) Financial Accounting(B) Financial Position(C) Management Accounting(D) Accounting System(E) Results of Operations(F) Internal Controls(G) None(H) Financial Statements 3) (A) Financial Accounting Standards Board(B) Security and Exchange Commission(C) American Accounting Association(D) Institute of Internal Auditors(E) Public Company Accounting Oversight Board(F) Institute of Management Accountants(G) Internal Revenue Service 4) (A) Financial Accounting Standards Board(B) American Institute of CPAs(C) Securities and Exchange Commission(D) None (The statement describes the Government Accountability Office)(E) American Accounting Association(F) Institute of Management Accountants(G) International Accounting Standards Board 5) 1. Investors;2. Creditors;3. Managers;4. Owners;5. Customers;6. Employees;7. Regulators. 6) Balance sheet (statement of financial position) - A position statement that shows where the company stands in financial terms at a specific date.Income statement - An activity statement that shows details and results of a company's profit-related activities for a period of time.Statement of cash flows - An activity statement that shows the details of the company's activities involving cash during a period of time.

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7) (1) Provide information useful in making investment and credit decisions.(2) Provide information useful in assessing the amount, timing, and uncertainty of future cash flows.(3) Provide information about economic resources, claims to economic resources, and changes in resources and claims. 8) Financial accounting information is primarily historical in nature, while management accounting information is future-oriented.Financial accounting information is general-purpose information designed to serve the needs of a variety of external parties.Management accounting information is customized to the needs of a particular internal decisionmaker.The timeliness of management accounting information is critical. For financial accounting, information, completeness, and verifiability are more important than timeliness.Financial accounting information is prepared in accordance with generally accepted accounting principles while the nature and content of management accounting information is dictated by the nature of the decision it is intended to support. 9) Cash flow prospects are the likelihood that an enterprise will be able to provide an investor with (1) a return on the investor’s investment and (2) the return of that investment. 10) Balance sheet (Statement of financial position)Income statementStatement of cash flows 11) To account for the use of long-lived equipment, estimates must be made of the lifetime and scrap value of that equipment. 12) (A) Generally accepted accounting principles provide the framework for determining what information is to be included in the financial statements and how that information is to be presented.(B) Financial Accounting Standards Board; Securities and Exchange Commission; American Institute of CPAs; American Accounting Association.

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13) Integrity refers to the qualities of completeness, honestly, and sincerity. GAAP provides the general framework for determining what information is included in financial statements and how this information is to be prepared and presented. This ensures that financial statements are prepared in accordance with standards that are understood by both preparers and users of the information. 14) (I) Responsibilities - members should exercise sensitive professional and moral judgments in all their activities.(II) The Public Interest members should act in a way that will serve the public interest.(III) Integrity - members should perform all professional responsibilities with the highest sense of integrity.(IV) Objectivity and Independence members should maintain objectivity and be free of conflicts of interest.(V) Due Care - members should observe the profession's technical and ethical standards.(VI) Scope and Nature of Services members should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.

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CHAPTER 1 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Managerial accounting information is designed primarily to assist investors and creditors in deciding how to allocate scarce resources. ⊚ ⊚

true false

2) Information provided to decision makers in an organization is comprised only of the accounting information generated by the organization’s information system. ⊚ ⊚

true false

All internal control systems need to be monitored. ⊚ ⊚

true false

4) A data analytics system is the integrated management of core business processes that an organization can use to collect, store, manage, and interpret data across a wide range of business activities. ⊚ ⊚

true false

5) Management accounting information is oriented toward the future while financial accounting information is historical in nature. ⊚ ⊚

true false

Return on investment is the same as return of investment. ⊚ ⊚

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true false

The IRS tax return is one of the primary financial statements. ⊚ ⊚

true false

8) External users of accounting information have a financial interest in an entity but are not involved with the day-to-day operations of the enterprise. ⊚ ⊚

true false

9) The tailoring of an accounting report to meet the needs of a specific decision maker is more characteristic of financial accounting reports than of management accounting reports. ⊚ ⊚

true false

10) The annual financial statements of large corporations such as Microsoft or PepsiCo need not be audited by independent certified public accountants, since these companies maintain large accounting departments as part of their organizations. ⊚ ⊚

11)

true false

The statement of financial position and the income statement are one and the same. ⊚ ⊚

true false

12) Investors are individuals and other enterprises that have provided equity to the reporting enterprise. ⊚ ⊚

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true false

13) A statement of cash flows depicts the way profits have changed during a designated period. ⊚ ⊚

true false

14) Management accounting refers to the preparation and use of accounting information designed to meet the needs of decision makers outside the business organization. ⊚ ⊚

true false

15) The content of management accounting reports needs to be presented in conformity with generally accepted accounting principles. ⊚ ⊚

true false

16) One purpose of generally accepted accounting principles is to make accounting information prepared by different companies more comparable. ⊚ ⊚

true false

17) An accounting practice can become a "generally accepted accounting principle" through widespread use, even if the practice is not mentioned in the official pronouncements of the accounting standard-setting organizations. ⊚ ⊚

true false

18) The Public Company Accounting Oversight Board is responsible for creating and promoting International Financial Reporting Standards.

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⊚ ⊚

true false

19) Today, the most authoritative source of generally accepted accounting principles is the American Accounting Association. ⊚ ⊚

true false

20) The American Institute of Certified Public Accountants has the legal authority over publicly held corporations to enforce compliance with generally accepted accounting principles. ⊚ ⊚

true false

21) The Securities and Exchange Commission is instrumental in the development of financial accounting standards. ⊚ ⊚

true false

22) Financial accounting standards issued by the FASBare considered generally accepted accounting principles. ⊚ ⊚

true false

23) Generally accepted accounting principles were established by the American Accounting Association in 1934 and are updated annually by Congress. ⊚ ⊚

true false

24) The CPA examination is administered by the General Accounting Office of the U.S.Government. Version 1

⊚ ⊚

true false

25) The Sarbanes-Oxley Act places responsibility on CEOsand CFOs of companies to certify the fairness of a company's financial statements. The Act also created the Public Company Accounting Oversight Board, which oversees the public accounting profession. ⊚ ⊚

true false

26) The Code of Ethics of the AICPA calls for a commitment to ethical behavior but not at the sacrifice of personal advantage. ⊚ ⊚

true false

27) The Code of Ethics of the AICPA calls for a member in public practice to be independent in fact and appearance when providing auditing services. ⊚ ⊚

true false

28) Public accounting is the segment of the profession where professionals offer audit, tax, and consulting services to clients. ⊚ ⊚

true false

29) Career opportunities in accounting exist in public accounting, management accounting, governmental accounting, and accounting education. ⊚ ⊚

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true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 30) Financial accounting information is: A) B) C) D)

31)

Which of the following does not describe accounting? A) B) C) D)

32)

Recording the financial transactions of an economic entity. Developing information in conformity with generally accepted accounting The art of interpreting, measuring, and describing economic activity. Developing the information required for the preparation of income tax returns.

The basic purpose of bookkeeping is to: A) B) C) D)

34)

It is commonly referred to as the language of business. It is an end rather than a means to an end. It is useful for decision-making. It is used by businesses, governments, non-profit organizations, and individuals.

The field of accounting may best be described as:

A) B) principles. C) D)

33)

Designed to assist investors and creditors. Submitted to the IRSin lieu of a tax form. Called "special-purpose" accounting information. Not applicable to individuals.

Provide financial information about an economic entity. Develop the types of information best-suited to specific managerial decisions. Record the financial transactions of an economic entity. Determine the taxable income of individuals and business entities.

Which of the following is not characteristic of financial accounting?

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A) Information used in financial statements is prepared in conformity with generally accepted accounting principles. B) The information is confidential and is intended for use only by company management. C) The information is used in a wide variety of business decisions. D) The information is developed primarily by "private accountants" that is, accountants employed by business organizations.

35)

The information systems of most business organizations:

A) Are tailored to meet the organization's needs for accounting information and the resources available for operating the system. B) Are similar in design to the journals, ledgers, and worksheets illustrated in this text. C) Utilize data bases, rather than ledger accounts. D) Are designed by the CPA firm that performs the annual financial audit.

36)

The NYSErequires all listed companies to:

A) Register with the PCAOB (Public Company Accounting Oversight Board). B) Send financial statements directly to investors, creditors, and other users of financial information. C) Maintain an internal audit function. D) Use IFRS (International Financial Reporting Standards) for financial statement reporting purposes.

37)

Which of the following is not a basic function of an information system?

A) To interpret and record the effects of business transactions. B) To classify the effects of similar transactions in a manner that permits determination of various totals and subtotals useful to management. C) To ensure that a business organization will be managed profitably. D) To summarize and communicate information to decision makers.

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38)

Information is cost-effective when: A) The information aids management in controlling costs. B) The information is based upon historical costs, rather than upon estimated market

values. C) The value of the information exceeds the cost of producing it. D) The information is generated by a computer-based accounting system.

39) Which of the following events is not a transaction that would be recorded in a company's accounting records? A) B) C) D)

40)

A strong internal control structure:

A) reports. B) C) D)

41)

The purchase of equipment for cash. The purchase of equipment on account. The investment of additional cash in the business by the owner. The death of a key executive.

Provides reasonable assurance that the organization produces reliable financial Will prevent a business from operating at a loss. Ensures a business will remain solvent. Will prevent fraud, theft, and embezzlement.

The best definition of an information system is:

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A) Journals, ledgers, and worksheets. B) Manual or computer-based records used in developing information about an entity for use by managers and also persons outside the organization. C) The personnel, procedures, technology, and records used by an entity to develop information and communicate this information to decision makers. D) The concepts, principles, and standards specifying the information which should be included in financial statements, and how that information should be presented.

42)

The objectives of an accounting system include all of the following, except: A) B) C) D)

Interpret and record the effects of business transactions. Classify the effects of transactions to facilitate the preparation of reports. Summarize and communicate information to decision makers. Dictate the specific types of business transactions the enterprise may pursue.

43) Suppose a number of your friends have organized a company to develop and sell a new software product. They have asked you to loan them $3,000 to help get the company started, and they have promised to repay your $3,000 plus 8% interest in one year. Of the following, which amount may be described as the return on your investment? A) B) C) D)

$3,240 $240 $2,760 $3,000

44) Suppose a number of your friends have organized a company to develop and sell a new software product. They have asked you to loan them $8,000 to help get the company started, and they have promised to repay your $8,000 plus 10% interest in one year. Of the following, which amount may be described as the return on your investment?

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A) B) C) D)

$8,000 $800 $8,800 $7,200

45) Which of the following is generally not considered one of the general-purpose financial statements issued by a corporation? A) B) C) D)

46)

Which of the following is considered a return "on" investment? A) B) C) D)

47)

Dividends. Repayment of a loan. Purchase of an asset. Securing a loan.

The financial statements of a business entity: A) B) C) D)

48)

Income statement forecast for the coming year. Balance sheet. Statement of financial position. Statement of cash flows.

Include the balance sheet, income statement, and income tax return. Provide information about the cash flow prospects of the company. Are the first step in the accounting process. Are prepared for a fee by the Financial Accounting Standards Board.

Which of the following are notconsidered "external" users of financial statements?

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A) B) C) D)

49)

Owners. Creditors. Labor unions. Managers.

Financial statements are designed primarily to:

A) Provide managers with detailed information tailored to the managers' specific information needs. B) Provide people outside the business organization with information about the company's financial position and operating results. C) Report to the Internal Revenue Service the company's taxable income. D) Indicate to investors in a particular company the current market values of their investments.

50) The principal difference between management accounting and financial accounting is that financial accounting information is: A) Prepared by managers. B) Intended primarily for use by decision makers outside the business organization. C) Prepared in accordance with a set of accounting principles developed by the Institute of Certified Management Accountants. D) Oriented toward measuring solvency rather than profitability.

51)

Which financial statement is prepared as of a specific date?

A) The balance sheet B) The income statement C) The statement of cash flows D) The balance sheet, income statement, and statement of cash flows are all for a period of time rather than at a specific date.

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52) In comparison with a financial statement prepared in conformity with generally accepted accounting principles, a management accounting report is more likely to: A) B) C) D)

Be used by decision makers outside of the business organization. Focus upon the operation results of the most recently completed accounting period. View the entire organization as the reporting entity. Be tailored to the specific needs of an individual decision maker.

53) Which of the following decision makers is least likely to be among the users of management accounting reports developed by a large organization that operates retail stores that sell to consumers? A) The chief executive officer of the organization. B) The manager of a department in one of the stores owned by the organization. C) The manager of a mutual fund considering investing in the organization’s common stock. D) Internal auditors within the organization.

54) Which financial statement is primarily concerned with reporting the financial position of a business at a particular time? A) B) C) D)

55)

The balance sheet. The income statement. The statement of cash flows. Consolidated statement of stockholders' equity.

Financial statements are prepared:

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A) B) C) D)

Only for publicly owned business organizations. For corporations, but not for sole proprietorships or partnerships. Primarily for the benefit of persons outside of the business organization. In either monetary or nonmonetary terms, depending upon the need of the decision

maker.

56)

Financial statements may be prepared for which time period? A) B) C) D)

One year. Less than one year. More than one year. Any time period.

57) Which of the following is generally not considered an external user of accounting information? A) B) C) D)

Stockholders of a corporation. Bank lending officers. Financial analysts. Factory managers.

58) Although accounting information is used by a wide variety of external parties, financial reporting is primarily directed toward the informational needs of: A) B) C) D)

59)

Investors and creditors. Government agencies such as the Internal Revenue Service. Customers. Trade associations and labor unions.

Investors may be described as:

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A) B) C) D)

Individuals and enterprises that have provided credit to a reporting entity. Individuals and enterprises that have ownership interest in a reporting entity. Anyone with an interest in the results of the operations of the reporting entity. Those whose primary economic activity consists of buying and selling stocks and

bonds.

60)

Of the following objectives of financial reporting, which is the most specific?

A) Provide information useful in assessing amount, timing, and uncertainty of future cash flows. B) Provide general information useful in making investment and credit decisions. C) Provide specific information about economic resources, claims to resources, and changes in resources and claims. D) Provide information useful to help the enterprise achieve its goals, objectives, and mission.

61) Investors and creditors are interested in the probability that their original investment or loan will eventually be returned, and that they will receive a reasonable return while their funds are invested or borrowed. These expectations are collectively referred to as: A) B) C) D)

Expected profitability. The objectives of financial reporting. Cash flow prospects. Financial position.

62) A complete set of financial statements for Citywide Company, at December 31, Year 1, would include each of the following, except:

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A) Balance sheet as of December 31, Year 1. B) Income statement for the year ended December 31, Year 1. C) Statement of projected cash flows for Year 2. D) Notes containing additional information that is useful in interpreting the financial statements.

63) The general-purpose financial statements prepared annually by a corporation would not include the: A) B) C) D)

64)

Balance sheet. Income tax return. Income statement. Statement of cash flows.

Which of the following is a characteristic of financial accounting information? A) B) C) D)

Its preparation requires judgment. It is more about the future than it is about the past. None of it is based on estimates, assumptions, and judgments. Notes and explanations from management are not included.

65) Which of the following statements is considered a "snapshot" of the business in financial or dollar terms? A) B) C) D)

Statement of financial position. Statement of cash flows. Income statement. The federal income tax return.

66) Objectives of financial reporting to external investors and creditors include preparing information about all of the following except: Version 1

A) Information used to determine which products to produce. B) Information about economic resources, claims to those resources, and changes in both resources and claims. C) Information that is useful in assessing the amount, timing, and uncertainty of future cash flows. D) Information that is useful in making investment and credit decisions.

67)

Financial accounting information is characterized by all of the following except: A) B) C) D)

68)

It is the function of management accounting to perform the following activities, except: A) B) C) D)

69)

It is historical in nature. It results from inexact and approximate measures. It is factual, so it does not require judgment to prepare. It is enhanced by management's explanation.

Create financial forecasts. Perform cost accounting. Complete internal audits. Audit financial statements.

All of the following are characteristics of management accounting, except: A) Reports are used primarily by insiders rather than by persons outside of the business

entity. B) Its purpose is to assist managers in planning and controlling business operations. C) Information must be developed in conformity with generally accepted accounting principles or with income tax regulations. D) Information may be tailored to assist in specific managerial decisions.

70)

Internal users of financial accounting information include all of the following except:

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A) B) C) D)

71)

Which of the following is not a user of internal accounting information? A) B) C) D)

72)

Investors. Managers. Chief Financial Officer. Chief Executive Officer.

Store manager Chief executive officer Creditor Chief financial officer

Characteristics of internal accounting information include all of the following except: A) B) C) D)

It is audited by a CPA. It must be timely. It is generally oriented toward the future. It measures efficiency and effectiveness.

73) Which of the following is not an important factor in ensuring the integrity of accounting information? A) B) C) D)

74)

Institutional factors, such as standards for preparing information. Professional organizations, such as the American Institute of CPAs. Competence, judgment, and ethical behavior of individual accountants. The cost of preparing the financial information.

Generally accepted accounting principles:

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A) B) C) D)

75)

The Sarbanes-Oxley Act of 2002 created: A) B) C) D)

76)

The Security and Exchange Commission. The Financial Accounting Standards Board. The Public Company Accounting Oversight Board. The Income Tax Return Overview Board.

Publicly owned companies are those whose ownership shares are: A) B) C) D)

77)

Are based on official decrees only. Are based on tradition only. Are based on an accountant's experience only. May change over time.

Bought and sold through stock exchanges or over-the-counter markets. Bought and sold through the NYSE. Owned by other publicly owned companies. Owned by foreign corporations.

The FASB’sconceptual framework:

A) B) principles. C) D)

Explains and guides the future development of accounting standards. Sets forth the accounting standards referred to as generally accepted accounting Is not recognized by the SEC. Has been superseded by generally accepted accounting principles.

78) Overseeing a company's affairs to ensure that the company is managed with the best interest of shareholders in mind is called:

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A) B) C) D)

79)

Internal control. Financial integrity. Corporate governance. The audit function.

The basic purpose of an audit is to:

A) Assure outsiders that financial statements are prepared in conformity withgenerally accepted accounting principles (GAAP). B) Provide as much useful information to decision makers as possible, regardless of cost. C) Record changes in the financial position of an organization by applying the concepts of double entry accounting. D) Meet an organization's need for accounting information as efficiently as possible.

80)

Audits of financial statements are performed by: A) B) C) D)

The controller of the reporting company. The Financial Accounting Standards Board (FASB). The management of the reporting company. Independent certified public accountants (CPAs).

81) The auditor's report on the published financial statements of a large corporation should be viewed as: A) The opinion of independent experts as to the overall fairness of the statements. B) The opinion of the corporation's chief accountant as to the overall fairness of the statements. C) A guarantee by a firm of certified public accountants that the statements are accurate. D) A guarantee by the Financial Statements Insurance Board that the statements do not overstate assets or net income.

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82) The set of standards, assumptions, and concepts that form the "ground rules" for financial reporting in the United States is termed: A) B) C) D)

83)

The conceptual framework. Generally accepted accounting principles. Statements of Financial Accounting Concepts. American standards for certified public accountants.

The basic purpose of generally accepted accounting principles is to:

A) Minimize the possibility of a business becoming insolvent. B) Provide a framework for financial reporting that is understood by both the preparers and the users of financial statements. C) Ensure that financial statements include the type of information that is best suited to every type of business decision. D) Eliminate the need for professional judgment in preparing financial statements.

84)

Establishing international accounting standards is the responsibility of: A) B) C) D)

AICPA. IASB. SEC. AAA.

85) Generally accepted accounting principles are intended to assist accountants in preparing financial statements that: A) B) C) D)

Are relevant, verifiable, comparable, and understandable. Show the business to be both solvent and profitable. Comply with all income tax rules and regulations. Are ideally suited to the specific needs of each user of the financial statements.

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86)

Which of the following is not an objective of generally accepted accounting principles?

A) To minimize the amount of income taxes owed. B) To ensure that both preparers and users of financial statements understand the concepts and assumptions used in presenting information within these statements. C) To enhance the relevance and verifiability of information contained in financial statements. D) To increase the comparability of financial statements prepared by different companies.

87) In the phrase "generally accepted accounting principles," the words accounting principlesrefers to: A) reporting. B) C) D) (FASB).

The standards, assumptions, and concepts that serve as "ground rules" for financial Ethical standards that prohibit fraudulent or misleading financial reporting. The steps in the accounting cycle. The accounting practices authorized by the Financial Accounting Standards Board

88) The accounting standards and concepts used in the preparation of financial statements are called: A) B) C) D)

89) of:

Certified principles of accounting (CPA). Generally accepted accounting principles (GAAP). Federal accounting standards and bylaws (FASB). Standards enforcing consistency (SEC).

Generally accepted accounting principles are the "ground rules" used in the preparation

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A) B) C) D)

90)

Income tax returns. All accounting reports. Reports to federal and state regulatory agencies. Financial statements.

The Financial Accounting Standards Board is:

A) Responsible for the review and audit of federal income tax returns. B) Primarily concerned with the preparation of the annual federal budget. C) A private group that conducts research and determines generally accepted accounting principles. D) A government agency with legal authority to approve or disapprove the financial statements of corporations that sell their securities to the public.

91)

The Accounting Standards Codification was developed by: A) B) C) D)

The Financial Accounting Standards Board. Certified public accountants. The Securities and Exchange Commission. The Internal Revenue Service.

92) The body created by the Sarbanes Oxley Act and charged with oversight of the accounting profession is the: A) B) C) D)

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Public Company Accounting Oversight Board. Auditing Standards Board. International Accounting Standards Board. Securities and Exchange Commission.

93) The measures used by an organization to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner are collectively referred to as: A) B) C) D)

Generally accepted accounting principles. Financial accounting standards. Securities and exchange regulations. The internal control structure.

94) In 2012 the SEC issued an extensive report regarding the use of IFRS by U.S. public companies and listed which of the following as a major obstacle to adopting IASB standards? A) IASBstandards are generally viewed as low quality. B) IASBis dependent on funding from the major accounting firms. C) Cross-border financing is decreasing in popularity. D) The IASB is not a governmental agency, and therefore it is not positioned to develop accounting standards.

95)

The basic purpose of audited financial statements is to:

A) Provide the reporting company with assurance that all assets are protected from theft or embezzlement. B) Prepare financial statements for companies that do not have their own accounting departments. C) Provide users of the financial statements with assurance that the statements are verifiable and are presented in conformity with generally accepted accounting principles. D) Provide both the reporting company and the users of the statements with a written guarantee that the statements are error-free.

96)

The FASB takes on a responsibility to do the following, except:

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A) Set the objectives of financial reporting. B) Describe the elements of financial statements. C) Judge disputes between management and the CPA. D) Determine the criteria for deciding what information to include in financial statements.

97) Which of the following is not recognized as a source of generally accepted accounting principles? A) B) C) D)

Widespread and long-term use of a particular practice. The Financial Accounting Standards Board (FASB). The Securities and Exchange Commission (SEC). Statements of the Committee of Sponsoring Organizations (COSO).

98) In the phrase "generally accepted accounting principles," the words generally accepted mean that the principles: A) Have been adopted by Congress or approved by the voters in a general election. B) Are acceptable to the Internal Revenue Service. C) Are understood and observed by all the participants in the financial reporting process. D) Have been approved by a majority of the members of the Financial Accounting Standards Board.

99) Which of the following has the least impact upon the integrity of financial statements issued by publicly owned corporations? A) B) C) D)

Federal securities laws. Professional judgment of the accountants who prepare the financial statements. Audits of the financial statements by the Internal Revenue Service. Competence and integrity of the CPAs who perform audits.

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100)

Which of the following is true?

A) The existence of generally accepted accounting principles (GAAP) eliminates the need for professional judgment except in very unusual circumstances. B) Federal securities laws regarding the issuance of misleading financial statements apply not only to the independent auditors, but to management of the company as well. C) Attaining a passing score on the part of the Uniform CPA Examination that covers professional ethics is evidence of integrity and commitment to ethical conduct. D) A professional accountant should resign his position rather than become involved in the distribution of financial statements indicating insolvency.

101)

Which organization best serves the professional needs of a CPA? A) B) C) D)

FASB. AICPA. SEC. AAA.

102) An accounting principle must receive substantial authoritative support to qualify as generally accepted. Among the organizations and agencies that have been influential in the development of generally accepted accounting principles, which of the following has provided the most influential leadership? A) B) C) D)

Internal Revenue Service. Institute of Management Accountants. Financial Accounting Standards Board. NYSE.

103) The American Institute of Certified Public Accountants has a Code of Professional Conduct that expresses the accounting profession's recognition of its responsibilities to all of the following except:

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A) B) C) D)

104)

The work of accountants practicing in public accounting may best be described as: A) B) C) D)

105)

The public. The client. Colleagues. The IRS.

Providing various types of accounting services to a wide variety of clients. Preparing income tax returns for individuals and small businesses. Developing and interpreting information tailored to the needs of business managers. Helping governmental agencies carry out their various regulatory responsibilities.

The primary function of external auditors is to:

A) Express an opinion on the fairness of the company's financial statements. B) Determine the accuracy of the management reports. C) Evaluate the efficiency of operations and the degree of compliance with management's policies in all departments within a large organization. D) Determine that financial statements and all special reports to management are prepared in conformity with generally accepted accounting principles.

106)

Management accountants primarily are concerned with developing information: A) B) C) D)

107)

For use in income tax returns. Suited to the needs of stockholders, creditors, and other external decision makers. In conformity with generally accepted accounting principles. Suited to the needs of decision makers within the organization.

The designation of CPA is given by:

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A) B) C) D)

108)

Universities. States. The AICPA. The SEC.

One of the principal functions of CPAsis to: A) Audit income tax returns to determine if taxpayers have underpaid their income

taxes. B) Conduct audits to determine whether the employees of a business are performing their jobs honestly and efficiently. C) Advise individual investors on stock market investments. D) Perform audits to determine the fairness of a company's financial statements.

109) The SEC requires corporate officers to sign the Form 10-K, which is filed annually with the SEC. Which of the following officers is not among those required to sign? A) B) C) D)

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CEO (Chief Executive Officer). CAO (Chief Accounting Officer). CFO (Chief Financial Officer). COO (Chief Operating Officer).

Answer Key Test name: Chapter 01 Test Bank - Algorithmic and Static 1) FALSE 2) FALSE 3) TRUE 4) FALSE 5) TRUE 6) FALSE 7) FALSE 8) TRUE 9) FALSE 10) FALSE 11) FALSE 12) TRUE 13) FALSE 14) FALSE 15) FALSE 16) TRUE 17) TRUE 18) FALSE 19) FALSE 20) FALSE 21) TRUE 22) TRUE 23) FALSE 24) FALSE 25) TRUE 26) FALSE Version 1

27) TRUE 28) TRUE 29) TRUE 30) A 31) B 32) C 33) C 34) B 35) A 36) C 37) C 38) C 39) D 40) A 41) C 42) D 43) B 44) B 45) A 46) A 47) B 48) D 49) B 50) B 51) A 52) D 53) C 54) A 55) C 56) D Version 1

57) D 58) A 59) B 60) C 61) C 62) C 63) B 64) A 65) A 66) A 67) C 68) D 69) C 70) A 71) C 72) A 73) D 74) D 75) C 76) A 77) A 78) C 79) A 80) D 81) A 82) B 83) B 84) B 85) A 86) A Version 1

87) A 88) B 89) D 90) C 91) A 92) A 93) D 94) B 95) C 96) C 97) D 98) C 99) C 100) B 101) B 102) C 103) D 104) A 105) A 106) D 107) B 108) D 109) D

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CHAPTER 2: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) A set of financial statements includes three related accounting reports, or statements. List the names of three primary statements, and give a brief description of the accounting information contained in each.

2) (A) What is meant by the phrase "generally accepted accounting principles"?(B) Explain the concept of the business entity and how it relates to generally accepted accounting principles.

3) Under generally accepted accounting principles, the assets owned by a business are reported in the balance sheet at their historical cost. Identify and briefly explain two accounting principles other than the cost principle that support the valuation of assets at cost in the balance sheet.

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4) Listed below are nine technical accounting terms introduced in this chapter:AssetsBalance SheetCost principleAccounting equationLiabilitiesOwner's equityInflationGoing concern assumptionLiqudity Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. Do not use a term more than once. (A) Having the financial ability to pay debts as they become due. (B) An assumption that a business will operate in the foreseeable future. (C) Economic resources owned by businesses that are expected to benefit future operations. (D) The debts or obligations of a business organization. (E) Assets = Liabilities + Owners' Equity (F) The principle which states that assets are valued in the balance sheet at their historical cost. (G) A residual amount equal to assets minus liabilities.

Answer each of the following questions:

(A) During the current year, the assets of Duffy Stationery increased by $650,000 and the liabilities decreased by $340,000. What was the change in owners' equity during the year?(B) The owners' equity of Graham Interiors appears on the balance sheet as $720,000 and is equal to one-fourth of total assets. Compute the amount of total liabilities.(C) At the end of the year, the owners' equity in Scott Manufacturing Company amounted to $845,000. During Year 1, the assets of the business increased by $515,000 and the liabilities increased by $205,000. The owners' equity at the beginning of Year 1 was how much?

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6) Some of the transactions carried out by Tudor Wholesale during the first month of the company's operations are listed below. Determine the effect of each transaction on the total assets, the total liabilities, and the owners' equity. Prepare your answer in columnar form, identifying each transaction by letter and using the symbols (+) for increase, (−) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example. Transactions A. Issued capital stock in exchange for cash B. Bought land and a building at a total price of $165,000. Made a down payment of $65,000 cash and signed a note payable for the balance. C. Bought adjoining lot for use as parking lot; paid cash in full D. Sold a portion of the land on credit at a price equal to its cost. E. Obtained a loan from a bank.

Total Assets +

Total Liabilities NC

Owners' Equity +

F. Purchased office equipment on credit. G. Paid a liability. H. Collected part of amount owned to the business from purchaser of land. I. Solid another portion of the land for cash at a price in excess of cost.

7) Some of the transactions carried out by Tsang Company during the first month of the company's operations are listed below. Determine the dollar effect of each transaction on the total assets, the total liabilities, and the owners' equity of Tsang Company. Use the symbols (+) for increase, (−) for decrease, and (NC) for no change. An answer is provided for the first transaction to serve as an example. Transaction

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Total Assets

Total Liabilities

Owners' Equity 3

A. Issued capital stock to Don Tsang in exchange for his investment of $200,000 in the business. B. Purchased a computer for the business for $5,500 cash. C. Borrowed $20,000 from the bank. D. Purchased office furnishings at a total price of $4,200, terms $600 cash and balance payable in two installments. E. Paid $1,800 of the balance due on the office furnishings. F. Sold an extra monitor that had cost $250 for $300 on credit. G. Collected $150 of accounts receivable from purchaser of the monitor. H. Bought a small truck to be used in the business for $29,000; paid cash in full.

+$ 200,000

+200,000

8) List the following accounts in the order that they would appear in a balance sheet: Capital Stock Equipment Accounts Receivable Retained Earnings Revenue Accounts Payable Cash Rent Expense

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9) Computation of assets, liabilities, and owners' equity after a series of transactions. On April 30, Year 1, the balance sheet of China Collectibles showed total assets of $700,000, total liabilities of $400,000, and owners' equity of $300,000. The following transactions occurred in May of Year 1: (1) Capital stock was issued in exchange for $165,000 cash. (2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note payable for $200,000. (3) The business paid $70,000 of its accounts payable. (4) The business collected $54,000 of its accounts receivable. Compute the following as of May 31, Year 1: A. Total assets B. Total liabilities C. Owners' equity

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10) Computation of assets, liabilities, and owners' equity after a series of transactions. The December 31, Year 1 balance sheet of Charles Realty reported total assets of $900,000, total liabilities of $350,000, and owners' equity of $550,000. The following transactions occurred in January of Year 2: (1) The business purchased land for $250,000, paying $100,000 cash and issuing a note payable for the balance. (2) The business collected accounts receivable totaling $45,000. (3) The business sold land costing $50,000 for $60,000 cash. (4) The business paid $50,000 of the note payable.

Compute the following at January 31, Year 1: A. Total assets B. Total liabilities C. Owners' equity

11) Prepare the balance sheet as of December 31, Year 1, for Gamma Company, from the following list of items, arranged in random order. You must compute the amount for accounts payable to complete the balance sheet. Accounts payable Office equipment Buildings Capital stock

12)

$ ? $ 41,600 $ 533,000 $ 494,000

Land Notes payable Accounts receivable Cash

$ 260,000 $ 377,000 $ 97,500 $ 19,760

The balance sheet was as follows for Custom Ceramics on February 1, Year 1:

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Cash

Custom Ceramics Balance Sheet February 1, Year 1 Liabilities & Owners' Equity $ 7,000 Liabilities:

Accounts receivable Office Equipment

5,200 30,000

Notes Payable Accounts Payable

$ 40,000 6,000

Buildings Land

50,000 80,000

Total Liabilities Owners' equity:

46,000

Capital Stock

100,000

Retained earnings

26,200

Total owners’ equity

126,200

Total Liabilities and Owners' Equity

$ 172,200

Assets

Total Assets

$ 172,200

During the first week of February, the following transactions occurred: (1) The business used cash to pay off $5,000 of its accounts payable. (No payment was made on the notes payable.) (2) Additional capital stock was issued to Joan Custom for $15,000 cash. (3) Equipment was purchased on credit for $1,800. (4) The business collected $4,000 cash from accounts receivable. Prepare a balance sheet for Custom Ceramics as of February 8, Year 1.

13) Use the following information to complete the balance sheet of Adelphi Construction as of December 31, Year 1.(1) The company was organized on January 1, Year 1.(2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders during the year.(3) Cash and accounts receivable together amount to one and one-half times the amount of notes payable. Adelphi Construction Balance Sheet

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Assets Cash Accounts receivable Equipment Building Land

December 31, Year 1 Liabilities & Owners' Equity ? Liabilities: 85,000 96,000 250,000 184,000

Notes Payable Accounts Payable Income taxes payable Total liabilities

? ? 40,000 $ 215,000

Owners' equity:

Total Assets

Capital stock

Retained earnings

Total Liabilities and Owners' Equity

$ 620,000

14) Use the following information to complete the December 31, Year 1 balance sheet of Copper Supplies Company. (1) Owners' equity as of January 1, Year 1, totaled $175,000, which included capital stock of $150,000. (2) Additional capital stock was issued during Year 1 in exchange for $40,000 cash. (3) Net income for Year 1 amounted to $200,000; no dividends were paid during Year 1. (4) Cash and accounts receivable together amount to 3 times as much as accounts payable.

Assets Cash

Copper Supplies Company Balance Sheet December 31, Year 1 Liabilities & Owners' Equity $ 30,000 Liabilities:

Accounts receivable

Accounts Payable

Equipment

Notes payable

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$ 40,000 ?

Building Land

Total Assets

300,000 215,000

$835,000

Total liabilities Owners' equity:

Capital stock

Retained earnings

Total owners’ equity

Total Liabilities and Owners' Equity

15) Show the effect of each of the seven listed transactions on the balance sheet items of Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each subsequent transaction. The effects of the May 1 transaction are already filled in to provide you with an example.

May 1 Issued capital stock for $75,000. May 2 Purchased a small office building at a price of $58,000 for the land and $65,000 for the building. Paid $43,000 cash and signed a

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note payable for the balance. May 8 Borrowed $15,000 from the bank. Signed a 60-day note payable for this amount. May 16 Purchased copying machines, computers , and other office equipment for $19,000. Paid $9,000 cash and signed a note payable for the balance. May 28 Sold an item of office equipment (computer ) to a stockhold er at its cost of $2,800. The stockhold

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er paid $800 cash and promised to pay the balance within 30 days. May 30 Paid $5,000 on the liability for the office equipment . May 31 Collected $500 from the stockhold er who had bought the computer. Assets

= Liabilite + Owners s ' Equity

Cash

May 1

+ Account + Lan + Buldin + Office = Notes + Capita Receivabl d g Equipmen Payable l e t Stock +$ 75,000 +$ 75,000

May 2 Balanc e May 8 Balanc e May 16

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Balanc e May 28 Balanc e May 30 Balanc e May 31 Balanc e

16) Show the effect of each of the six listed transactions on the balance sheet items of Renaissance Investment Services, Incorporated. Indicate the new balances after the transaction of November 2 and each subsequent transaction. The effects of the November 1 transaction are already filled in to provide you with an example. November Issued 1 capital stock for $200,000. November Purchased 2 a small office building at a price of $86,000 for the land and $74,000 for the building. Made a cash

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November 7

November 12

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payment of 20% of the total price and signed a note payable for the balance. Purchased telephone s, computers , and other office equipment for $58,000. Paid $23,000 cash and signed a note payable for the balance. Sold one of the computers to a stockhold er at its cost of $3,500. The stockhold er paid $500 cash and agreed to pay the balance within 10

November 22

November 30

days. Received $3,000 due from the stockhold er who had purchased the computer. Paid $17,500 on the note payable for the office equipment . Assets Cash

Novembe r 1 Novembe r 2 Balance

= Liabilit + Owners' es Equity

+ Account + Lan + Buldin + Office = Notes + Capital Receivab d g Equipme Payable Stock le nt +$200,0 00

Novembe r 7 Balance Novembe r 12 Balance Novembe r 22 Balance

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Novembe r 30 Balance

17) An inexperienced accounting intern at Tasso Company prepared the following income statement for the month of July Year 1: Tasso Company Income Statement Month of July Year 1 Revenues: Services provided to customers

$ 25,000

Capital stock

12,500

Loan from bank Expenses:

37,500

Payments to long-term creditors Expenses required to provide services to customers Purchase of equipment Net income

$ 75,000

$ 20,000 18,750 10,000

48,750 $ 26,250

Prepare a revised income statement in accordance with generally accepted accounting principles.

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18) From the following accounts and amounts prepare a balance sheet for the Swell Company for December 31, Year 1. (Hint: You must compute the amount for retained earnings to complete the balance sheet.). Accounts Payable Accounts Receivable Building Capital Stock Cash Equipment Insurance Expense Land Notes Payable Sales Revenue Salaries Expense

$ 61,250 $ 70,500 $ 50,000 $ 50,000 $ 64,000 $ 30,000 $ 5,000 $ 125,000 $ 175,000 $ 25,000 $ 20,000

19) State and describe the three most common forms of business organizations in the United States.

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Answer Key Test name: Chapter 02 Test Bank (Problem Material) 1) The order of these items may vary: Balance sheet. A report showing at a specific date the financial position of the company by reporting the assets (resources) that it owns, the liabilities (debts) that it owes, and the amount of the owners' equity in the business. Income statement. A report indicating the profitability (or net income) of the business over a specific time period. Statement of cash flows. A report summarizing the cash receipts and cash payments of the business over the same time period covered by the income statement. The cash flows from three activities are presented on the statement. In order of presentation, they include: (1) operating activities; (2) investing activities; and (3) financing activities. 2) (A) Generally accepted accounting principles are the concepts, standards, or rules used in the preparation of financial statements.(B) Generally accepted accounting principles require that financial statements describe the activities of a specific economic entity, which is an economic unit that engages in identifiable business activities.

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3) Going-concern assumption. An assumption by accountants that a business will operate in the foreseeable future unless specific evidence that this is not a reasonable assumption exists, such as impending bankruptcy. Since assets of the business were acquired for use and not for resale, estimated current market prices or appraisal values are of less importance than if these items were intended for sale.Objectivity principle. Accounting measurements should be based upon dollar amounts that are factual and subject to independent verification. Historical cost of assets is objective; estimated market values or appraisals change over time and are not factual or objective.Stable-dollar assumption. An assumption by accountants that the dollar is a stable unit of measure. This assumption permits reporting assets at cost, even though individual assets may have been acquired in different years. 4) (A) Liquidity(B) Going concern assumption(C) Assets(D) Liabilities(E) Accounting equation(F) Cost principle(G) Owners' equity 5) (A) $990,000 increase (B) $2,160,000 (C) $535,000 A. Change in owners' equity = $650,000 + $340,000 = $990,000 increase B. Total assets = 4 × $720,000 = $2,880,000 Total liabilities = $2,880,000 assets − $720,000 owners' equity = $2,160,000 C. Change in owners' equity = $515,000 − $205,000 = $310,000 increase Beginning owners' equity = $845,000 ending balance − $310,000 increase = $535,000 6) Transactions A. Issued capital stock in exchange

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Total Assets +

Total Liabilities NC

Owners' Equity +

for cash B. Bought land and a building at a total price of $165,000. Made a down payment of $65,000 cash and signed a note payable for the balance. C. Bought adjoining lot for use as parking lot; paid cash in full D. Sold a portion of the land on credit at a price equal to its cost. E. Obtained a loan from a bank. F. Purchased office equipment on credit. G. Paid a liability. H. Collected part of amount owned to the business from purchaser of land. I. Solid another portion of the land for cash at a price in excess of cost.

+ +

NC NC

− NC

NC NC

7) Transaction

Total Assets

A. Issued capital stock to +$ Don Tsang in exchange for 200,000 his investment of $ 200,000 in the business. B. Purchased a computer for NC the business for $ 5,500 cash. C. Borrowed $ 20,000 from +$ 20,000 the bank. D. Purchased office +$ 3,600 furnishings at a total price of $ 4,200, terms $ 600 cash and balance payable in two installments. E. Paid $ 1,800 of the −$ 1,800 balance due on the office furnishings. F. Sold an extra monitor +$ 50 that had cost $ 250 for $ 300 on credit. G. Collected $ 150 of NC

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Total Liabilities NC

Owners' Equity +200,000

+$ 200,000 +$ 3,600

−$ 1,800

+$ 50

accounts receivable from purchaser of the monitor. H. Bought a small truck to be used in the business for $ 29,000; paid cash in full.

8) Cash, Accounts Receivable, Equipment, Accounts Payable, Capital Stock, Retained Earnings The balance sheet lists assets, then liabilities, and then owners’ equity. Assets are ordinarily presented in their order of “permanence,” starting with cash. Next are other assets that are close to cash (e.g., receivables from customers), followed by more permanent assets like equipment, buildings, and land, which is considered the most permanent asset. Liabilities are usually presented in the order in which they become due. Revenue and Rent Expense do not appear in a balance sheet; both appear on the income statement. 9) A. Total assets = $995,000 B. Total liabilities = $530,000 C. Owners' equity = $465,000A. Total assets: $700,000 + $165,000 + $360,000 − $160,000 − $70,000 + $54,000 − $54,000 = $995,000 B. Total liabilities: $400,000 + $200,000 − $70,000 = $530,000 C. Owners' equity: $300,000 + $165,000 = $465,000 (or $995,000 − $530,000 = $465,000) 10) A.Total assets = $1,010,000 B.Total liabilities = $450,000 C.Owners' equity = $560,000A. Total assets: $900,000 + $250,000 − $100,000 + $45,000 − $45,000 − $50,000 + $60,000 − $50,000 = $1,010,000 B. Total liabilities: $350,000 + $150,000 − $50,000 = $450,000 C. Owners' equity: $550,000 + $10,000 = $560,000 (or $1,010,000 − $450,000 = $560,000) 11) Version 1

Cash

GAMMA Company Balance Sheet December 31, Year 1 Liabilities & Owners' Equity $ 19,760 Liabilities:

Accounts receivable Office Equipment Buildings Land

97,500 41,600 533,000 260,000

Assets

Total Assets

$ 951,860

Notes Payable Accounts Payable Total Liabilities Owners' equity

$ 377,000 80,860 $ 457,860

Capital Stock

494,000

Total Liabilities and Owners' Equity

$ 951,860

12) Custom Ceramics Balance Sheet February 1, Year 1 Assets Cash Accounts receivable Office Equipment Buildings Land

Liabilities & Owners' Equity $ 21,000 1,200

(a)

Liabilities:

(b)

Notes Payable

31,800

(c)

50,000

Accounts Payable Total Liabilities

80,000

Owners' equity: Capital Stock Retained earnings

Total Assets

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$ 184,000

Total Liabilities and Owners' Equity

$ 40,000 2,800

(d)

42,800

$ 115,000 26,200

141,200 $ 172,200

(e)

(a) $7,000 + $4,000 + $15,000 − $5,000 = $21,000(b) $5,200 − $4,000 collected = $1,200(c) $30,000 + $1,800 = $31,800(d) $6,000 + $1,800 (equipment purchase) − $5,000 paid = $2,800(e) $100,000 + $15,000 (additional investment) = $115,000 + $26,200 = $141,200 13)

Cash

Assets $ 5,000

Adelphi Construction Balance Sheet December 31, Year 1 Liabilities & Owners' Equity (b) Liabilities:

Accounts receivable Equipment

85,000

Notes Payable

96,000

Building

250,000

Land

184,000

Accounts Payable Income taxes payable Total liabilities Owners' equity: Capital stock Retained earnings

Total Assets

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$ 620,000

Total Liabilities and Owners' Equity

$ 60,000 115,000 $40,000 215,000

$ 200,000 205,000

(f) (e) 405,000 $ 620,000

(a.) Total assets must be $620,000 to agree with the total of liabilities plus owners' equity.(b.) Cash must be $5,000 to achieve a total asset figure of $620,000.(c.) Cash ($5,000) plus accounts receivable ($85,000) equals $90,000. This total is stated to be 1.5 times the amount of notes payable. Notes payable is computed as $90,000 divided by 1.5, or $60,000.(d.) Accounts payable must be $115,000 to achieve total liabilities figure of $215,000.(e.) Retained earnings at the end of the first accounting period must be earnings ($275,000) less dividends $(70,000), or $205,000.(f.) Capital stock must be $200,000 to achieve total liabilities and owners' equity figure of $620,000. 14) Copper Supplies Company Balance Sheet December 31, Year 1 Assets Liabilities & Owners' Equity Cash $ Liabilities: 30,000 Accounts 90,000 (b) Accounts $ receivable Payable 40,000 Equipment 200,000 Notes payable 380,000

(g)

Building

300,000

(f)

Land

215,000

Total Assets

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$ 835,000

(c)

Total liabilities Owners' equity:

420,000

Capital stock $190,000

(d)

Retained earnings

(e) 415,000

Total Liabilities and Owners' Equity

225,000

$ 835,000

(a)

(a) Total of liabilities & owners' equity must be $835,000 to agree with the amount of total assets. (b) Cash and accounts receivable together amount to 3 times accounts payable, or $120,000. Since cash is $30,000, accounts receivable equals $120,000 − $30,000, or $90,000. (c) Equipment must be $200,000 to achieve total assets of $835,000. (d) Beginning capital stock is $150,000 + stock issued of $40,000 = $190,000. (e) Beginning retained earnings (175,000 − 150,000) + net income of 200,000 = 225,000. (f) Total liabilities must be $420,000 to achieve the total of liabilities plus owners' equity of $835,000. (g) Since total liabilities are $420,000 and accounts payable are $40,000, notes payable must be $380,000. 15)

Cash

May 1

May 2

Balan ce May 8

Balan ce

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+$ 75,00 0 −$ 43,00 0 $ 32,00 0 +$ 15,00 0 $ 47,00 0

+ Account + Receivab le

Assets

= Liabilit + Owners es ' Equity

Land

+ Bulding + Office = Notes + Capita Equipme Payable l nt Stock +$ 75,00 0 +$ +$ 65,00 80,000 0 $ $ $ 65,00 80,000 75,00 0 0 +$ 15,000

+$ 58,00 0 $ 58,00 0

$ 58,00 0

$ 65,00 0

$ 95,000

$ 75,00 0 24

May 16

−$ 9,000

Balan ce

$ 38,00 0 +$ 800 $ 38,80 0 −$ 5,000 $ 33,80 0 +$ 500

May 28 Balan ce May 30 Balan ce May 31 Balan ce

$ 34,30 0

+$ 2,000 $ 2,000

$ 2,000

$ 58,00 0

$ 65,00 0

$ 58,00 0

$ 65,00 0

+$ 19,00 0 $ 19,00 0 −$ 2,800 $ 16,20 0

$ 58,00 0

$ 65,00 0

$ 16,20 0

$ 58,00 0

$ 65,00 0

$ 16,20 0

+$ 10,000 $ 105,000

$ 75,00 0

$ 105,000

$ 75,00 0

−$ 5,000 $ 100,000

$ 75,00 0

−$ 500 $ 1,500

$ 100,000

$ 75,50 0

16) Cash

Novem ber 1 Novem ber 2 Balan ce Novem ber 7 Balan ce Novem ber 12 Balan ce

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+$200, 000 −$32,0 00 $168,0 00 −$23,0 00 $145,0 00 +$500

$145,5 00

+ Account + Receivab le

Assets

= Liabili + Owners' tes Equity

Land

+ Bulding + Office = Notes + Capital Equipme Payable Stock nt +$200, 000 +$74, +$128, 000 000 $74,0 $128,0 $200,0 00 00 00 +$58, +$35,0 000 00 $74,0 $58,0 $163,0 $200,0 00 00 00 00 −$3,5 00

+$86, 000 $86,0 00

$86,0 00 +$3, 000 $3,0 00

$86,0 00

$74,0 00

$54,5 00

$163,0 00

$200,0 00

Novem ber 22 Balan ce Novem ber 30

+$3,00 0

Balan ce

$131,0 00

−$3, 000

$148,5 00 −$17,0 00 $3,0 00

$86,0 00

$74,0 00

$54,5 00

$163,0 00 −$17,5 00

$200,0 00

$86,0 00

$74,0 00

$54,5 00

$100,0 00

$200,0 00

17) Tasso Company Income Statement Month of July Year 1 Revenues: Services provided to customers Expenses:

$ 25,000

Expenses required to provide services to customers Net income

18,750 $ 6,250

18)

Assets Cash

Swell Company Balance Sheet December 31, Year 1 Liabilities & Owners' Equity $ 64,000 Liabilities

Accounts receivable

70,500

Notes Payable

Equipment Building Land

30,000 50,000 125,000

Accounts Payable Total Liabilities Owners' equity

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$ 175,000 61,250 236,250

Capital Stock

50,000

Retained Earnings

53,250

Total Owners' Equity

103,250

Total Assets

$ 339,500

Total Liabilities and Owners' Equity

$ 339,500

19) (1) Sole Proprietorship: One person, unlimited liability, and owner acts as manager.(2) Partnership: Two or more persons and owners are personally responsible for debts.(3) Corporation: Stockholders are owners, limited liability, ease of transfer of ownership, and separate entity under the law.

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CHAPTER 2 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The sale of additional shares of capital stock will cause retained earnings to increase. ⊚ ⊚

true false

2) A business entity is regarded as separate from the personal activities of its owners whether it is a sole proprietorship, a partnership, or a corporation. ⊚ ⊚

true false

3) Assets need not always have physical characteristics as do buildings, machinery, or inventory. ⊚ ⊚

true false

The going concern principle assumes that the business will continue indefinitely. ⊚ ⊚

true false

5) Notes payable and accounts payable both require a company to pay an amount owed by a certain date. Notes payable generally have interest, while accounts payable generally do not. ⊚ ⊚

true false

6) Any business event that might affect the future profitability of a business should be reported in its balance sheet. ⊚ ⊚

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true false

7) The practice of showing assets on the balance sheet at their cost, rather than at their current market value is explained, in part, by the fact that cost is supported by objective evidence that can be verified by independent experts. ⊚ ⊚

true false

8) Liabilities are usually listed in order of magnitude, from smallest dollar amount to largest dollar amount. ⊚ ⊚

true false

9) The entity principle states that the affairs of the owners are not part of the financial operations of a business entity and should be separated. ⊚ ⊚

10)

The accounting equation may be stated as "assets minus liabilities equals owners' equity." ⊚ ⊚

11)

true false

Total assets plus total liabilities must equal total owners' equity. ⊚ ⊚

true false

12) A transaction that causes an increase in an asset may also cause a decrease in another asset, an increase in a liability, or an increase in owners' equity. ⊚ ⊚

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true false

13)

The collection of an account receivable will cause total assets to decrease. ⊚ ⊚

14)

true false

The payment of a liability causes an increase in owners' equity. ⊚ ⊚

true false

15) When a business borrows money from a bank, the immediate effect is an increase in total assets and a decrease in liabilities or owners’ equity. ⊚ ⊚

true false

16) The purchase of an asset, such as office equipment, for cash will cause owners' equity to decrease. ⊚ ⊚

17)

Total assets must always equal total liabilities plus total owners' equity. ⊚ ⊚

18)

true false

If a company purchases equipment with cash, its total assets will increase. ⊚ ⊚

true false

19) If a company purchases equipment by issuing a note payable, its total assets will not change.

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⊚ ⊚

true false

20) The balance sheet shows assets, liabilities, and equity, as an extension of the accounting equation. ⊚ ⊚

21)

true false

A net profit results from having more revenues than liabilities. ⊚ ⊚

true false

22) A statement of cash flows reports revenue and expense activities for a specific time period such as one month or one year. ⊚ ⊚

true false

23) It is not unusual for an entity to report a significant increase in cash from operating activities, but a decrease in the total amount of cash. ⊚ ⊚

true false

24) The statement of cash flows provides a link between two balance sheets by showing how net income (or loss) has changed owners' equity from one balance sheet date to the next. ⊚ ⊚

true false

25) A company’s ability to meet its obligations as they arise, as well as earn a fair return for its owners, is dependent on its ability to generate net income.

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⊚ ⊚

true false

26) Articulation between the financial statements means that they relate closely to each other on the basis of the same underlying transaction information. ⊚ ⊚

true false

27) Limited liability means that owners of a business are only liable for the debts of the business up to the amounts they can afford. ⊚ ⊚

true false

28) In a business organized as a corporation, it is not necessary to list the equity of each stockholder on the balance sheet. ⊚ ⊚

true false

29) The owner of a sole proprietorship is personally liable for the debts of the business, whereas the stockholders of a corporation are not personally liable for the debts of the business. ⊚ ⊚

true false

30) Window dressing occurs when management attempts to make a company look financially stronger than it actually is. ⊚ ⊚

true false

31) Decision makers outside the organization base their credit decisions on weekly, or even daily, financial statements.

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⊚ ⊚

true false

32) The major outgrowth from business failures and allegations of fraudulent financial reporting during the 1990's was the passage of the Securities and Exchange Act. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 33) Which of the following is the primary objective of an income statement? A) Providing managers with detailed information about where the enterprise stands at a specific date. B) Providing users outside the business organization with information about the company's operating results for a period of time. C) Reporting to the Internal Revenue Service the company's taxable income. D) Indicating to investors in a particular company the current market values of their investments.

34)

Which of the following describes the proper form of a balance sheet?

A) Owners’ equity is always the first section listed because it is the most important to external users. B) Cash is always the first asset listed, followed by permanent assets (such as land and buildings), and finally by assets such as receivables and supplies. C) Liabilities are listed before owners' equity. D) A subtotal for total assets plus total liabilities is shown.

35)

A balance sheet is designed to show:

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A) B) C) D)

How much a business is worth. The profitability of the business during the current year. The assets, liabilities, and owners' equity of a business as of a particular date. The cost of replacing the assets and of paying off the liabilities at December 31.

36) Blue Wholesale Shirt Company sold shirts to Pink Retail Shoppe. The owner of Pink Retail said she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Company is considered to be a: A) B) C) D)

37)

borrower. liability. creditor. debtor.

Which of the following best defines an asset?

A) Something with physical form that is valued at cost in the accounting records. B) An economic resource owned by a business and expected to benefit future operations. C) An economic resource representing cash or the right to receive cash in the near future. D) Something owned by a business that has a ready market value.

38) From an accounting viewpoint, when is a business considered as an entity separate from its owner(s)? A) Only when organized as a sole proprietorship. B) Only when organized as a partnership. C) Only when organized as a corporation. D) A business is always considered as an accounting entity separate from the activities of the owner(s).

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39) The accounting principle that assumes that a company will operate in the foreseeable future is: A) B) C) D)

40)

Going concern. Objectivity. Liquidity. Disclosure.

The valuation of assets in the balance sheet is based primarily upon:

A) What it would cost to replace the assets. B) Cost, because cost is usually factual and verifiable. C) Current fair market value as established by independent appraisers. D) Cost, because in the event of liquidation, the assets would be sold at an amount equal to their original cost.

41) Which of the following is not a generally accepted accounting principle relating to the valuation of assets? A) The cost principle - in general, assets are valued at cost, rather than at estimated market values. B) The objectivity principle - accountants prefer to use objective, rather than subjective, information as the basis for accounting information. C) The safety principle - assets are valued at no more than the value for which they are insured. D) The going-concern assumption - one reason for valuing assets such as buildings and equipment at cost rather than at their current market values is the assumption that the business will use these assets rather than sell them.

42) Each year, the accountant for Southern Real Estate Company adjusts the recorded value of each asset to its market value. Using these market value figures on the balance sheet violates:

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A) B) C) D)

The accounting equation. The stable-dollar assumption. The business entity concept. The cost principle.

43) The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's balance sheet. The reporting of this item in this manner violated the: A) B) C) D)

Cost principle. Business entity concept. Objectivity principle. Going-concern assumption.

44) Eton Corporation purchased land in Year 1 for $190,000. In Year 10, it purchased a nearly identical parcel of land for $430,000. Eton valued these two parcels of land at a combined value of $860,000 in the balance sheet prepared at the end of Year 10. Reporting the land in this manner violated the: A) B) C) D)

Cost principle. Principle of the business entity. Objectivity principle. Going-concern assumption.

45) Bob Bertolucci, owner of Bob’s Bazaar, also owns a personal residence that costs $575,000. The market value of his residence is $725,000. During preparation of the financial statements for Bob’s Bazaar, the accounting principle most relevant to the presentation of Bob’s home is:

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A) B) C) D)

46)

Which of the following will not cause a change in the owners' equity of a business? A) B) C) D)

47)

The concept of the business entity. The cost principle. The going-concern assumption. The objectivity principle.

Purchase of land with cash. Withdrawal of cash by the owner. Sale of land at a profit. Losses from unprofitable operations.

Which of the following is correct when a corporation uses cash to pay for an expense? A) B) C) D)

Total assets will decrease. Retained earnings will increase. Owners' equity will increase. Liabilities will increase.

48) Deer Park Corporation recently borrowed $70,000 cash from its bank. Which of the following was unaffected by this transaction? A) B) C) D)

Assets. Liabilities. Owners' equity. Cash.

49) Which of the following transactions would cause an increase in both assets and owners' equity?

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A) B) C) D)

Investment of cash in the business by the owner. Sale of land for a price less than its cost. Borrowing money from a bank. Sale of land for cash at a price equal to its cost.

50) A transaction caused an increase in both assets and owners' equity. This transaction could have been resulted from the: A) B) C) D)

51)

The amount of owners' equity in a business is not affected by: A) B) C) D)

52)

The percentage of total assets held in cash. The investments made in the business by the owner. The profitability of the business. The amount of dividends paid to stockholders.

Decreases in owners' equity are caused by: A) B) C) D)

53)

Sale of services to a customer. Sale of land for a price less than its cost. Borrowing money from a bank. Sale of land for cash at a price equal to its cost.

Purchases of assets and payment of liabilities. Purchases of assets and incurrence of liabilities. Payment of liabilities and unprofitable operations. Distributions of assets to the owners and unprofitable operations.

Which of the following transactions would cause a change in owners' equity?

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A) B) C) D)

54)

Repayment of the principal on a bank loan. Purchase of a delivery truck on credit. Sale of land on credit for a price above cost. Borrowing money from a bank.

On the statement of financial position, how are assets and liabilities normally presented?

A) Assets are presented in order of liquidity; liabilities are presented in the order in which they become due. B) Assets are presented in the order in which they become due; liabilities are presented in their order of permanence. C) Assets are presented in order of profitability; liabilities are presented in order of liquidity. D) Assets are presented in order of liquidity; liabilities are presented in order of profitability.

55) Which of the following assets would most likely be listed last on a statement of financial position? A) B) C) D)

Land. Cash. Accounts receivable. Equipment.

56) Which of the following liabilities would most likely be listed last on a statement of financial position? A) B) C) D)

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Bonds payable, due in 20 years. Accounts payable. Note payable, due in 3 years. Income taxes payable.

57) If a transaction causes an asset account to decrease, which of the following related effects may occur? A) B) C) D)

58)

An increase of equal amount in an owners' equity account. An increase in a liability account. An increase of equal amount in another asset account. An increase in the combined total of liabilities and owners' equity.

A payment of a business debt not including interest: A) B) C) D)

Decreases total assets. Increases total liabilities. Increases the owners' equity in the business. Decreases the owners' equity in the business.

59) If total assets equal $262,000 and total liabilities equal $198,500, the total owners' equity must equal: A) B) C) D)

$63,500. Cannot be determined from the information given. $262,000. $460,500.

60) If total assets equal $270,000 and total liabilities equal $202,500, the total owners' equity must equal: A) B) C) D)

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$472,500. $67,500. $270,000. Cannot be determined from the information given.

61) If total assets equal $346,000 and total owners' equity equal $120,500, then total liabilities must equal: A) B) C) D)

$225,500. $466,500. Cannot be determined from the information given. $120,500.

62) If total assets equal $345,000 and total owners' equity equal $120,000, then total liabilities must equal: A) B) C) D)

63)

Owners’ equity in a business increases as a result of which of the following? A) B) C) D)

64)

$465,000. $225,000. $120,000. Cannot be determined from the information given.

Payments of cash to the owners. Losses from unprofitable operation of the business. Earnings from profitable operation of the business. Borrowing from a commercial bank.

Owners’ equity in a business decreases as a result of which of the following? A) B) C) D)

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Investments of cash by the owners. Profits from operating the business. Losses from unprofitable operation of the business. Repaying a loan to a commercial bank.

65)

To appear in a balance sheet of a business entity, an asset need not: A) B) C) D)

66)

Be an economic resource. Have a ready market value. Be expected to benefit future operations. Be owned by the business.

A balance sheet:

A) Provides owners, investors, and other interested parties with all the financial information they need to evaluate the financial strength, profitability, and future prospects of a given business entity. B) Shows the current market value of the owners' equity in the business at the balance sheet date. C) Assists creditors in evaluating the debt-paying ability of a business by showing the assets and liabilities of the business, plus the assets and liabilities of its owner (or owners). D) Shows the assets, liabilities, and owners' equity of a business entity, valued in conformity with generally accepted accounting principles.

67)

Which of the following is correct if a company purchases equipment for $70,000 cash? A) B) C) D)

68)

Total assets will increase by $70,000. Total assets will decrease by $70,000. Total assets will remain the same. Total owners' equity will decrease.

If a company purchases equipment for $65,000 by issuing a note payable: A) B) C) D)

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Total assets will increase by $65,000. Total assets will decrease by $65,000. Total assets will remain the same. Total owners' equity will decrease.

69)

If a company has a profit: A) B) C) D)

70)

Assets will be equal to liabilities plus owners' equity. Assets will be less than liabilities plus owners' equity. Assets will be greater than liabilities plus owners' equity. Owners' equity will be greater than its assets.

Capital stock represents:

A) The amount invested in the business by stockholders when shares of stock were initially issued by a corporation. B) The owners' equity for a business organized as a corporation. C) The owners' equity accumulated through profitable operations that have not been paid out as dividends. D) The price paid by the current owners to acquire shares of stock in the corporation, regardless of whether they bought the shares directly from the corporation or from another stockholder.

71) The balance sheet item that represents the portion of owners' equity resulting from profitable operations of the business is: A) B) C) D)

72)

Accounts receivable. Cash. Capital stock. Retained earnings.

Retained earnings appears on:

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A) B) C) D)

The income statement. The balance sheet. The statement of cash flows. All three of the financial statements.

73) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 17,500 $ 243,000 ? $ 183,000 $ 163,000

Accounts Receivable Cash Equipment Notes Payable

$ 43,000 ? $ 123,000 $ 193,000

If Capital Stock is $263,000, what is the December 31, Year 1 cash balance? A) B) C) D)

$87,500. $95,500. $44,500. $636,500.

74) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 16,000 240,000 ? 180,000 160,000

Accounts Receivable Cash Equipment Notes Payable

$ 40,000 ? 120,000 190,000

If Capital Stock is $260,000, what is the December 31, Year 1 cash balance?

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A) B) C) D)

$86,000. $94,000. $46,000. $686,000.

75) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 11,000 $ 230,000 ? $ 170,000 $ 150,000

Accounts Receivable Cash Equipment Notes Payable

$ 30,000 ? $ 110,000 $ 180,000

If Capital Stock is $310,000, total assets of Braun Corporation at December 31, Year 1, amounts to: A) B) C) D)

$651,000. $881,000. $681,000. $91,000.

76) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 16,000 240,000 ? 180,000 160,000

Accounts Receivable Cash Equipment Notes Payable

$ 40,000 ? 120,000 190,000

If Capital Stock is $320,000, total assets of Braun Corporation at December 31, Year 1, amounts to:

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A) B) C) D)

$686,000. $926,000. $726,000. $106,000.

77) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 14,500 $ 237,000 ? $ 177,000 $ 157,000

Accounts Receivable Cash Equipment Notes Payable

$ 37,000 ? $ 117,000 $ 187,000

If Cash at December 31, Year 1, is $83,000, Capital Stock is: A) B) C) D)

$255,500. $292,500. $606,500. $165,000.

78) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 16,000 240,000 ? 180,000 160,000

Accounts Receivable Cash Equipment Notes Payable

$ 40,000 ? 120,000 190,000

If Cash at December 31, Year 1, is $86,000, Capital Stock is:

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A) B) C) D)

$260,000. $300,000. $620,000. $168,000.

79) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 17,500 $ 243,000 ? $ 183,000 $ 163,000

Accounts Receivable Cash Equipment Notes Payable

$ 43,000 ? $ 123,000 $ 193,000

If Cash at December 31, Year 1, is $29,000, total owners' equity is: A) B) C) D)

$163,000. $373,500. $621,000. $410,500.

80) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 16,000 240,000 ? 180,000 160,000

Accounts Receivable Cash Equipment Notes Payable

$ 40,000 ? 120,000 190,000

If Cash at December 31, Year 1, is $26,000, total owners' equity is:

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A) B) C) D)

$160,000. $366,000. $606,000. $400,000.

81) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 12,000 $ 232,000 ? $ 172,000 $ 152,000

Accounts Receivable Cash Equipment Notes Payable

$ 32,000 ? $ 112,000 $ 182,000

If Cash at December 31, Year 1, is $58,000, total assets amounts to: A) B) C) D)

$574,000. $758,000. $618,000. $606,000.

82) At December 31, Year 1, the accounting records of Braun Corporation contain the following items: Accounts Payable Land Capital Stock Building Retained Earnings

$ 16,000 240,000 ? 180,000 160,000

Accounts Receivable Cash Equipment Notes Payable

$ 40,000 ? 120,000 190,000

If Cash at December 31, Year 1, is $66,000, total assets amounts to:

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A) B) C) D)

$606,000. $806,000. $662,000. $646,000.

83) At December 31, Year 1, the accounting records of Hercules Manufacturing, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 12,000 90,000 250,000 135,000 ?

Accounts Receivable Cash Equipment Capital Stock

$ 30,000 7,000 ? 188,000

If total assets of Hercules Manufacturing, Incorporated are $556,000, Equipment is carried in Hercules Manufacturing accounting records at: A) B) C) D)

$377,000. $179,000. $150,000. $90,000.

84) At December 31, Year 1, the accounting records of Hercules Manufacturing, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 12,000 90,000 250,000 135,000 ?

Accounts Receivable Cash Equipment Capital Stock

$ 30,000 7,000 ? 188,000

If total assets of Hercules Manufacturing, Incorporated are $556,000, Retained Earnings at December 31, Year 1, must be:

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A) B) C) D)

$811,000. $180,000. $221,000. $335,000.

85) At December 31, Year 1, the accounting records of Hercules Manufacturing, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 12,000 90,000 250,000 135,000 ?

Accounts Receivable Cash Equipment Capital Stock

$ 30,000 7,000 ? 188,000

If Retained Earnings at December 31, Year 1, is $140,000, total assets amounts to: A) B) C) D)

$98,000. $377,000. $475,000. $188,000.

86) At December 31, Year 1, the accounting records of Hercules Manufacturing, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 12,000 90,000 250,000 135,000 ?

Accounts Receivable Cash Equipment Capital Stock

$ 30,000 7,000 ? 188,000

If Retained Earnings at December 31, Year 1, is $100,000, Equipment is carried in Hercules Manufacturing, Incorporated accounting records at:

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A) B) C) D)

$42,000. $58,000. $43,500. $345,000.

87) At December 31, Year 1, the accounting records of Hercules Manufacturing, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 12,000 90,000 250,000 135,000 ?

Accounts Receivable Cash Equipment Capital Stock

$ 30,000 7,000 ? 188,000

Assume that the Equipment shown above was acquired by the business five years ago and has a book value of $156,000, but has a current appraised value of $200,000. Hercules Manufacturing’s Retained Earnings at December 31, Year 1, amounts to: A) B) C) D)

$533,000. $345,000. $198,000. $356,000.

88) At December 31, Year 1 the accounting records of Gordon, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 2,500 30,000 31,250 ? 125,000

Accounts Receivable Cash Equipment Capital Stock

$ 18,750 ? 40,000 12,500

If the Notes Payable is $10,000, the December 31, Year 1 cash balance is:

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A) B) C) D)

$60,000. $160,000. $30,000. $20,000.

89) At December 31, Year 1 the accounting records of Gordon, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 2,500 30,000 31,250 ? 125,000

Accounts Receivable Cash Equipment Capital Stock

$ 18,750 ? 40,000 12,500

If the Notes Payable balance is $25,000, then the total assets of Gordon, Incorporated at December 31, Year 1 amount to: A) B) C) D)

$27,500. $152,500. $120,000. $165,000.

90) At December 31, Year 1 the accounting records of Gordon, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 2,500 30,000 31,250 ? 125,000

Accounts Receivable Cash Equipment Capital Stock

$ 18,750 ? 40,000 12,500

If the Cash balance at December 31, Year 1 is $67,500, the Notes Payable balance is:

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A) B) C) D)

$118,750. $47,500. $137,500. $140,000.

91) At December 31, Year 1 the accounting records of Gordon, Incorporated contain the following items: Accounts Payable Land Building Notes Payable Retained Earnings

$ 2,500 30,000 31,250 ? 125,000

Accounts Receivable Cash Equipment Capital Stock

$ 18,750 ? 40,000 12,500

If the Cash balance at December 31, Year 1 is $62,500 then Total Liabilities amounts to: A) B) C) D)

$42,500. $140,000. $45,000. $182,500.

92) Which of the following is correct if at the end of Crystal Imports’ first year of operations, Assets are $800,000 and Owners' Equity is $720,000? A) B) C) D)

The owner (s) must have invested $800,000 to start the business. The business must be operating profitably. Liabilities are $80,000. Liabilities are $1,520,000.

93) During the current year, the assets of Wheatley’s increased by $362,000, and the liabilities increased by $260,000. The owners' equity in the business must have:

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A) B) C) D)

Decreased by $102,000. Decreased by $622,000. Increased by $102,000. Increased by $622,000.

94) The total liabilities of Hogan’s Company on the balance sheet are $270,000; this amount is equal to three-fourths of the total assets. What is the amount of owners' equity? A) B) C) D)

$202,500. $90,000. $360,000. $630,000.

95) Twenty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $380,000. What is the amount of owners' equity? A) B) C) D)

$76,000. $1,900,000. $1,520,000. $2,280,000.

96) Thirty percent of the total assets of Shanahan Corporation have been financed through borrowing. The total liabilities of the company are $600,000. What is the amount of owners' equity? A) B) C) D)

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$180,000. $2,000,000. $1,400,000. $2,600,000.

97) A transaction caused a $60,000 increase in both total assets and total liabilities. This transaction could have been which of the following? A) Purchase for office equipment for $60,000 cash. B) Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note payable for the balance. C) Repayment of a $60,000 bank loan. D) Investment of $60,000 cash in the business by the owner.

98) If $9,600 cash and a $31,000 note payable are given in exchange for some office machines to be used in a business: A) B) C) D)

Total assets are increased. Total liabilities are decreased. Total assets are decreased. The owners' equity is increased.

99) If during the current year, liabilities of Corbett's Store increased by $224,000 and owners' equity increased by $162,000, then: A) B) C) D)

Assets at the end of the year total $386,000. Assets at the end of the year total $62,000. Assets increased during the year by $386,000. Assets decreased during the year by $62,000.

100) If during the current year, liabilities of Corbett’s Store increased by $220,000 and owners' equity increased by $160,000, then: A) B) C) D)

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Assets at the end of the year total $380,000. Assets at the end of the year total $60,000. Assets increased during the year by $380,000. Assets decreased during the year by $60,000.

101) If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners' equity increased by $75,000, then: A) B) C) D)

Assets at the end of the year total $125,000. Assets at the end of the year total $25,000. Assets increased during the year by $25,000. Assets decreased during the year by $125,000.

102) At the end of the current year, the owners' equity in Barclay Bakery is $236,000. During the year, the assets of the business had increased by $110,000 and the liabilities had increased by $67,000. Owners' equity at the beginning of the year must have been: A) B) C) D)

$193,000. $169,000. $279,000. $413,000.

103) At the end of the current year, the owners' equity in Barclay Bakery is $246,000. During the year, the assets of the business had increased by $120,000 and the liabilities had increased by $72,000. Owners' equity at the beginning of the year must have been: A) B) C) D)

$198,000. $174,000. $284,000. $438,000.

104) At the end of the current year, the owners' equity in Durante Company is $354,000. During the year, the assets of the business had increased by $62,000 and the liabilities had increased by $115,000. Owners' equity at the beginning of the year must have been:

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A) B) C) D)

$407,000. $301,000. $531,000. $177,000.

105) At the end of the current year, the owners' equity in Durante Company is $360,000. During the year, the assets of the business had increased by $68,000 and the liabilities had increased by $118,000. Owners' equity at the beginning of the year must have been: A) B) C) D)

$410,000. $310,000. $546,000. $174,000.

106) During the current year, the assets of Quality Stairs increased by $166,000 and the liabilities decreased by $6,000. If the owners' equity in the business is $466,000 at the end of the year, the owners' equity at the beginning of the year must have been: A) B) C) D)

$626,000. $294,000. $638,000. $306,000.

107) During the current year, the assets of Quality Stairs increased by $175,000 and the liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of the year, the owners' equity at the beginning of the year must have been: A) B) C) D)

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$335,000. $285,000. $665,000. $615,000.

108)

An expense is best defined as: A) B) C) D)

109)

Any payment of cash for the benefit of the company. Past, present, or future payments of cash required to generate revenues. Past payments of cash required to generate revenues. Future payments of cash required to generate revenues.

A revenue transaction may result in all of the following except: A) B) C) D)

An increase in assets. An increase in owners' equity. A positive cash flow in either the past, present, or future. An increase in liabilities.

110) Astoria Company had the following transactions during the month of August Year 1:(1) Cash received from bank loans was $27,000.(2) Dividends of $10,200 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $40,500(4) Expenses incurred and paid were $29,500.What amount of net income will be reported on an income statement for the month of August? A) B) C) D)

$27,000. $11,000. $0. $40,500.

111) Astoria Company had the following transactions during the month of August Year 1:(1) Cash received from bank loans was $20,000.(2) Dividends of $9,500 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $33,500.(4) Expenses incurred and paid were $26,000.What amount of net income will be reported on an income statement for the month of August?

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A) B) C) D)

$20,000. $7,500. $0. $33,500.

112) Astoria Company had the following transactions during the month of August Year 1:(1) Cash received from bank loans was $28,000.(2) Dividends of $10,300 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $41,500(4) Expenses incurred and paid were $30,000.At the beginning of August, Year 1, owners' equity in Astoria was $168,000. Given the transactions of August, what will be the owners' equity be at the end of the month? A) B) C) D)

$179,500. $157,700. $209,500. $169,200.

113) Astoria Company had the following transactions during the month of August Year 1:(1) Cash received from bank loans was $20,000.(2) Dividends of $9,500 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $33,500.(4) Expenses incurred and paid were $26,000.At the beginning of August, Year 1, owners' equity in Astoria was $160,000. Given the transactions of August, what will be the owners' equity be at the end of the month? A) B) C) D)

$167,500. $150,500. $193,500. $158,000.

114) Astoria Company had the following transactions during the month of August Year 1:(1) Cash received from bank loans was $25,000.(2) Dividends of $10,000 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $38,500(4) Expenses incurred and paid were $28,500.For the month of August, net cash flows from operating activities for Astoria were:

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A) B) C) D)

$38,500. $10,000. $25,000. $28,500.

115) Astoria Company had the following transactions during the month of August Year 1:(1) Cash received from bank loans was $20,000.(2) Dividends of $9,500 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $33,500.(4) Expenses incurred and paid were $26,000.For the month of August, net cash flows from operating activities for Astoria were: A) B) C) D)

$33,500. $7,500. $20,000. $26,000.

116) Waldorf Company had the following transactions during the month of October Year 1:(1) Cash received from bank loans was $60,000.(2) Dividends of $18,500 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $100,500.(4) Expenses incurred and paid were $78,000.What amount of net income will be reported on an income statement for the month of October? A) B) C) D)

$18,500. $22,500. $78,000. $100,500.

117) Waldorf Company had the following transactions during the month of October Year 1:(1) Cash received from bank loans was $60,000.(2) Dividends of $18,500 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $100,500.(4) Expenses incurred and paid were $78,000.At the beginning of October, owners' equity in Waldorf was $480,000. Given the transactions in October Year 1, what will be the owners' equity at the end of the month?

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A) B) C) D)

$480,000. $484,000. $502,500. $580,500.

118) Waldorf Company had the following transactions during the month of October Year 1:(1) Cash received from bank loans was $60,000.(2) Dividends of $18,500 were paid to stockholders in cash.(3) Revenues earned and received in cash amounted to $100,500.(4) Expenses incurred and paid were $78,000.For the month of October, net cash flows from operating activities for Waldorf were: A) B) C) D)

119)

Which of the following activities is not a category into which cash flows are classified? A) B) C) D)

120)

$18,500. $22,500. $78,000. $100,500.

Marketing activities. Operating activities. Financing activities. Investing activities.

A strong statement of cash flows indicates that significant cash is being generated by: A) B) C) D)

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Operating activities. Financing activities. Investing activities. Effective tax planning.

121) During the month of May, Henderson Company had the following transactions:(1) Revenues of $59,000 were earned and received in cash.(2) Bank loans of $8,250 were paid off.(3) Equipment of $19,000 was purchased.(4) Expenses of $36,300 were paid.(5) Stockholders purchased additional shares for $21,000 cash.A statement of cash flows for May would report net cash flows from operating activities of: A) B) C) D)

$59,000. $16,450. $22,700. $31,750.

122) During the month of May, Henderson Company had the following transactions:(1) Revenues of $60,000 were earned and received in cash.(2) Bank loans of $9,000 were paid off.(3) Equipment of $20,000 was purchased.(4) Expenses of $36,800 were paid.(5) Stockholders purchased additional shares for $22,000 cash.A statement of cash flows for May would report net cash flows from operating activities of: A) B) C) D)

$60,000. $16,200. $23,200. $20,000.

123) During the month of August, Boyce Company had the following transactions:(1) Revenues of $110,000 were earned and received in cash.(2) Bank loans of $10,500 were paid off.(3) Equipment of $30,000 was purchased with cash.(4) Expenses of $68,600 were paid.(5) Stockholders purchased additional shares for $34,000 cash.A statement of cash flows for August, would report net cash flows from operating activities of: A) B) C) D)

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$23,500. $34,900. $30,000. $41,400.

124) During the month of August, Boyce Company had the following transactions:(1) Revenues of $120,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) Equipment of $40,000 was purchased with cash.(4) Expenses of $73,600 were paid.(5) Stockholders purchased additional shares for $44,000 cash.A statement of cash flows for August, would report net cash flows from operating activities of: A) B) C) D)

$26,000. $32,400. $40,000. $46,400.

125) During the month of August, Boyce Company had the following transactions:(1) Revenues of $124,000 were earned and received in cash.(2) Bank loans of $21,000 were paid off.(3) Equipment of $44,000 was purchased with cash.(4) Expenses of $75,600 were paid.(5) Stockholders purchased additional shares for $48,000 cash.A statement of cash flows for August, would report net cash flows from financing activities of: A) B) C) D)

$31,400. $27,000. $44,000. $48,400.

126) During the month of August, Boyce Company had the following transactions:(1) Revenues of $120,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) Equipment of $40,000 was purchased with cash.(4) Expenses of $73,600 were paid.(5) Stockholders purchased additional shares for $44,000 cash.A statement of cash flows for August, would report net cash flows from financing activities of: A) B) C) D)

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$40,000. $26,000. $46,400. $32,400.

127) During the month of August, Boyce Company had the following transactions:(1) Revenues of $114,000 were earned and received in cash.(2) Bank loans of $13,500 were paid off.(3) Equipment of $34,000 was purchased with cash.(4) Expenses of $70,600 were paid.(5) Stockholders purchased additional shares for $38,000 cash.A statement of cash flows for August, would report net cash flows from investing activities of: A) B) C) D)

$24,500. $33,900. $34,000. $43,400.

128) During the month of August, Boyce Company had the following transactions:(1) Revenues of $120,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) Equipment of $40,000 was purchased with cash.(4) Expenses of $73,600 were paid.(5) Stockholders purchased additional shares for $44,000 cash.A statement of cash flows for August, would report net cash flows from investing activities of: A) B) C) D)

($26,000). $32,400. ($40,000). $46,400.

129) During the month of August, Boyce Company had the following transactions:(1) Revenues of $114,000 were earned and received in cash.(2) Bank loans of $13,500 were paid off.(3) Equipment of $34,000 was purchased with cash.(4) Expenses of $70,600 were paid.(5) Stockholders purchased additional shares for $38,000 cash.A statement of cash flows for August, would report an increase in cash of: A) B) C) D)

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$24,500. $33,900. $34,000. $43,400.

130) During the month of August, Boyce Company had the following transactions:(1) Revenues of $120,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) Equipment of $40,000 was purchased with cash.(4) Expenses of $73,600 were paid.(5) Stockholders purchased additional shares for $44,000 cash.A statement of cash flows for August, would report an increase in cash of: A) B) C) D)

$26,000. $32,400. $40,000. $46,400.

131) During the month of February, Farness Company had the following transactions:(1) Revenues of $225,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) New bank loans of $15,000 were incurred.(4) Equipment of $40,000 was purchased with cash.(5) Equipment was sold for its book value of $36,000. Cash was received.(6) Expenses of $171,400 were paid.(7) Stockholders purchased additional shares for $50,000 cash.A statement of cash flows for February, would report net cash flows from operating activities of: A) B) C) D)

$4,000. $35,600. $53,600. $96,600.

132) During the month of February, Farness Company had the following transactions:(1) Revenues of $225,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) New bank loans of $15,000 were incurred.(4) Equipment of $40,000 was purchased with cash.(5) Equipment was sold for its book value of $36,000. Cash was received.(6) Expenses of $171,400 were paid.(7) Stockholders purchased additional shares for $50,000 cash.A statement of cash flows for February, would report net cash flows from financing activities of: A) $4,000. B) $47,000. C) $83,000. D) $96,600.

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133) During the month of February, Farness Company had the following transactions:(1) Revenues of $225,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) New bank loans of $15,000 were incurred.(4) Equipment of $40,000 was purchased with cash.(5) Equipment was sold for its book value of $36,000. Cash was received.(6) Expenses of $171,400 were paid.(7) Stockholders purchased additional shares for $50,000 cash.A statement of cash flows for February, would report net cash flows from investing activities of: A) ($4,000). B) $47,000. C) $53,600. D) $76,000.

134) During the month of February, Farness Company had the following transactions:(1) Revenues of $225,000 were earned and received in cash.(2) Bank loans of $18,000 were paid off.(3) New bank loans of $15,000 were incurred.(4) Equipment of $40,000 was purchased with cash.(5) Equipment was sold for its book value of $36,000. Cash was received.(6) Expenses of $171,400 were paid.(7) Stockholders purchased additional shares for $50,000 cash.A statement of cash flows for February, would report an increase in cash of: A) ($4,000). B) $47,000. C) $53,600. D) $96,600.

135)

If cash flows from operating activities is a positive amount, then: A) B) C) D)

The amount will be shown on the statement of cash flows in parentheses. The company must have had a net profit for the year. The company must have paid off more debts than it earned during the year. The company may still have a decrease in the total amount of cash for the period.

136) The change in owners' equity due to only revenue and expense transactions is explained by the: Version 1

A) B) C) D)

Statement of cash flows. Statement of financial position. Income statement. Tax return.

137) Which one of the following is not considered as one of the three primary financial statements? A) B) C) D)

138)

The way in which financial statements relate is known as: A) B) C) D)

139)

Solvency. Objectivity. Articulation. Entity.

Which business organization is recognized as a separate legal entity under the law? A) B) C) D)

140)

Balance sheet. Income statement. Statement of cash flows. Statement of budgeting activities.

Corporation. Sole proprietorship. Partnership. Allbusiness organizations are separate legal entities.

Retained earnings is:

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A) B) C) D)

141)

Which of the following best describes liquidity? A) B) C) D)

142)

The ability to increase the value of retained earnings. The ability to pay the debts of the company as they become due. Being able to buy everything the company requires for cash. Purchasing everything the company requires on credit.

Profitability may be defined as: A) B) C) D)

143)

The positive cash flows of a company. The net worth of a company. The owners' equity that has accumulated as a result of profitable operations. Equal to the total assets of a company.

The ability to pay the debts of the company as they become due. The ability to increase retained earnings. Distributing dividends out of retained earnings. Having excess cash.

The principle of adequate disclosure means that a company should disclose:

A) Only the important monetary information. B) All confidential information regarding the company. C) Any financial facts that a reasonably informed person would consider necessary for the proper interpretation of the financial statements. D) Only subsequent events.

144)

Which of the following statements regarding liquidity and profitability is not true?

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A) B) C) D) profitably.

145)

If a business is unable to pay its debts as they come due, it is operating unprofitably. A business may be liquid, yet operate unprofitably for several years. A business may operate profitably, yet be unable to meet its obligations. In order to survive in the long run, a business must both remain liquid and operate

The concept of adequate disclosure means that:

A) The accounting department of a business must inform management of the accounting principles used in preparing the financial statements. B) The company must inform users of any significant facts necessary for proper interpretation of the financial statements, including events occurring after the financial statement date. C) The independent auditors must disclose in the financial statements any and all errors detected in the company's accounting records. D) The financial statements should include a comprehensive list of each transaction that occurred during the year.

146) According to the Sarbanes-Oxley Act, CEOsand CFOsmust certify to the accuracy of their company's financial statements: A) B) C) D) CPAsdo.

147)

Monthly and Quarterly. Quarterly and Annually. Monthly and Annually. CEOsand CFOsare not required to certify to the company's financial statement; only

A strong statement of financial position shows:

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A) B) C) D)

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Large amounts of liquid assets relative to the liabilities due in the near future. Large amounts of debt relative to stockholders’ equity. That cash is being generated by operations. That profits are being generated by operations.

Answer Key Test name: Chapter 02 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) TRUE 4) TRUE 5) TRUE 6) FALSE 7) TRUE 8) FALSE 9) TRUE 10) TRUE 11) FALSE 12) TRUE 13) FALSE 14) FALSE 15) FALSE 16) FALSE 17) TRUE 18) FALSE 19) FALSE 20) TRUE 21) FALSE 22) FALSE 23) TRUE 24) FALSE 25) FALSE 26) TRUE Version 1

27) FALSE 28) TRUE 29) TRUE 30) TRUE 31) FALSE 32) FALSE 33) B 34) C 35) C 36) C 37) B 38) D 39) A 40) B 41) C 42) D 43) B 44) A 45) A 46) A 47) A 48) C 49) A 50) A 51) A 52) D 53) C 54) A 55) A 56) A Version 1

57) C 58) A 59) A 60) B 61) A 62) B 63) C 64) C 65) B 66) D 67) C 68) A 69) A 70) A 71) D 72) B 73) C 74) C 75) A 76) A 77) B 78) B 79) D 80) D 81) D 82) D 83) B 84) C 85) C 86) B Version 1

87) C 88) C 89) D 90) B 91) C 92) C 93) C 94) B 95) C 96) C 97) B 98) A 99) C 100) C 101) C 102) A 103) A 104) A 105) A 106) B 107) B 108) B 109) D 110) B 111) B 112) D 113) D 114) B 115) B 116) B Version 1

117) B 118) B 119) A 120) A 121) C 122) C 123) D 124) D 125) B 126) B 127) C 128) C 129) B 130) B 131) C 132) B 133) A 134) D 135) D 136) C 137) D 138) C 139) A 140) C 141) B 142) B 143) C 144) A 145) B 146) B Version 1

147) A

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CHAPTER 3: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine technical accounting terms introduced in this chapter:Matching principleDouble-entryAccounting cycleDebitCreditLedgerTrial balanceJournalConservatismMatch each term to its definition below.(A.) The accounting record in which transactions are initially recorded. (B.) A concept designed to avoid overstatement of the financial strength of a company. (C.) A schedule prepared to determine the equality of the debit and credit amounts in the ledger. (D.) An amount entered in the right side of a ledger account. (E.) The sequence of procedures involved in recording transactions, processing the information in the accounting system, and summarizing the information in the form of financial statements. (F.) The accounting record that contains a separate account for each type of asset and liability, and for each element of owners' equity appearing in the balance sheet. (G.) The system of accounting in which every business transaction is recorded by equal dollar amounts of debit and credit entries.

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2) On July 20, Year 1, Mollie Rose began a new business called MR Printing, which provides typing, duplicating, and printing services. The following six transactions were completed by the business during July, Year 1. a) Issued to Rose 1,000 shares of capital stock in exchange for her investment of $200,000 cash. b) Purchased land and a small building for $450,000, paying $165,000 cash and signing a note payable for the balance. The land was considered to be worth $240,000 and the building $210,000. c) Purchased office equipment for $30,000 from Quality Interiors, Incorporated. Paid $17,000 cash and agreed to pay the balance within 60 days. d) Purchased a motorcycle on credit for $3,400 to be used for making deliveries to customers. Mollie agreed to make payment to Spokes, Incorporated. within 10 days. e) Paid in full the account payable to Spokes, Incorporated. f) Borrowed $30,000 from a bank and signed a note payable due in six months. Required: (1) Record the above transactions directly in the T accounts below. Identify each entry in a T account with the letter shown for the transaction. Cash Debit Credit

Office Equipment Debit Credit

Notes Payable Debit Credit

Land Debit Credit

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Delivery Equipment Debit Credit

Accounts Payable Debit Credit

Buildings Debit Credit

Capital Stock Debit Credit

</div>

(2) Prepare a trial balance at July 31, Year 1.

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3) On May 15, Year 1, George Manny began a new business, called Sounds, Incorporated, a recording studio to be rented out to artists on an hourly or daily basis. The following six transactions were completed by the business during May, Year 1: a) Issued to Manny 5,000 shares of capital stock in exchange for his investment of $200,000 cash. b) Purchased land and a building for $410,000, paying $100,000 cash and signing a note payable for the balance. The land was considered to be worth $310,000 and the building $100,000. c) Installed special insulation and soundproofing throughout most of the building at a cost of $120,000. Paid $32,000 cash and agreed to pay the balance in 60 days. Manny considers these items to be additional costs of the building. (D.) Purchased office furnishings costing $18,000 and recording equipment costing $88,400 from Music Supplies. Sounds paid $28,000 cash with the balance due in 30 days. d) Borrowed $180,000 from a bank by signing a note payable. e) Paid the full amount of the liability to Music Supplies arising from the purchases in D above. Required: (1) Record the above transactions directly in the T accounts below. Identify each entry in a T account with the letter shown for the transaction. Cash Debit Credit

Office Furnishings Debit Credit

Notes Payable Debit Credit

Land Debit Credit

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Recording Equipment Debit Credit

Accounts Payable Debit Credit

Buildings Debit Credit

Capital Stock Debit Credit

(2) Prepare a trial balance at May 31, Year 1.

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4) A list of accounts for Harding Company is provided below.1.Cash2.Acccounts Receivable3.Land4.Building5.Office Equipment6.Notes Payable7.Accounts Payable8.Capital Stock9.Retained EarningsRequired:For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.) Transaction Example: Purchased office equipment, paying part cash, with the balance due on account A. Purchased land and a building, paying part cash and issuing a note payable for the balance of the purchase price B. Sold a piece of the company's office equipment at cost; received part of the proceeds in cash, with the balance due in 30 days C. Collected an account receivable

Account(s) Debited 5

Account(s) Credited 1,7

D. Borrowed money from a bank and signed a note payable due in one year E. Paid an account payable F. Issued capital stock in exchange for cash

5) Listed below are accounts of Global Company, each identified by a number.1.Cash2.Acccounts Receivable3.Land4.Building5.Delivery Equipment6.Notes Payable7.Accounts Payable8.Capital Stock9.Retained EarningsRequired: For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.) Transaction

Account(s) Debited Example: Purchased delivery equipment, paying 5 part cash and charging the balance on account

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Account(s) Credited 1,7

A. Paid an account payable B. Collected an account receivable C. Issued capital stock in exchange for cash D. Sold some delivery equipment at cost; received part of the proceeds in cash, with the balance due in 60 days E. Purchased land and building paying part cash and signing a note payable for the balance F.Borrowed money from a bank and signed a note payable due in six months

6) Fieldstone, Incorporated had the following transactions during the month of March, the first month of operations for the business:The corporation issued 12,000 shares of capital stock to Sandy Fieldstone in exchange for $120,000 cash.Purchased $73,000 of equipment; made an $18,000 down payment and signed a note payable for the balance.Made payment of $9,000 on the amount owed for equipment.Required: (A) Compute the balance in the Cash account at the end of March. (B) What are the total assets of Fieldstone, Incorporated at the end of March? (C) Compute the balance in the Notes Payable account at the end of March. (D) What is the total amount of owners' equity at the end of March?

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7) Clark Plumbing had the following transactions during the month of June, the first month of operations for the business:The corporation issued 12,000 shares of capital stock to Bill Clark in exchange for his investment of $72,000 cash.Purchased $36,000 of equipment; made an $8,000 down payment and signed a note payable for the balance.Made payment of $4,000 on the amount owed for equipment. (A) Compute the balance in the Cash account at the end of June. (B) What are the total assets of Clark Plumbing at the end of June? (C) Compute the balance in the Notes Payable account at the end of June. (D) What is the total amount of owners' equity at the end of June?

8) Items in the balance sheet are classified into three categories: assets, liabilities, and owners' equity.

Required: (A) Identify by name two ledger accounts in each of the first two categories above (assets and liabilities) and one owners' equity account. State whether each account would normally have a debit or credit balance. (B) Describe briefly the rules of debits and credits as applied to the three categories of balance sheet accounts: asset accounts, liability accounts, and owners' equity accounts.

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9) The accounting system of most businesses, whether manual or computer-based, is some form of a double-entry system of accounting. Required: (A) What is meant by the term "double-entry accounting"? (B) Explain how the double-entry system is applied in accounting for the following transaction: Majestic Company purchases a piece of equipment costing $6,000, paying $3,000 cash with the balance of the purchase price to be paid within 60 days.

10)

Baumann Bathrooms entered into the following transactions:

March 1 Borrowed $90,000 cash from the bank by signing a 90-day note payable. March 3 Issued an additional 5,000 shares of capital stock in exchange for $40,000 cash. March 4 Purchased an adjacent vacant lot for use as parking space. The price was $70,000, of which $30,000 was paid in cash; a note payable was issued for the balance. March 8 Acquired shop equipment from Elite Baths for $5,400 cash. March 8 Collected an account receivable of $2,900 from a customer, Beekman Art Shoppe. March 9 Issued a check for $1,060 in full payment of an account payable to Austin Industries, Incorporated.

Required: Enter each transaction in the two-column journal provided below. Include a brief explanation of the transaction as part of each journal entry. Date 20__

General Journal

Debit

Credit

March 1

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March 3

March 4

March 8

March 9

11)

Festive Parties, Incorporated, entered into the following transactions:

June 2 Collected an account receivable of $860 from a customer, East, Incorporated. June 5 Issued a check for $430 in full payment of an account payable to North, Incorporated. June 9 Borrowed $12,000 cash from the bank by signing a 120-day note

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June 12 June 15 June 21

payable. Issued an additional 3,000 shares of capital stock in exchange for $45,000 cash. Purchased equipment for the business. The price was $13,000, of which $3,000 was paid in cash; a note payable was issued for the balance. Acquired office furniture from West Company for $1,100, on account.

Required:Enter the following transactions in the two-column journal of Festive Parties, Incorporated. Include a brief explanation of the transaction as part of each journal entry. Date 20__

General Journal

Debit

Credit

June 2

June 5

June 9

June 12

June 15

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June 21

12) Precision Grading Company was organized to grade construction sites and entered into the following transactions: On June 1, owner Dave Precision deposited $90,000 in a new bank account opened in the name of the business in exchange for stock.On June 3, the company acquired grading equipment costing $89,000, paying $43,000 cash and signing a note payable for the balance.On June 10, the company paid $13,000 of the amount owed for equipment acquired on June 3. Required: Journalize these transactions and post to the ledger accounts using the forms provided below. General Journal Date

Account Titles & Explanation

Cash Date

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Explanation

Page 1 Debit

Credit

Account Number 1 Debit

Credit

Balance

Grading Equipment Date

Explanation

Notes Payable Date

Explanation

Capital Stock Date

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Explanation

Account Number 25 Debit

Credit

Balance

Account Number 40 Debit

Credit

Balance

Account Number 50 Debit

Credit

Balance

13) Geller Landscaping was organized on April 5 and entered into the following transactions:On April 5, the corporation issued 20,000 shares of capital stock to Larry Geller in exchange for $60,000 cash.On April 8, the business acquired gardening equipment by paying cash of $26,000 and signing a $20,000 note payable, due in four monthly installments of $5,000 each, beginning on April 15.On April 15, Larry Geller made the first payment on the note payable by writing a check from the business bank account.Required:Journalize these transactions and post to the ledger accounts using the forms provided below.

General Journal Date

Account Titles & Explanation

Cash Date

Explanation

Grading Equipment Date

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Explanation

Page 1 Debit

Credit

Account Number 1 Debit

Credit

Balance

Account Number 25 Debit

Credit

Balance

Notes Payable Date

Explanation

Capital Stock Date

Explanation

Account Number 40 Debit

Credit

Balance

Account Number 50 Debit

Credit

Balance

14) During April, Grinnel Paving, Incorporated acquired a large quantity of crushed stone on account with payment due in 90 days. The stone was used in May when Grinnel Paving, Incorporated completed a large parking lot for a local shopping center. In early July, Grinnel Paving, Incorporated. paid the supplier from which the crushed stone had been purchased. Required:(1) In which month should Grinnel Paving, Incorporated recognize the cost of the crushed stone as an expense? (2) What accounting principle provides the justification for the answer?

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15) The following is a list of accounts and their amounts for Hayden's Company (in alphabetical order) as of December 31, Year 1: Accounts Payable Accounts Receivable Advertising expense Building Capital stock Cash Dividends Land Notes Payable Revenue Retained Earnings Supplies Utilities expense Wage expense Wages Payable

5,000 3,000 400 18,000 14,100 6,500 1,600 26,000 15,000 31,000 ? 700 900 13,250 3,050

Required: Prepare a trial balance for Hayden Company as of December 31, Year 1.

16) As shown below, the following trial balance of Brian's Pickle Company, dated June 30, Year 1, does not balance. Debit Cash

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Credit

$ 21,860

Accounts Receivable

35,000

Supplies

3,640

Building

51,000

Notes Payable

$ 15,500

Owners' Equity

30,000

Retained Earnings

10,000

Revenue

39,500

Expenses Total

25,000 $ 136,500

$ 95,000

The following errors were discovered: 1. A purchase of supplies for cash was posted as $40 when it should have been $400. 2. The first two numbers of the amount for notes payable were transposed while being copied from the account balance to the trial balance. The correct amount of Notes Payable should be $51,500. 3. A collection of cash was debited to the cash account in the amount of $5,500 but was not credited to the revenue account. 4. A purchase of supplies for $725 on account was not recorded. Required: Prepare a corrected trial balance.

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Answer Key Test name: Chapter 03 Test Bank (Problem Material) 1) (A.) Journal; (B.) Conservatism; (C.) Trial balance; (D.) Credit; (E.) Accounting cycle; (F.) Ledger; (G.) Double-entry 2) (1) Cash Debit (a) (f)

200,000 30,000

Credit 165,000 17,000 3,400

(b) (c) (e)

44,600

</div> <div style=" display: inline-block; vertical-align: top;"> Delivery Equipment Debit Credit (d)

3,400

</div> <div style=" display: inline-block; vertical-align: top;"> Land Debit (b)

Credit

240,000

240,600

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</div> <div style=" display: inline-block; vertical-align: top;"> Notes Payable Debit Credit 285,000

(b)

30,000

(f)

315,000

</div> <div style=" display: inline-block; vertical-align: top;"> Buildings Debit Credit (b)

210,000

</div> <div style=" display: inline-block; vertical-align: top;"> Accounts Payable Debit Credit (e)

3,400

13,000 3,400

13,000

Office Equipment Debit Credit (c)

30,000 30,000

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</div> <div style=" display: inline-block; vertical-align: top;"> Capital Stock Debit Credit 200,000

(a)

200,000

(2) MR PRINTING Trial Balance July 31, Year 1 Debit Cash

$ 44,600

Land

240,000

Buildings

210,000

Office Equipment

30,000

Delivery Equipment

3,400

Notes Payable

Credit

$ 315,000

Accounts Payable

13,000

Capital Stock

200,000

Total

$ 528,000

3) (1) Cash Debit (a) (e)

200,000 180,000

Credit 100,000 32,000 28,000

(b) (c) (d)

78,400

(f)

</div><div style=" display: inline-block; vertical-align: top;"> Recording Equipment

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Debit (d)

Credit

88,400

</div><div style=" display: inline-block; vertical-align: top;"> Land Debit (b)

Credit

310,000

</div><div style=" display: inline-block; vertical-align: top;"> Notes Payable Debit Credit 310,000

(b)

180,000

(e)

</div><div style=" display: inline-block; vertical-align: top;"> Buildings Debit Credit (b)

100,000

(c)

120,000

</div><div style=" display: inline-block; vertical-align: top;"> Accounts Payable Debit Credit (f)

78,400 88,000 78,400

</div><div style=" display: inline-block; vertical-align: top;"> Office Equipment Debit Credit (d)

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18,000

</div><div style=" display: inline-block; vertical-align: top;"> Capital Stock Debit Credit 200,000

(a)

(2) SOUNDS,INCORPORATED Trial Balance May 31, Year 1 Debit Cash

$ 141,600

Land

310,000

Buildings

220,000

Office Furnishings

18,000

Recording Equipment

88,400

Notes Payable

Credit

$ 490,000

Accounts Payable

88,000

Capital Stock

200,000

Total

$ 778,000

4) A B C D E F

Account(s) Debited 3,4 1,2 1 1 7 1

Account(s) Credited 1,6 5 2 6 1 8

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A B C D E F

Account(s) Debited 7 1 1 1,2 3,4 1

Account(s) Credited 1 2 8 5 1,6 6

6) (A) $93,000 (B) $166,000 (C) $46,000 (D) $120,000Feedback: (A) Ending Cash balance = $120,000 − $18,000 − $9,000 = $93,000 (B) Total Assets = Cash $93,000 (from part a) + Equipment $73,000 = $166,000 (C) Ending Notes Payable balance = Note issued of $55,000 − Payment of $9,000 = $46,000 (D) Total owners' equity = $120,000, which is the amount of capital stock that was issued. Since this is the first month of operations and none of the transactions listed reported any revenue or expense, there are no retained earnings at this point.

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7) (A) $60,000 (B) $96,000 (C) $24,000 (D) $72,000 Feedback: (A) Ending Cash balance = $72,000 − $8,000 − $4,000 = $60,000 (B) Total Assets = Cash $60,000 (from part a) + Equipment $36,000 = $96,000 (C) Ending Notes Payable balance = Note issued of $28,000 − Payment of $4,000 = $24,000 (D) Total owners' equity = $72,000, which is the amount of capital stock that was issued. Since this is the first month of operations and none of the transactions listed reported any revenue or expense, there are no retained earnings at this point. 8) (A.) Student's answer should include two from asset and liability categories (other account titles are possible); they have been introduced to only two owner's equity accounts at this stage. Assets Cash Accounts Receivable Land

Liabilities Accounts Payable Notes Payable Salaries Payable

Building

Income Taxes Payable

Equipment

(All have credit balances)

Owners' Equity Capital Stock Retained Earnings (All have credit balances)

Supplies (All have debit balances)

(B.) Debit and credit rules for: Asset accounts

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Increases in assets are recorded by debits.

Decreases in assets are recorded by credits. Liability and ownners' Equity accounts

Increases in both liability and owners' equity accounts are recorded by credits. Decreases in both liability and owners' equity accounts are recorded by debits.

9) (A) The phrase "double-entry" refers to the need for both debit entries and credit entries, equal in dollar amount, to record every transaction. As a result of this double-entry system, the accounting equation always remains in balance. (B) This transaction is recorded with a debit to the asset Equipment for $6,000, a credit to the asset Cash for $3,000, and a credit to a liability Accounts Payable for $3,000. This accounting demonstrates that the transaction is recorded by an equal dollar amount ($6,000) of debit entries and credit entries. The accounting equation remains in balance: total assets have increased by $3,000 and total liabilities have increased by $3,000 as a result of this transaction. 10) Date 20__ March 1

General Journal

Cash

Debit

Credit

90,000

Notes Payable

90,000

Borrowed money from bank on 90-day note. March 3

Cash

40,000

Capital stock

40,000

Issued new captial stock March 4

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Land

70,000

Cash

30,000

Notes payable

40,000

Purchased land for parking lot March 8

Shop Equipment

5,400

Cash

5,400

Acquired shop equipment from Elite Baths March 8

Cash

2,900

Account Receivable

2,900

Collected from Beekman Art Shoppe. March 9

Account Payable

1,060

Cash

1,060

Paid in full amount due Austin Industries, Incorporated

11) Date 20__ June 2

General Journal

Cash

Debit

860

Account Receivable

June 5

Collected from customer, East, Incorporated Account Payable

860

430

Cash

June 9

Paid in full amount due North, Incorporated Cash

430

12,000

Notes payable

June 12

Borrowed money from bank on 120-day note. Cash Capital Stock

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Credit

12,000

45,000 45,000

Issued new capital stock June 15

Equipment

13,000

Cash

3,000

Notes payable

10,000

Purchased Equipment June 21

Office Furniture

1,100

Account Payable

1,100

Acquired office furniture from West Company.

12) General Journal Date

Account Titles & Explanation

Page 1 Ledger Page

Debit

90,000

Credit

20__ June 1

Cash Capital Stock

June 3

Issued capital stock in exchange for cash. Grading Equipment

90,000

89,000

Cash

43,000

Notes Payable

46,000

Purchased grading equipment. June 10

Notes Payable Cash

40 1

13,000 13,000

Paid off a portion of note payable.

13) GENERAL JOURNAL

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Page 1

Date

Account Titles & Explanation

Ledger Page

Debit

60,000

Credit

20__ April 5

Cash Capital Stock

April 8

Issued capital stock in exchange for cash. Grading Equipment

60,000

46,000

Cash

26,000

Notes Payable

20,000

Purchased grading equipment. April 15

Notes Payable

Cash

5,000

Made payment on liability for gardening equipment.

LEDGER Cash Date April 5

Explanation

Account Number 1 Ref 1

Debit 60,000

Credit

Balance 60,000

April 8

26,000

34,000

April 15

5,000

29,000

Grading Equipment Date April 8

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Explanation

Account Number 25 Ref 1

Debit 46,000

Credit

Balance 46,000

Notes Payable Date April 8

Explanation

April 15

Account Number 40 Ref 1

Debit

5,000

Capital Stock Date April 5

Explanation

Credit 20,000

Balance 20,000 15,000

Account Number 50 Ref 1

Debit

Credit 60,000

Balance 60,000

14) (1) Grinnel Paving, Incorporated must recognize the expense in the month of May. This is the period in which the stone was used in earning revenue. The cost of the stone must be matched against the revenue earned in May. (2) The matching principle requires and supports this accounting treatment. 15) Hayden's Company Trial Balance December 31, Year 1 Account Cash

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Debit $ 6,500

Credit

Accounts receivable

3,000

Supplies

700

Building

18,000

Land

26,000

Notes Payable

$ 15,000

Accounts Payable

5,000

Wages Payable

3,050

Capital Stock

14,100

Retained Earnings

2,200

Dividends

1,600

Revenue

31,000

Advertising Expense

400

Utilities Expense

900

Wages Expense

13,250

Total

$ 70,350

16) Brian's Pickle Company Trial Balance June 30, Year 1 Account Cash

Debit $ 21,500

Accounts Receivable

35,000

Supplies

4,725

Building

51,000

Note Payable

Credit

$ 15,500

Accounts Payable

725

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Owners' Equity

30,000

Retained Earnings

10,000

Revenue

45,000

Expenses Total

25,000 $ 137,225

$ 137,225

Feedback: Cash = $21,860 + $40 − $400 = $21,500 Supplies = $3,640 − $40 + $400 + $725 = $4,725 Revenue = $39,500 + $5,500 = $45,000 Note Payable = $15,500 − $51,500 = $36,000 adjustment

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CHAPTER 3 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The credit side of an account is the right side, while the debit side is the left side. ⊚ ⊚

true false

2) In its simplest form an account has only three elements: a title, a left side (called debit), and a right side (called credit). ⊚ ⊚

true false

3) A credit to a ledger account refers to the entry of an amount on the right side of an account. ⊚ ⊚

true false

4) Every transaction affects equal numbers of ledger accounts and is recorded by equal dollar amounts of debits and credits. ⊚ ⊚

All liability accounts normally have a credit balance. ⊚ ⊚

true false

Decreases to owners' equity accounts are recorded using debits. ⊚ ⊚

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true false

Liability accounts should only be debited and never credited. ⊚ ⊚

true false

8) Increases in owners' equity are recorded by credits; increases in assets and in liabilities are recorded by debits. ⊚ ⊚

true false

An increase in a liability is recorded by a credit; an increase in owners' equity by a debit. ⊚ ⊚

true false

10) The left-hand side of an account is used for recording debits and the right-hand side for recording credits. ⊚ ⊚

true false

11) If the number of debit entries in an account is greater than the number of credit entries, the account will have a debit balance. ⊚ ⊚

true false

12) Every business transaction is recorded by a debit to a balance sheet account and a credit to an income statement account. ⊚ ⊚

13)

true false

When making a general journal entry, there can only be one debit and one credit.

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⊚ ⊚

true false

14) When a company uses the double-entry method, the total dollar amount of debits recorded must equal the total dollar amount of credits recorded, but the number of debit and credit entries may differ. ⊚ ⊚

15)

true false

The ledger is a chronological, day-by-day, record of business transactions. ⊚ ⊚

true false

16) When recording a journal entry, asset accounts are shown first, followed by liabilities, and finally owners' equity accounts. ⊚ ⊚

17)

Ledger accounts are updated first, and then transactions are recorded in the journal. ⊚ ⊚

18)

true false

Ledger accounts are updated through a process called posting. ⊚ ⊚

true false

19) Earning revenue increases owners' equity and expenses reduce owners' equity, therefore, revenues are recorded with debit entries and expenses are recorded with credit entries. ⊚ ⊚

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true false

20)

Dividends are an expense to a corporation and appear on the income statement. ⊚ ⊚

21)

true false

The matching principle refers to the relationship between revenues and expenses. ⊚ ⊚

true false

22) The purpose of accrual accounting is to measure the amounts of cash received and paid during the period. ⊚ ⊚

true false

23) The concept of applying the accounting treatment that results in the lowest, most conservative, estimate of net income for the period is called the matching principle. ⊚ ⊚

24)

true false

The accrual basis of accounting recognizes expenses only when they are paid. ⊚ ⊚

true false

25) A business that is profitable and liquid will have more accounts with credit balances than with debit balances. ⊚ ⊚

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true false

26) Revenues increase owners' equity and are, therefore, recorded by crediting the revenues account. ⊚ ⊚

true false

27) Every transaction that affects an income statement account also affects a balance sheet account. ⊚ ⊚

true false

28) Since most companies update their Retained Earnings balances only once per year, the Retained Earnings balance will always have a $0 balance in the trial balance. ⊚ ⊚

true false

29) A trial balance includes only the balance sheet accounts; income statement accounts are not included on a trial balance. ⊚ ⊚

true false

30) When in balance, a trial balance provides proof that all transactions were correctly journalized and posted to the ledger. ⊚ ⊚

31)

true false

A trial balance proves that equal amounts of debits and credits were posted to the ledger. ⊚ ⊚

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true false

32) A CEO or CFO associated with fraudulent financial reporting may be fined, but not imprisoned, under the Sarbanes Oxley Act . ⊚ ⊚

true false

33) "I was just following orders" is an acceptable defense if you commit an unethical action during an audit . ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 34) The sequence of accounting procedures used to record, classify, and summarize accounting information is called the: A) B) C) D)

35)

Accounting cycle. Accounting period. Accrual accounting. Double-entry bookkeeping.

Which of the following is not a step in the accounting cycle? A) B) C) D)

Prepare a trial balance. Prepare a purchase order. Prepare financial statements. Prepare an adjusted trial balance.

36) Steps in the accounting cycle include (1) prepare financial statements, (2) post each journal entry to the appropriate ledger account, and (3) journalize transactions. Which of the following reflects the correct order of these steps?

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A) B) C) D)

37)

The accounting cycle begins with: A) B) C) D)

38)

Posting of journal entries to ledger accounts. Formation of a business. Initial recording of business transactions. Preparation of a trial balance.

In the general ledger, a separate "account" is maintained for each: A) B) C) D)

39)

(1), (2), (3). (3), (2), (1). (2), (1), (3). (3), (1), (2).

Type of asset and liability and for each element of owners' equity. Business transaction. Business day. Journal entry.

Which of the following is not true regarding the general ledger account for Cash?

A) The balance of the account indicates the amount of cash owned by the business on a particular date. B) Each debit entry in the Cash account represents a cash receipt. C) Debit entries are made before credit entries. D) Credit entries in the Cash account represent cash payments.

40) The cash account of Grande Home Improvement Store shows the following: a debit on June 1 for $25,000; a credit on June 5 for $10,000, a debit on June 16 for $14,000, and a credit on June 27 for $8,000. What is the balance in the cash account at the end of June?

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A) B) C) D)

41)

The purchase of equipment on credit is recorded by a: A) B) C) D)

42)

Debit to Cash and a debit to Accounts Receivable. Credit to Cash and a credit to Accounts Receivable. Debit to Cash and a credit to Accounts Receivable. Credit to Cash and a debit to Accounts Receivable.

In accounting, the terms debit and credit indicate, respectively: A) B) C) D)

44)

Debit to Equipment and a credit to Accounts Payable. Debit to Accounts Payable and a credit to Equipment. Debit to Equipment and a debit to Accounts Payable. Credit to Equipment and a credit to Accounts Payable.

The collection of accounts receivable is recorded by a: A) B) C) D)

43)

$39,000 debit. $21,000 debit. $18,000 credit. $21,000 credit.

Increase and decrease. Left and right. Decrease and increase. Right and left.

In a ledger, debit entries cause:

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A) B) C) D)

45)

Which of the following accounts normally has a credit balance? A) B) C) D)

46)

Increases in owners' equity, decreases in liabilities, and increases in assets. Decreases in liabilities, increases in assets, and decreases in owners' equity. Decreases in assets, decreases in liabilities, and increases in owners' equity. Decreases in assets, increases in liabilities, and increases in owners' equity.

Cash Service revenue Accounts receivable Utilities expense

Which of the following accounts normally contain a debit balance? A) B) C) D)

Asset Liability Owners' equity Revenue

47) Sue Costa, owner of A-1 Cleaning Services, invested an additional $75,000 in the company. Which of the following would be a part of the correct journal entry to record this transaction? A) B) C) D)

48)

A debit to the Cash account. A debit to the Equity account. A debit to the Capital Stock account. A debit to the Cash Revenue account

If a company purchases equipment on account:

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A) B) C) D)

Assets will increase and owners' equity will also increase. Assets will increase and owners' equity will decrease. Assets will increase and owners' equity will remain unchanged. Assets will increase and liabilities will decrease.

49) The journal entry to record a particular business transaction includes a credit to a liability account. This transaction is most likely also to include: A) B) C) D)

Issuance of new capital stock. The purchase of an asset on account. A cash payment. A credit to Accounts Receivable.

50) The journal entry to record a particular business transaction includes a credit to the Cash account. This transaction is most likely also to include: A) B) C) D)

Issuance of new capital stock. The purchase of an asset on account. Payment of an outstanding note payable. A credit to Accounts Receivable.

51) The collection of an account receivable is recorded by a debit to Cash and a credit to Accounts Payable. If this error is not corrected: A) B) C) D)

52)

Total liabilities are understated. Total assets are understated. Total liabilities are overstated. Owners' equity is overstated.

If a company purchases equipment for cash:

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A) B) C) D)

53)

Collection of an accounts receivable: A) B) C) D)

54)

Assets will increase and owners' equity will also increase. Assets will increase and owners' equity will decrease. Assets will increase and owners' equity will remain unchanged. Total assets and owners' equity will remain unchanged.

Increases the total assets of a company. Decreases the total assets of a company. Does not change the total assets of a company. Reduces a company's total liabilities.

Which of the following accounts normally has a credit balance A) B) C) D)

Accounts receivable. Cash. Building. Capital Stock.

55) On June 18, Baltic Arena paid $6,600 to Marvin Maintenance, Incorporated for cleaning the arena following a monster truck show. Which of the following most likely occurred on Baltic’s books as a result of this transaction? A) B) C) D)

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The accounts receivable account was debited. Total assets increased. The cash account was credited. Total liabilities increased.

56) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $366,000 cash.Purchased $192,000 of equipment by making a $66,000 cash down payment and signing a note payable for the balance.Made a $38,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $24,000. The equipment was sold at cost, so there is no gain or loss on the sale.What is the balance in the Cash account at the end of March? A) B) C) D)

$286,000 $352,000 $324,000 $390,000

57) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $360,000 cash.Purchased $180,000 of equipment by making a $60,000 cash down payment and signing a note payable for the balance.Made a $35,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $18,000. The equipment was sold at cost, so there is no gain or loss on the sale.What is the balance in the Cash account at the end of March? A) B) C) D)

$283,000 $343,000 $318,000 $378,000

58) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $350,000 cash.Purchased $160,000 of equipment by making a $50,000 cash down payment and signing a note payable for the balance.Made a $30,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $8,000. The equipment was sold at cost, so there is no gain or loss on the sale.What are total assets of Quality Galleries at the end of March?

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A) B) C) D)

$278,000 $152,000 $430,000 $460,000

59) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $360,000 cash.Purchased $180,000 of equipment by making a $60,000 cash down payment and signing a note payable for the balance.Made a $35,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $18,000. The equipment was sold at cost, so there is no gain or loss on the sale.What are total assets of Quality Galleries at the end of March? A) B) C) D)

$283,000 $162,000 $445,000 $480,000

60) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $368,000 cash.Purchased $196,000 of equipment by making a $68,000 cash down payment and signing a note payable for the balance.Made a $39,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $26,000. The equipment was sold at cost, so there is no gain or loss on the sale.What is the balance in the Note Payable account at the end of March? A) B) C) D)

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$128,000 $89,000 $39,000 $167,000

61) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $360,000 cash.Purchased $180,000 of equipment by making a $60,000 cash down payment and signing a note payable for the balance.Made a $35,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $18,000. The equipment was sold at cost, so there is no gain or loss on the sale.What is the balance in the Note Payable account at the end of March? A) B) C) D)

$120,000 $85,000 $35,000 $155,000

62) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $361,000 cash.Purchased $182,000 of equipment by making a $61,000 cash down payment and signing a note payable for the balance.Made a $35,500 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $19,000. The equipment was sold at cost, so there is no gain or loss on the sale.What is the total owners' equity at the end of March? A) B) C) D)

$283,500 $446,500 $482,000 $361,000

63) The following transactions occurred during March, the first month of operations for Quality Galleries, Incorporated:Capital stock was issued in exchange for $360,000 cash.Purchased $180,000 of equipment by making a $60,000 cash down payment and signing a note payable for the balance.Made a $35,000 cash payment on the note payable from the purchase of equipment.Sold a piece of equipment for cash of $18,000. The equipment was sold at cost, so there is no gain or loss on the sale.What is the total owners' equity at the end of March?

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A) B) C) D)

$283,000 $445,000 $480,000 $360,000

64) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 56,000 shares of capital stock to the owners of the corporation in exchange for $672,000 cash.Purchased a piece of land for $460,000, making a $180,000 cash down payment and signing a note payable for the balance.Made a $66,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $69,000.What is the balance in the Cash account at the end of May? A) B) C) D)

$672,000 $426,000 $918,000 $246,000

65) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 50,000 shares of capital stock to the owners of the corporation in exchange for $600,000 cash.Purchased a piece of land for $400,000, making a $150,000 cash down payment and signing a note payable for the balance.Made a $60,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $63,000.What is the balance in the Cash account at the end of May? A) B) C) D)

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$210,000 $390,000 $600,000 $810,000

66) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 51,000 shares of capital stock to the owners of the corporation in exchange for $612,000 cash.Purchased a piece of land for $410,000, making a $155,000 cash down payment and signing a note payable for the balance.Made a $61,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $64,000.What are total assets of Hunter Products at the end of May? A) B) C) D)

$931,000 $806,000 $870,000 $934,000

67) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 50,000 shares of capital stock to the owners of the corporation in exchange for $600,000 cash.Purchased a piece of land for $400,000, making a $150,000 cash down payment and signing a note payable for the balance.Made a $60,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $63,000.What are total assets of Hunter Products at the end of May? A) B) C) D)

$913,000 $790,000 $853,000 $916,000

68) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 47,000 shares of capital stock to the owners of the corporation in exchange for $564,000 cash.Purchased a piece of land for $370,000, making a $135,000 cash down payment and signing a note payable for the balance.Made a $57,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $60,000.What is the total of Hunter Products' liabilities at the end of May?

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A) B) C) D)

$238,000 $60,000 $295,000 $178,000

69) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 50,000 shares of capital stock to the owners of the corporation in exchange for $600,000 cash.Purchased a piece of land for $400,000, making a $150,000 cash down payment and signing a note payable for the balance.Made a $60,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $63,000.What is the total of Hunter Products' liabilities at the end of May? A) B) C) D)

$253,000 $190,000 $63,000 $313,000

70) The following transactions occurred during May, the first month of operations for Hunter Products, Incorporated:Issued 50,000 shares of capital stock to the owners of the corporation in exchange for $600,000 cash.Purchased a piece of land for $400,000, making a $150,000 cash down payment and signing a note payable for the balance.Made a $60,000 cash payment on the note payable from the purchase of land.Purchased equipment on credit from BBW, Incorporated for $63,000.What is the total owners' equity at the end of May? A) B) C) D)

$810,000 $600,000 $790,000 $660,000

71) Master Equipment has a $17,400 liability to Arrow Paint Company When Master Equipment makes a partial payment of $7,600 on this liability, which of following occurs on Master’s books?

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A) B) C) D)

Retained earnings are debited $9,800. The Accounts Payable account is credited $9,800. The Cash account is debited $7,600. The Accounts Payable account is debited $7,600.

72) Eagle News has a $6,000 account receivable from one of its advertisers, Allwood Floors. When Eagle receives $3,600 from Allwood as partial payment: A) B) C) D)

Eagle should debit Accounts Receivable for $3,600. Eagle should credit Cash for $3,600. Eagle should credit Accounts Receivable for $3,600. Eagle makes no journal entry until the total of $6,000 is received from Allwood.

73) Bruno's Pizza Restaurant makes full payment of $8,300 on an account payable to Stella's Cheese Company Stella's would record this transaction with a: A) B) C) D)

Debit to Accounts Payable for $8,300. Credit to Cash for $8,300. Credit to Accounts Receivable for $8,300. Credit to Accounts Payable for $8,300.

74) The purchase of office equipment at a cost of $7,600 with an immediate payment of $4,200 and agreement to pay the balance within 60 days is recorded by the purchaser with: A) A debit of $7,600 to Office Equipment, a debit of $4,200 to Accounts Receivable, and a credit of $3,400 to Accounts Payable. B) A debit of $7,600 to Office Equipment, a credit of $4,200 to Cash, and a credit of $3,400 to Accounts Receivable. C) A debit of $3,400 to Accounts Receivable, a debit of $4,200 to Cash, and a credit of $7,600 to Office Equipment. D) A debit of $7,600 to Office Equipment, a credit of $4,200 to Cash, and a credit of $3,400 to Accounts Payable.

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75) Land is purchased by making cash down payment of $40,000 and signing a note payable for the balance of $130,000. The journal entry to record this transaction in the accounting records of the purchaser includes: A) B) C) D)

76)

A credit to Land for $40,000. A debit to Cash for $40,000. A debit to Land for $170,000. A debit to Note Payable for $130,000.

Montauk Oil Company reports these account balances at December 31, Year 1:

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

$ 101,000 191,000 251,000 151,000 71,000 91,000 231,000 331,000 61,000

On January 2, Year 2, Montauk Oil collected $41,000 of its accounts receivable and paid $11,000 of its accounts payable. On January 3, Year 2, total liabilities are: A) B) C) D)

77)

$352,000. $341,000. $291,000. $61,000.

Montauk Oil Company reports these account balances at December 31, Year 1:

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable

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$ 110,000 200,000 260,000 160,000 80,000 100,000 19

Buildings Capital Stock Retained Earnings

240,000 340,000 70,000

On January 2, Year 2, Montauk Oil collected $50,000 of its accounts receivable and paid $20,000 of its accounts payable. On January 3, Year 2, total liabilities are: A) B) C) D)

$370,000. $350,000. $300,000. $70,000.

78) Ceramic Products, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 28,000 20,000 153,000 185,000 13,000 20,000 80,000 24,000 49,000

On January 5, Year 2, Ceramic Products collected $12,000 of its accounts receivable and paid $11,000 on its note payable. On January 6, Year 2, total liabilities are: A) B) C) D)

$0. $52,000. $275,000. $41,000.

79) Ceramic Products, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings

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$ 28,000 20,000 153,000 20

Capital Stock Cash Equipment Land Notes Payable Retained Earnings

185,000 13,000 20,000 80,000 24,000 49,000

On January 5, Year 2, Ceramic Products collected $12,000 of its accounts receivable and paid $11,000 on its note payable. On January 6, Year 2, total liabilities are: A) B) C) D)

$0. $30,000. $56,000. $41,000.

80) Ben Dryden, president of Jet Glass, Incorporated noticed a $8,000 debit to Accounts Payable in the company's general ledger. This debit could correspond to: A) B) C) D)

81)

A $8,000 sale to a customer. A purchase of equipment costing $8,000 on credit. A payment of $8,000 to a supplier to settle a balance due. The failure to pay this month's $8,000 utility bill on time.

Indirect Oil Company reports these account balances at December 31, Year 1

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

$ 55,000 100,000 130,000 80,000 40,000 50,000 120,000 170,000 35,000

On January 2, Year 2, Indirect Oil collected $25,000 of its accounts receivable and paid $20,000 of its accounts payable. On January 3, Year 2, total liabilities are:

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A) B) C) D)

$185,000. $165,000. $150,000. $70,000.

82) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 220,000 200,000 480,000 680,000 160,000 320,000 400,000 520,000 140,000

On January 5, Wilson Trucking collected $175,000 of its accounts receivable, paid $150,000 on its accounts payable, and paid $11,000 on its note payable.On January 6, Year 2, total liabilities are: A) B) C) D)

$901,000. $579,000. $1,399,000. $1,721,000.

83) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land

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$ 220,000 200,000 480,000 680,000 160,000 320,000 400,000

Notes Payable Retained Earnings

520,000 140,000

84)

Which of the following accounts normally has a debit balance? A) B) C) D)

85)

$1,350,000. $1,399,000. $1,560,000. $1,574,000.

Accounts payable. Retained earnings. Accounts receivable. Service revenue.

The rules of debit and credit may be summarized as follows:

A) Asset accounts are increased by debits, whereas, liabilities and owners' equity are increased by credits. B) The balance of a ledger account is increased by debit entries and is decreased by credit entries. C) Accounts on the left side of the balance sheet are increased by credits, whereas accounts on the right side of the balance sheet are increased by debits. D) The balance of a ledger account is increased by credit entries and is decreased by debit entries.

86)

The essential point of a double-entry system of accounting is that every transaction:

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A) Affects accounts on both sides of the balance sheet. B) Is recorded in both the journal and the ledger. C) Increases one ledger account and decreases another. D) Affects two or more ledger accounts and is recorded by an equal dollar amount of debits and credits.

87)

Double-entry accounting is characterized by which of the following?

A) Every transaction affects both an asset account and either a liability account or an owners' equity account. B) The number of general ledger accounts with debit balances is equal to the number with credit balances. C) The total dollar amount of debit entries posted to the general ledger is equal to the dollar amount of the credit entries. D) The number of debit entries posted to the general ledger equals the number of credit entries.

88)

All of the following statements are true of double-entry accounting except:

A) There is a need for both debit and credit entries for each and every transaction. B) Double-entry accounting can only be used with computer-based accounting systems. C) The total dollar amount of debit entries posted to the general ledger is equal to the dollar amount of the credit entries. D) Double-entry accounting allows us to measure net income at the same time we record the effect of transactions on the balance sheet accounts.

89) The process of originally recording a business transaction in the accounting records is termed:

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A) B) C) D)

Journalizing. Footing. Posting. Balancing.

90) Brett Tarek, a manager at D&J Landscaping, Incorporated needs information regarding the amount of accounts payable currently owed by the company. This information would most easily be found in the: A) B) C) D)

91)

Transactions are recorded in the general journal in: A) B) C) D)

92)

Numerical order. Chronological order. Account number order. Financial statement order.

A transaction is first recorded in which of the following accounting records? A) B) C) D)

93)

General ledger. General journal. Income statement. Notes to the financial statements.

Trial balance. Ledger. General journal. Balance sheet.

Preparing a journal entry in proper form involves all the following except:

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A) B) C) D)

94)

Listing all accounts debited before any credits. Computing the balances in accounts involved in the transaction. Indicating the date of the transaction. Providing a brief written explanation of the transaction.

Posting is the process of:

A) Transferring debit and credit entries from the journal into the appropriate ledger accounts. B) Determining that the dollar amount of debit entries recorded in the ledger is equal to the dollar amount of credit entries. C) Entering information into a computerized data base. D) Preparing journal entries to describe each business transaction.

95) The bookkeeper for Wood Manufacturing Company made the following journal entry to record a transaction that took place on January 30, Year 2: Debit Land

201,500

Buildings

84,500

Credit

Cash

65,000

Notes Payable

221,000

This transaction involves: A) B) C) D)

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The sale of land and building for $286,000. Payment of $221,000 on a note payable. The receipt of $65,000 cash. An increase in liabilities of $221,000.

96) The bookkeeper for Wood Manufacturing Company made the following journal entry to record a transaction that took place on January 30, Year 2: Debit Land

201,500

Buildings

84,500

Credit

Cash

65,000

Notes Payable

221,000

Before the journal entry above, Wood had assets, liabilities, and owners' equity of $450,000, $100,000, and $350,000, respectively. What are total assets immediately after the above transaction occurs? A) B) C) D)

$221,000. $671,000. $735,500. $450,000.

97) The bookkeeper for Martin Supply Company made the following journal entry to record a transaction that took place on March 10, Year 2: Debit Accounts Receivable

30,000

Cash

21,000

Equipment

Credit

51,000

This transaction involves: A) B) C) D)

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Martin's collection of $30,000 on an account receivable. Payment of $21,000 cash by Martin. A $21,000 overall increase in Martin's assets. Sale of equipment by Martin for $51,000.

98) The bookkeeper for Martin Supply Company made the following journal entry to record a transaction that took place on March 10, Year 2: Debit Accounts Receivable

30,000

Cash

21,000

Equipment

Credit

51,000

Before the journal entry above, Martin had assets of $900,000; liabilities of $460,000; and owners' equity of $440,000. Total assets immediately after the above transaction has been recorded amount to: A) B) C) D)

$900,000. $921,000. $956,000. $794,000.

99) The bookkeeper for Galloway Paints made the following journal entry to record a transaction that took place on April 23, Year 2: Debit Inventory

Credit

26,400

Accounts Payable

20,200

Cash

6,200

This transaction involves: A) B) C) D)

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Galloway's collection of $6,200 on an account payable. Payment of $6,200 cash by Galloway. A $26,400 overall increase in Galloway's assets. Sale of inventory by Galloway for $26,400.

100) The bookkeeper for Galloway Paints made the following journal entry to record a transaction that took place on April 23, Year 2: Debit Inventory

Credit

26,000

Accounts Payable

20,000

Cash

6,000

This transaction involves: A) B) C) D)

Galloway's collection of $20,000 on an account payable. Payment of $6,000 cash by Galloway. A $26,000 overall increase in Galloway's assets. Sale of inventory by Galloway for $26,000.

101) The bookkeeper for Galloway Paints made the following journal entry to record a transaction that took place on April 23, Year 2: Debit Inventory

Credit

27,600

Accounts Payable

20,800

Cash

6,800

Before the journal entry above, Galloway had assets of $466,000; liabilities of $238,000; and owners' equity of $228,000. Total assets immediately after the above transaction has been recorded amount to: A) B) C) D)

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$493,600. $445,200. $486,800. $466,000.

102) The bookkeeper for Galloway Paints made the following journal entry to record a transaction that took place on April 23, Year 2: Debit Inventory

Credit

26,000

Accounts Payable

20,000

Cash

6,000

Before the journal entry above, Galloway had assets of $450,000; liabilities of $230,000; and owners' equity of $220,000. Total assets immediately after the above transaction has been recorded amount to: A) B) C) D)

$430,000. $450,000. $470,000. $476,000.

103) The price of the goods sold or services rendered during a given accounting period is called: A) B) C) D)

104)

Net income. Profit. Revenue. Equity.

All of the following statements are true of an income statement except: A) The period of time covered by an income statement is the company's accounting

period. B) A fiscal year is any accounting period less than 12 months in length. C) The length of a company's accounting period may vary. D) Every business prepares an annual income statement.

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105)

Which of the following would not appear on an income statement? A) B) C) D)

Repair service revenue. Insurance expense. Dividends. Net income.

106) Sally Smith had expenses of $800 in June which she paid in July. She reported these expenses on her June income statement. By doing this, she is following the accounting principle of: A) B) C) D)

Revenue realization. Adequate disclosure. Matching. Conservatism.

107) The principle that states revenue should be recognized at the time goods are sold or services rendered is called: A) B) C) D)

Adequate disclosure. Conservatism. Matching. Revenue realization.

108) Recognizing revenue when it is earned and not when cash is received and recognizing expenses when the related goods or services are used rather than when they are paid for is called: A) B) C) D)

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Revenue recognition. Accrual accounting. Conservatism. Matching.

109) The realization principle indicates that revenue usually should be recognized and recorded in the accounting records: A) B) C) D)

When goods are sold or services are rendered to customers. When cash is collected from customers. At the end of the accounting period. Only when the revenue can be matched by an equal dollar amount of expenses.

110) In February of each year, the Carlton Hotel holds a very popular wine tasting event. Tickets must be ordered and paid for in advance, and are typically sold out by November of the preceding year. The realization principle indicates that the revenue from these ticket sales should be recognized in the period in which the: A) B) C) D)

111)

Order is placed. Wine tasting event is held. Payments are received. Expenses associated with the wine tasting are paid in full.

The matching principle is best demonstrated by:

A) Using debits to record decreases in owners' equity and credits to record increases. B) The equation Assets = Liabilities + Owners' Equity. C) Allocating the cost of an asset to expense over the periods during which benefits are derived from the asset. D) Offsetting the cash receipts of the period with the cash payments made during the period.

112) Clinton prepares monthly financial statements. Which of the following violates the matching principle?

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A) A portion of the salary payments made this month are not recognized as expense because some of the work was done by employees last month. B) The premium on a six-month insurance policy is charged immediately to expense. C) Expenses for the period exceed revenues. D) The cost of advertising done during the month is charged to expense even though no payment is due for 60 days.

113)

The matching principle:

A) Applies only to situations in which a cash payment occurs before an expense is recognized. B) Applies only to situations in which a cash receipt occurs before revenue is recognized. C) Is used in accrual accounting to determine the proper period in which to recognize revenue. D) Is used in accrual accounting to determine the proper period for recognition of expenses.

114) Davis, Incorporated a music group, entertained at a black-tie dinner dance on April 26, and collected the fee in full at the end of the evening. This transaction: A) Causes an increase in assets and revenue, as well as an increase in owners' equity. B) Is recorded by debiting Cash and crediting the Retained Earnings account. C) Causes an increase in assets and a decrease in owners' equity. D) Violates the matching principle unless any expenses associated with this cash receipt are paid prior to recording the revenue.

115) At the end of October, Flagship Marina received a bill for fuel used in October. Payment is not due until November 30. This transaction:

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A) B) C) D)

Should not be recorded in the accounting records until November. Causes a decrease in assets and in owners' equity in November, when the bill is paid. Should be recorded as an expense of October, regardless of the payment date. Is recorded as a liability in October, but is not considered an expense until paid.

116) On June 27, Healthy Life Services, Incorporated performed extensive tests on lab specimens submitted by several customers and sent invoices totaling $5,200, due in 30 days. A) No revenue from rendering these services should be recorded until payment is received. B) This situation causes an increase in assets and in revenue in June, but has no effect on owners' equity until payment is received. C) Revenue is earned in June, but assets are not increased until payment is received. D) Assets, revenue, and owners' equity are increased in June, regardless of when payments are received for the services rendered.

117) Green Systems sold and delivered modems to Blue Computers for $660,000 to be paid by Blue in three equal installments over the next three months. The journal entry made by Blue Computers to record the last of the three installment payments will include: A) B) C) D)

A debit of $220,000 to Modem Expense. A debit of $220,000 to Accounts Receivable. A debit of $220,000 to Cash. A debit of $220,000 to Accounts Payable.

118) Black Systems sold and delivered modems to White Computers for $330,000 to be paid by White in three equal installments over the next three months. The journal entry made by Black Systems to record this transaction will include:

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A) B) C) D)

A debit to Sales Revenue for $330,000. A debit to Accounts Receivable for $330,000. A debit to Accounts Receivable for $110,000. A debit to Cash for $330,000.

119) The statement "This business produced net income of $520,000" is unclear because it failed to specify: A) B) C) D)

120)

The accounting method, that is, accrual or cash basis. Whether the amount earned is before or after expenses. The time period. The amount of cash withdrawn from the business by the owner.

The term revenue can best be described as:

A) The selling price of goods and services rendered to customers during a given accounting period. B) The cash received from selling goods and serving customers during a given accounting period. C) The net increase in owners' equity during a given period. D) The "bottom line" in the income statement.

121)

Net income is:

A) B) business. C) D)

122)

The excess of debits over credits. The increase in owners' equity resulting from the profitable operations of the The excess of liabilities over assets. The increase in assets of a company during a year.

The reason that revenue is recorded by a credit entry to a revenue account is:

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A) B) C) D)

123)

That revenue always involves a debit to the Cash account. Explained by the realization principle. Explained by the matching principle. That revenue increases owners' equity.

Revenues increase owners' equity because:

A) Revenues increase net income, which increases retained earnings. B) Revenues are recorded by a debit. C) Of the matching principle. D) The conservatism principle requires revenues be recognized with an increase to owners' equity.

124)

The reason that both expenses and dividends are recorded by debit entries is that:

A) All dividend and expense transactions involve offsetting credit entries to the Cash account. B) Both expenses and dividends are offset against revenues in the income statement. C) Both expenses and dividends reduce owners' equity. D) The statement is untrue-expenses are recorded by debits, but dividends are recorded by credits to the owners' equity account.

125)

A journal entry that records revenue must include: A) B) C) D)

126)

A debit to Cash. A credit to a revenue account. A credit to the owners' equity account. A debit to the owners' equity account.

A journal entry to record revenue could include each of the following, except:

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A) B) C) D)

127)

A journal entry to recognize an expense must include: A) B) C) D)

128)

A credit to Accounts Payable. A credit to an expense account. A credit to Cash. A debit to an expense account.

A journal entry to recognize an expense could include each of the following, except: A) B) C) D)

129)

A credit to a revenue account. A credit to the Capital Stock account. A debit to Cash. A debit to Accounts Receivable.

A debit to an expense account. A credit to Accounts Payable. A debit to a liability account. A credit to Cash.

The agreement of the debit and credit totals of the trial balance gives assurance that:

A) All transactions were posted correctly. B) No transactions were omitted. C) The number of accounts with debit balances equals the number of accounts with credit balances. D) The total debits equal the total credits.

130)

If the trial balance has a higher debit balance than credit balance, it signifies:

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A) B) C) D)

131)

If the trial balance has a smaller debit balance than credit balance, it signifies: A) B) C) D)

132)

Assets are more than liabilities. A profit. A loss. An error has been made.

A trial balance that is out of balance indicates that:

A) The number of ledger accounts with debit balances is not equal to the number of accounts with credit balances. B) A debit has been posted to the wrong account. C) There is not an equality of debit and credit amounts in the ledger. D) A journal entry has been completely omitted from the posting process.

133)

A trial balance consists of:

A) A two-column schedule of all debit and credit entries posted to ledger accounts. B) A two-column financial statement intended for distribution to interested parties outside the business. C) A two-column schedule showing the totals of all debits and of all credits made in journal entries. D) A two-column schedule listing names and balances of all ledger accounts.

134)

Which of the following errors would be disclosed by preparation of a trial balance?

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A) The collection of an account receivable was recorded by a debit to the Land account rather than to the Cash account. B) The collection of an account receivable for $219 was recorded by a $291 debit to Cash and a $291 credit to Accounts Receivable. C) The collection of a $365 account receivable was not recorded at all. D) The collection of a $325 account receivable was recorded by a $325 debit to Cash and a $325 debit to Accounts Receivable.

135)

Which of the following errors would not be disclosed by preparation of a trial balance?

A) An error was made in computing the balance of the Cash account. B) A journal entry included a debit to the Equipment account for $3,200, but this amount was erroneously posted as $2,300. C) During the posting process, a $1,700 debit to Cash was accidentally entered in the credit side of the Cash account. D) The journal entries recorded on the last day of the year have never been posted to the ledger.

136)

Montauk Oil Company reports these account balances at December 31, Year 1

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

$ 120,000 210,000 270,000 170,000 90,000 110,000 250,000 350,000 80,000

On January 2, Year 2, Montauk Oil collected $60,000 of its accounts receivable and paid $30,000 of its accounts payable.In a trial balance prepared at December 31, Year 1 the total of the debit column is:

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A) B) C) D)

137)

$1,070,000. $830,000. $1,630,000. $740,000.

Montauk Oil Company reports these account balances at December 31, Year 1

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

$ 110,000 200,000 260,000 160,000 80,000 100,000 240,000 340,000 70,000

On January 2, Year 2, Montauk Oil collected $50,000 of its accounts receivable and paid $20,000 of its accounts payable.In a trial balance prepared at December 31, Year 1 the total of the debit column is: A) B) C) D)

138)

$1,540,000. $780,000. $1,020,000. $700,000.

Montauk Oil Company reports these account balances at December 31, Year 1

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

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$ 108,000 198,000 258,000 158,000 78,000 98,000 238,000 338,000 68,000

On January 2, Year 2, Montauk Oil collected $48,000 of its accounts receivable and paid $18,000 of its accounts payable.In a trial balance prepared at January 3, Year 2, the total of the debit column is: A) B) C) D)

139)

$752,000. $1,552,000. $734,000. $366,000.

Montauk Oil Company reports these account balances at December 31, Year 1

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

$ 110,000 200,000 260,000 160,000 80,000 100,000 240,000 340,000 70,000

On January 2, Year 2, Montauk Oil collected $50,000 of its accounts receivable and paid $20,000 of its accounts payable.In a trial balance prepared at January 3, Year 2, the total of the debit column is: A) B) C) D)

$760,000. $1,570,000. $740,000. $370,000.

140) Ceramic Products, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash

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$ 28,000 20,000 153,000 185,000 13,000 41

Equipment Land Notes Payable Retained Earnings

20,000 80,000 24,000 49,000

On January 5, Ceramic Products collected $12,000 of its accounts receivable and paid $11,000 on its note payable.In a trial balance prepared for Ceramic Products on January 1, Year 2, the total of the credit column is: A) B) C) D)

$185,000. $196,000. $234,000. $286,000.

141) Ceramic Products, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 28,000 20,000 153,000 185,000 13,000 20,000 80,000 24,000 49,000

$182,000. $196000. $166,000. $286,000.

142) Ceramic Products, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order):

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Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 36,000 28,000 161,000 193,000 21,000 28,000 88,000 32,000 57,000

On January 5, Ceramic Products collected $20,000 of its accounts receivable and paid $19,000 on its note payable.In a trial balance prepared on January 6, Year 2, the total of the credit column is: A) B) C) D)

$299,000. $318,000. $337,000. $319,000.

143) Ceramic Products, Incorported reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 28,000 20,000 153,000 185,000 13,000 20,000 80,000 24,000 49,000

On January 5, Ceramic Products collected $12,000 of its accounts receivable and paid $11,000 on its note payable.In a trial balance prepared on January 6, Year 2, the total of the credit column is:

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A) B) C) D)

144)

$275,000. $286,000. $287,000. $297,000.

Indirect Oil Company reports these account balances at December 31, Year 1:

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

$ 55,000 100,000 130,000 80,000 40,000 50,000 120,000 170,000 35,000

On January 2, Year 2, Indirect Oil collected $25,000 of its accounts receivable and paid $20,000 of its accounts payable.In a trial balance prepared at December 31, Year 1 the total of the debit column is: A) B) C) D)

145)

$805,000. $780,000. $415,000. $390,000.

Indirect Oil Company reports these account balances at December 31, Year 1:

Accounts Payable Land Notes Payable Equipment Cash Accounts Receivable Buildings Capital Stock Retained Earnings

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$ 55,000 100,000 130,000 80,000 40,000 50,000 120,000 170,000 35,000

On January 2, Year 2, Indirect Oil collected $25,000 of its accounts receivable and paid $20,000 of its accounts payable. In a trial balance prepared at January 3, Year 2, the total of the debit column is: A) B) C) D)

$760,000. $825,000. $740,000. $370,000.

146) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 219,000 199,000 479,000 679,000 159,000 319,000 399,000 519,000 138,000

On January 5, Year 2, Wilson Trucking collected $174,000 of its accounts receivable, paid $149,000 on its accounts payable, and paid $22,000 on its note payable.In a trial balance prepared for Wilson Trucking on January 1, Year 2, the total of the credit column is: A) B) C) D)

$1,576,000. $1,555,000. $1,616,000. $3,110,000.

147) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock

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$ 220,000 200,000 480,000 680,000 45

Cash Equipment Land Notes Payable Retained Earnings

160,000 320,000 400,000 520,000 140,000

On January 5, Year 2, Wilson Trucking collected $175,000 of its accounts receivable, paid $150,000 on its accounts payable, and paid $11,000 on its note payable.In a trial balance prepared for Wilson Trucking on January 1, Year 2, the total of the credit column is: A) B) C) D)

$1,580,000. $1,560,000. $1,620,000. $3,120,000.

148) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 210,000 190,000 470,000 670,000 150,000 310,000 390,000 510,000 120,000

On January 5, Year 2, Wilson Trucking collected $165,000 of its accounts receivable, paid $140,000 on its accounts payable, and paid $31,000 on its note payable.In a trial balance prepared for Wilson Trucking on January 6, Year 2, the total of the debit column is: A) B) C) D)

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$1,540,000. $1,339,000. $1,580,000. $3,020,000.

149) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 220,000 200,000 480,000 680,000 160,000 320,000 400,000 520,000 140,000

On January 5, Year 2, Wilson Trucking collected $175,000 of its accounts receivable, paid $150,000 on its accounts payable, and paid $11,000 on its note payable.In a trial balance prepared for Wilson Trucking on January 6, Year 2, the total of the debit column is: A) B) C) D)

$1,580,000. $1,399,000. $1,620,000. $3,120,000.

150) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 219,000 199,000 479,000 679,000 159,000 319,000 399,000 519,000 138,000

On January 5, Year 2, Wilson Trucking collected $174,000 of its accounts receivable, paid $149,000 on its accounts payable, and paid $22,000 on its note payable.In a trial balance prepared on January 6, Year 2, the total of the credit column is:

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A) B) C) D)

$1,406,000. $1,384,000. $1,555,000. $1,726,000.

151) Wilson Trucking, Incorporated reports these account balances at January 1, Year 2 (shown in alphabetical order): Accounts Payable Accounts Receivable Buildings Capital Stock Cash Equipment Land Notes Payable Retained Earnings

$ 220,000 200,000 480,000 680,000 160,000 320,000 400,000 520,000 140,000

On January 5, Year 2, Wilson Trucking collected $175,000 of its accounts receivable, paid $150,000 on its accounts payable, and paid $11,000 on its note payable.In a trial balance prepared on January 6, Year 2, the total of the credit column is: A) B) C) D)

152)

$1,350,000. $1,399,000. $1,560,000. $1,721,000.

The need for familiarity with accounting concepts is: A) B) C) D)

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Limited to those planning a career in accounting. Limited to those planning to pursue the CPA credential. Universal for each and every career path. Necessary for anyone entering the world of business.

Answer Key Test name: Chapter 03 Test Bank - Algorithmic and Static 1) TRUE 2) TRUE 3) TRUE 4) FALSE 5) TRUE 6) TRUE 7) FALSE 8) FALSE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) FALSE 14) TRUE 15) FALSE 16) FALSE 17) FALSE 18) TRUE 19) FALSE 20) FALSE 21) TRUE 22) FALSE 23) FALSE 24) FALSE 25) FALSE 26) TRUE Version 1

27) TRUE 28) FALSE 29) FALSE 30) FALSE 31) TRUE 32) FALSE 33) FALSE 34) A 35) B 36) B 37) C 38) A 39) C 40) B 41) A 42) C 43) B 44) B 45) B 46) A 47) A 48) C 49) B 50) C 51) C 52) D 53) C 54) D 55) C 56) A Version 1

57) A 58) C 59) C 60) B 61) B 62) D 63) D 64) B 65) B 66) C 67) C 68) A 69) A 70) B 71) D 72) C 73) C 74) D 75) C 76) B 77) B 78) D 79) D 80) C 81) B 82) B 83) B 84) C 85) A 86) D Version 1

87) C 88) B 89) A 90) A 91) B 92) C 93) B 94) A 95) D 96) B 97) D 98) A 99) B 100) B 101) C 102) C 103) C 104) B 105) C 106) C 107) D 108) B 109) A 110) B 111) C 112) B 113) D 114) A 115) C 116) D Version 1

117) D 118) B 119) C 120) A 121) B 122) D 123) A 124) C 125) B 126) B 127) D 128) C 129) D 130) D 131) D 132) C 133) D 134) D 135) D 136) B 137) B 138) A 139) A 140) D 141) D 142) A 143) A 144) D 145) D 146) B Version 1

147) B 148) B 149) B 150) B 151) B 152) D

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CHAPTER 4: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) The president of Crown Construction was informed that the first quarter financial statements would be available "as soon as the adjusting entries are made." Being a nonaccountant, the president feels adjustments should not be necessary if the accounting department is operating in a competent manner. Does the need for adjusting entries at the end of the quarter imply that transactions are not being recorded properly? Explain.

2) Identify four types of timing differences between cash flows and the recognition of expenses or revenues that may require adjusting entries.

3) Listed below are nine technical accounting terms emphasized in this chapter:Adjusting entriesAccumulated depreciationMaterialityUnearned revenueAccrued revenueContraassetAccrued expensePrepaid expenseBook valueInstructions: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ______ (a.) An account with a credit balance that is an offset against an asset account. ______ (b.) A contra-account. ______ (c.) A liability to customers who have paid in advance. ______ (d.) The estimated current value of an asset. ______ (e.) Entries made to achieve the goals of accrual accounting when revenue or expense transactions span more than one accounting period. ______ (f.) An asset that will expire shortly. ______ (g.) Revenue that has been earned, but not yet received.

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4) Selected ledger accounts used by Cross Country Truck Rentals, Incorporated are listed along with identifying numbers. 1 2 3 4 5 6 21 22 23 24 25 31 32 33 41 51 52 53 54 55 56

Cash Accounts Receivable Office Supplies Unexpired Insurance Trucks Accumulated Depreciation Expense Trucks Accounts Payable Notes Payable Dividends Payable Income Taxes Payable Unearned Revenue Capital Stock Retained Earnings Dividends Truck Rental Revenue Advertising Expense Office Supplies Expense Rent Expense Insurance Expense Depreciation Expense: Trucks Income Taxes Expense

Instructions: For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.) Transactions Example: Paid rent on the building for the current period a) Trucks are purchased by making a 30% cash

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Account(s) Debited 53

Account(s) Credited 1

down payment and issuing a note payable for the balance of the purchase price. b) Fee is received in advance, for rental of truck for a future period c) Purchased a large quantity of office supplies on credit d) Bought a three-year insurance policy and paid in full e) Declared a dividend to be paid in 60 days f) Depreciation on trucks is recorded g) Adjusting entry is made to record liability to Daily News for advertising done in this period; payment is due next month h) Adjusting entry is made to record truck rentals earned but not yet received or recorded i) Some portion of the truck rentals previously received in advance have now been earned j) Made an adjusting entry for office supplies used during this period k) Made an adjusting entry for the portion of the insurance premium which had expired l) Made an adjusting entry to accrue income taxes expenses at the end of a profitable period.

5) Selected ledger accounts used by American Advertising, Incorporated are listed along with identifying numbers. 1 2 3 4

Cash Accounts Receivable Office Supplies Unexpired Insurance

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5 6 22 23 24 25 31 32 33 41 51 52 53 54 55 56

Office Equipment Accumulated DepreciationExpense Office Equipment Accounts Payable Income Taxes Payable Unearned Fees Dividends Payable Capital Stock Retained earnings Dividends Fees Earned Salaries Expense Office Supplies Expense Rent Expense Insurance Expense Depreciation Expense:Office Equipment Income Taxes Expense

Account(s) Debited 53

Account(s) Credited 1

c) Bought a three-year insurance policy and paid in full. d) Performed services for a client, received part of fee in cash remainder to be collected in 30 days. e) Purchased office equipment; paid [part] in cash, balance payable in 60 days. f) Purchased a large quantity of office supplies on credit. g) Declared a dividend to be paid in 45 days. h) Made an adjusting entry for the portion of

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the insurance premium which had expired. i) Made an adjusting entry to record depreciation for the period. j) Made an adjusting entry for office supplies used during this period. k) Made an adjusting entry to recognize that a portion of the fee received in advance (transaction a) had now been earned. l) Paid the dividend declared in transaction g.

6) Allied Architects adjusts its books each month and closes its books at December 31, the end of the year. The company’s unadjusted trial balance at January 31, Year 2, is as follows: Debit Cash

$ 39,645

Accounts Receivable

27,000

Supplies

3,375

Prepaid Advertising

7,560

Equipment

64,800

Accumulated Depreciation: Equipment

Credit

$ 22,500

Unearned Consulting Fees

17,550

Income Taxes Payable

15,840

Capital Stock

18,000

Retained Earnings

23,850

Consulting Fees Earned

78,570

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Salaries Expense

28,800

Utilities Expense

1,080

Rent Expense

4,050 $ 176,310

$ 176,310

The following information relates to month-end adjustments:According to contracts, consulting fees received in advance that were earned in January total $13,500.On November 1, Year 1, the company paid in advance for 5 months' advertising in professional journals.At January 31, Year 2, supplies on hand amount to $2,250.The equipment, which was purchased at the beginning of January Year 2, has an estimated useful life of 4 years.The corporation is subject to income taxes of 25% of taxable income. (Assume taxable income is the same as "income before taxes.") Instructions: 1) What is the adjusted balance of the Unearned Consulting Fees account at January 31, Year 2? 2) What is the amount of Advertising Expense that will be reported in the income statement for the month ended January 31, Year 2? 3) What is the amount of Supplies Expense that will be reported in the income statement for the month ended January 31, Year 2? 4) After the related adjusting entry is recorded, what is the book value of the equipment at January 31, Year 2? 5) What is the net income (net loss) that will be reported in the income statement for the month ended January 31, Year 2?

7) West Laboratory adjusts and closes its accounts at the end of each month. The company’s unadjusted trial balance at September 30, is as follows:

Debit Cash Medical Fees Receivable

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Credit

$ 18,200 27,000

Prepaid Rent

5,000

Office Supplies

1,200

Medical Equipment

21,800

Accumulated Depreciation: Medical Equipment

$ 6,000

Accounts Payable

3,000

Notes Payable

8,000

Unearned Medical Fees

14,000

Capital Stock

18,000

Retained Earnings

16,000

Dividends

1,000

Medical Fees Earned

31,000

Salaries Expense

14,000

Utilities Expense

2,000

Insurance Expense

5,800 $ 96,000

$ 96,000

The following information relates to month-end adjustments: (a) Office supplies on hand September 30 amounted to $500. (b) The useful life of the medical equipment was estimated to be 20 years. (c) Many patients pay in advance for major medical procedures. Fees of $6,000 were earned during the month by performing procedures on patients who had paid in advance. (d) Salaries earned by employees during the month but not yet recorded amounted to $2,300. (e) On September 1, West Laboratory had moved and paid 2 month's rent in advance. (f) Medical procedures performed during the month but not yet billed or recorded amounted to $4,600. Instructions: Prepare the adjusting entries required at September 30.

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Date

Account

Debit

Credit

8) The Blue Chip Company prepared the following income statement for December 31, Year 1, but neglected to make the necessary adjusting entries relating to Year 1. The Blue Chip Company

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Income Statement For the Year ending December 31, Year 1 Revenues

$ 96,400

Expenses Wage Expense

$ 16,480

Rent Expense

4,320

Telephone Expense

560

Utility Expense

960

Total Expenses Net Income

22,320 $ 74,080

The following information relates to year-end adjustments: • The company had purchased a truck for $4,800 on January 1, Year 1, that was expected to last 5 years. It was originally debited to the account "Truck" and credited to cash. • Salaries of $2,400 were owed to employees but not yet recorded. • The company owed $640 in accrued interest that was to be paid early in January Year 2. • In November Year 1, the company had received $3,600 of advance payments, which were originally recorded as Unearned Revenue. One-third of this was earned in December Year 1. Instructions: Prepare a corrected income statement.

9) Murphy's Auto Company purchased a large piece of equipment on January 1, Year 1. The equipment is being depreciated, using the straight-line method, at the rate of $16,000 per year. On January 1, Year 12, the book value of the machine was $190,000. (A) What was the original cost of the machine? (B) What will the book value be on December 31, Year 13? Version 1

10)

Consider the concept of materiality.

Instructions: (A) Identify several factors considered by an accountant in deciding whether an item is material. (B) Does the concept of materiality complicate or simplify the process of making adjusting entries? (C) Give an illustration to support your answer to part (B).

11) Before making any year-end adjusting entries, the revenues of Hot Jazz Studio exceeded expenses by $127,000. However, the following adjustments are necessary: (a). Prepaid rent consumed, $1,500. (b). Services rendered to clients but not yet billed, $20,000. (c).Interest accrued on notes payable, $1,100. (d). Depreciation, $4,800. (e). Accrued wages payable, $3,900. (f). Fees collected in advance which have now been earned, $7,100. Instructions: Complete the schedule to determine the net income of Hot Jazz Studio after these adjustments have been recorded. Show the effect of each adjustment in the space provided. Compute net income after adjustments and place answer in space provided. Income before adjusting entries Adjustments:

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$ 127,000

Net income after adjustments

12) Ocean View, Incorporated reported revenues of $645,000 and expenses of $360,000 for the month of May, before making any month-end adjusting entries. The following data are provided regarding adjusting entries: (a.) Portion of insurance expiring in May, $2,520. (b.) A customer has used the facilities for two weeks in May; the fee of $4,200 has not yet been billed. (c.) Amount owed for salaries accrued in the last week of May, $1,650. (d.) Depreciation on equipment for May $1,290. (e.) Supplies used in May, $13,125. (f.) Fees collected in advance which have been earned during May, $23,400. Instructions: Complete the schedule to determine the net income of Ocean View Incorporated for May after these adjustments have been recorded. Begin your schedule with income before adjusting entries and then show the effect of each adjustment to arrive at net income after adjustment. Income before adjusting entries Adjustments:

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Net income after adjustments

13) Galaxy Entertainment prepares monthly financial statements. On July 31, the accountant made adjusting entries to record: (a). Depreciation for the month of July. (b). The portion of prepaid rent for outdoor stage and seating which had expired in July. (c). Earning of ticket revenue for July which had been subscribed in advance. (When patrons purchase the Summer Jazz Series tickets in advance, the accountant credits Unearned Ticket Revenue.) (d). Amount owed to Galaxy from the caterer who sold food and beverages during the July performances. The amount due will be paid to the company on August 8. (e). Amount owed to the musicians which had accrued since the last pay day in July.Instructions: Indicate the effect of each of these adjusting entries on the major elements of the company's financial statements by completing the schedule provided below. Use the symbols + for increase, – for decrease, and NE for no effect.

Income Statement Adjusting Entry (a).

Revenue Expenses

Net Income

Balance Sheet Assets Liabilities

Owners' Equity

(b). (c).

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(d). (e).

14) Whoop-It-Up, Incorporated. prepares monthly financial statements. On March 31, the company's accountant made adjusting entries to record: (a) Depreciation for the month of March. (b) Amount owed to Whoop-It-Up, Incorporated for March from the concessionaire operating a juice bar in the facility. The amount due will be remitted to Whoop-It-Up, Inc during the first week in April. (c) Cost of supplies used in March. (When purchased, the cost of supplies is debited to an asset account.) (d) Earning of a portion of annual membership fees which had been collected in advance. (When customers purchase annual memberships, an Unearned Revenue account is credited.) (e) Accrued interest for March owed on a bank loan obtained March 1. No interest expense has yet been recorded. Instructions: Indicate the effect of each of these adjusting entries on the major elements of the company's financial statements by completing the schedule provided below. Use the symbols + for increase, – for decrease, and NE for no effect. Income Statement Adjusting Entry (a).

Revenue Expenses

Net Income

Balance Sheet Assets

Liabilities

Owners' Equity

(b). (c). (d).

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(e).

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Answer Key Test name: Chapter 04 Test Bank (Problem Material) 1) No, the need for adjusting entries does not mean that transactions are being recorded improperly. There are many situations in which a cash receipt represents revenue of two or more accounting periods, or a cash payment covers expenses of several accounting periods. The purpose of adjusting entries is to ensure that revenue and expenses are recognized on an accrual basis, regardless of when a cash receipt or payment occurs. Revenue is to be recognized when earned; expenses are to be recorded when related goods and services are used. An adjusting entry is required for each transaction that involves either revenue or expense of more than one accounting period. 2) Examples may vary. (1). To convert assets to expenses as they are consumed. Example: Depreciation. (2). To convert liabilities to revenue as they become earned. Example: Unearned revenue. (3). To accrue unpaid expenses. Example: Salaries earned, but not paid. (4). To accrue uncollected revenue. Example: Service revenue earned, but not collected. 3) (a) Contra-asset (b) Accumulated depreciation (c) Unearned revenue (d) None (Book value is based on cost, not estimated current market value.) (e) Adjusting entries (f) Prepaid expense (g) Accrued revenue Version 1

4) Transactions Example: Paid rent on the building for the current period a) Trucks are purchased by making a 30% cash down payment and issuing a note payable for the balance of the purchase price. b) Fee is received in advance, for rental of truck for a future period c) Purchased a large quantity of office supplies on credit d) Bought a three-year insurance policy and paid in full e) Declared a dividend to be paid in 60 days f) Depreciation on trucks is recorded g) Adjusting entry is made to record liability to Daily News for advertising done in this period; payment is due next month h) Adjusting entry is made to record truck rentals earned but not yet received or recorded i) Some portion of the truck rentals previously received in advance have now been earned j) Made an adjusting entry for office supplies used during this period k) Made an adjusting entry for the portion of the insurance premium which had expired l) Made an adjusting entry to accrue income taxes expenses at the end of a profitable period.

Account(s) Debited 53

Account(s) Credited 1

1,22

33 55 51

23 6 21

Account(s) Debited 53

Account(s) Credited 1

5) Transactions Example: Paid rent on the building for the current period. a) Received an advance payment from a client for services to be rendered over next six months. b) Paid salaries of employees.

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c) Bought a three-year insurance policy and paid in full. d) Performed services for a client; received part of fee in cash remainder to be collected in 30 days. e) Purchased office equipment; paid [part] in cash, balance payable in 60 days. f) Purchased a large quantity of office supplies on credit. g) Declared a dividend to be paid in 45 days. h) Made an adjusting entry for the portion of the insurance premium which had expired. i) Made an adjusting entry to record depreciation for the period. j) Made an adjusting entry for office supplies used during this period. k) Made an adjusting entry to recognize that a portion of the fee received in advance (transaction a) had now been earned. l) Paid the dividend declared in transaction g.

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1,2

1,22

33 54

25 4

6) 1)$4,050 2)$1,512 3)$1,125 4)$40,950 5)$39,859 Feedback: 1) Consulting fees received in advance of $17,550 −Amount earned in January of $13,500 = $4,050 balance (or amount still owed) 2) Advertising expense for January Year 2 = Prepaid amount of $7,560 × 1/5 = $1,512 3) Supplies expense for January Year 2 = Account balance of $$3,375 −Amount on hand of $2,250 = $1,125 (which is the amount used) 4) Monthly depreciation = $64,800 ÷ 48 months = $1,350 Accumulated depreciation at January 31, Year 2 = Unadjusted balance of accumulated depreciation of $22,500 + January Year 2 depreciation of $1,350 = $23,850 Book value = Cost of $64,800 − Adjusted accumulated depreciation of $23,850 = $40,950 5) Net income for January 31 (see computation below).... $39,859 Net income before adjustment: ($78,750 − $28,800 − $1,080 − $4,050)

$ 44,460

Adjustments: Fees earned Advertising expense (from 2 above) Supplies expense (from 2 above) Depreciation expense Income before income taxes Income taxes expense (25% of $53, 145) Net income for January

13,500 (2,520) (1,125) (1,350) $ 53,145 (13,286) $ 39,859

<br>or<br> Fees earned ($78,570 + 13,500)

92,070

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Less: Salaries expense

$ 28,800

Utilities expense

1,080

Rent expense

4,050

Advertising expense (2 above)

2,520

Supplies expense (2 above)

1,125

Depreciation expense Income before taxes

1,350

(38,925) 53,145

Income taxes expense (25% of $53,145)

(13,286)

Net income for January

$ 39,859

7) Date September 30

Account Supplies expense

Debit 700

Office supplies Depreciation expense Accumulated depreciation: Medical equipment Unearned medical fees

700 90.83 90.83 6,000

Medical fees earned Salaries expense

6,000 2,300

Salaries payable Rent expense

2,300 2,500

Prepaid rent Medical fees receivable Medical fees earned

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Credit

2,500 4,600 4,600

Feedback: Supplies expense = Balance in Supplies account of $1,200 − Supplies on hand of $500 = $700 Depreciation expense = Cost of medical equipment of $21,800 ÷ 20 years × 1/12 = $90.83 (rounded) Rent expense = Prepaid rent of $5,000 × ½ (for one of the two months that were prepaid) = $2,500 8) The Blue Chip Company Income Statement For the Year ending December 31, Year 1 Revenues

$ 97,600

Expenses Wages

$ 18,880

Rent

4,320

Telephone

560

Utility

960

Depreciation

960

Interest

640

Total Expenses Net Income

26,320 $ 71,080

Feedback: Revenue = $96,400 + ($3,600 × 1/3) = $96,400 + $1,200 = $97,600 Wages Expense = $16,480 + $2,400 = $18,880 Depreciation expense = Cost of truck of $4,800 ÷ 5 years × 12/12 = $960 Interest Expense = $0 + $640 = $640 Version 1

9) (A) $366,000 (B) $158,000 Feedback: (A) Eleven years have passed since the machine was purchased on January 1, Year 1. Cost of machine = Book value of $190,000 at December 31, Year 12 + Accumulated depreciation of (11 × $16,000) = $190,000 + $176,000 = $366,000 (B) Book value at December 31, Year 13 = Book value at January 1, Year 12, $190,000 − Depreciation for Years 12 and 13 of $32,000 (or 2 years × $16,000) = $158,000 10) (A) Factors to be considered include the following:The dollar amount of the item (relative to annual net income, for example).The cumulative effect of all items under consideration.The nature of the item (politically sensitive, illegal, contrary to company policies, etc.).Accountants' use their professional judgment in deciding which items are material, i.e., might reasonably influence the decisions of users of the financial statements. (B) The concept of materiality should simplify the adjusting process because it allows accountants to use estimated amounts and even to ignore other accounting principles if the results do not have a material effect upon the financial statements. (C) Students are required to provide one illustration; several are listed below:Low-cost assets may be charged directly to expense.Some expenses such as utilities are charged to expense as the bills are paid, rather than when services are used, even though this practice technically violates the matching principle. Some adjusting entries may be ignored for immaterial dollar amounts.Adjusting entries may be based upon estimates if the amount of error is likely to be immaterial. Version 1

11) Income before adjusting entries Adjustments:

$ 127,000

(a). Rent expense (b). Revenue earned not yet recorded (c). Accrued interest expense (d). Depreciation expense (e). Accrued wages expense (f). Earned a portion of unearned revenue Net income after adjustments

(1,500) 20,000 (1,100) (4,800) (3,900) 7,100 $ 142,800

12) Income before adjusting entries Adjustments:

$ 285,000

(a.) Insurance expiring in May (b.) Revenue earned not yet recorded (c.) Accrued salaries expense for May (d.) May depreciation expense (e.) Supplies expense (f.) Earned a portion of unearned revenue Net income after adjustments

(2,520) 4,200 (1,650) (1,290) (13,125) 23,400 $ 294,015

<br>Feedback:<br>Income before adjusting entries = Revenue of $645,000 - Expenses of $360,000 = $285,000 13) Income Statement Adjusting Entry (a). (b). (c). (d). (e).

Revenue

Expenses

NE NE + + NE

+ + NE NE +

Net Income + + -

Balance Sheet Assets Liabilities NE + NE

NE NE NE +

Owners' Equity + + -

14) Income Statement Adjusting Entry (a).

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Revenue

Expenses

Net Income -

Balance Sheet Assets Liabilities −

Owners' Equity 22

(b). (c). (d). (e).

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+ NE + NE

NE + NE +

+ + -

+ NE NE

NE NE +

+ + -

CHAPTER 4 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Adjusting entries are needed whenever transactions affect the revenue or expenses of more than one accounting period. ⊚ ⊚

Adjusting entries are usually made on a daily basis. ⊚ ⊚

true false

The Cash account is usually affected by adjusting entries. ⊚ ⊚

true false

Adjusting entries are only required when errors are made. ⊚ ⊚

true false

Every adjusting entry involves the recognition of either revenue or an expense. ⊚ ⊚

true false

6) Depreciation expense on equipment is considered a cash expense since the company must pay cash for the equipment. ⊚ ⊚

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true false

7) The failure to record an adjusting entry for depreciation would cause assets to be overstated and net income to be understated. ⊚ ⊚

true false

8) If a depreciable asset’s market value increases during the year, no depreciation expense should be recorded. ⊚ ⊚

true false

9) The period of time over which the cost of an asset is allocated to depreciation expense is called its useful life. ⊚ ⊚

true false

10) Avalon Company paid $4,400 cash for an insurance policy providing three years’ protection against fire loss. This transaction could properly be recorded by a $4,400 debit to Unexpired Insurance and a $4,400 credit to Cash. ⊚ ⊚

11)

Prepaid expenses are assets that should appear on the balance sheet. ⊚ ⊚

12)

true false

One of the purposes of adjusting entries is to convert assets to expenses. ⊚ ⊚

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true false

13) Since the Accumulated Depreciation account has a credit balance, it is reported on the liability side of the balance sheet along with other accounts that have a credit balance. ⊚ ⊚

true false

14) Recording depreciation expense is an example of an adjusting entry to accrue unpaid expenses resulting from expenses being incurred before cash is paid. ⊚ ⊚

true false

15) When a company receives cash in advance and is obligated to provide a service or a product in the future, the entry would be a debit to a revenue account and a credit to a liability account. ⊚ ⊚

16)

true false

Unearned revenue is a liability and should be reported on the income statement. ⊚ ⊚

true false

17) The adjusting entry to record estimated income taxes in a profitable period consists of a debit to Income Tax Payable and a credit to Income Tax Expense. ⊚ ⊚

18)

true false

Unpaid expenses may be included as an expense on the income statement. ⊚ ⊚

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true false

19) Omission of the adjusting entry needed to accrue an expense at the end of the period would cause liabilities to be understated. ⊚ ⊚

20)

true false

Wages are an expense to the employer when earned, rather than when paid. ⊚ ⊚

true false

21) An expenditure that benefits year one but is paid for in year two should not be recorded until year two. ⊚ ⊚

true false

22) An adjusting entry to recognize revenue that has been earned but not yet billed or collected will cause an increase in total liabilities. ⊚ ⊚

true false

23) The realization principle underlies the accounting practices of depreciating plant assets and amortizing the cost of unexpired insurance policies. ⊚ ⊚

true false

24) Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts. ⊚ ⊚

25)

true false

Materiality is determined by the Financial Accounting Standards Board.

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⊚ ⊚

26)

true false

The adjusted trial balance may be used in place of the income statement. ⊚ ⊚

true false

27) The balance in the Retained Earnings account that appears on the adjusted trial balance is the same as the balance of the Retained Earnings account that is reported on the balance sheet. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 28) Adjusting entries are prepared: A) B) C) D)

29)

Before financial statements and after a trial balance has been prepared. After a trial balance has been prepared and after financial statements are prepared. After posting but before a trial balance is prepared. Anytime an accountant sees fit to prepare the entries.

Adjusting entries: A) B) C) D)

Are generally made daily. Assign revenues to the period in which they are received. Generally fall into one of two categories. Are needed whenever revenue transactions affect more than one period.

30) We can compare income of the current period with income of a previous period to determine whether the operating results are improving or declining:

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A) B) C) D)

31)

Only if each accounting period covered is a full year. Only if the same accountant prepares the income statement each period. Only if the accounting periods are equal in length. Only if a manual accounting system is used in both periods.

The purpose of adjusting entries is to:

A) Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period. B) Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions. C) Correct errors made during the accounting period. D) Update the owners’ equity account for the changes in owners' equity that had been recorded in revenue and expense accounts throughout the period.

32)

Which of the following is not a purpose of adjusting entries?

A) To prepare the revenue and expense accounts for recording transactions of the following period. B) To apportion the proper amounts of revenue and expense to the current accounting period. C) To establish the proper amounts of assets and liabilities in the balance sheet. D) To accomplish the objective of offsetting the revenue of the period with all the expenses incurred in generating that revenue.

33) Which of the following situations does not require Empire Company to record an adjusting entry at the end of January?

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A) On January 1, Empire Company purchased delivery equipment with an estimated useful life of five years. B) On January 1, Empire Company began delivery service for a large client who will pay at the end of a three-month period. C) At the end of January, Empire Company pays the custodian for January office cleaning services. D) On January 1, Empire Company paid rent for six months on its office building.

34)

Which of the following is not considered a basic type of adjusting entry? A) B) C) D)

35)

An entry to convert a liability to a revenue. An entry to accrue unpaid expenses. An entry to convert an asset to an expense. An entry to convert an asset to a liability.

Adjusting entries are needed: A) B) C) D)

Whenever revenue is not received in cash. Whenever expenses are not paid in cash. Only to correct errors in the initial recording of business transactions. Whenever transactions affect the revenue or expenses of more than one accounting

period.

36)

No adjusting entry should consist of: A) B) C) D)

37)

A debit to an expense and a credit to an asset. A debit to an expense and a credit to revenue. A debit to an expense and a credit to a liability. A debit to a liability and a credit to revenue.

Which of the following is not an example of an adjusting entry?

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A) B) C) D)

38)

Which of the following is considered an adjusting entry? A) B) C) D)

39)

The entry to record unpaid expenses. The entry to record uncollected revenues. The entry to convert liabilities to revenue. The entry to pay outstanding bills.

The entry to record depreciation. The entry to pay salaries. The entry to pay outstanding bills. The entry to declare a dividend distribution.

The normal balance of the Accumulated Depreciation account is: A) B) C) D)

A debit balance. A credit balance. Either a debit balance or a credit balance. There is no normal balance for this account.

40) If Hot Bagel Company estimates depreciation on an automobile to be $578 for the year, the company should make the following adjusting entry: A) B) C) D)

41)

Debit Accumulated Depreciation $578 and credit Depreciation Expense $578. Debit Depreciation Expense $578 and credit Automobile $578. Debit Depreciation Expense $578 and credit Accumulated Depreciation $578. Debit Automobile $578 and credit Depreciation Expense $578.

Accumulated Depreciation is:

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A) B) C) D)

42)

An asset account. A revenue account. A contra-asset account. An expense account.

Which of the following statements regarding depreciation is correct? A) Depreciation is an exact calculation of the decline in value of an asset. B) Depreciation is only an estimate of the decline in value of an asset. C) Depreciation is only recorded at the end of a year and never over a shorter time

period. D) Management must know the exact life of an asset in order to calculate an acceptable depreciation expense.

43)

The entry to record depreciation is an example of an adjusting entry: A) B) C) D)

44)

To apportion a recorded cost. To apportion unearned revenue. To convert a liability to revenue. To record unrecorded revenue.

Prepaid expenses are: A) B) C) D)

Assets. Income. Liabilities. Expenses.

45) Colonial Systems prepares monthly financial statements. Colonial would record a prepaid expense in each of the following situations except:

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A) B) C) D)

46)

Colonial Systems purchased a two-year fire insurance policy. Colonial Systems paid for six months' gardening services in advance. A tenant paid Colonial Systems three months' rent in advance. Colonial Systems purchased enough office supplies to last several months.

Which of the following statements is not true regarding prepaid expenses? A) B) C) D)

Prepaid expenses represent assets. Prepaid expenses are shown in a special section of the income statement. Prepaid expenses become expenses only as goods or services are used up. Prepaid expenses appear in the balance sheet.

47) Recently, Bon Appetite Café contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Café's current fiscal year, the Cafe's accountant recorded the disbursement to advertising expense. If no adjusting entry is made, how will this year's financial statements of Bon Appetite Café be affected? A) B) C) D)

48)

An example of a contra-asset account is: A) B) C) D)

49)

Net income will be overstated and total assets will be understated. Net income will be overstated and total assets will be overstated. Net income will be understated and total assets will be understated Net income will be understated and total assets will be overstated.

Depreciation Expense. Accumulated Depreciation. Prepaid expenses. Unearned revenue.

Which of the following entries causes an immediate decrease in assets and in net income?

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A) B) C) D)

50)

Prepaid expenses appear: A) B) C) D)

51)

A debit to a liability and a credit to cash. A debit to an expense and a credit to cash. A debit to an expense and a credit to an asset account. A debit to an asset account and a credit to an expense account.

Which statement is true about land? A) B) C) D)

53)

As an expense on the income statement. As an asset on the balance sheet. As a liability on the balance sheet. As a reduction to retained earnings.

An adjusting entry to convert an asset to expense consists of: A) B) C) D)

52)

The entry to record depreciation expense. The entry to record revenue earned but not yet received. The entry to record the earned portion of rent received in advance. The entry to record accrued wages payable.

Land should be depreciated over the same period as the building located on it. Land cannot be depreciated for greater than a 40-year period. Land should not be depreciated. The straight-line method should be used to depreciate land.

Depreciation expense is:

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A) B) C) D)

54)

The cost of insurance is considered an expense: A) B) C) D)

55)

Only when the entire policy period has passed. Only when the policy is purchased. Only when the premium is paid. Evenly over the term of the policy.

Shop supplies are expensed when: A) B) C) D)

56)

Only an estimate. An exact calculation prepared by an appraiser. Not to be calculated unless the exact life of an asset can be determined. To be determined for all assets owned by a company.

Consumed. Purchased. Paid for. Ordered.

Accumulated depreciation is: A) B) C) D)

The depreciation expense recorded on an asset to date. The remaining book value of an asset. The depreciation expense taken on an asset during the current period. An expense on the income statement.

57) In which of the following situations would the largest amount be recorded as an expense of the current year? (Assume accrual basis accounting.)

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A) B) C) D)

$4,000 is paid in January for equipment with a useful life of four years. $1,800 is paid in January for a two-year fire insurance policy. $1,200 cash dividends are declared and paid. $900 is paid to an attorney for legal services rendered during the current year.

58) Gourmet Shop purchased cash registers on April 1 for $6,840. If this asset has an estimated useful life of three years, what is the book value of the cash registers on May 31? A) B) C) D)

$190. $2,280. $6,840. $6,460.

59) Gourmet Shop purchased cash registers on April 1 for $12,000. If this asset has an estimated useful life of four years, what is the book value of the cash registers on May 31? A) B) C) D)

$250. $3,000. $9,000. $11,500.

60) An asset purchased on January 1, Year 1, for $35,400 that has an estimated life of 6 years will have a book value on December 31, Year 4, of: A) B) C) D)

$35,400. $23,600. $11,800. $17,700.

61) An asset purchased on January 1, Year 1, for $60,000 that has an estimated life of 10 years will have a book value on December 31, Year 4, of: Version 1

A) B) C) D)

$60,000. $24,000. $36,000. $42,000.

62) If an asset was purchased on January 1, Year 1, for $174,000 with an estimated life of 6 years, what is the accumulated depreciation at December 31, Year 4? A) B) C) D)

$29,000. $116,000. $58,000. $87,000.

63) If an asset was purchased on January 1, Year 1, for $140,000 with an estimated life of 5 years, what is the accumulated depreciation at December 31, Year 4? A) B) C) D)

$28,000. $112,000. $56,000. $84,000.

64) Tuna Company purchased a building in Year 1 for $650,000 and debited an asset called "Buildings" for the entire amount. The company never depreciated the building although it had a useful life of 15 years. At the end of Year 1, this action will cause: A) B) C) D)

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Net income to be understated. Net income to be overstated. Net income will not be affected. Total assets will be understated.

65) On June 1, Norma Company signed a 12-month lease for warehouse space. The lease requires monthly rent of $550, with 4 months paid in advance. Norma Company records the payment by debiting Prepaid Rent $2,200 and crediting Cash $2,200. At the end of June, what should be the balance of Norma’s Prepaid Rent account? A) B) C) D)

$0 $2,200 $1,650 $550

66) Paddle, Incorporated purchased equipment for $14,760 on February 1, Year 1. The equipment has a useful life of 3 years. How much depreciation expense should Paddle recognize on its income statement for Year 1? A) B) C) D)

67)

Unearned revenue may also be called: A) B) C) D)

68)

$4,510 $410 $4,920 $14,760

Net income. Deferred revenue. Unexpired revenue. Services rendered.

Unearned revenue is: A) B) C) D)

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An asset. Income. A liability. An expense.

69)

The balance of an unearned revenue account: A) B) C) D)

Appears in the balance sheet as a component of owners' equity. Appears in the income statement along with other revenue accounts. Appears in a separate section of the income statement for revenue not yet earned. Appears in the liability section of the balance sheet.

70) In which of the following situations would Daystar Company record unearned revenue in May? A) In April, Daystar Company received payment from a customer for services that are performed in May. B) Daystar Company completes a job for a customer in May; payment will be received in June. C) Daystar Company is paid on May 25 for work done in the first two weeks of May. D) Daystar Company receives payment in May for work to be performed in June and July.

71)

Unearned revenue appears: A) B) C) D)

As income on the income statement. As an asset on the balance sheet. As a liability on the balance sheet. As a part of the retained earnings.

72) Videobusters, Incorporated offered books of video rental coupons to its patrons at $35 per book. Each book contained a certain number of coupons for video rentals. During the current period 450 books were sold for $15,750, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $12,500 worth of coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be:

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A) B) C) D)

Debit Rental Revenue $3,250 and credit Unearned Rental Revenue $3,250. Debit Rental Revenue $12,500 and credit Unearned Rental Revenue $12,500. Debit Unearned Rental Revenue $3,250 and credit Rental Revenue $3,250. Debit Unearned Rental Revenue $12,500 and credit Rental Revenue $12,500.

73) Videobusters, Incorporated offered books of video rental coupons to its patrons at $40 per book. Each book contained a certain number of coupons for video rentals. During the current period 500 books were sold for $20,000, and this amount was credited to Unearned Rental Revenue. At the end of the period, it was determined that $15,000 worth of coupons had been used by customers to rent videos. The appropriate adjusting entry at the end of the period would be: A) B) C) D)

Debit Rental Revenue $5,000 and credit Unearned Rental Revenue $5,000. Debit Rental Revenue $15,000 and credit Unearned Rental Revenue $15,000. Debit Unearned Rental Revenue $5,000 and credit Rental Revenue $5,000. Debit Unearned Rental Revenue $15,000 and credit Rental Revenue $15,000.

74) Hoffman, Incorporatedadjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 11,080

Accounts Receivable

9,780

Supplies

1,460

Prepaid Insurance

2,880

Equipment

23,400

Accumulated Depreciation: Equipment

Credit

$ 9,360

Unearned Service Revenue

7,300

Capital Stock

6,000

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Retained Earnings Dividends

24,200 1,720

Service Revenue Earned

14,710

Salaries Expense

8,600

Utilities Expense

550

Rent Expense Totals

2,100 $ 61,570

$ 61,570

According to service contracts, $4,970 of the Unearned Service Revenue has been earned in March. The amount of Service Revenue Earned to be reported in the March income statement is: A) B) C) D)

$14,710. $19,680. $9,740. $19,010.

75) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 10,920

Accounts Receivable

9,620

Supplies

1,300

Prepaid Insurance

3,120

Equipment

26,000

Accumulated Depreciation: Equipment

Credit

$ 10,400

Unearned Service Revenue

6,500

Capital Stock

5,200

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Retained Earnings Dividends

23,400 1,560

Service Revenue Earned

16,510

Salaries Expense

7,800

Utilities Expense

390

Rent Expense Totals

1,300 $ 62,010

$ 62,010

According to service contracts, $4,810 of the Unearned Service Revenue has been earned in March. The amount of Service Revenue Earned to be reported in the March income statement is: A) B) C) D)

$16,510. $21,320. $11,700. $20,410.

76) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 11,120

Accounts Receivable

9,820

Supplies

1,500

Prepaid Insurance

2,720

Equipment

21,000

Accumulated Depreciation: Equipment

Credit

$ 8,400

Unearned Service Revenue

7,500

Capital Stock

6,200

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Retained Earnings Dividends

24,400 1,760

Service Revenue Earned

13,110

Salaries Expense

8,800

Utilities Expense

590

Rent Expense Totals

2,300 $ 59,610

$ 59,610

On March 1, Hoffman paid in advance for four months' insurance. The necessary adjusting entry at March 31 includes which of the following? A) B) C) D)

A credit to Prepaid Insurance for $2,040. A credit to Prepaid Insurance for $680. A debit to Prepaid Insurance for $2,040. A debit to Prepaid Insurance for $680.

77) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 10,920

Accounts Receivable

9,620

Supplies

1,300

Prepaid Insurance

3,120

Equipment

26,000

Accumulated Depreciation: Equipment

Credit

$ 10,400

Unearned Service Revenue

6,500

Capital Stock

5,200

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Retained Earnings Dividends

23,400 1,560

Service Revenue Earned

16,510

Salaries Expense

7,800

Utilities Expense

390

Rent Expense Totals

1,300 $ 62,010

$ 62,010

On March 1, Hoffman paid in advance for four months' insurance. The necessary adjusting entry at March 31 includes which of the following? A) B) C) D)

A credit to Prepaid Insurance for $2,340. A credit to Prepaid Insurance for $780. A debit to Prepaid Insurance for $2,340. A debit to Prepaid Insurance for $780.

78) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 11,010

Accounts Receivable

9,710

Supplies

1,390

Prepaid Insurance

3,480

Equipment

31,200

Accumulated Depreciation: Equipment

Credit

$ 12,480

Unearned Service Revenue

6,950

Capital Stock

5,650

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Retained Earnings Dividends

23,850 1,650

Service Revenue Earned

19,990

Salaries Expense

8,250

Utilities Expense

480

Rent Expense Totals

1,750 $ 68,920

$ 68,920

At March 31, the amount of supplies on hand is $565. What amount is reported in the March income statement for supplies expense? A) B) C) D)

$1,390 $0 $565 $825

79) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 10,920

Accounts Receivable

9,620

Supplies

1,300

Prepaid Insurance

3,120

Equipment

26,000

Accumulated Depreciation: Equipment

Credit

$ 10,400

Unearned Service Revenue

6,500

Capital Stock

5,200

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Retained Earnings Dividends

23,400 1,560

Service Revenue Earned

16,510

Salaries Expense

7,800

Utilities Expense

390

Rent Expense Totals

1,300 $ 62,010

$ 62,010

At March 31, the amount of supplies on hand is $520. What amount is reported in the March income statement for supplies expense? A) B) C) D)

$1,300 $0 $520 $780

80) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 11,060

Accounts Receivable

9,760

Supplies

1,440

Prepaid Insurance

2,960

Equipment

24,600

Accumulated Depreciation: Equipment

Credit

$ 9,840

Unearned Service Revenue

7,200

Capital Stock

5,900

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Retained Earnings Dividends

24,100 1,700

Service Revenue Earned

15,510

Salaries Expense

8,500

Utilities Expense

530

Rent Expense Totals

2,000 $ 62,550

$ 62,550

The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the proper March adjustment is recorded. A) B) C) D)

$10,250 $14,350 $24,190 $9,840

81) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 10,920

Accounts Receivable

9,620

Supplies

1,300

Prepaid Insurance

3,120

Equipment

26,000

Accumulated Depreciation: Equipment

Credit

$ 10,400

Unearned Service Revenue

6,500

Capital Stock

5,200

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Retained Earnings Dividends

23,400 1,560

Service Revenue Earned

16,510

Salaries Expense

7,800

Utilities Expense

390

Rent Expense Totals

1,300 $ 62,010

$ 62,010

The equipment had an estimated useful life of five years. Compute the book value of the equipment at March 31, after the proper March adjustment is recorded. A) B) C) D)

$10,833 $15,167 $25,567 $10,400

82) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 11,120

Accounts Receivable

9,820

Supplies

1,500

Prepaid Insurance

2,720

Equipment

21,000

Accumulated Depreciation: Equipment

Credit

$ 8,400

Unearned Service Revenue

7,500

Capital Stock

6,200

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Retained Earnings Dividends

24,400 1,760

Service Revenue Earned

13,110

Salaries Expense

8,800

Utilities Expense

590

Rent Expense Totals

2,300 $ 59,610

$ 59,610

Employees are owed $950 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is: A) B) C) D)

$8,800 $950 $7,850 $9,750

83) Hoffman, Incorporated adjusts its books each month but closes its books at the end of the year. The company’s unadjusted trial balance at March 31 is as follows: Debit Cash

$ 10,920

Accounts Receivable

9,620

Supplies

1,300

Prepaid Insurance

3,120

Equipment

26,000

Accumulated Depreciation: Equipment

Credit

$ 10,400

Unearned Service Revenue

6,500

Capital Stock

5,200

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Retained Earnings Dividends

23,400 1,560

Service Revenue Earned

16,510

Salaries Expense

7,800

Utilities Expense

390

Rent Expense Totals

1,300 $ 62,010

$ 62,010

Employees are owed $750 for services since the last payday in March, to be paid the first week in April. The amount to be reported in the March income statement for salaries expense is: A) B) C) D)

$7,800 $750 $7,050 $8,550

84) Under accrual accounting, fees received in advance from customers should be shown as being earned: A) B) C) D)

When cash is collected. When services are performed or goods delivered. When tax rates are low. When tax rates are high.

85) The United Shipping Company borrowed $25,000 at 12% interest on March 1, Year 1. The note is to be repaid, with interest, in six months. If United Shipping makes monthly adjusting entries, which of the following is included as part of the related adjusting entry dated March 31, Year 1?

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A) B) C) D)

Debit Interest Receivable $250. Credit Interest Payable $2,500. Debit Interest Expense $250. Debit Interest Payable $250.

86) Hahn Corporation has three employees. Each earns $600 per week for a five-day workweek ending on Friday. The last day of the current month falls on a Wednesday. The company should make an adjusting entry at the end of the current month: A) B) C) D)

Debiting Wage Expense for $1,080 and crediting Wages Payable for $1,080. Debiting Wage Expense for $360 and crediting Wages Payable for $360. Crediting Wage Expense for $1,080 and debiting Wages Payable for $1,080. Crediting Wage Expense for $360 and debiting Wages Payable for $360.

87) Interest that has accrued during the accounting period on a note payable requires an adjusting entry consisting of: A) B) C) D)

A debit to Interest Expense and a credit to Cash. A debit to Notes Payable and a credit to Interest Payable. A debit to an asset and a credit to a liability. A debit to Interest Expense and a credit to Interest Payable.

88) The adjusting entry to record interest that has accrued on a note payable to the bank will cause an immediate: A) B) C) D)

89)

Increase in liabilities and reduction in net income. Decrease in liabilities and reduction in net income. Decrease in assets and reduction in net income. Increase in assets and increase in net income.

Which of the following would not be considered an adjusting entry?

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Option A)

Account Title Supplies expense

Debit 400

Supplies B)

Depreciation expense

400 400

Accumulated depreciation C)

Wage expense

400 400

Cash D)

Insurance expense Prepaid insurance

A) B) C) D)

Credit

400 400 400

Option A Option B Option C Option D

90) In which of the following situations would an adjusting entry be made at the end of January to record an accrued expense? A) Ramona’s Nursery purchased playground equipment on January 1 with an estimated useful life of six years. B) On January 25, Ramona’s Nursery hired a college student to drive the minibus; the new employee is to begin work in February. C) January 31 falls on a Tuesday; salaries are paid on Friday of each week. D) On January 31, Ramona’s Nursery paid the interest owed on a note payable for January.

91) As of January 31, Princess Company owes $500 to Butler Company for equipment rented during January. If no adjustment is made for this item at January 31, how will Princess's financial statements be affected?

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A) B) C) D)

Cash will be overstated at January 31. Net income for January will be overstated. Owners' equity will be understated. The financial statements will be accurate since the $500 does not have to be paid

yet.

92)

Which of the following is not considered an end-of-period adjusting entry?

A) The entry to record the portion of unexpired insurance which has become expense during the period. B) An entry to record revenue that has been earned but has not yet been billed to customers. C) The entry to record depreciation expense. D) An entry to record repayment of a bank loan and to recognize related interest expense.

93)

The accrual of interest on a note payable will: A) B) C) D)

Reduce total liabilities. Increase total liabilities. Have no effect upon total liabilities. Will have no effect upon the income statement but will affect the balance sheet.

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94) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $768,000 at an annual interest rate of 8% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $7,600.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,800.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $12,240; no change has occurred in the account during the year.(5) Fees of $10,600 were earned during the month for clients who had paid in advance.What amount of interest expense has accrued on the bank loan? A) B) C) D)

$4,320 $4,920 $5,120 $5,720

95) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.What amount of interest expense has accrued on the bank loan? A) B) C) D)

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$6,400 $7,000 $7,200 $7,800

96) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.The accrued interest should be: A) B) C) D)

Debited to Notes Payable. Credited to Interest Payable. Credited to Cash. Credited to Interest Expense.

97) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded? A) B) C) D)

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$1,560 $130 $0 $1,430

98) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.By what amount will the book value of the office equipment decline after the appropriate December adjustment is recorded? A) B) C) D)

$1,560 $130 $0 $1,430

99) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.After the appropriate adjusting entry is recorded, the balance in the liability account Unearned Fees will: A) B) C) D)

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Decrease by $9,800. Increase by $9,800. Equal $9,800. Be unaffected.

100) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.The entry to record rent expense will include: A) B) C) D)

A debit to Prepaid Rent for $6,000. A credit to Prepaid Rent for $6,000. A credit to Prepaid Rent for $18,000. A debit to Prepaid Rent for $18,000.

101) Omega Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31, Year 1:(1) A one-year bank loan of $720,000 at an annual interest rate of 12% had been obtained on December 1, Year 1.(2) The company pays all employees up-to-date each Friday. Since December 31, Year 1, fell on Tuesday, there was a liability to employees at that date for two day's pay amounting to $6,800.(3) On December 1, Year 1, rent on the office building had been paid for four months. The monthly rent is $6,000.(4) Depreciation of office equipment is based on an estimated useful life of six years. The balance in the Office Equipment account is $9,360; no change has occurred in the account during the year.(5) Fees of $9,800 were earned during the month for clients who had paid in advance.Failure to make the appropriate adjustment to the Salary Expense account will: A) B) C) D)

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Understate net income for December by $6,800. Understate net income for January by $6,800. Overstate total liabilities at December 31. Overstate the balance in Cash at December 31.

102) On December 31, Louis Jeweler’s made an adjusting entry to record $4,200 accrued interest payable on a note payable. On January 10, the note, which had a balance of $20,000, was repaid. The payment of $26,300 included interest charges of $6,300, $2,100 of which were applicable to the period from January 1 through January 10. The entry to record the repayment of the loan would include: A) A debit to Accrued Interest Payable for $4,200 and a debit to Interest Expense for $2,100. B) A debit to Interest Expense for $6,300. C) A debit to Accrued Interest Payable for $6,300. D) A debit to Interest Expense for $2,100 and a credit Accrued Interest Payable for $4,200.

103) Under accrual accounting, salaries earned by employees but not yet paid should be expensed in the period: A) B) C) D)

In which they are earned. In which they are paid. With higher earnings. With lower earnings.

104) Gordy's Corporation has six employees. Each earns $820 per week for a five-day work week ending on Friday. This month, the last day of the month falls on a Thursday. The company should make an adjusting entry: A) B) C) D)

Debiting Wage Expense for $3,936 and crediting Wages Payable for $3,936. Debiting Wage Expense for $656 and crediting Wages Payable for $656. Crediting Wage Expense for $3,936 and debiting Wages Payable for $3,936. Crediting Wage Expense for $656 and debiting Wages Payable for $656.

105) Gordy’s Corporation has seven employees. Each earns $800 per week for a five-day work week ending on Friday. This month, the last day of the month falls on a Thursday. The company should make an adjusting entry:

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A) B) C) D)

Debiting Wage Expense for $4,480 and crediting Wages Payable for $4,480. Debiting Wage Expense for $640 and crediting Wages Payable for $640. Crediting Wage Expense for $4,480 and debiting Wages Payable for $4,480. Crediting Wage Expense for $640 and debiting Wages Payable for $640.

106) Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1.The company's pays all employees up-to-date each Friday for a five-day workweek. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay (Monday and Tuesday). Employees earn a total of $12,800 per week.On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000.Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year.All fees totaling $19,800 were earned during the month for clients who had paid in advance.What amount of interest expense has accrued on the bank loan? A) B) C) D)

$3,200 $3,500 $3,600 $3,900

107) Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1.The company's pays all employees up-to-date each Friday for a five-day workweek. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay (Monday and Tuesday). Employees earn a total of $12,800 per week.On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000.Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year.All fees totaling $19,800 were earned during the month for clients who had paid in advance.How much is owed the employees for their wages?

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A) B) C) D)

$0 $2,560 $5,120 $12,800

108) Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1.The company's pays all employees up-to-date each Friday for a five-day workweek. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay (Monday and Tuesday). Employees earn a total of $12,800 per week.On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000.Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year.All fees totaling $19,800 were earned during the month for clients who had paid in advance.What should be the adjusted balance of the Prepaid Rent account? A) B) C) D)

$0 $7,000 $14,000 $21,000

109) Gamma Company adjusts its accounts at the end of each month. The following information has been assembled in order to prepare the required adjusting entries at December 31:A one-year bank loan of $720,000 at an annual interest rate of 6% had been obtained on December 1.The company's pays all employees up-to-date each Friday for a five-day workweek. Since December 31 fell on Tuesday, there was a liability to employees at December 31 for two day's pay (Monday and Tuesday). Employees earn a total of $12,800 per week.On December 1, rent on the office building had been paid for three months. The monthly rent is $7,000.Depreciation of office equipment is based on an estimated useful life of five years. The balance in the Office Equipment account is $12,360; no change has occurred in the account during the year.All fees totaling $19,800 were earned during the month for clients who had paid in advance.How much depreciation expense should be recorded for December?

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A) B) C) D)

$206 $472 $12,360 $9,800

110) During the last month of its fiscal year, Echo Lake Resort provided catering services for local business. Echo Lake Resort has not yet received payment from the local business. The entry to record this event is an example of an adjusting entry: A) B) C) D)

To apportion unearned revenue. To accrue an uncollected revenue. To record unrecorded expenses. To record unearned revenue.

111) The accountant for the Grassroots Company failed to make an adjusting entry to record revenue earned but not yet billed to customers. The effect of this error is: A) An overstatement of assets and of net income offset by an understatement of owners' equity. B) An overstatement of net income and an understatement of assets. C) An understatement of assets, net income, and owners' equity. D) An overstatement of liabilities offset by an understatement of owners' equity.

112) An adjusting entry involving recognition of accrued revenue is necessary at the end of March in which of the following situations?

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A) Midwood Consultants received payment in February for consulting services rendered in March. B) Midwood Consultants began working for a client on March 15; bills will be sent monthly beginning April 15. C) Midwood Consultants made payment in January for office rent for the first three months of the year. D) On March 31, a major customer paid his bill for a consulting job completed in February.

113) Regal Real Estate, which maintains its accounts on the basis of a fiscal year ending June 30, began the management of an office building on June 15 for an agreed annual fee of $4,800. The first payment is due on July 15. The adjusting entry required at June 30 is: A) A debit to Management Fees Receivable for $200 and a credit to a revenue account for $200. B) A $200 debit to Unearned Management Fees and a $200 credit to Management Fees Earned. C) A debit to Cash for $200 and a credit to Management Fees Earned. D) A debit to Cash for $400 offset by a credit to a revenue account for $200 and a liability for $200.

114) Great Kids Company began providing day care for the children of employees of a large corporation on January 15 for an agreed monthly fee of $9,000. The first payment is to be received on February 15. The adjusting entry required by Great Kids Company on January 31 includes: A) B) C) D)

A credit to Child Care Fees Earned of $4,500. A debit to Child Care Fees Receivable of $9,000. A debit to Unearned Child Care Revenue of $4,500. A debit to Fees Receivable of $9,000.

115) Adjusting entries help achieve the goals of accrual accounting by applying which two accounting principles?

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A) B) C) D)

Business entity concept and realization principle Cost principle and the accounting equation Realization principle and matching principle Matching principle and safety principle

116) Which of the following is the accounting principle that governs the timing of revenue recognition? A) B) C) D)

Realization principle Materiality Matching Depreciation

117) Which of the following accounting principles is concerned with offsetting revenue with the expenses incurred in producing that revenue? A) B) C) D)

Realization principle Materiality Matching Depreciation

118) Dolphin Company received $1,500 in fees during Year 1, 1/3 of which will be earned in Year 2. The rest was earned when the amount was received. The company should report which of the following amounts as income in Year 1? A) B) C) D)

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$1,500 $500 $1,000 $0

119) Dolphin Company received $1,500 in fees during Year 1, 1/3 of which will be earned in Year 2. The rest was earned when the amount was received. The company should report which of the following amounts as income in Year 1? A) B) C) D)

$1,500 $500 $1,000 $0

120) Swordfish Company earned $72,000 in Year 1 and expects to receive 2/3 of the amount in Year 2 and the remainder in Year 3. How much revenue should Swordfish Company report in Year 1? A) B) C) D)

$0. $24,000. $48,000. $72,000.

121) Swordfish Company earned $75,000 in Year 1 and expects to receive 2/3 of the amount in Year 2 and the remainder in Year 3. How much revenue should Swordfish Company report in Year 1? A) B) C) D)

122)

$0 $25,000 $50,000 $75,000

The concept of materiality:

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A) Involves only tangible assets and not intangible assets. B) Relates only to the income statement and not the balance sheet. C) Is always an exact percentage of a financial account balance. D) Is measured as an item significant enough to influence the decisions of users of financial statements.

123)

Which of the following statements concerning materiality is true?

A) Generally accepted accounting principles are violated if estimates are used in endof-period adjustments. B) Each year the Financial Accounting Standards Board (FASB) publishes the dollar amount considered "material" for each industry. C) Immaterial items should be handled in the most expedient manner, even if resulting financial statements are not completely precise. D) Accountants should not waste time and money in recording transactions involving small dollar amounts.

124)

The concept of materiality:

A) Treats as material only those items that are greater than 2% or 3% of net income. B) Justifies ignoring the matching principle or the realization principle in certain circumstances. C) Affects only items reported in the income statement. D) Results in financial statements that are less useful to decision makers because many details have been omitted.

125) Which of the following would not be a proper application of the concept of materiality by Millridge Corporation?

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A) Transactions involving small dollar amounts are not recorded in Millridge’s accounting records. B) Estimates of supplies on hand are used to determine the supplies expense for the period. C) On a monthly basis, utility bills are expensed in the month paid, rather than in the month in which services are used. D) Immaterial items are ignored in making end-of-period adjusting entries.

126)

Which statement is true about an adjusted trial balance?

A) B) balance. C) D)

127)

It is prepared before adjusting entries. Revenue accounts and expense accounts should not appear on the adjusted trial Balance sheet items are presented before income statement items. Accumulated depreciation should equal depreciation expense.

On the adjusted trial balance, retained earnings is: A) B) C) D)

Stated at the period-end amount. Stated at the period-beginning amount. Adjusted for all revenues and expenses for the period. Adjusted for the period's dividends.

128) Before any month-end adjustments are made, the net income of Bennett Company is $77,000. The following adjustments are necessary: office supplies used, $3,260; services performed for clients but not yet recorded or collected, $3,740; interest accrued on note payable to bank, $3,140. After adjusting entries are made for the items listed above, Bennett Company's net income will be:

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A) B) C) D)

$66,860. $79,660. $74,340. $77,000.

129) Before any month-end adjustments are made, the net income of Bennett Company is $76,000. The following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,640; interest accrued on note payable to bank, $3,040. After adjusting entries are made for the items listed above, Bennett Company's net income will be: A) B) C) D)

$66,160. $78,560. $73,440. $76,000

130) The accountant for Perfect Painting forgot the following two adjustments at the end of Year 1:(a) The entry to record depreciation: $3,000.(b) The entry to record the portion of fees received in advance, which have now been earned: $3,000. As a result of these two omissions: A) B) C) D)

Net income for Perfect Painting is overstated for Year 1. Net income for Perfect Painting is understated for Year 1. Assets of Perfect Painting are overstated at December 31, Year 1. Liabilities of Perfect Painting are understated at December 31, Year 1.

131) Before making month-end adjustments, net income of Cardinal Company was $119,000 for March. Adjusting entries are necessary for the following items:Depreciation for the month of March: $2,900.Rental income accrued during March, tenant to pay in April: $860.Supplies used in March: $160.Fees earned in March that had been collected in advance: $3,200.After recording these adjustments, net income for March is:

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A) B) C) D)

$116,800. $115,940. $120,000. $119,000.

132) Before making month-end adjustments, net income of Cardinal Company was $116,000 for March. Adjusting entries are necessary for the following items:Depreciation for the month of March: $2,300.Rental income accrued during March, tenant to pay in April: $800.Supplies used in March: $100.Fees earned in March that had been collected in advance: $2,600.After recording these adjustments, net income for March is: A) B) C) D)

$112,400. $113,620. $117,000. $110,800.

133) Before any month-end adjustments are made, the net income of Russell Company is $38,700. However, the following adjustments are necessary: office supplies used, $3,230; services performed for clients but not yet recorded or collected, $3,110; interest accrued on a note payable to bank, $3,710. After adjusting entries are made for the items listed above, Russell Company's net income would be: A) B) C) D)

$38,700. $34,870. $42,530. $28,650.

134) Before any month-end adjustments are made, the net income of Russell Company is $38,000. However, the following adjustments are necessary: office supplies used, $3,160; services performed for clients but not yet recorded or collected, $3,040; interest accrued on a note payable to bank, $3,640. After adjusting entries are made for the items listed above, Russell Company's net income would be:

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A) B) C) D)

$38,000. $34,240. $41,160. $44,200.

135) Before making month-end adjustments, net income of Bobwhite Company was $230,000 for March. Adjusting entries are necessary for the following items:Depreciation for the month of March: $3,900.Rental income accrued during March, tenant to pay in April: $860.Supplies used in March: $440.Fees earned in March that had been collected in advance: $3,200.After recording these adjustments, net income for March is: A) B) C) D)

$230,000. $225,660. $229,720. $226,520.

136) Before making month-end adjustments, net income of Bobwhite Company was $232,000 for March. Adjusting entries are necessary for the following items:Depreciation for the month of March: $4,300.Rental income accrued during March, tenant to pay in April: $900.Supplies used in March: $300.Fees earned in March that had been collected in advance: $3,600.After recording these adjustments, net income for March is: A) B) C) D)

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$222,900. $227,700. $231,900. $235,600.

Answer Key Test name: Chapter 04 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) FALSE 4) FALSE 5) TRUE 6) FALSE 7) FALSE 8) FALSE 9) TRUE 10) TRUE 11) TRUE 12) TRUE 13) FALSE 14) FALSE 15) FALSE 16) FALSE 17) FALSE 18) TRUE 19) TRUE 20) TRUE 21) FALSE 22) FALSE 23) FALSE 24) TRUE 25) FALSE 26) FALSE Version 1

27) FALSE 28) A 29) D 30) C 31) B 32) A 33) C 34) D 35) D 36) B 37) D 38) A 39) B 40) C 41) C 42) B 43) A 44) A 45) C 46) B 47) C 48) B 49) A 50) B 51) C 52) C 53) A 54) D 55) A 56) A Version 1

57) A 58) D 59) D 60) C 61) C 62) B 63) B 64) B 65) C 66) A 67) B 68) C 69) D 70) D 71) C 72) D 73) D 74) B 75) B 76) B 77) B 78) D 79) D 80) B 81) B 82) D 83) D 84) B 85) C 86) A Version 1

87) D 88) A 89) C 90) C 91) B 92) D 93) B 94) C 95) C 96) B 97) B 98) B 99) A 100) B 101) B 102) A 103) A 104) A 105) A 106) C 107) C 108) C 109) A 110) B 111) C 112) B 113) A 114) A 115) C 116) A Version 1

117) C 118) C 119) C 120) D 121) D 122) D 123) C 124) B 125) A 126) C 127) B 128) C 129) C 130) C 131) C 132) C 133) B 134) B 135) C 136) C

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CHAPTER 5: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms emphasized in this chapter: Adequate disclosureAfter-closing trial balanceClosing entriesIncome SummaryWorksheetNotes to financial statementsInterim financial statementsGeneral ledger software Instructions: In the space provided for each statement, indicate the accounting term described. ______ a. The generally accepted accounting principle of providing with financial statements any information that users need to interpret those statements properly. ______ b. A trial balance prepared after all closing entries have been posted. This trial balance consists only of accounts for assets, liabilities, and owners' equity. ______ c. Journal entries made at the end of the period for the purpose of closing temporary accounts (revenue, expense, and dividend accounts) and transferring balances to the Retained Earnings account. ______ d. Computer software used for recording transactions, maintaining journals and ledgers, and preparing financial statements. Also includes spreadsheet capabilities for showing the effects of proposed adjusting entries or transactions on the financial statements without actually recording these entries in the accounting records. ______ e. The summary account in the ledger to which revenue and expense accounts are closed at the end of the period. The balance (credit balance for a net income, debit balance for a net loss) is transferred to the Retained Earnings account. ______ f. Financial statements prepared for periods of less than one year (includes monthly and quarterly statements). ______ g. Supplemental disclosures that accompany financial statements. They provide users with various types of information considered necessary for the proper interpretation of the statements. ______ h. A multicolumn schedule showing the relationships among the current account balances (a trial balance), proposed or actual adjusting entries or transactions, and the financial statements that would result if these adjusting entries or transactions were recorded. Used both at the end of the accounting period as an aid to preparing financial statements and for planning purposes.

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2) Using the Adjusted Trial Balance shown below, prepare (a) an Income Statement and (b) a Statement of Retained Earnings for All Star Repairs. All Star Repairs Adjusted Trial Balance July 31 Debit Cash

Credit

$ 20,200

Accounts receivable

70,600

Supplies

2,500

Shop equipment

26,600

Accumulated depreciation: shop equipment Accounts payable

$ 9,600 18,000

Notes payable

3,700

Income taxes payable

26,700

Capital stock

22,200

Retained earnings

5,900

Dividends

16,700

Fees earned

127,400

Rent expense

9,000

Wages expense

35,600

Supplies expense

2,900

Utilities expense

2,100

Depreciation expense: shop equipment Income taxes expense

600 26,700 $ 213,500

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$ 213,500

a. All Star Repairs Income Statement For the Month Ended July 31, Year 1

b. All Star Repairs Statement of Retained Earnings For the Month Ended July 31, Year 1

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3) Indicate which of the following accounts will be closed to Income Summary at yearend.(a) Cash(b) Office Supplies Expense(c) Unexpired Insurance(d) Unearned Revenue(e) Dividends(f) Depreciation Expense(g) Income Taxes Payable(h) Accumulated Depreciation

4) Given the following information for the Maple Tree company for the year ended December 31, Year 1, prepare a Statement of Retained Earnings. Retained Earnings Debit Credit 59,150

Dividends Debit

Credit 4,550

Income Summary

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Debit

Credit 9,100

36,790

5,070

5) Consider the concept of adequate disclosure.Instructions:(A) Briefly explain what is meant by the principle of adequate disclosure.(B) How does professional judgment enter into the application of the principle of adequate disclosure?(C) List 5 types of information that a publicly held corporation generally would be required to provide according to the concept of adequate disclosure.

6) The Adjusted Trial Balance for Tiger Incorporated, at December 31, Year 1, appears below: Tiger, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

$ 33,750

Accounts receivable

175,000

Office equipment

262,500

Credit

Accumulated depreciation: office equipment

$ 50,000

Accounts payable

100,000

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Income taxes payable

50,000

Capital stock

125,000

Retained earnings

100,000

Dividends

42,500

Sales commissions earned

542,500

Advertising expense

80,000

Rent expense

110,000

Salaries expense

112,500

Utilities expense

76,250

Depreciation expense office equipment

25,000

Income taxes expense

50,000 $ 967,500

$ 967,500

Prepare journal entries to close the accounts. (Hint: Prepare separate entries to: (1) close the revenue account, (2) close the expense accounts, (3) close the Income Summary account, and (4) close the Dividends account.) Date

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GENERAL LEDGER

Debit

Credit

7) Selected ledger accounts used by Goldstone Advertising Incorporated, are listed along with identifying numbers. 1 2 3 4 5 6 21 22 23

Cash Accounts Receivable Office Supplies Unexpired Insurance Office Equipment Accumulated Depreciation Office Equipment Dividends Payable Accounts Payable Income Taxes Payable

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24 30 31 32 35 41 51 52 53 54 55 56

Unearned Fees Capital Stock Retained Earnings Dividends Income Summary Fees Earned Salaries Expense Office supplies Expense Rent Expense Insurance Expense Depreciation Expense: Office Equipment Income Taxes Expense

b) c) d)

e) f) g) h)

i) j)

Example: Paid rent on building for the current period. Received an advance payment from a client for services to be rendered over next six months. Paid salaries of employees.

Account(s) Debited 53

Account(s) Credited 1

Bought a three-year insurance policy and paid in full. Performed services for a client; received part of fee in cash, remainder to be collected in 30 days. Purchased office equipment; paid in cash, balance payable in 60 days. Purchased a large quantity of office supplies on credit. Declared a dividend to be paid in 45 days. Made an adjusting entry for the portion of the insurance premium that had expired. Made an adjusting entry to record depreciation for the period. Made an adjusting entry for office

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l) m)

n) o)

supplies used during the period. Made an adjusting entry to recognize that a portion of the fee received in advance (transaction a) had now been earned. Paid the dividend declared in transaction g. Made an adjusting entry to accrue income taxes at the end of an unprofitable period. Closed the Income Summary account at the end of an unprofitable period. Closed the Dividends account at the end of the period.

8) Selected ledger accounts used by Speedy Truck Rentals Incorporated, are listed along with identifying numbers. 1 2 3 4 5 6 21 22 23 24 25 31 32 33 35 41 51

Cash Accounts Receivable Office Supplies Unexpired Insurance Trucks Accumulated Depreciation Trucks Accounts Payable Notes Payable Dividends Payable Income Taxes Pay Unearned Revenue Capital Stock Retained Earnings Dividends Income Summary Truck Rental Revenue Advertising Expense

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52 53 54 55 56

Office Supplies Expense Rent Expense Insurance Expense Depreciation Expense: Trucks Income Taxes Expense

b) c) d) e) f) g)

j) k)

Example: Paid rent on the building for the current 53 period. Trucks are purchased by making a 30% cash down payment and financing the rest for 5 years. Fee is received in advance, for rental of truck for a future period. Purchased a large quantity of office supplies on credit. Bought a three-year insurance policy and paid in full. Declared a dividend to be paid in 60 days. Depreciation on trucks is recorded.

Account(s) Debited 53

Account(s) Credited 1

Adjusting entry is made to record liability to Daily News for advertising done this period; payment is due next month. Adjusting entry is made to record truck rentals earned but not yet received or recorded. Some portion of the truck rentals previously received in advance have now been earned. Made an adjusting for office supplies used during this period. Made an adjusting entry for the portion of the insurance premium which had expired. Made an adjusting entry to accrue income taxes expense at the end of a profitable

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m) n) o)

period. Closed the revenue account at the end of the period. Closed the Income Summary account at the end of a profitable period. Closed the Dividends account at the end of the period.

The adjusted trial balance for Belgrave company at December 31, Year 1, follows: Belgrave company Adjusted Trial Balance December 31, Year 1 Debit

Cash Accounts Receivable

Credit

$ 5,300 5,850

Supplies

360

Prepaid Insurance

700

Machinery

2600

Accumulated Depreciation Machinery

1,650

Salary Payable

400

Capital Stock

5,200

Retained Earnings

1,940

Dividends

500

Revenue Insurance Expense

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13,250 120

Salary Expense

6,210

Miscellaneous Expense

340

Depreciation Expense

460

Totals

$ 22,440

Instructions:(A) Prepare the closing entries required at December 31, Year 1. (Dates are not required.)(B) Prepare an After-Closing Trial Balance at December 31, Year 1.

10) Certain data are given on the worksheet below, and certain missing data are indicated by the blank lines. Sufficient information is included to fill in the missing data. Each account has a debit or credit balance characteristically normal for that kind of account. Note that the dollar amounts have been reduced to figures of not more than three digits to simplify the arithmetic. Instructions: Insert the dollar amounts necessary to complete the worksheet in the blanks indicated by an underline. If no dollar amount is necessary, do not enter anything in the blank. The lines cover both debit and credit columns; be sure to insert the missing figures in the correct column of the blank line.

Trial Adjustments Income Balance Balance Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit Balance sheet accounts: Cash (example)

Fees receivable

102

Supplies

Equipment

116

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72 30

Accumulated depreciation Unearned fees

Accounts payable

Salaries payable

Income taxes payable Capital stock

Retained earnings

Dividends

49 54

Income statement accounts: Fees earned

177

Advertising expense Salaries expense

Supplies expense

Depreciation expense Income taxes expense Totals

10 16

0 400

400

108

139

232

334

241

232

334

Net income or loss Totals

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11) Certain data are given on the worksheet below, and certain missing data are indicated by the blank boxes. Sufficient information is included to fill in the missing data. Each account has a debit or credit balance characteristically normal for that kind of account. Note that the dollar amounts have been reduced to figures of not more than three digits to simplify the arithmetic. Instructions: Insert the figures necessary to complete the worksheet in the blanks indicated by an underline. If no dollar amount is necessary, do not enter anything in the blank. Trial Adjustments Income Balance Balance Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit Balance sheet accounts: Cash (example)

Fees receivable

45 13

Supplies Office equipment

Accumulated depreciation Unearned fees

Accounts payable

Salaries payable

Income taxes payable Capital stock

Retained earnings

Dividends

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Income statement accounts: Fees earned Utilities expense

48 27

Salaries expense

Supplies expense

Depreciation expense Income taxes expense Totals

191

171

168

171

Net income or loss Totals

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Answer Key Test name: Chap 05_19e_Problem Material 1) (a) Adequate disclosure(b) After-closing trial balance(c) Closing entries(d) General ledger software(e) Income Summary(f) Interim financial statements(g) Notes to financial statements(h) Worksheet 2) a. All Star Repairs Income Statement For the Month Ended July 31, Year 1 Fees Earned

$ 127,400

Expenses Rent

$ 9,000

Wages

36,600

Supplies

2,900

Utilities

2,100

Depreciation

600

Total Expenses

50,200

Income before taxes

$ 72,200

Income taxes expense

26,700

Net income

$ 50,00

b. All Star Repairs Statement of Retained Earnings For the Month Ended July 31, Year 1 Retained earnings, June 30

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$ 5,900

Add: Net income for July Subtotal Less: Dividends Retained earnings, July 31

50,500 56,400 16,700 $ 39,700

3) (b) Office Supplies Expense and (f) Depreciation Expense are the only accounts shown that will be closed to Income Summary. The remaining accounts, except Dividends, are balance sheet accounts, which are not closed. Dividends are closed directly to Retained Earnings. 4) Maple Tree company Statement of Retained Earnings For the Year Ended December 31, Year 1 Retained Earnings January 1, Year 1 Plus: Net income for the year Less: Dividends Retained Earnings December 31, Year 1

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$ 59,150 22,620 (4,550) $ 77,220

5) (A) The principle of adequate disclosure means that financial statements should be accompanied by any information necessary for the statements to be interpreted properly. Most disclosures appear within several pages of notes (or footnotes) that accompany the financial statements.(B) Drafting footnotes requires an in-depth understanding of the company and its operations. As there is no comprehensive list of information that must be disclosed and the content of the notes often is not drawn directly from the accounting records, the adequacy of disclosure is dependent upon the accountants' professional judgment. This professional judgment is used in selecting those items for disclosure that an intelligent person would consider necessary to properly interpret the financial statements.(C) A publicly held corporation is generally required to disclose the following types of information. (Students are required to list only five types.) Accounting methods in use.Due dates of major liabilities.Lawsuits pending against the business.Scheduled plant closings.Governmental investigations into the safety of the company's products or the legality of its pricing policies.Significant events occurring after the balance sheet date, but before the financial statements are actually issued.Specific customers that account for a large portion of the company's business.Unusual transactions or conflicts of interest between the company and its key officers. 6) Date GENERAL JOURNAL December 31 Year 1 Sales Commissions Earned December 31

December 31

Income Summary To close Sales Commissions Earned account. Income Summary Advertising Expense

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Debit 542,000

Credit

542,500

453,750 80,000

Rent Expense

110,000

Utilities Expense

76,250

Depreciation expense: office equipment Income Taxes Expense

25,000 50,000

To close the expense accounts December 31

Income Summary

88,750

Retained Earnings

December 31

88,750

To close the Income Summary account by transferring the net income for the year to the Retained Earnings account. Retained Earnings

42,500

Dividends

42,500

To close the Dividends account.

7) Transactions

b) c) d)

e) f) g)

Example: Paid rent on building for the current period. Received an advance payment from a client for services to be rendered over next six months. Paid salaries of employees. Bought a three-year insurance policy and paid in full. Performed services for a client; received part of fee in cash, remainder to be collected in 30 days. Purchased office equipment; paid in cash, balance payable in 60 days. purchased a large quantity of office supplies on credit. Declared a dividend to be paid in 45

Version 1

Account(s) Debited 53

Account(s) Credited 1

51 4

1 1

1,2

1,22

i) j) k)

l) m)

n) o)

days. Made an adjusting entry for the portion of the insurance premium that had expired. Made an adjusting entry to record depreciation for the period. Made an adjusting entry for office supplies used during the period. made an adjusting entry to recognize that a portion of the fee received in advance (transaction a) had now been earned. Paid the dividend declared in transaction g. Made an adjusting entry to accrue income taxes at the end of an unprofitable period. Closed the income summary account at the end of an unprofitable period. Closed the dividends account at the end of the period.

Account(s) Debited 53

Account(s) Credited 1

1,22

55 51

6 21

8) Transactions

b) c) d) e) f) g)

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j) k)

m) n) o)

Adjusting entry is made to record truck rentals earned but not yet received or recorded. Some portion of the truck rentals previously received in advance have now been earned. Made an adjusting for office supplies used during this period. Made an adjusting entry for the portion of the insurance premium which had expired. Made an adjusting entry to accrue income taxes expense at the end of a profitable period. Closed the revenue account at the end of the period. Closed the Income Summary account at the end of a profitable period. Closed the Dividends account at the end of the period.

9) (A) Debit Revenue

Credit

13,250

Income Summary

13,250

To close the revenue account. Income Summary

7,130

Insurance Expense

120

Salary Expense

6,210

Miscellaneous Expense

340

Depreciation Expense

460

To close the expense account. Income Summary Retained Earnings

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6,120 6,120

To close the income summary account. Retained Earnings

500

Dividends

500

To close the dividends account.

(B) Belgrave company After Closing Trial Balance December 31, Year 1 Debit Cash

Credit

$ 5,300

Accounts receivable

5,850

Supplies

360

Prepaid Insurance

700

Machinery

2,600

Accumulated Depreciation Machinery

$ 1,650

Salary Payable

400

Capital Stock

5,200

Retained Earnings

7,560

Total

$ 14,810

10) Trial Adjustments Income Balance Balance Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit Balance sheet accounts: Cash Fees receivable

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72 102

72 30

132

Supplies

Equipment

116

8 116

Accumulated depreciation Unearned fees

Accounts payable

Salaries payable

Income taxes payable Capital stock

Retained earnings

Dividends

11 52

Income statement accounts: Fees earned

177

232

Advertising expense Salaries expense

48 38

Supplies expense

Depreciation expense Income taxes expense Totals

400

108

139

232

334

241

232

334

Net income or loss Totals

11) Trial Adjustments Income Balance Balance Statement Sheet Debit Credit Debit Credit Debit Credit Debit Credit

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Balance sheet accounts: Cash (example)

Fees receivable

Supplies

Office equipment

45 56

4 51

Accumulated depreciation Unearned fees

Accounts payable

Salaries payable

Income taxes payable Capital stock

Retained earnings Dividends

5 31

Income statement accounts: Fees earned

Utilities expense Salaries expense

Supplies expense Depreciation expense Income taxes expense Totals

67 27

191

Net income or loss

Totals

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171

168 3

171

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CHAPTER 5 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A company's annual report includes comparative statements for several years. ⊚ ⊚

true false

2) Accountants refer to the period of time from October 1 through December 31 as "busy season." ⊚ ⊚

true false

3) The income statement, statement of retained earnings, and the balance sheet can all be prepared directly from the Management's Discussion and Analysis. ⊚ ⊚

true false

Stockholders typically prepare the financial statements of publicly owned companies. ⊚ ⊚

true false

5) The balance sheet is prepared first because if it balances, all the accounting information is correct and can be used to prepare the other financial statements. ⊚ ⊚

true false

6) Publicly owned companies must file their audited financial statements and detailed supporting schedules with the Financial Accounting Standards Board. ⊚ ⊚

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true false

Dividends declared are an expense and reduce net income. ⊚ ⊚

true false

The report form of the balance sheet lists liabilities and owners' equity below assets. ⊚ ⊚

true false

9) A current asset must be capable of being converted into cash within a relatively short period of time, usually less than five years. ⊚ ⊚

true false

10) IFRS 1 requires that management and auditors should depart from compliance with GAAP if it is necessary to achieve a fair presentation when reporting financial results. ⊚ ⊚

true false

11) The Financial Accounting Standards Board (FASB) maintains and periodically updates a well-defined list of disclosure items that companies must include in their annual reports. ⊚ ⊚

true false

12) Companies need not disclose information that may have a damaging effect on the business, such as product liability lawsuits. ⊚ ⊚

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true false

13) Most disclosures appear within the body of the financial statements; however, a few disclosures may also appear in the notes that accompany the financial statements. ⊚ ⊚

14)

true false

Real accounts can only be closed at the end of the year with a single compound entry. ⊚ ⊚

true false

15) A revenue account is closed by debiting Income Summary and crediting Service Revenue. ⊚ ⊚

16)

At year-end, all equity accounts must be closed. ⊚ ⊚

17)

true false

The income summary account appears on the statement of retained earnings. ⊚ ⊚

18)

true false

The Dividends account is closed directly to retained earnings at year-end. ⊚ ⊚

true false

19) After all the closing entries have been posted the Income Summary account will have a zero balance. ⊚ ⊚ Version 1

true false 3

20)

Closing entries do not affect the cash account. ⊚ ⊚

true false

21) The adjusted trial balance contains income statement accounts and balance sheet accounts, while the after-closing trial balance will only have balance sheet accounts. ⊚ ⊚

true false

22) The purpose of the after-closing trial balance is to give assurance that the accounts are in balance and ready for the new accounting period. ⊚ ⊚

true false

23) An after-closing trial balance consists only of asset, liability, and owners' equity accounts. ⊚ ⊚

24)

Measures of profitability tell us how quickly current assets can be converted into profits. ⊚ ⊚

25)

true false

The current ratio is a measure of liquidity. ⊚ ⊚

26)

true false

The net income percentage can be measured by dividing net income by total assets.

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⊚ ⊚

27)

Working capital equals current assets divided by current liabilities. ⊚ ⊚

28)

true false

The current ratio is a measure of short-term debt paying ability. ⊚ ⊚

32)

true false

Return on equity is a commonly used measure of a company's profitability. ⊚ ⊚

31)

true false

The return on equity ratio equals net income divided by common stock. ⊚ ⊚

30)

true false

The current ratio equals current assets plus current liabilities. ⊚ ⊚

29)

true false

Interim financial statements usually report on a period of time less than one year. ⊚ ⊚

true false

33) An annual report filed with the Securities and Exchange Commission must include a section called "Management Discussion and Analysis" (MD&A).

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⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 34) An annual report: A) B) C) D)

35)

Which of the following financial statements is usually prepared first? A) B) C) D)

36)

Income statement. Statement of retained earnings. Income tax return. Balance sheet.

Publicly-owned companies: A) B) C) D)

37)

Must be audited by the IRS. Is delivered to stockholders and the public on the last day of the fiscal year. Includes comparative financial statements for several years. Must be filed with the SEC by all companies in the United States.

Are managed and owned by the government. Must be not-for-profit companies. Are usually listed on a stock exchange. Are not permitted to be owned by individuals.

The normal order in which the financial statements are prepared is:

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A) B) C) D)

38)

Publicly traded companies must file audited financial statements with the: A) B) C) D)

39)

Earnings Statement. Statement of Operations. Profit and Loss Statement. Statement of Financial Position.

The statement of retained earnings is based upon which of the following relationships? A) B) C) D)

41)

AICP. IRS. SEC. AAA.

Of the following, which is not an alternative title for the income statement? A) B) C) D)

40)

Balance sheet, income statement, statement of retained earnings. Income statement, statement of retained earnings, balance sheet. Income tax return, income statement, balance sheet. Income statement, annual report, balance sheet.

Retained Earnings − Net Income − Dividends. Retained Earnings − Net Income + Dividends. Retained Earnings + Net Income + Dividends. Retained Earnings + Net Income − Dividends.

Dividends declared:

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A) B) C) D)

42)

The dividends account should be: A) B) C) D)

43)

Reduce retained earnings. Increase retained earnings. Reduce net income. Increase net income.

Closed to income summary. Closed to retained earnings. Closed only if there is a profit. Not closed at all.

Retained Earnings at the end of a period:

A) Is equal to the balance in the Retained Earnings account in the adjusted trial balance at the end of a period. B) Is determined in the Statement of Retained Earnings. C) Is equal to Retained Earnings at the beginning of the period, minus net income (or plus net loss) for the period. D) Appears in the Income Statement for the period.

44)

A statement of retained earnings shows:

A) The changes in the Cash account occurring during the accounting period. B) The revenue, expense, and dividends of the period. C) The types of assets that have been purchased with the earnings retained during the accounting period. D) The changes in the Retained Earnings account occurring during the accounting period.

45)

Declaring a dividend will:

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A) B) C) D)

46)

Dividends will have what effect upon retained earnings? A) B) C) D)

47)

Increase. Decrease. No effect. Depends upon if there is income or loss.

Net income from the Income Statement appears on: A) B) C) D)

48)

Increase net income. Decrease net income. Not change net income. Increase the net worth of a company.

The Balance Sheet. The Statement of Retained Earnings. Neither the Balance Sheet nor the Statement of Retained Earnings. Both the Balance Sheet and the Statement of Retained Earnings.

All of the following statements are true regarding the Income Statement except?

A) The Income Statement may also be called the earnings statement. B) The measurement of income is not absolutely accurate or precise due to assumptions and estimates. C) The Income Statement only includes those events that have been evidenced by actual business transactions. D) The net income (or net loss) generated on the Income Statement appears at the top of the company's year-end balance sheet.

49) Assets are considered current assets if they are cash or will usually be converted into cash: Version 1

A) B) C) D)

50)

In the notes to financial statements, adequate disclosure would typically not include: A) B) C) D)

51)

The accounting methods in use. Lawsuits pending against the business. Customers that account for 10 percent or more of the company's revenues. The optimism of the CFO regarding future profits.

The adequacy of a company's disclosure is based on: A) B) C) D)

52)

Within a month or less. Within 3 months. Within a year or less. Within 6 months or less.

Laws established by Congress. IRS rules and FASB requirements. A combination of official rules, tradition, and professional judgment. The needs of stockholders and creditors.

The concept of adequate disclosure:

A) Demands a "good faith effort" by management. B) Grants users of the financial statements access to a company's accounting records. C) Does not apply to events occurring after the balance sheet date. D) Specifies which accounting methods must be used in a company's financial statements.

53) The concept of adequate disclosure requires a company to inform financial statement users of each of the following, except:

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A) The accounting methods in use. B) The due dates of major liabilities. C) Destruction of a large portion of the company's inventory on January 20, three weeks after the balance sheet date, but prior to issuance of the financial statements. D) Income projections for the next five years based upon anticipated market share of a new product; the new product was introduced a few days before the balance sheet date.

54)

Closing entries would be prepared before: A) B) C) D)

55)

The opening balance sheet is prepared. The after-closing trial balance. An adjusted trial balance. Adjusting entries.

The closing entry for an expense account would consist of a: A) B) C) D)

Debit to Income Summary and a credit to the expense account. Debit to the expense account and a credit to Income Summary. Credit to Retained Earnings and a debit to the expense account. Credit to Revenue and a debit to the expense account.

56) Before it was closed, the Income Summary account has debits of $85,000 and credits of $75,000. The company had which of the following: A) B) C) D)

57)

Net income of $10,000. Net income of $160,000. Net loss of $10,000. Net loss of $160,000.

During the closing process:

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A) B) C) D)

58)

A debit balance in the income summary account indicates: A) B) C) D)

59)

An error was made. A Net Profit. A Net Loss. The closing process is incomplete.

If Income Summary has a net credit balance, it signifies: A) B) C) D)

60)

All income statement accounts are credited to income summary. All income statement accounts are debited to income summary. All revenue accounts are credited and expense accounts are debited. All revenue accounts are debited and expense accounts are credited.

A net loss. Net income. A reduction of net worth. Dividends have been declared.

The balance in Income Summary: A) B) C) D)

Should equal retained earnings. Will always be equal to the increase in retained earnings. Will equal net income less dividends. Will equal net income or net loss.

61) After preparing the financial statements for the current year, the accountant for Exquisite Gems closed the Dividends account at year-end by debiting Income Summary and crediting the Dividends account. What is the effect of this entry on current-year net income and the balance in the Retained Earnings account at year-end?

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A) Net income is overstated and the balance in the Retained Earnings account is correct. B) Net income is correct and the balance in the Retained Earnings account is overstated. C) Net income is understated and the balance in the Retained Earnings account is correct. D) Net income is understated and the balance in the Retained Earnings account is overstated.

62)

Income Summary appears on which financial statement? A) B) C) D)

63)

Income statement. Balance sheet. Retained Earnings statement. Income summary does not appear on any financial statement.

The purpose of making closing entries is to:

A) Prepare revenue and expense accounts for the recording of the next period's revenue and expenses. B) Enable the accountant to transfer the balances from all permanent accounts to the Income Summary account. C) Establish new balances in the balance sheet accounts. D) Reduce the number of expense accounts.

64) When closing the accounts at the end of the period, which of the following is closed directly into the Retained Earnings account? A) B) C) D)

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Depreciation Expense. Accumulated Depreciation. Revenue and liability accounts. The Income Summary account.

65)

Closing entries never involve posting a credit to the: A) B) C) D)

Income Summary account. Accumulated Depreciation account. Dividends account. Depreciation Expense account.

66) Which of the following account titles would not be debited in the process of preparing closing entries for Andrew's Auto Shop? A) B) C) D)

67)

If a business closes its accounts only at year-end: A) B) C) D)

68)

Financial statements are prepared only at year-end. Adjusting entries are made only at year-end. Revenue and expense accounts reflect year-to-date amounts throughout the year. Monthly and quarterly financial statements cannot be prepared.

Closing entries should be made: A) B) C) D)

69)

Income Summary. Fees Earned. Dividends. Retained Earnings.

Every year. Only when an entity goes out of business. Only if there is a profit. Only if there is a loss.

Which of the following accounts should not be closed?

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A) B) C) D)

70)

Expenses and revenues. Dividends. Income summary. Accumulated depreciation.

Which of the following accounts will be closed to Income Summary? A) B) C) D)

Prepaid Expenses. Unearned Revenue. Dividends. Depreciation Expense.

71) If revenues are $246,000, expenses are $204,000 and dividends are $26,000, before it is closed, the Income Summary will have a: A) B) C) D)

Credit balance of $42,000. Debit balance of $42,000. Debit balance of $16,000. Credit balance of $16,000.

72) If revenues are $270,000, expenses are $220,000, and dividends are $30,000, before it is closed, the Income Summary will have a: A) B) C) D)

Credit balance of $50,000. Debit balance of $50,000. Debit balance of $20,000. Credit balance of $20,000.

73) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1:

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Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 7,750

Accounts Receivable

6,375

Office Equipment

11,250

Accumulated Depreciation

$ 3,000

Accounts Payable

3,875

Capital Stock

11,250

Retained Earnings

-0-

Dividends

3,750

Fees Earned

22,750

Salaries Expense

8,000

Advertising Expense

1,625

Depreciation Expense

2,125

Totals

$ 40,875

The entry to close the Fees Earned account will: A) B) C) D)

Produce a zero balance in that account when posted. Include a debit to Income Summary. Include a credit to Fees Earned. Include a debit to Capital Stock.

74) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance

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December 31, Year 1 Debit Cash

Credit

$ 7,750

Accounts Receivable

6,375

Office Equipment

11,250

Accumulated Depreciation

$ 3,000

Accounts Payable

3,875

Capital Stock

11,250

Retained Earnings

-0-

Dividends

3,750

Fees Earned

22,750

Salaries Expense

8,000

Advertising Expense

1,625

Depreciation Expense

2,125

Totals

$ 40,875

The entry to close Salaries Expense account will: A) B) C) D)

Transfer the total of Salaries Expense directly to Retained Earnings. Include a debit to Income Summary. Include a debit to Salaries Expense. Include a credit to Capital Stock.

75) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1

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Debit Cash

Credit

$ 15,350

Accounts Receivable

12,675

Office Equipment

22,200

Accumulated Depreciation

$ 5,850

Accounts Payable

7,675

Capital Stock

22,350

Retained Earnings

-0-

Dividends

7,350

Fees Earned

44,750

Salaries Expense

15,700

Advertising Expense

3,175

Depreciation Expense

4,175

Totals

$ 80,625

Net income for the period equals: A) B) C) D)

$14,350. $21,700. $44,750. $23,050.

76) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit

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Credit

Cash

$ 7,750

Accounts Receivable

6,375

Office Equipment

11,250

Accumulated Depreciation

$ 3,000

Accounts Payable

3,875

Capital Stock

11,250

Retained Earnings

-0-

Dividends

3,750

Fees Earned

22,750

Salaries Expense

8,000

Advertising Expense

1,625

Depreciation Expense

2,125

Totals

$ 40,875

Net income for the period equals: A) B) C) D)

$18,375. $11,000. $ 5,800. $11,250.

77) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

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Credit

$ 15,450

Accounts Receivable

12,725

Office Equipment

22,400

Accumulated Depreciation

$ 5,950

Accounts Payable

7,725

Capital Stock

22,450

Retained Earnings Dividends

-07,450

Fees Earned

45,250

Salaries Expense

15,900

Advertising Expense

3,225

Depreciation Expense

4,225

Totals

$ 81,375

After closing the accounts, Retained Earnings at December 31 equals: A) B) C) D)

$21,900. $14,450. Zero. $45,250.

78) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash Accounts Receivable

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Credit

$ 7,750 6,375

Office Equipment

11,250

Accumulated Depreciation

$ 3,000

Accounts Payable

3,875

Capital Stock

11,250

Retained Earnings Dividends

-03,750

Fees Earned

22,750

Salaries Expense

8,000

Advertising Expense

1,625

Depreciation Expense

2,125

Totals

$ 40,875

After closing the accounts, Retained Earnings at December 31 equals: A) B) C) D)

$11,000. $7,250. Zero. $22,250.

79) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

$ 15,050

Accounts Receivable

12,525

Office Equipment

21,600

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Credit

Accumulated Depreciation

$ 5,550

Accounts Payable

7,525

Capital Stock

22,050

Retained Earnings

-0-

Dividends

7,050

Fees Earned

43,250

Salaries Expense

15,100

Advertising Expense

3,025

Depreciation Expense

4,025

Totals

$ 78,375

The total debits in the After-Closing Trial Balance will equal: A) B) C) D)

$49,175. $78,375. $56,225. $35,125.

80) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

$ 7,750

Accounts Receivable

6,375

Office Equipment

11,250

Accumulated Depreciation

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Credit

$ 3,000

Accounts Payable

3,875

Capital Stock

11,250

Retained Earnings

-0-

Dividends

3,750

Fees Earned

22,750

Salaries Expense

8,000

Advertising Expense

1,625

Depreciation Expense

2,125

Totals

$ 40,875

The total debits in the After-Closing Trial Balance will equal: A) B) C) D)

$25,375. $29,125. $40,875. $18,125.

81) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

$ 15,950

Accounts Receivable

12,975

Office Equipment

23,400

Accumulated Depreciation Accounts Payable

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Credit

$ 6,450 7,975

Capital Stock

22,950

Retained Earnings

-0-

Dividends

7,950

Fees Earned

47,750

Salaries Expense

16,900

Advertising Expense

3,475

Depreciation Expense

4,475

Totals

$ 85,125

The Income Summary will have what balance before it is closed? A) B) C) D)

Zero. $23,700. $23,450. $22,900.

82) Shown below is an adjusted trial balance for Novelty Toys, Incorporated, on December 31, Year 1: Novelty Toys, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

$ 7,750

Accounts Receivable

6,375

Office Equipment

11,250

Accumulated Depreciation

Credit

$ 3,000

Accounts Payable

3,875

Capital Stock

11,250

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Retained Earnings

-0-

Dividends

3,750

Fees Earned

22,750

Salaries Expense

8,000

Advertising Expense

1,625

Depreciation Expense

2,125

Totals

$ 40,875

The Income Summary will have what balance before it is closed? A) B) C) D)

Zero. $11,750. $ 7,250. $11,000.

83) Shown below is the adjusted Trial Balance for Simon Incorporated, on December 31, after the first year of operations, after adjusting entries: Simon, Incorporated Adjusted Trial Balance December 31 Debit Cash

Credit

$ 1,600

Accounts Receivable

4,000

Office Equipment

16,800

Accumulated Depreciation

$ 1,600

Capital Stock

2,400

Retained Earnings

2,720

Dividends

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960

Service Fees Earned

21,920

Wages Expense

3,200

Supplies Expense

1,120

Depreciation Expense

960

Totals

$ 28,640

The entry to close the Service Fees Earned account will: A) B) C) D)

Produce a zero balance in that account when posted. Include a debit to Income Summary. Include a credit to Service Fees Earned. Include a debit to Capital Stock.

84) Shown below is the adjusted Trial Balance for Simon Incorporated, on December 31, after the first year of operations, after adjusting entries: Simon, Incorporated Adjusted Trial Balance December 31 Debit Cash

Credit

$ 1,600

Accounts Receivable

4,000

Office Equipment

16,800

Accumulated Depreciation

$ 1,600

Capital Stock

2,400

Retained Earnings

2,720

Dividends

960

Service Fees Earned Wages Expense

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21,920 3,200

Supplies Expense

1,120

Depreciation Expense

960

Totals

$ 28,640

The entry to close Depreciation Expense account will: A) B) C) D)

Transfer the balance of Depreciation Expense directly to Retained Earnings. Include a debit to Income Summary. Include a debit to Depreciation Expense. Include a credit to Capital Stock.

85) Shown below is the adjusted Trial Balance for Simon Incorporated, on December 31, after the first year of operations, after adjusting entries: Simon, Incorporated Adjusted Trial Balance December 31 Debit Cash

Credit

$ 1,600

Accounts Receivable

4,000

Office Equipment

16,800

Accumulated Depreciation

$ 1,600

Capital Stock

2,400

Retained Earnings

2,720

Dividends

960

Service Fees Earned

21,920

Wages Expense

3,200

Supplies Expense

1,120

Depreciation Expense

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960

Totals

$ 28,640

Net income for the period equals: A) B) C) D)

$20,960. $16,640. $21,920. $23,360.

86) Shown below is the adjusted Trial Balance for Simon Incorporated, on December 31, after the first year of operations, after adjusting entries: Simon, Incorporated Adjusted Trial Balance December 31 Debit Cash

Credit

$ 1,600

Accounts Receivable

4,000

Office Equipment

16,800

Accumulated Depreciation

$ 1,600

Capital Stock

2,400

Retained Earnings

2,720

Dividends

960

Service Fees Earned

21,920

Wages Expense

3,200

Supplies Expense

1,120

Depreciation Expense Totals

960 $ 28,640

$ 28,640

After closing the accounts, Retained Earnings at December 31 equals:

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A) B) C) D)

Zero. $18,400. $19,360. $16,640.

87) Shown below is the adjusted Trial Balance for Simon Incorporated, on December 31, after the first year of operations, after adjusting entries: Simon, Incorporated Adjusted Trial Balance December 31 Debit Cash

Credit

$ 1,600

Accounts Receivable

4,000

Office Equipment

16,800

Accumulated Depreciation

$ 1,600

Capital Stock

2,400

Retained Earnings

2,720

Dividends

960

Service Fees Earned

21,920

Wages Expense

3,200

Supplies Expense

1,120

Depreciation Expense Totals

960 $ 28,640

$ 28,640

The total debits in the After Closing-Trial Balance will equal:

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A) B) C) D)

$23,360. $28,640. $22,400. $6,720.

88) Shown below is the adjusted Trial Balance for Simon Incorporated, on December 31, after the first year of operations, after adjusting entries: Simon, Incorporated Adjusted Trial Balance December 31 Debit Cash

Credit

$ 1,600

Accounts Receivable

4,000

Office Equipment

16,800

Accumulated Depreciation

$ 1,600

Capital Stock

2,400

Retained Earnings

2,720

Dividends

960

Service Fees Earned

21,920

Wages Expense

3,200

Supplies Expense

1,120

Depreciation Expense Totals

960 $ 28,640

$ 28,640

The Income Summary will have what balance before it is closed?

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A) B) C) D)

$28,640 $15,600 $21,920 $16,640

89) If sales are $540,000, expenses are $440,000 and dividends are $50,000, just before it is closed, the Income Summary account will have a: A) B) C) D)

Credit balance of $50,000. Debit balance of $50,000. Debit balance of $100,000. Credit balance of $100,000.

90) Shown below is an adjusted trial balance for Cornell Products, Incorporated, on December 31: Cornell Products, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 15,400

Accounts Receivable

12,700

Office Equipment

22,300

Accumulated Depreciation

$ 5,900

Accounts Payable

7,700

Capital Stock

22,400

Retained Earnings Dividends Service Fees Earned

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-07,400 45,000

Salaries Expense

15,800

Advertising Expense

3,200

Depreciation Expense

4,200

Totals

$ 81,000

Net income for the period equals: A) B) C) D)

$14,400. $21,800. $45,000. $23,200.

91) Shown below is an adjusted trial balance for Cornell Products, Incorporated, on December 31: Cornell Products, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 15,500

Accounts Receivable

12,750

Office Equipment

22,500

Accumulated Depreciation

$ 6,000

Accounts Payable

7,750

Capital Stock

22,500

Retained Earnings Dividends

-07,500

Service Fees Earned Salaries Expense

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45,500 16,000

Advertising Expense

3,250

Depreciation Expense

4,250

Totals

$ 81,750

Net income for the period equals: A) B) C) D)

$11,600. $22,000. $22,500. $36,750.

92) Shown below is an adjusted trial balance for Cornell Products, Incorporated, on December 31: Cornell Products, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 15,300

Accounts Receivable

12,650

Office Equipment

22,100

Accumulated Depreciation

$ 5,800

Accounts Payable

7,650

Capital Stock

22,300

Retained Earnings Dividends

-07,300

Service Fees Earned

44,500

Salaries Expense

15,600

Advertising Expense

3,150

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Depreciation Expense Totals

4,150 $ 80,250

$ 80,250

After closing the accounts, Retained Earnings at December 31 equals: A) B) C) D)

zero. $14,300. $44,500. $21,600.

93) Shown below is an adjusted trial balance for Cornell Products, Incorporated, on December 31: Cornell Products, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 15,500

Accounts Receivable

12,750

Office Equipment

22,500

Accumulated Depreciation

$6,000

Accounts Payable

7,750

Capital Stock

22,500

Retained Earnings Dividends

-07,500

Service Fees Earned

45,500

Salaries Expense

16,000

Advertising Expense

3,250

Depreciation Expense

4,250

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Totals

$ 81,750

After closing the accounts, Retained Earnings at December 31 equals: A) B) C) D)

Zero. $14,500. $22,000. $22,500.

94) Shown below is an adjusted trial balance for Cornell Products, Incorporated, on December 31: Cornell Products, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 15,200

Accounts Receivable

12,600

Office Equipment

21,900

Accumulated Depreciation

$ 5,700

Accounts Payable

7,600

Capital Stock

22,200

Retained Earnings Dividends

-07,200

Service Fees Earned

44,000

Salaries Expense

15,400

Advertising Expense

3,100

Depreciation Expense

4,100

Totals

$ 79,500

The total debits in the After-Closing Trial Balance will equal: Version 1

A) B) C) D)

$79,500. $56,900. $49,700. $35,500.

95) Shown below is an adjusted trial balance for Cornell Products, Incorporated, on December 31: Cornell Products, Incorporated Adjusted Trial Balance December 31, Year 1 Debit Cash

Credit

$ 15,500

Accounts Receivable

12,750

Office Equipment

22,500

Accumulated Depreciation

$ 6,000

Accounts Payable

7,750

Capital Stock

22,500

Retained Earnings Dividends

-07,500

Service Fees Earned

45,500

Salaries Expense

16,000

Advertising Expense

3,250

Depreciation Expense

4,250

Totals

$ 81,750

The total debits in the After-Closing Trial Balance will equal:

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A) B) C) D)

96)

Which of the following accounts will appear on an After-Closing Trial Balance? A) B) C) D)

97)

Dividends Prepaid Expenses Unearned Revenue Retained Earnings, at the end of the period

Which of the following accounts will appear on the After-Closing Trial Balance? A) B) C) D)

99)

Dividends Unexpired Insurance Retained Earnings, at the beginning of the period Sales

Which of the following accounts will not appear on an After-Closing Trial Balance? A) B) C) D)

98)

$23,500. $31,000. $50,750. $58,250.

Service Revenue Unearned Revenue Dividends Retained Earnings, Beginning of Year

Return on equity measures:

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A) B) C) D)

100)

Return on equity is calculated by: A) B) C) D)

101)

59.80%. $39,800. 1.67 $158,200.

If current assets are $90,000 and current liabilities are $70,000, the current ratio will be: A) B) C) D)

103)

Dividing net income by total revenue. Dividing net income by average stockholders' equity. Dividing net income by working capital. Dividing dividends by stockholders' equity.

If current assets are $99,000 and current liabilities are $59,200, the current ratio will be: A) B) C) D)

102)

Solvency. Profitability. Leverage. Both solvency and leverage.

77%. $20,000. 1.3. $160,000.

If current assets are $118,500 and current liabilities are $39,800, working capital will be:

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A) B) C) D)

104)

If current assets are $110,000 and current liabilities are $50,000, working capital will be: A) B) C) D)

105)

33.59%. 2.98 $78,700. $158,300.

45.5%. 2:2. $60,000. $160,000.

The following information is available:

Sales Net Income Retained Earnings Average Stockholders' Equity Dividends

$ 320,000 38,000 49,000 148,000 5,200

What is the return on equity? (Round your answer to the nearest whole number or percent.) A) B) C) D)

106)

41%. 29%. 12%. 26%.

The following information is available:

Sales Net Income Retained Earnings Average Stockholders' Equity Dividends

$ 400,000 20,000 40,000 130,000 6,000

What is the return on equity? (Round your answer to the nearest whole number.) Version 1

A) B) C) D)

107) be:

If current assets are $180,000 and current liabilities are $130,000, the current ratio will

A) B) C) D)

108) be:

72%. $50,000. 1.4. $310,000.

If current assets are $180,000 and current liabilities are $130,000, working capital will

A) B) C) D)

109)

5%. 20%. 25%. 15%.

72%. $50,000. 1.4. $310,000.

The following information is available:

Sales Net Income Retained Earnings Average Stockholders' Equity Dividends

$ 600,000 30,000 60,000 200,000 10,000

What is the return on equity? (Round your answer to the nearest whole number.)

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A) B) C) D)

110)

5% 15% 20% 25%

The following information is available:

Revenues Net Income Retained Earnings Average Stockholders' Equity Dividends

$ 570,000 43,000 66,500 213,000 8,500

What is the net income percentage? (Round your answer to the nearest whole number.) A) B) C) D)

8%. 20%. 24%. 32%.

111) The following information is available: (Round your answer to the nearest whole number.) Revenues Net Income Retained Earnings Average Stockholders' Equity Dividends

$ 600,000 30,000 60,000 200,000 10,000

What is the net income percentage? A) B) C) D)

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5% 15% 20% 25%

112)

Interim financial statements: A) B) C) D)

113)

Preparation of interim financial statements: A) B) C) D)

114)

Cover a period less than one year. Cover only periods of one quarter (of a year). Cover periods greater than a year. Cannot cover a period of one month or less.

Makes the preparation of year-end financial statements unnecessary. Requires the journalizing and posting of adjusting entries. Requires the journalizing and posting of closing entries. Is done monthly or quarterly or in-between the year-end financial statements.

If management desires monthly financial statements:

A) Journalizing and posting adjusting entries must be completed each month. B) Journalizing and posting closing entries must be completed each month. C) Monthly financial statements can be prepared from worksheets; adjustments and closing entries need not be entered in the accounting records. D) Adjusting and closing entries must be entered in the accounting records before preparation of interim financial statements.

115)

The section of the annual report titled "Management Discussion and Analysis" is:

A) Required by the Securities and Exchange Commission (SEC). B) Not required, but it may be included by management. C) Required by generally accepted accounting principles (GAAP). D) Reported to the Securities and Exchange Commission (SEC), but it is not included in the annual report.

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116)

A worksheet consists of all of the following except: A) B) C) D)

A trial balance. Adjusting entries. An adjusted trial balance. Transaction entries.

117) When a worksheet is prepared, which account would not be entered into the income statement columns? A) B) C) D)

118)

Depreciation Expense Unearned Revenue Service Revenue Insurance Expense

The worksheet: A) B) C) D)

Is one of the basic financial statements. Is prepared throughout the year. Is not a formal step in the accounting cycle. Starts with the first column being the adjusted trial balance.

119) Which of the following amounts appears in both the Income Statement debit column and the Balance Sheet credit column of a worksheet? A) B) C) D)

120)

Net income. Net loss. Dividends. Retained earnings.

A worksheet should be viewed as:

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A) A financial statement to be distributed to investors. B) A financial statement to assist managers in making managerial decisions. C) A tool to assist accountants in making end-of-period adjustments and in preparing financial statements. D) A tool to assist auditors in determining that all transactions have been properly recorded throughout the period.

121) The amount of net income will appear on the debit side of the Income Statement columns in a worksheet if: A) B) C) D)

122)

Revenue exceeds total expenses for the period. The trial balance is out of balance. Dividends are more than the income or loss for the period. There is a net loss for the period.

Which of the following is true regarding a worksheet prepared at year-end?

A) The number of account titles applicable to the Adjusted Trial Balance columns is usually greater than the number of account titles applicable to the Trial Balance columns. B) The worksheet can be issued instead of financial statements. C) The worksheet eliminates the need to make adjusting and closing entries. D) An equal number of account titles are applicable to the Income Statement columns and the Balance Sheet columns.

123)

When a worksheet is used:

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A) Adjusting entries are not prepared, since adjustments are shown on the worksheet. B) Revenue and expense accounts do not have to be closed to the Income Summary account, because the income statement is prepared from the worksheet and net income is already computed. C) Financial statements may be prepared before recording adjusting and closing entries in the accounting records. D) The Income Statement column and Balance Sheet column of the worksheet eliminate the need to prepare formal financial statements for a business.

124) Only two adjustments appear in the "Adjustments" column of a worksheet for Wycliff Publications: one to record $760 depreciation of office equipment and the other to record the use of $520 of office supplies. If the Trial Balance column totals are $15,340, what are the totals of the Adjusted Trial Balance columns? A) B) C) D)

$16,620. $15,100. $16,100. $15,580.

125) Only two adjustments appear in the “Adjustments” column of a worksheet for Wycliff Publications: one to record $800 depreciation of office equipment and the other to record the use of $560 of office supplies. If the Trial Balance column totals are $15,380, what are the totals of the Adjusted Trial Balance columns? A) B) C) D)

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$16,740 $15,140 $16,180 $15,860

126) The December 31, Year 1, worksheet for Fran's Fine Dining showed the following amounts related to the Supplies Expense account:In the Trial Balance debit column: $745In the Adjustments debit column: $125In the Adjusted Trial Balance debit column: $870What is the proper balance in the Supplies Expense account on January 1, Year 2, after all of the closing entries for Year 1 have been posted, but before any Year 2 transactions are recorded? A) B) C) D)

$870 $745 $0 $125

127) Only two adjustments appear in the "Adjustments" column of a worksheet for Winona Manufacturing Company: one to record $7,400 depreciation of factory equipment and the second to record the use of $1,200 of prepaid insurance. If the Trial Balance column totals are $144,780, what are the totals of the Adjusted Trial Balance columns? A) B) C) D)

$153,380. $152,180. $144,780. $150,980.

128) Only two adjustments appear in the “Adjustments” column of a worksheet for Winona Manufacturing Company: one to record $8,000 depreciation of factory equipment and the second to record the use of $1,500 of prepaid insurance. If the Trial Balance column totals are $145,380, what are the totals of the Adjusted Trial Balance columns? A) B) C) D)

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$145,380 $153,380 $152,880 $154,880

129) The December 31, Year 1, worksheet for Albertville Grill showed the following amounts related to the Depreciation Expense account: In the Trial Balance debit column: $1,745In the Adjustments debit column: $1,125In the Adjusted Trial Balance debit column: $2,870 What is the proper balance in the Depreciation Expense account on January 1, Year 2, after all closing entries for Year 1 have been posted, but before any Year 2 transactions are recorded? A) B) C) D)

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$1,870 $1,745 $0 $1,125

Answer Key Test name: Chap 05_19e_MCQs 1) TRUE 2) FALSE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) FALSE 8) TRUE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) FALSE 14) FALSE 15) FALSE 16) FALSE 17) FALSE 18) TRUE 19) TRUE 20) TRUE 21) TRUE 22) TRUE 23) TRUE 24) FALSE 25) TRUE 26) FALSE Version 1

27) FALSE 28) FALSE 29) FALSE 30) TRUE 31) TRUE 32) TRUE 33) TRUE 34) C 35) A 36) C 37) B 38) C 39) D 40) D 41) A 42) B 43) B 44) D 45) C 46) B 47) B 48) D 49) C 50) D 51) C 52) A 53) D 54) B 55) A 56) C Version 1

57) D 58) C 59) B 60) D 61) C 62) D 63) A 64) D 65) B 66) C 67) C 68) A 69) D 70) D 71) A 72) A 73) A 74) B 75) B 76) B 77) B 78) B 79) A 80) A 81) D 82) D 83) A 84) B 85) B 86) B Version 1

87) C 88) D 89) D 90) B 91) B 92) B 93) B 94) C 95) C 96) B 97) A 98) B 99) B 100) B 101) C 102) C 103) C 104) C 105) D 106) D 107) C 108) B 109) B 110) A 111) A 112) A 113) D 114) C 115) A 116) D Version 1

117) B 118) C 119) A 120) C 121) A 122) A 123) C 124) C 125) C 126) C 127) B 128) B 129) C

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CHAPTER 6: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine technical accounting terms introduced in this chapter: Gross profit Gross profit rate General ledger Cost of goods sold Physical inventory Subsidiary ledger Perpetual inventory system Periodic inventory system Inventory shrinkage Required:Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ______ a. An approach to accounting for inventories and the cost of goods sold used primarily in small businesses with manual accounting systems. ______ b. A reason why perpetual inventory records may not be entirely accurate. ______ c. The difference between the revenue earned by selling merchandise and the cost of goods sold. ______ d. Gross profit divided by average total stockholders' equity. ______ e. An accounting procedure used in both perpetual and periodic inventory systems. In a perpetual system, this procedure brings to light the amount of inventory shrinkage. In a periodic system, it is the basis for computing the cost of goods sold. ______ f. An accounting record showing the individual items comprising the balance of a general ledger account. ______ g. The accounting record in which transactions initially are recorded.

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2) Listed below are several merchandising transactions of Siegel's Garden Center, a garden supply store: (a) Purchased merchandise from Bayview Wholesale on account. (b) Sold merchandise for cash. (c) Sold merchandise on account to Dom's Landscaping Company. (d) Paid the account payable to Bayview Wholesale. (e) Collected the account receivable from Dom's Landscaping Company. Among the accounting records maintained by Siegel's are subsidiary ledgers for inventory, accounts receivable, and accounts payable.

Required: For each of the five transactions list below, indicate any subsidiary ledger (or ledgers) to which the transaction would be recorded in using the following codes: Inv = Inventory subsidiary ledger AR = Accounts receivable subsidiary ledger AP = Accounts payable subsidiary ledger Also indicate whether each transaction causes the balance in the subsidiary ledger account to increase or decrease. The answer for transaction “A” is provided as an example. Transaction A

Subsidiary Ledger(s) Inv AP

Effect upon subsidiary Account Balance Increase Decrease[Increase]

B C D E

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3) The table below contains information from a recent annual report of Molloy, Incorporated. (Dollar amounts are stated in millions.)Required:Fill in the missing amounts.

Net sales Cost of goods sold Gross profit

Year 1

Year 2

$ 28,800 ? $ 12,200

$ 32,200 $ 16,600 ?

4) Consider the concept of subsidiary ledgers.Required:(A) Explain the nature of subsidiary ledgers.(B) Give two specific examples of subsidiary ledgers. For each of these examples, explain (1) the unit of organization within this ledger, and (2) the usefulness of this ledger in business operations.

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5) Listed below are selected transactions of Simon's, a retail store that uses a perpetual inventory system: (a) Purchased merchandise on account. (b) Made an entry to recognize the revenue from a sale of merchandise on account. (Ignore the cost of goods sold.) (c) Recognized the cost of goods sold relating to the sale in Transaction b. (d) Collected in cash the account receivable from the customer in Transaction b. (e) Following the taking of a physical inventory at year-end, made an adjusting entry to record a normal amount of inventory shrinkage. Required:Indicate the effects of each of these transactions upon the elements of the company's financial statements. Organize your answer in tabular form, using the column headings shown below. (Notice that the cost of goods sold is shown separately from all other expenses.) Use the code letters I for increase, D for decrease, and NE for no effect. The answer for Transaction "a" is provided as an example. Income Statement Transaction

Balance Sheet

Net − Cost − All = Net Assets = Liabilities + Owners' Sales of Other Income Equity Goods Sold NE NE NE NE I I NE

b c d e

6) Renato Company uses a perpetual inventory system. A partial chart of accounts is shown below, followed by a series of merchandising transactions. 1

Cash

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2 5 30 50 60 XX

Accounts Receivable Inventory Accounts Payable Sales Cost of Goods Sold All other expense accounts

Required:For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. Ignore sales taxes. (An example transaction has been completed below.) Transactions Example: Sold merchandise for cash

Account(s) Debited 1,60

Account(s) Credited 50,5

A Purchased merchandise on account B Sold merchandise on account C Paid the supplier for the merchandise in transaction a D Collected cash from the customer in transaction b E The physical inventory at year-end disclosed a normal amount of inventory shrinkage

7) Danny's Wholesale Company uses a perpetual inventory system. A partial chart of accounts is shown below: 1 2 5 30 40 50 60 99

Cash Accounts Receivable Inventory Accounts Payable Retained Earnings Sales Cost of Goods Sold Income Summary

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Transactions Example: Sold merchandise for cash

Account(s) Account(s) Debited Credited 1,60 50,5

A Purchased merchandise on account B Sold merchandise on account C Paid the supplier of the merchandise in transaction A D Collected cash from the customer in transaction B E The physical inventory at year-end disclosed a normal amount of inventory shrinkage F Made an entry to close the Revenue account G Made an entry at year-end to close the Cost of Goods Sold account H Closed the Income Summary account at the end of an unprofitable year

8) A customer purchased merchandise for $400 which cost the seller $200. The customer was dissatisfied with some of the goods and thus returned $100 worth of merchandise and received a cash refund. Required: (A) What journal entries should the seller make when the merchandise is sold and at the time of the return? Assume that the seller uses a perpetual inventory system. (B) If the seller uses a periodic inventory system, what entries would be made?

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9) Soundview Centre uses a periodic inventory system. At the end of Year 2, the accounting records include the following information: Inventory, December 31, Year 2 Inventory, December 31, Year 3 Net sales Purchase

$ 23,100 $ 15,900 $ 318,000 $ 183,000

Required: Compute the following for Year 2: a) Cost of goods sold b) Gross profit

$ __________ $ __________

10) Armstrong Creation uses a periodic inventory system. During the current year, the company purchased merchandise at a cost of $245,000. Required:Compute the cost of goods sold under each of the following alternative assumptions:

A B C D

No beginning inventory; ending inventory $18,000 Beginning inventory $15,000; no ending inventory Beginning inventory $12,000; ending inventory, $9,000 Beginning inventory $11,000; ending inventory $17,000

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Cost of Goods Sold $ __________ $ __________ $ __________ $ __________

11) Required:Briefly distinguish between a perpetual inventory system and a periodic inventory system.

12) Consider the pros and cons of perpetual and periodic inventory systems. Required: Indicate whether you would expect each of the following businesses to maintain a perpetual or a periodic inventory system. Explain the reasoning behind your answers: (A) A jewelry store (B) A roadside vegetable stand

13) Bookmarks, Incorporated sells used books at its store in the resort community of Lake Bryn Mawr. The owner maintains a large inventory of used books purchased from estate sales, flea markets, and customers. During the tourist seasons of summer and winter, the store is exceptionally busy with customers. Each customer usually makes small purchases ranging in amount from one to twenty dollars.Required:What type of inventory system would you recommend to the owner of Bookmarks, Incorporated? Explain the reasoning behind your advice.

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14) Danny's Wholesale Company uses a perpetual inventory system. A partial chart of accounts is shown below:

1 2 5 30 40 50 60 99

Cash Accounts Receivable Inventory Accounts Payable Retained Earnings Sales Cost of Goods Sold Income Summary

Transactions Example: Sold merchandise for cash

Account(s) Debited 1,60

Account(s) Credited 50,5

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G Made an entry at year-end to close the Cost of Goods Sold account H Closed the Income Summary account at the end of an unprofitable year

15) The company uses a perpetual inventory method and records purchases at their net amounts.Required:Prepare journal entries for each of the following transactions. (Round your answers to 2 decimal places.) June 1 Purchased merchandise from Martin Company for $900 with the terms of 2/10,n/30. June 2 Returned $100 of the merchandise to the Martin Company. June 4 Purchased merchandise from the Elizabeth Company for $700 with the terms of 3/10,n/30. June 6 Paid the amount owed to the Martin Company. June 8 Returned $50 of the merchandise purchased from the Elizabeth Company. June Sold all of the merchandise on hand from the Martin Company for 12 $1,060 and collected 8% sales tax in addition to the sales price June Paid the amount owed to Elizabeth Company in full. 16

16) Mayflower Supply House had gross sales revenue of $1,700,000, cost of goods sold of $950,000, sales returns and allowances of $52,500, and allowed sales discounts of $30,000. Required: Compute each of the following: (a) (b)

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Net sales. Gross profit.

$ _______ $ _______

(c)

Gross profit rate.

_______%

17) Consider gross profit rates. Required: (A) Explain how the gross profit rate for a particular product is determined. (B) How would you expect the manager of a large department store to use these gross profit rates in deciding which products to feature in the store's window displays and in determining the location of various types of merchandise within the store? Explain.

18) Your store sells computers and software. The average computer sells for $1,350, but the customer buying a computer also buys an average of $750 in software. You earn only 10% gross profit rate on sales of computers, but you make a 40% gross profit rate on software. You currently are selling 150 computers per month. Required:(A) What is the total amount of your monthly gross profit?(B) To increase sales, you are thinking about selling computers at cost ($1,215.) This would be the "cheapest price in town," and should attract more customers. You expect each customer who buys a computer to also buy $750 worth of software. Under these assumptions, how many computers must you sell each month in order to earn the same amount of gross profit as you are earning now?(C) Assume that as a result of reducing the sales price of computers to cost ($1,215), you are able to sell 250 computers each month, and that each customer now buys $850 worth of software. What will be the total amount of your monthly gross profit?(D) Assume that you achieve the results specified in part c (250 sales transactions per month, including an average of $850 in software). Would you consider the policy of selling computers at cost successful or unsuccessful? Explain specifically why this strategy is working out favorably or unfavorably.

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Answer Key Test name: Chapter 06 Test Bank (Problem Material) 1) (a) Periodic inventory system(b) Inventory shrinkage(c) Gross profit(d) None (Gross profit rate equals gross profit divided by net sales.)(e) Physical inventory(f) Subsidiary ledger(g) None (The statement describes a journal.) 2) Transaction A B C D E

Subsidiary Ledger(s) Inv AP Inv Inv AR AP AR

Effect upon subsidiary Account Balance Increase Increase Decrease Decrease Increase Decrease Decrease

3) Net sales Cost of goods sold Gross profit

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Year 1

Year 2

$ 28,800 $ 16,600 $ 12,200

$ 32,200 $ 16,600 $ 15,600

4) (A) Subsidiary ledgers provide detailed information about the individual items that comprise the balance of a general ledger account. (B) Students are asked to provide two examples of subsidiary ledgers, stating the unit of organization and usefulness of the ledger in business operations. Usually, students select two of the following.: Of course, students may identify other subsidiary ledgers. Several are described in the text. Inventory subsidiary ledger. Organized by type of product. Used to determine quantities of the product currently on hand, quantities sold recently, and recent purchase costs relating to the product. Accounts receivable subsidiary ledger. Organized by customer (name or account number). Used in billing customers, evaluating the customers' credit history with the business, and in enforcing credit limits. Accounts payable subsidiary ledger. Organized by creditor. Used in paying creditors and in monitoring the volume of business done with a specific supplier. 5) Income Statement Transaction

Balance Sheet

Net − Cost − All = Net Assets = Liabilities + Owners' Sales of Other Income Equity Goods Sold NE NE NE NE I I NE

6) Version 1

Transactions

Account(s) Account(s) Debited Credited 1,60 50,5

Example: Sold merchandise for cash A Purchased merchandise on account B Sold merchandise on account C Paid the supplier for the merchandise in transaction a D Collected cash from the customer in transaction b E The physical inventory at year-end disclosed a normal amount of inventory shrinkage

5 2,60 30

30 50,5 1

Account(s) Debited 1,60

Account(s) Credited 50,5

5 2,60 30

30 50,5 1

50 99

99 60

7) Transactions Example: Sold merchandise for cash A Purchased merchandise on account B Sold merchandise on account C Paid the supplier of the merchandise in transaction A D Collected cash from the customer in transaction B E The physical inventory at year-end disclosed a normal amount of inventory shrinkage F Made an entry to close the Revenue account G Made an entry at year-end to close the Cost of Goods Sold account H Closed the Income Summary account at the end of an unprofitable year

8) (A) At the time of sale Cash

Debit 400

Sales Cost of Goods Sold Inventory

Credit

400 200 200

At the return of the merchandise

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Sales Returns and Allowances

100

Cash Inventory

100 50

Cost of Goods Sold

<br> <br> (B)<br> At the time of sale Cash

Debit 400

Credit

Sales

400

At the return of the merchandise Sales Returns and Allowances

100

Cash

100

9) (a) Cost of goods sold: $190,200(b) Gross Profit: $127,800(a) Inventory, December 31, Year 2 Add: Purchases during the year Cost of goods available for sale Less: Inventory, December 31, Year 3 Cost of goods sold

$ 23,100 183,000 206,100 15,900 $ 190,200

(b) Net sales Less: Cost of goods sold (part a) Gross profit

$ 318,000 190,200 $ 127,800

10) A $227,000 B $260,000 C $248,000 D $239,000A $227,000 ($245,000 − $18,000) B $260,000 ($245,000 + $15,000) C $248,000 ($245,000 + $12,000 − $9,000) D $239,000 ($245,000 + $11,000 − $17,000)

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11) Students' answers should address most of the following points set forth below. Perpetual inventory system:Inventory and Cost of Goods Sold accounts are kept continuously up-to-date, reflecting the effects of the merchandising transactions as they occur.The system requires recording the cost of sales transactions on a timely basis. Often, this is practicable only with a computer-based accounting system.This method is used by virtually all businesses with extensive interim reporting requirements (publicly owned companies), or which must continuously know the quantities of various types of merchandise on hand. Periodic inventory system:No effort is made to keep the Inventory account up-to-date, or to record the cost of goods sold as sales take place.The amounts of inventory on hand and the cost of goods sold are not determined until a complete physical inventory is taken, usually only at year-end. The method is used primarily by small businesses with manual accounting systems, and with few external reporting requirements.

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12) Students' answers should address most of the following points: (A) A jewelry store probably would maintain a perpetual inventory system for the following reasons:Items have different per-unit costs. Therefore, management needs detailed information about the cost of specific units sold in order to properly measure income.Because the items are expensive and subject to theft, management needs detailed records of the items in inventory and their cost, to recognize when shrinkage losses occur, to measure such losses, and to support theftinsurance claims.Because the volume of sales transactions is relatively low, it would not be difficult or costly to maintain a perpetual inventory system.(B) A roadside vegetable stand probably would maintain a periodic inventory system for the following reasons:Management has no need of perpetual inventory records to see what is in stock.It would be difficult to determine the per-unit cost of vegetables, as they probably are purchased in bulk. Also, it would be impractical to record the cost of each sales transaction.The company does not need an elaborate accounting system; it probably has no external reporting requirements other than income tax returns. 13) The owner would be well advised to use a periodic inventory system. Sales during the store's busy seasons are occurring in high volume and are individually of low value. Up-to-date information regarding the cost of goods sold and the value of the existing inventory would not seem to be worth the cost of installing point of sale terminals. A manual perpetual system would impose time costs that would likewise be difficult to justify in terms of the value of the information obtained. 14) Transaction Example: Sold merchandise for cash A

Purchased merchandise on account, terms 2/10, n/30

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Account(s) Debited 1,60 5

Account(s) Credited 35,50,5 30

C D

E F G H I

J K L

Returned some of the merchandise purchased in transaction A to the supplier for full credit Sold merchandise on account, terms 2/10, 1/30 The customer in transaction C returned some of the merchandise, credited the customer's account for the original sales price (The returned goods were in "new" condition and were returned to inventory) Paid an account payable within the discount period Paid an account payable after the discount period had expired Received cash payment from a credit customer within the discount period Received payment from a credit customer after the discount period had expired Paid transportation charges on an inbound shipment of merchandise from a supplier Paid delivery charges on a shipment of merchandise being sent to a customer Remitted sales taxes collected during the period to the state tax authorities The physical inventory taken at yearend disclosed a normal amount of inventory shrinkage

2,60

50,5,35

35,52,5

2,60

30,XX

1,51

15) Date June 1

Accounts Title Inventory

Debit 882.00

Accounts Payable – Martin June 2

Accounts Payable – Martin

882.00 98.00

Inventory June 4

Inventory Accounts Payable – Elizabeth

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Credit

98.00 679.00 679.00

June 6

Accounts Payable – Martin

784.00

Cash June 8

Accounts Payable – Elizabeth

784.00 48.50

Inventory June 12

Cash

48.50 1144.80

Sales Tax Payable

84.80

Sales Revenue Cost of Goods Sold

1060.00 784.00

Inventory June 16

784.00

Accounts Payable – Elizabeth

630.50

Purchase Discounts Lost

19.50

Cash

650.00

16) (a) $1,617,500 (b) $667,500 (c) 41.3% (rounded)(a) Net sales = ($1,700,000 − $52,500 − $30,000) = $1,617,500 (b) Gross profit = ($1,617,500 − $950,000) = $667,500 (c) Gross profit rate = $667,500 (from part b) ÷ $1,617,500 (from part a) = 41.3%

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17) The gross profit rate of a particular product is determined as follows: %media:formula1.mml% Most businesses seek to maximize sales of those products with the highest gross profit rates (profit margins). Therefore, the store manager wants customers to be aware of these products, and to see them in an appealing setting. The manager logically would feature high-margin products in the window displays. Also, the manager will locate highmargin products where they will be seen by all customers such as on the main floor, near the main entrance. Low-margin items usually are displayed in space off of the main traffic areas, such as the top floor, corners of the store, and the "bargain basement." 18) (A) $65,250(B) 218 (rounded)(C) $85,000(D) The policy of selling computers at cost appears modestly successful, increasing the monthly gross profit from $65,250 to $85,000. There are two factors leading to the success of this strategy. The first is an increase in sales transactions to 250 computer sales per month instead of 150. But as shown in part b, an increase to 250 sales per month would not in itself make this strategy successful since the computers are being sold at cost (no gross profit). The reason that total monthly profit margin increased is that the average customer is now buying more software. A

Gross profit per computer ($1,350 × 10%) Gross profit per $750 sale of software ($750 × 40%)

$ 135 300

Gross profit per average computer sale

435

Number of transactions per month

150

Total monthly gross profits ($435 × 150 transactions)

$ 65,250

Current gross profit per month (per part A) Gross profit from sale of software to average computer buyer (part A)

$ 65,250 $ 300

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Number of sales transactions required to provide $65,250 in monthly gross profit ($65,250 ÷ $300) Gross profit per sale under new assumptions:

218

On sale of each computer

$ 0

On sale of $850 of software ($850 × 40%)

340

Gross profit per average computer sale

$ 340

Number of transactions per month Total monthly gross profit ($340 × 250 transactions)

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250 $ 85,000

CHAPTER 6 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet. ⊚ ⊚

true false

2) The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable. ⊚ ⊚

true false

3) The operating cycle of a merchandiser is longer and more complex than the operating cycle of a manufacturer. ⊚ ⊚

true false

Wholesalers buy from retailers and sell to the general public. ⊚ ⊚

true false

5) When revenue is included in a company’s income statement, it is said to have been “recognized.” ⊚ ⊚

true false

Revenue is recognized when it has been collected from the customer. ⊚ ⊚

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true false

7) Revenue is recognized when the company receiving the revenue has performed all of the functions that are included in the agreement with the customer, and the costs associated with the transaction are known or can be reasonably estimated. ⊚ ⊚

true false

8) Cost of goods sold is an expense shown separately from other expenses in an income statement. ⊚ ⊚

true false

9) If ending inventory and cost of goods sold are added together, they should equal gross profit. ⊚ ⊚

10)

true false

If gross profit and cost of goods sold are added together, they should equal sales. ⊚ ⊚

true false

11) General ledgers contain information about specific control accounts in the company's subsidiary ledger. ⊚ ⊚

true false

12) If a company has 240 credit customers, there are 480 individual customer accounts in the accounts receivable subsidiary ledger (one for sales for each customer, one for receipts from each customer).

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⊚ ⊚

true false

13) Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft, and shoplifting. ⊚ ⊚

true false

14) In a perpetual inventory system, when merchandise is purchased, it is debited to an account called Purchases. ⊚ ⊚

true false

15) A perpetual inventory system requires the capability of recording the cost of the goods sold for individual sales transaction. ⊚ ⊚

true false

16) When using a perpetual inventory system, the Inventory account is credited when a sale is made. ⊚ ⊚

true false

17) In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. ⊚ ⊚

true false

18) When an adjusting entry is made to record inventory shrinkage, the Inventory account is debited and the Cost of Goods Sold account is credited.

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⊚ ⊚

true false

19) In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period. ⊚ ⊚

true false

20) In a periodic inventory system, when a sale is made there is no entry made to record the cost of goods sold. ⊚ ⊚

true false

21) In a periodic inventory system, a complete physical inventory must be taken at year-end in order to compute the amount of purchases made during the period. ⊚ ⊚

true false

22) In a periodic inventory system, cost of goods sold is the cost of goods available for sale less ending inventory. ⊚ ⊚

true false

23) In a periodic inventory system, the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account. ⊚ ⊚

true false

24) Under the periodic inventory system, no effort is made to keep up-to-date records of either Inventory or Cost of Goods Sold as transactions occur. Version 1

⊚ ⊚

true false

25) In a periodic inventory system, the ending inventory can be determined from the accounting records, and a physical count of the merchandise on hand will confirm the amount. ⊚ ⊚

true false

26) In a periodic inventory system, the cost of goods sold is determined by the following endof-period computation: Beginning Inventory + Purchases − Ending inventory = Cost of Goods Sold. ⊚ ⊚

true false

27) Almost all manufacturing companies, most large merchandising companies, and many small merchandising companies use perpetual systems. ⊚ ⊚

28)

true false

Today, most large merchandising companies use a perpetual inventory system. ⊚ ⊚

true false

29) A factor that might suggest that a periodic inventory system is appropriate is that all merchandise is stored at the sales site. ⊚ ⊚

true false

30) A factor that might suggest that a perpetual inventory system is appropriate is that inventory includes many different kinds of low-cost items.

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⊚ ⊚

true false

31) Net Sales is computed as total sales revenue less sales returns and allowances less sales discounts. ⊚ ⊚

true false

32) If a transaction takes place with terms 2/10, n/30, the "10" refers to the percent discount a purchaser can take if payment is made within 2 days. ⊚ ⊚

true false

33) The terms "sales discount," "purchase discount," and "cash discount" all refer to the same discount. ⊚ ⊚

true false

34) If a company records a purchase at net cost and then fails to take advantage of the discount, the discount not taken is recorded in the Interest Expense account. ⊚ ⊚

true false

35) If a company records a purchase at the gross invoice price and then takes advantage of the discount, the discount is treated as a reduction in the cost of goods sold. ⊚ ⊚

true false

36) Sales returns and allowances is an expense account, and on the income statement it is added to cost of goods sold.

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⊚ ⊚

true false

37) Instead of paying for merchandise purchased on account, Olympic Corporation returned this merchandise to the supplier. Olympic should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances. ⊚ ⊚

true false

38) Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement. ⊚ ⊚

true false

39) The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account. ⊚ ⊚

true false

40) In a retail department store with an efficient perpetual inventory system, the quantities of goods actually on hand are probably somewhat more than the quantities indicated in the accounting records. ⊚ ⊚

true false

41) When many different products arrive in a single shipment, because of the concept of materiality, a company might choose not to separate the transportation costs into those costs related to inventory that has been sold and those costs related to inventory still on hand at the end of the accounting period. ⊚ ⊚

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true false

42) In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts payable subsidiary ledger, rather than the general ledger. ⊚ ⊚

true false

43) Regardless of the number of special journals used, every business needs a general journal. ⊚ ⊚

true false

44) Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross sales. ⊚ ⊚

45)

true false

The average gross profit margin is a measure of relative profitability. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 46) The operating cycle: A) Is repeated once per year for manufacturers and merchandisers. B) Has seven steps. C) Starts with using cash to purchase merchandise and ends with collecting the cash back from customers. D) Is longer for a retailer than for a manufacturer.

47)

Which of the following businesses is likely to have the shortest operating cycle?

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A) B) C) D)

48)

Merchandising companies: A) B) C) D)

49)

Include both wholesalers and retailers. Do not sell directly to the public. Manufacture their own products and then sell them to the public. Include companies such as General Motors, IBM, and Boeing Aircraft.

Sales revenue is recognized in the period in which: A) B) C) D)

50)

A food store A department store An art store A car store

Merchandise is delivered to the customer. The customer orders the merchandise. Cash payment is received by the seller. Purchases are made to replace the merchandise sold.

Which of the following criteria must be met for revenue to be recognized?

A) The company receiving the revenue has performed all of the functions that are included in the agreement with the customer and all the costs associated with the transaction are known. B) The company receiving the revenue has performed all of the functions that are included in the agreement with the customer and all the costs associated with the transaction are known or can be reasonably estimated. C) The company receiving the revenue has invoiced the customer. D) The company receiving the revenue has collected the amount due from the customer.

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51)

Gross profit is the difference between: A) B) C) D)

52)

Net sales and the cost of goods sold. The cost of merchandise purchased and the cost of merchandise sold. Net sales and net income. Net sales and all expenses.

The basic purpose of a subsidiary ledger is to:

A) Provide a chronological record of all business transactions. B) Provide details about the individual items comprising the balance of a general ledger account. C) Enable accountants to prepare financial statements. D) Provide persons outside of the organization with detailed information about the company's operations.

53) Parkside Pool reports net sales of $319,000, gross profit of $180,000, and net income of $28,000. The company's cost of goods sold is: A) B) C) D)

$111,000. $139,000. $319,000. $208,000.

54) Parkside Pool reports net sales of $625,000, gross profit of $275,000, and net income of $15,000. The company's cost of goods sold is: A) B) C) D)

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$335,000. $350,000. $340,000. $325,000.

55) Berg Tooling reports net sales of $385,000, gross profit of $205,000, and net income of $21,000. The company's cost of goods sold is: A) B) C) D)

$159,000. $180,000. $226,000. $364,000.

56) Berg Tooling reports net sales of $325,000, gross profit of $175,000, and net income of $15,000. The company's cost of goods sold is: A) B) C) D)

$135,000. $150,000. $140,000. $125,000.

57) Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership? A) Pickup trucks offered for sale. B) Used cars taken in trade and offered for sale on the company's used-car lot. C) Spark plugs, oil filters, and other parts that are intended for use by the service department in repairing and servicing customers' cars. D) "Company cars" provided to specific company executives for their personal use.

58) The purchasing agent of Superb Service Company wants to know the dollar amount of inventory purchased on account during the year from a particular supplier. This information can be found most easily in Superb Service's:

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A) B) C) D)

Inventory subsidiary ledger. Accounts payable controlling account. Inventory controlling account. Accounts payable subsidiary ledger.

59) Sutton Supplies reports net sales of $3,850,000, net income of $310,000, and gross profit of $990,000. The company's cost of goods sold is: A) B) C) D)

$680,000. $1,980,000. $3,540,000. $2,860,000.

60) Sutton Supplies reports net sales of $3,750,000, net income of $375,000, and gross profit of $900,000. The company's cost of goods sold is: A) B) C) D)

$1,700,000. $1,900,000. $3,375,000. $2,850,000.

61) Van Roy Supplies reports net sales of $1,880,000, net income of $190,000, and gross profit of $313,000. The company's cost of goods sold is: A) B) C) D)

$1,377,000. $503,000. $1,690,000. $1,567,000.

62) Van Roy Supplies reports net sales of $1,750,000, net income of $175,000, and gross profit of $300,000. The company's cost of goods sold is: Version 1

A) B) C) D)

$1,400,000. $475,000. $1,575,000. $1,450,000.

63) Which of the following appears in the income statement of a merchandising business, but not in the income statement of a business that renders only services? A) B) C) D)

Interest revenue Gross profit Advertising expense Income tax expense

64) Cumberland, Incorporated has applied to its bank for a loan. The bank asks Cumberland's controller about the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to: A) B) C) D)

65)

The Income Statement. The Accounts Receivable control account. The Accounts Receivable subsidiary ledger. Last year's Balance Sheet.

The Cost of Goods Sold account is closed by: A) B) C) D)

Debiting Cost of Goods Sold and crediting Income Summary. Debiting Cost of Goods Sold and crediting Retained Earnings. Debiting Income Summary and crediting Cost of Goods Sold. Debiting Retained Earnings and crediting Cost of Goods Sold.

66) Under the perpetual inventory system which journal entry would indicate a purchase of merchandise? Version 1

A) B) C) D)

67)

Debit Inventory and credit Cash. Debit Purchases and credit Cash. Debit Costs of Goods Sold and credit Inventory. Debit Inventory and credit Cost of Goods Sold.

In a perpetual inventory system:

A) Merchandising transactions are recorded as they occur. B) No effort is made to record the Cost of Goods Sold until year-end. C) Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or sold. D) The need to take physical inventory is eliminated.

68) In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these entries are best described as follows: A) One entry recognizes the sales revenue, and the other recognizes the cost of goods sold. B) One entry records the purchase of the merchandise, and the other records the sale. C) One entry records the cost of goods sold, and the other reduces the balance in the Inventory account. D) One entry updates the general ledger, and the other updates the subsidiary ledgers.

69) Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory control account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory: A) Is unnecessary. B) Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory control account represents the beginning inventory. C) Probably will indicate more than $1,200,000 in merchandise on hand. D) Probably will indicate less than $1,200,000 in merchandise on hand.

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70) Jayson Products uses a perpetual inventory system. At year-end, the Inventory account had a balance of $280,000, but a complete year-end physical inventory indicated goods on hand costing only $273,000. Jayson should: A) Reduce its cost of goods sold by $7,000. B) Record a $7,000 current liability. C) Reduce the balance in its Inventory control account and inventory subsidiary ledger by $7,000. D) Reduce the balance in the Inventory control account and record a current liability, both in the amount of $7,000.

71) Washington Warehouse is a small retail business that specializes in the sale of top-of-theline televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Company. Thus far, Washington has recorded the following transactions involving the Flat TV: January 5 Purchased 8 Flat TVs at a unit cost of $1,400 January 18 Purchased 5 additional Flat TVs at $1,400 each February 12 Sold 9 Flat TVs to the Duke Hotel for $15,300

If Washington uses a perpetual inventory system, the journal entry to record the purchase on January 18th would include which of the following? A) B) C) D)

A debit to the Purchases account for $7,000. A debit to the Cost of Goods Sold for $7,000. A credit to Inventory for $7,000. A debit to Inventory for $7,000.

72) Washington Warehouse is a small retail business that specializes in the sale of top-of-theline televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Company. Thus far, Washington has recorded the following transactions involving the Flat TV: January 5 Purchased 8 Flat TVs at a unit cost of $1,400 January 18 Purchased 5 additional Flat TVs at $1,400 each February 12 Sold 9 Flat TVs to the Duke Hotel for $15,300

If Washington uses a perpetual inventory system, the gross profit on the Flat TVs as of February 12th is:

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A) B) C) D)

$11,200. $2,700. $4,100. $15,300.

73) Washington Warehouse is a small retail business that specializes in the sale of top-of-theline televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Company. Thus far, Washington has recorded the following transactions involving the Flat TV: January 5 Purchased 8 Flat TVs at a unit cost of $1,400 January 18 Purchased 5 additional Flat TVs at $1,400 each February 12 Sold 9 Flat TVs to the Duke Hotel for $15,300

If Washington uses a perpetual inventory system, the two journal entries required to record the sale on February 12th would include all of the following except: A) B) C) D)

A debit to the Cost of Goods Sold for $12,600. A credit to Sales Revenue for $15,300. A credit to Purchases for $15,300. A credit to Inventory for $12,600.

74) Washington Warehouse is a small retail business that specializes in the sale of top-of-theline televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Company. Thus far, Washington has recorded the following transactions involving the Flat TV: January 5 Purchased 8 Flat TVs at a unit cost of $1,400 January 18 Purchased 5 additional Flat TVs at $1,400 each February 12 Sold 9 Flat TVs to the Duke Hotel for $15,300

Washington maintains a subsidiary ledger account for each type of TV carried in the store. An examination of the account for the Flat TV model at the end of February would show: A) B) C) D)

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4 units on hand with a total value of $1,400. 4 units on hand with a total value of $5,600. 13 units on hand with a total value of $18,200. The amount that Washington owes to Bass.

75) World of Sound is a small retail business that specializes in the sale of top-of-the-line sound systems. This year, the store has begun to carry the Surround Sound manufactured by Carp Company. Thus far, World of Sound has recorded the following transactions involving the Surround Sound: May 5 Purchased 18 units at a unit cost of $2,400 May 18 Purchased 15 additional units at $2,550 each June 12 Sold 19 units to the Davies Theater

If World of Sound uses a perpetual inventory system, the journal entry to record the purchase on May 18th would include which of the following? A) B) C) D)

A debit to the Purchases account for $38,250. A debit to the Cost of Goods Sold for $38,250. A credit to Inventory for $38,250. A debit to Inventory for $38,250.

76) World of Sound is a small retail business that specializes in the sale of top-of-the-line sound systems. This year, the store has begun to carry the Surround Sound manufactured by Carp Company. Thus far, World of Sound has recorded the following transactions involving the Surround Sound: May 5 Purchased 18 units at a unit cost of $2,400 May 18 Purchased 15 additional units at $2,550 each June 12 Sold 19 units to the Davies Theater

If World of Sound uses a perpetual inventory system, the second journal entry required to record the sale on June 12th would include which of the following? (Assume that all of the units purchased on May 5 are sold before any of the units that are purchased on May 18 are sold.) A) B) C) D)

77)

A debit to the Cost of Goods Sold for $45,750. A credit to the Cost of Goods Sold for $45,750. A credit to Purchases for $45,750. A debit to Inventory for $45,750.

Inventory shrinkage is not caused by:

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A) B) C) D)

Shoplifting. Breakage. Price reductions by competitors. Spoilage.

78) In a periodic inventory system, the formula used in computing the cost of goods sold may be summarized as follows: A) Beginning inventory + purchases − ending inventory. B) Beginning inventory + purchases − net sales. C) Ending inventory + purchases − net sales. D) Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage account.

79) In a periodic inventory system, which of the following accounts may be closed by debiting Cost of Goods Sold? A) B) C) D)

80)

Sales, Inventory (beginning), and Gross Profit. Inventory (beginning) and Purchases. Purchases and Inventory (ending). Sales, Inventory (beginning), and Cost of Goods Available for Sale.

In a periodic inventory system, the cost of goods sold is:

A) Recorded as sales transactions occur. B) Determined by a computation which is performed at year-end, after the taking of a complete physical inventory. C) Equal to the beginning inventory, plus purchases made during the period, less sales revenue for the period. D) Determined by subtracting the balance in the Gross Profit account from the amount of net sales.

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81)

Which of the following statements about a periodic inventory system is not correct?

A) systems. B) C) D)

82)

These systems are used primarily by small businesses with manual accounting The system does not include an up-to-date inventory ledger. The balance in the Inventory account remains unchanged until the end of the period. The Cost of Goods Sold account is updated as sales transactions occur.

The following information is available:

Sales Ending Inventory Purchases Cost of Goods Sold

$ 3,200 1,000 1,960 2,540

Gross profit is: A) B) C) D)

83)

$0. $1,000. $660. $1,240.

The following information is available:

Sales Ending Inventory Purchases Cost of Goods Sold

$ 2,850 1,500 1,950 2,400

Gross profit is: A) B) C) D)

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$0. $1,500. $450. $900.

84) During Year 1, the inventory of Debra's Gift Shop decreased by $46,000. If the income statement for Year 1 reported cost of goods sold of $306,000, purchases during the year must have amounted to: A) B) C) D)

$352,000. $306,000. $260,000. $176,000.

85) During Year 1, the inventory of Debra's Gift Shop decreased by $50,000. If the income statement for Year 1 reported cost of goods sold of $350,000, purchases during the year must have amounted to: A) B) C) D)

86)

$400,000. $310,000. $300,000. $350,000.

Michael uses its periodic inventory system and the following information is available:

Sales Beginning Inventory Ending Inventory Purchases

$ 55,700 10,000 8,000 46,300

What is the cost of goods sold? A) B) C) D)

87)

$56,300 $48,300 $46,300 $8,000

Michael uses its periodic inventory system and the following information is available:

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Sales Beginning Inventory Ending Inventory Purchases

$ 43,400 11,200 9,800 32,200

What is the cost of goods sold? A) B) C) D)

88)

$9,800 $33,600 $32,200 $43,400

Michael uses its periodic inventory system and the following information is available:

Sales Beginning Inventory Ending Inventory Purchases

$ 49,500 10,600 9,200 32,000

What is the gross profit? A) B) C) D)

89)

$16,100 $33,400 $32,000 $42,600

Michael uses its periodic inventory system and the following information is available:

Sales Beginning Inventory Ending Inventory Purchases

$ 43,400 11,200 9,800 32,200

What is the gross profit?

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A) B) C) D)

90)

$9,800 $33,600 $32,200 $43,400

Bremmer uses a periodic inventory system and the following information is available:

Sales Beginning Inventory Ending Inventory Purchases

$ 198,700 16,000 14,100 111,000

What is the cost of goods sold? A) B) C) D)

91)

$85,800 $112,900 $111,000 $198,700

Bremmer uses a periodic inventory system and the following information is available:

Sales Beginning Inventory Ending Inventory Purchases

$ 230,400 21,200 19,800 132,200

What is the cost of goods sold? A) B) C) D)

92)

$96,800 $133,600 $132,200 $230,400

Bremmer uses a periodic inventory system and the following information is available:

Sales

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$ 161,100

Beginning Inventory Ending Inventory Purchases

17,800 15,000 90,000

What is the gross profit? A) B) C) D)

93)

$68,300 $90,000 $161,100 $92,800

Bremmer uses a periodic inventory system and the following information is available:

Sales Beginning Inventory Ending Inventory Purchases

$ 230,400 21,200 19,800 132,200

What is the gross profit? A) B) C) D)

$96,800 $133,600 $132,200 $230,400

94) Merchandising companies that are small and do not use a perpetual inventory system may elect to use: A) B) C) D)

A physical inventory system. A periodic inventory system. An inventory shrinkage method. An inventory subsidiary ledger system.

95) Which of the following would not tend to make a manufacturer choose a perpetual inventory system?

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A) B) C) D)

96)

Management wants information about quantities of specific products. A low volume of sales transactions and a computerized accounting system. A high volume of sales transactions and a manual accounting system. Items in inventory with high per unit costs.

Which of the following factors would suggest the use of a perpetual inventory system? A) B) C) D)

A small company. Inventory items with a high per-unit cost. A desire to minimize record-keeping requirements. Only annual reporting is required.

97) Which of the following companies would be most likely to use a periodic inventory system? A) B) C) D)

A computer manufacturer. A bank. A retailer that operates a number of stores. A newspaper stand.

98) Which of the following companies would be most likely to use a perpetual inventory system? A) B) C) D)

99)

Corner deli. A retailer that operates a number of hardware stores. A CPA firm. A manufacturer of custom sailboats.

Which of the following factors would suggest the use of a periodic inventory system?

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A) B) C) system. D)

A small company. A high volume of sales and a manual accounting system. Neither a small company nor a high volume of sales and a manual accounting Both a small company and a high volume of sales and a manual accounting system.

100) In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct? A) Most large companies use perpetual inventory systems. B) A periodic system does not include an inventory subsidiary ledger. C) The perpetual method is easier to apply in a manual accounting system. D) Regardless of the system in use, most businesses take a physical inventory at least once a year.

101)

Periodic inventory systems are used primarily by:

A) Small businesses with manual accounting systems. B) Large manufacturing companies. C) Small businesses that sell a high volume of low-priced items. D) Companies that sell a high volume of low-priced items and record sales transactions on point-of-sale terminals.

102)

Which account listed below is classified as a contra-revenue account? A) B) C) D)

103)

Cost of Goods Sold. Gross profit. Sales Discounts. Purchases.

The credit term 2/10, n/30 means:

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A) That after 10 days 2% interest is charged. B) That there is a 10% discount if payment is received within 30 days. C) That there is a 2% discount if payment is received within 10 days, otherwise, full payment is due within 30 days. D) There is a 10% discount if paid immediately and 2% if paid within 30 days.

104)

Sales discounts and allowances: A) B) C) D)

Will reduce net profit when properly recorded. Will increase net profit when properly recorded. Will not affect net profit. Are always immaterial and need not be recorded.

105) Which of the following credit terms is the most advantageous to the purchaser of merchandise? A) B) C) D)

106)

The cost of delivering merchandise to the customer is: A) B) C) D)

107)

1/10, n/30. 5/10, n/60. 2/10, n/30. 5/10, n/20.

Part of cost of goods sold. Used in the calculation of net sales. An operating expense. A reduction of gross profit.

The cost of the transportation of inventory purchased:

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A) B) C) D)

108)

To arrive at net sales: A) B) C) D)

109)

Add sales discounts to sales. Subtract the cost of goods sold from the sales price. Subtract sales returns and sales discounts from sales. Subtract accounts receivable from sales.

The Sales Returns and Allowances account is debited when: A) B) C) D)

110)

Are expensed in the current period. Increases income. Becomes part of the cost of inventory. Reduces the sales price.

Merchandise is returned to a supplier. Merchandise is returned by a customer. Payment is made to a supplier within the discount period. An account receivable is collected within the discount period.

All of the following accounts normally have debit balances except: A) B) C) D)

Transportation-in. Cost of Goods Sold. Sales Returns & Allowances. Purchase Returns & Allowances.

111) If sales discounts are shown as a separate item in financial statements, they should be shown as a(n):

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A) B) C) D)

Deduction from accounts receivable. Deduction from gross sales revenue. Operating expense. Current liability.

112) Regal Artworks Company records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a: A) B) C) D)

Debit to Purchase Discounts Lost. Credit to Purchase Discounts Lost. Debit to Sales Discounts. Credit to Sales Discounts.

113) Bernice Beverages is not satisfied with the quality of merchandise purchased from Reade Supplies. If Reade Supplies agrees to settle this matter by granting Bernice Beverages a sales allowance, Bernice Beverages will: A) Return the entire shipment to Reade Supplies and receive a full refund. B) Return only that portion of the merchandise that it is unable to sell within the discount period. C) Keep the merchandise, but pay a reduced purchase price. D) Keep the merchandise and sell it at a reduced sales price.

114)

The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:

A) Increase sales. B) Reduce net sales. C) Speed up the collection of accounts receivable. D) Focus management's attention upon customers that fail to take advantage of all available cash discounts.

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115)

When making sales, the sales taxes received are: A) B) C) D)

Revenue. A liability. An expense if incurred. A reduction in inventory value.

116) Emerald Company uses a perpetual inventory system and records purchases of merchandise at net cost. The company recently purchased 520 compact discs at an invoice price of $7,000 and terms of 3/10, n/30. Half of these discs had been mislabeled and were returned immediately to the supplier. The journal entry to record payment of this invoice after the discount period has expired will include a: A) B) C) D)

Debit to Inventory for $3,500. Credit to Cash for $3,500. Credit to an expense account for $105. Credit to Cash for $3,395.

117) Emerald Company uses a perpetual inventory system and records purchases of merchandise at net cost. The company recently purchased 200 compact discs at an invoice price of $6,000 and terms of 2/10, n/30. Half of these discs had been mislabeled and were returned immediately to the supplier. The journal entry to record payment of this invoice after the discount period has expired will include a: A) B) C) D)

Debit to Inventory for $3,000. Credit to Cash for $3,000. Credit to an expense account for $60. Credit to Cash for $2,940.

118) Gartner Furniture, Incorporated purchased inventory at $1,200 list price and the terms were 3/10 n/30. If Gartner paid the full invoice price on the 10th day, what amount of cash did Gartner pay to settle the account?

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A) B) C) D)

$1,176. $1,236. $1,164. $1,200.

119) Beacon Food Stores purchased canned goods at an invoice price of $5,600 and terms of 4/10, n/30. Half of the goods had been mislabeled and were returned immediately to the supplier. If Beacon Food pays the remaining amount of the invoice within the discount period, the amount paid should be: A) B) C) D)

$5,376. $2,688. $5,600. $2,576.

120) Beacon Food Stores purchased canned goods at an invoice price of $4,000 and terms of 2/10, n/30. Half of the goods had been mislabeled and were returned immediately to the supplier. If Beacon Food pays the remaining amount of the invoice within the discount period, the amount paid should be: A) B) C) D)

$1,920. $1,960. $3,920. $4,000.

121) If Bounder Dog Supplies, Incorporated purchased inventory at $2,200 list price and the terms were 3/10 n/60, what would be the value associated with the inventory if payment was made within 10 days?

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A) B) C) D)

$2,134. $2,156. $2,266. $2,200.

122) If Bounder Dog Supplies, Incorporated purchased inventory at $2,200 list price and the terms were 3/10 n/30, what would be the value associated with the inventory if payment was made within 10 days? A) B) C) D)

$2,268. $2,334. $2,200. $2,134.

123) Pet Foods Plus purchased bagged dog food at an invoice price of $6,000 and terms of 2/10, n/30. Half of the bags had been damaged in shipment and delivery was refused. If Pet Foods Plus pays the remaining amount of the invoice within the discount period, the amount paid should be: A) B) C) D)

$2,940. $3,000. $5,880. $6,000.

124) Which of the following is not a reason that a company would offer its customers a discount if they pay sooner than later?

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A) The company does not expect its customers to return any merchandise. B) The faster the seller receives cash, the sooner it is able to turn that cash over and reinvest it in additional inventory purchases for future sales. C) The longer an accounts receivable is outstanding, the more likely that some issue may arise that further delays payment. D) The seller must be competitive with other alternative sellers.

125)

Which of the following is not an advantage of a special journal?

A) Transactions are recorded faster and more efficiently. B) There are specific rules for the design and content of special journals. C) Automation may reduce the risk of errors. D) Employees maintaining special journals generally do not need expertise in accounting.

126)

The gross profit margin:

A) Is the dollar amount of gross profit expressed as a percentage of cost of sales. B) May indicate popular products and successful marketing strategies. C) Must be computed for the business as a whole rather than for specific sales departments. D) Is equal to cost of goods sold plus gross operating expenses.

127) At the beginning of Year 2, Midway Hardware has an inventory of $400,000. Because sales growth was strong during Year 2, the owner wants to increase inventory on hand to $460,000 at December 31, Year 2. If net sales for Year 2 are expected to be $2,160,000, and the gross profit rate is expected to be 25%, what is the cost of the merchandise the owner should expect to purchase during Year 2?

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A) B) C) D)

$2,080,000. $1,620,000. $1,680,000. $2,160,000.

128) At the beginning of Year 2, Midway Hardware has an inventory of $400,000. Because sales growth was strong during Year 2, the owner wants to increase inventory on hand to $450,000 at December 31, Year 2. If net sales for Year 2 are expected to be $1,600,000, and the gross profit rate is expected to be 35%, what is the cost of the merchandise the owner should expect to purchase during Year 2? A) B) C) D)

129)

If cost of goods sold is $320,000 and the gross profit rate is 20%, what is the gross profit? A) B) C) D)

130)

$1,490,000. $1,040,000. $1,090,000. $1,600,000.

$80,000. $256,000. $320,000. $1,600,000.

If cost of goods sold is $480,000 and the gross profit rate is 40%, what is the gross profit? A) B) C) D)

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$320,000. $288,000. $480,000. $1,200,000.

131) At the beginning of the year, Saratoga Dress Company had an inventory of $300,000. During the year, the company purchased merchandise costing $850,000. Net sales for the year totaled $1,200,000, and the gross profit rate was 45%. The cost of goods sold and the ending inventory, respectively, were: A) B) C) D)

$1,150,000 and $660,000. $540,000 and $610,000. $660,000 and $490,000. $1,150,000 and $490,000.

132) At the beginning of Year 2, England Dresses has an inventory of $90,000. However, management wants to reduce the amount of inventory on hand to $50,000 at December 31. If net sales for Year 2 are forecast at $280,000 and the gross profit rate is expected to be 28%, What is the cost of the merchandise which management should expect to purchase during Year 2? (Hint: First compute the expected cost of goods sold.) A) B) C) D)

$251,600. $161,600. $201,600. $140,000.

133) At the beginning of Year 2, England Dresses has an inventory of $140,000. However, management wants to reduce the amount of inventory on hand to $80,000 at December 31. If net sales for Year 2 are forecast at $400,000 and the gross profit rate is expected to be 40%, What is the cost of the merchandise which management should expect to purchase during Year 2? (Hint: First compute the expected cost of goods sold.) A) B) C) D)

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$240,000. $180,000. $320,000. $220,000.

134) On July 1, the inventory of Barnett Shoes was $48,000. Because of anticipated back-toschool sales, the owner wants to have an inventory of $83,000 on hand at the beginning of August. Net sales during July are expected to total $84,000, with a gross profit rate of 22%. During July, the company should purchase merchandise costing: A) B) C) D)

$65,520. $148,520. $100,520. $83,000.

135) On July 1, the inventory of Barnett Shoes was $60,000. Because of anticipated back-toschool sales, the owner wants to have an inventory of $105,000 on hand at the beginning of August. Net sales during July are expected to total $70,000, with a gross profit rate of 45%. During July, the company should purchase merchandise costing: A) B) C) D)

$38,500. $143,500. $83,500. $105,000.

136) If costs of goods sold is $700,000 and its gross profit rate is 30%, what is the gross profit? A) B) C) D)

$300,000. $210,000. $100,000. $280,000.

137) If costs of goods sold is $560,000 and its gross profit rate is 20%, what is the gross profit?

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A) B) C) D)

$140,000 $ 70,000 $120,000 $112,000

138) At the beginning of Year 2, Wilson Stores has an inventory of $300,000. Because sales growth was strong during Year 2, the owner wants to increase inventory on hand to $450,000 at December 31, Year 2. If net sales for Year 2 are expected to be $2,600,000, and the gross profit rate is expected to be 35%, what is the cost of the merchandise the owner should expect to purchase during Year 2? A) B) C) D)

139)

$750,000 $1,240,000 $1,690,000 $1,840,000

If cost of goods sold is $360,000 and the gross profit rate is 40%, what is the gross profit? A) B) C) D)

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$240,000 $360,000 $600,000 $900,000

Answer Key Test name: Chapter 06 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) FALSE 4) FALSE 5) TRUE 6) FALSE 7) TRUE 8) TRUE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) TRUE 14) FALSE 15) TRUE 16) TRUE 17) TRUE 18) FALSE 19) FALSE 20) TRUE 21) FALSE 22) TRUE 23) TRUE 24) TRUE 25) FALSE 26) TRUE Version 1

27) TRUE 28) TRUE 29) TRUE 30) FALSE 31) TRUE 32) FALSE 33) TRUE 34) FALSE 35) TRUE 36) FALSE 37) FALSE 38) FALSE 39) TRUE 40) FALSE 41) TRUE 42) FALSE 43) TRUE 44) FALSE 45) TRUE 46) C 47) A 48) A 49) A 50) B 51) A 52) B 53) B 54) B 55) B 56) B Version 1

57) D 58) D 59) D 60) D 61) D 62) D 63) B 64) B 65) C 66) A 67) A 68) A 69) D 70) C 71) D 72) B 73) C 74) B 75) D 76) A 77) C 78) A 79) B 80) B 81) D 82) C 83) C 84) C 85) C 86) B Version 1

87) B 88) A 89) A 90) B 91) B 92) A 93) A 94) B 95) C 96) B 97) D 98) B 99) D 100) C 101) A 102) C 103) C 104) A 105) B 106) C 107) C 108) C 109) B 110) D 111) B 112) A 113) C 114) C 115) B 116) B Version 1

117) B 118) C 119) B 120) B 121) A 122) D 123) A 124) A 125) B 126) B 127) C 128) C 129) A 130) A 131) C 132) B 133) B 134) C 135) C 136) A 137) A 138) D 139) A

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CHAPTER 7: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Consider the concept of financial assets.Required: (A) Briefly explain what is meant by the term "financial assets." (B) List the three major categories of assets comprising a company's financial assets. For each category, indicate the basis for valuation in the balance sheet.

2) Listed below are eight terms that relate to financial assets:Accounts Receivable Turnover RateCash EquivalentsFinancial AssetsUnrealized GainAllowance for Doubtful Accounts Direct Write Off Method Marketable Securities Fair Value AccountingRequired:In the space provided for each statement, indicate the accounting term described. If no term fits the explanation write “none.”_________ (1) A means of accounting for uncollectibles, which does not recognize any expense until specific receivables are determined to be worthless. _________ (2) An account showing the amount of estimated uncollectible receivables. _________ (3) The process of estimating uncollectible accounts by classifying accounts receivables by age groups. _________ (4) Dividing net sales by average receivables to create a ratio to measure the liquidity of accounts receivable. _________ (5) Very short-term liquid investments that must mature within 90 days of acquisition. _________ (6) Cash and assets convertible directly into known amounts of cash. _________ (7) An account showing the difference between the cost of an investment in marketable securities and its market value. _________ (8) The value of a note at its maturity date. _________ (9) Highly liquid investments that can be sold in organized securities exchanges.

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3) During its first month of operations, a company entered into the five events involving financial assets that are described below: (A) December 1 – Sold merchandise on account to two customers (B) December 5 – Purchased an investment in marketable equity securities (C) December 7 – Sold one-half of the investment in marketable equity securities at a gain (D) December 8 – Collected the account receivable from one of the two customers (E) December 31 – Adjusted the allowance for doubtful accounts to reflect the portion of accounts receivable estimated to be uncollectible at year-end (F) December 31 – Made the fair value accounting adjustment to reflect a decrease in the market value of securities that are still ownedRequired:Indicate the effects of each independent transaction or adjusting entry upon the financial measurements shown in the column headings below. Use the code letters: I for increase, D for decrease, and NE for no effect. Transaction

Current Assets

Net Income

Net Cash Flow (from any source)

(A) (B) (C) (D) (E) (F)

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Five events involving financial assets are described below:

(A) Received dividends earned on investment in marketable securities. (B) Invested excess cash in marketable securities. (C) Determined that a specific account receivable is worthless and wrote it off against the allowance for doubtful accounts. (D) Made sale of merchandise for cash. (E) Sold an investment in marketable equity securities at a loss. Cash proceeds from the sale were equal to the current market value reflected in the last balance sheet.Required:Indicate the effects of each independent transaction or adjusting entry upon the financial measurements shown in the column headings below. Use the code letters, I for increase, D for decrease, and NE for no effect. Transaction

Current Assets

Net Income

Net Cash Flow (from any source)

A B C D E

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5) Listed below are nine technical accounting terms emphasized in this chapter.Fair value accounting Factoring Direct write-off Financial asset Cash equivalent Bank reconciliation Allowance for doubtful accounts Accounts receivable turnover Uncollectible accounts expenseRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ______ a. A transaction in which a business sells its accounts receivables to a financial institution. ______ b. An estimate of the portion of year-end accounts receivable that ultimately will turn out to be uncollectible. ______ c. Schedule explaining any differences between cash balances appearing in the accounting records and in the monthly bank statement. ______ d. Balance sheet valuation standard applicable to investments in marketable securities. ______ e. Cash and assets convertible directly into known amounts of cash, such as marketable securities and receivables. ______ f. A ratio, computed by dividing 365 days by average receivables, that indicates the liquidity of the receivables. ______ g. Method of accounting for uncollectible receivables that fails to match revenues and expenses.

6) Consider the concept of cash management.Required: (A) What is meant by the term "cash management"? (B) Identify at least three basic objectives of effective cash management.

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7) Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a separate list of internal control procedures.Required:Indicate the internal control procedure that should prevent the error or problem from occurring. If none of the control procedures would effectively prevent the error, place an "x" in the space provided. Possible Error or Problem: _______ 1. A purchase invoice was paid even though the merchandise was never received. _______ 2. An employee issued a credit memorandum for a nonexistent sales return in order to conceal his theft of the amount received in payment of an account receivable. _______ 3. Management is unaware that blank checks are being issued for unauthorized expenditures by the official designated to sign checks. _______ 4. A salesclerk collects the full selling price from a customer but rings up the sale at less than actual price and pockets the difference. _______ 5. Several days' cash receipts are lost in a fire. _______ 6. A new employee often gives customers an incorrect amount of change. _______ 7. No one has discovered that amounts deposited in the company's bank account by the cashier over the last few years are frequently smaller than amounts forwarded to him from the mailroom or sales department.Internal Control Procedures: (a.) Periodic reconciliation of bank statements to accounting records. (b.) Use of a Cash Over and Short account. (c.) Adequate separation of duties. (d.) Use of pre-numbered sales tickets. (e.) Depositing each day's cash receipts intact in the bank. (f.) Use of electronic cash registers equipped with optical scanners to read magnetically coded labels on merchandise. (g.) Immediate preparation of a control listing when cash is received and the comparison of this listing with bank deposits. (h.) Cancellation of paid vouchers. (i.) Requirement that a voucher be prepared as advance authorization of every cash disbursement.

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8) Consider the concept of internal control over cash transactions.Required: (A) Describe two measures contributing to strong internal control over cash receipts. (B) Describe two measures contributing to effective internal control over cash disbursements.

9) Consider how cash is reported in the balance sheet.Required: (A) The first asset shown in the balance sheet of many companies is labeled "cash and cash equivalents." (1) Explain the term "cash equivalent" and give two examples. (2) Why are cash and cash equivalents listed first in the balance sheet? B) The December bank statement for Kowal Publishing Company reports a balance of $13,847.59 at December 31, Year 1. Kowal's accounting records, however, show a balance of $15,245.47 in the same bank account prior to preparation of the bank reconciliation. Which amount should be included in the amount of cash reported in Kowal's balance sheet at December 31, Year 1? Explain your answer.

10) Listed below are various items that are listed on a bank reconciliation.Required:Indicate how each of the items would be treated in a bank reconciliation by using the following codes to complete the table below.(A) Deducted from the balance per accounting records. (B) Added to balance per accounting records. (C) Deducted from balance per bank statement. (D) Added to balance per bank statement.

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Items ____ (1) Collection of a note receivable which you left with the bank for collection; proceeds were deposited in your account. ____ (2) Deposit in transit at month-end. ____ (3) Bank service charges. ____ (4) Checks outstanding at month-end. ____ (5) Customer check deposited in the bank but returned as NSF. ____ (6) Error in check number 924, which was drawn in the amount of $817 but was recorded in the accounting records as $871. ____ (7) Interest earned on the average balance during the month. ____ (8) A check drawn by another depositor that the bank erroneously deducted from your account.

11)

Listed below are various items that are listed on a bank reconciliation.Required:

Indicate how each of the items would be treated in a bank reconciliation by using the following codes to complete the table below. (a) Deducted from the balance per accounting records. (b) Added to balance per accounting records. (c) Deducted from balance per bank statement. (d) Added to balance per bank statement. Items ____ 1. Bank service charges for printing new checks ordered by Aladdin's, Incorporated ____ 2. Deposits in transit at the end of the month. ____ 3. A deposit of $4,364.21 recorded in the accounting records as $4,346.21. ____ 4. Collection of rent from one of Aladdin's tenants who makes payment directly to the bank. ____ 5. Interest earned on the average balance during the month. ____ 6. Checks outstanding at the end of the month. ____ 7. Customer checks deposited in the bank but returned as NSF.

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____ 8. Check Number 153, which was written in the amount of $475 but recorded by the bank as $745.

12) The Cash account in the records of Arnaz Company showed a balance of $13,307 at March 31. The bank statement, however, showed a balance of $9,936 at the same date. The only reconciling items consisted of a $4,902 deposit in transit, a bank service charge of $36, outstanding checks totaling $2,600, and an NSF check from L. Ball, one of Arnaz' customers.Required: (A) What is the amount of the adjusted cash balance on March 31? (B) What is the amount of the NSF check? (C) Record the journal entry necessary, if any, to adjust Arnaz Company's accounting records at March 31: (An explanation is not required; a single compound journal entry is acceptable.)

13) The Cash account in the records of Pine Golf Club shows a balance of $11,925 at December 31, Year 1. The December 31 bank statement shows a balance of $10,440. The only reconciling items consist of:Bank service charges of $32.Deposit in transit of $1,813.NSF check from customer L. Diamond in the amount of $126.Error in recording check number 970 for utilities: check was written in the amount of $834 but was recorded in Pine's accounting records as $384.Outstanding checks.Required: (A) What is the amount of the adjusted cash balance at December 31, Year 1? (B) What is the total amount of outstanding checks at December 31, Year 1? (C) Record the journal entry necessary, if any, to adjust Pine's Golf Club accounting records at December 31, Year 1. (An explanation is not required; a single compound journal entry is acceptable.)

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14) At March 31, the balance of the Cash account according to the records of Fisher Company was $7,261. The March 31 bank statement showed a balance of $8,798. Reconciling items include the following:Deposit in transit at March 31, $6,772.Outstanding checks: number 120, $140; number 121, $932; number 127, $307; number 134, $2,200.Service charge by bank, $50.A note receivable for $5,050 left by Fisher Company with bank for collection that had been collected and credited to company's account. No interest involved.A check for $90 drawn by a customer, Stuart Sands, but deducted from Fisher's account by the bank and returned with the notation "NSF."Fisher's check number 480, issued in payment of $970 worth of office equipment, correctly written in the amount of $970 but erroneously recorded in Fisher's accounting records as $790.Required: Prepare the bank reconciliation of Fisher Company at March 31, using the format shown below. Fisher Company Bank Reconciliation March 31 Balance per bank statement, March 31 Add:

Deduct: Adjusted balance Balance per depositor's records Add:

$ $

Deduct: Adjusted balance (as above)

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15) Consider the following information relating to the Cash account of Silver Company as of June 30: 1 Outstanding checks: Number 479

$ 527

Number 486

390

Number 490

650

2 Check number 485 (for Repairs Expense was written for $323 but erroneously recorded in Silver's records as $233 Difference 3 Deposit in transit 4 Note collected by bank As agent of Silver

$ 2,325

$ 2,000

(no interest) 5 NSF check of D. Chan 6 Bank service charge

$ 995 $ 45

A partially completed bank reconciliation is also available:

SILVER COMPANY Bank Reconciliation June 30, 20__ Balance per bank statement, June 30 Add:

$ 9,079

Deduct: Adjusted balance Balance per depositor's records, June 30

$ 8,967

Add: Deduct:

Adjusted balance (as above)

Required:(A) Prepare a bank reconciliation for Silver Company as of June 30.(B) Prepare the journal entry or entries necessary to correct Silver's accounting records as of June 30. (Explanations may be omitted; one compound journal entry is acceptable.) Version 1

16)

Consider the accounting for marketable securities.

Required: (A) Explain how investments in marketable equity securities are valued in the investor's balance sheet. (B) Is valuation of investments in marketable equity securities consistent with the cost principle and the objectivity principle? (C) What does the Unrealized Holding Loss on Investments account balance represent? How is this item reported in the financial statements?

17) At December 31, Year 1, Laconia Industries' portfolio of investments in marketable equity securities consisted of the following: At December 31, Year 1 Crown, Incorporated (10,000 shares; cost of $10 per share, market value of $16 per share) Plastic Dots (5,000 shares; cost of $50 per share, market value $47 per share)

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Cost $ 100,000

Current Market Value $ 160,000

$ 250,000

$ 235,000

Required:(A) Illustrate the presentation of marketable equity securities in Laconia's balance sheet at December 31, Year 1.(B) Compute the unrealized holding gain (or loss) at the end of Year 1 and describe how it is reflected in the company’s Year 1 financial statements.(C) Assume that on March 15, Year 2, Laconia made the following sales of securities: (1) Sold 5,000 shares of its investment in Crown, Incorporated for $100,000. (2) Sold 1,000 shares of its investment in Plastic Dots for $45,000. Compute the gain or loss recognized in Laconia's Year 2 income statement for each sale. (Show your work.)(D) At December 31, Year 2, the market values of these stocks are: Crown, $21 per share; Plastic Dots, $42 per share. Determine the total cost and market value of securities owned by Laconia at the end of Year 2. (Use the same table format as above.)(E) Illustrate the presentation of marketable equity securities in Laconia's balance sheet at December 31, Year 2.(F) Compute the unrealized holding gain (or loss) at the end of Year 2.

18) Consider the concept of uncollectible accounts. Required: (A) What is an uncollectible account? Explain how a business suffers losses from uncollectible accounts. (B) "A competent credit manager should set credit policies so as to avoid any and all losses from uncollectible accounts." Is this statement accurate? Explain your answer.

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19) The general ledger controlling account for Accounts Receivable has a balance of $120,500 at year-end before adjustment. The company uses the balance sheet approach to estimate uncollectible accounts. By aging the individual customers' accounts, it was determined that the doubtful accounts amounted to $5,020. Required:Prepare the year-end adjusting entry for uncollectible accounts under each of the following independent assumptions. (a) Allowance for Doubtful Accounts has a credit balance of $2,850. (b) Allowance for Doubtful Accounts has a debit balance of $925.

20) Rainbow Company uses the balance sheet approach to estimate uncollectible accounts. By aging the customers' accounts, it was estimated that $7,325 of the company's month-end accounts receivable would prove to be uncollectible. Determine the amount that should be debited to the Uncollectible Accounts Expense account in the month-end adjusting entry under each of the following independent assumptions: Required: (A) Before making any adjustment, the Allowance for Doubtful Accounts has a $635 credit balance. (B) Before making any adjustment, the Allowance for Doubtful Accounts has a debit balance of $720.

21) At the end of the year, the unadjusted trial balance of Angel Provisions included the following accounts: Account Title Sales (80% represent credit sales)

Debit

Accounts Receivable

$ 101,475

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Credit $ 780,575

Allowance for Doubtful Accounts

$ 1,218

Required: (A) If Angel uses the balance sheet approach to estimate uncollectible accounts expense, and aging the accounts receivable indicates the estimated uncollectible portion to be $6,075, what will the uncollectible accounts expense for the year be?(B) If the income statement approach to estimating uncollectible accounts expense is followed, and uncollectible accounts expense is estimated to be 1% of net credit sales, what is the amount of uncollectible accounts expense for the year?

22)

On January 10, Winston, Incorporated's trial balance included the following accounts:

Account Title Accounts Receivable

Debit $ 220,000

Allowance for Doubtful Accounts

Credit

$ 7,200

On January 11, Len Palmer, a major customer, declares bankruptcy and thus, Winston determines that a receivable from Palmer in the amount of $3,400 is worthless. Required:(A) In the space provided, prepare the journal entry that Winston should record to write-off the account receivable from Len Palmer on January 11. Date

General Journal

Debit

Credit

20_ January 11

(B) Compute the net realizable value of Winston's accounts receivable at each of the following dates: (1) January 10 (before write-off of Palmer's account). (2) January 11 (immediately after write-off of Palmers' account).

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23)

Information for the Hooper Company is as follows:

Accounts Receivable at March 31, 2018 Allowance for Doubtful Accounts (Credit balance) Net Sales (85% on credit) for year ending December 31, Year 1

$ 9,000 $ 2,000 $ 100,000

Required: (A) What is the amount of uncollectible account expense for Year 1 if the company uses the Percentage of Sales method and 2% of credit sales are deemed uncollectible? (B) What is the amount of uncollectible account expense if the company uses the balance sheet approach and estimates $2,200 as uncollectible in Year 1? (C) What is the net realizable value of accounts receivable if the company uses the balance sheet approach? (D) If the company uses the balance sheet approach and writes-off a receivable of $450 what will be the net realizable value of accounts receivable after the write off?

24) Required:Complete the following statements about promissory notes and interest by entering amounts in the spaces provided. (Use 360 days in one year.) (a) (b) (c) (d) (e)

The interest on $70,000 for 100 days at 14% is The interest on $80,000 for 90 days at 14% is The interest on $3,200 for 45 days at 18% is A 90-day note dated September 20 will mature on If interest expense on a 15%, one-year note is $9,000, the amount of the note is (f) The maturity value of a 12%, 60-day note for $40,000 is

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$ _______ $ _______ $ _______ $ _______ $ _______ $ _______

25) On September 1, Year 1, Dental Equipment Corporation sold equipment priced at $350,000 in exchange for a six-month note receivable with an annual interest rate of 12%, all due at maturity.Required: (a) Prepare the December 31, Year 1 (fiscal year-end), adjusting entry made by Dental with regard to this note receivable. (b) Prepare the entry made by Dental on March 1, Year 2 (maturity date of note), to record collection of note and interest. (c) Assume that on March 1, Year 2, the maker of the note defaults and Dental does not collect the note. Prepare the entry to be made to Dental on March 1, Year 2, in this situation.

26) Required:Why would a company accept a note receivable in lieu of an account receivable for the same amount?

27) During Year 1, Larsen Company's accounts receivable averaged $750,000. Larsen's Year 1 income statement reported net sales of $6,780,000, uncollectible accounts expense of $160,000, and net income of $768,000. (Assume 365 days in a year.) Required: Using the information, compute the following for Larsen Company: (A) Accounts receivable turnover: (Round to the nearest two decimals.) (B) Average number of days to collect accounts receivable (Round to nearest day, if necessary):

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28) Consider the quality of receivables.Required:(A) The annual report of Modern Books, a publicly traded corporation, reports accounts receivable (net of allowance for doubtful accounts), of $190,714. What assurance do readers of Modern Books ' annual report have that these receivables really exist and are not fictitious assets recorded to make the balance sheet "look good"? (B) The accounts receivable turnover rate is frequently used in evaluating the liquidity of accounts receivable. How is the accounts receivable turnover rate computed? What type of information does the accounts receivable turnover rate provide?

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Answer Key Test name: Chapter 07 Test Bank (Problem Material) 1) (A) The term, financial assets, refers to cash and also those assets easily and directly convertible into known amounts of cash. (B) Financial assets are shown in the balance sheet at their current values, meaning the amounts of cash that these assets represent. The three categories of financial assets and the basis of valuation in the balance sheet are summarized below: Cash (and cash equivalents ) Marketable securities Receivables

Face amount Current market value Net realizable value

2) (1.) Direct Write Off Method (2.) Allowance for Doubtful Accounts (3.) None (This answer refers to aging accounts receivable.) (4.) Accounts Receivable Turnover Rate (5.) Cash Equivalents (6.) Financial Assets (7.) Unrealized Gain (8.) None (9.) Marketable Securities 3) Transaction (A) (B) (C) (D) (E) (F)

Current Assets I NE I NE D D

Net Income I NE I NE D D

Net Cash Flow (from any source) NE D I I NE NE

4) Transaction

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Current

Net Income

Net Cash Flow (from any

A B C D E

Assets I NE NE I NE*

I NE NE I D

source) I D NE I I

*Note to Instructor: Exchanging marketable securities (adjusted to current market value) for an equal amount of cash has no effect upon current assets. The journal entry to record the sale, however, removes the original cost of the securities in exchange for a smaller amount of cash in a loss situation. The overall effect is not evident until the fair value accounting adjustment is made at the end of the period. Therefore, you may wish to accept the answer Decrease with respect to those students who analyze only the sale transaction journal entry in determining their answer. 5) (a) Factoring (b) Allowance for doubtful accounts (c) Bank reconciliation (d) Fair value accounting (e) Financial asset (f) None (The accounts receivable turnover is computed by dividing net credit sales by average accounts receivable.) (g) Direct write-off

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6) (A) The term cash management refers to planning, controlling, and accounting for cash transactions and cash balances. (B) Student may choose three of the following objectives of cash management:Provide accurate accounting for cash receipts, cash disbursements, and cash balances.Prevent or minimize losses from theft or fraud.Anticipate the need for borrowing and assure the availability of adequate amounts of cash for conducting business. Prevent unnecessarily large amounts of cash from sitting idle in bank accounts that produce no revenue. 7) Possible Error or Problem i c

e x g

1. A purchase invoice was paid even though the merchandise was never received. 2. An employee issued a credit memorandum for a nonexistent sales return in order to conceal his theft of the amount received in payment of an account receivable. 3. Management is unaware that blank checks are being issued for unauthorized expenditures by the official designated to sign checks. 4. A salesclerk collects the full selling price from a customer but rings up the sale at less than actual price and pockets the difference. 5. Several days' cash receipts are lost in a fire. 6. A new employee often gives customers an incorrect amount of change. 7. No one has discovered that amounts deposited in the company's bank account by the cashier over the last few years are frequently smaller than amounts forwarded to him from the mailroom or sales department.

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8) (A) Students may choose two of the following:Separate the function of handling cash from the maintenance of accounting records. Employees who handle cash should not have access to the accounting records, and accounting personnel with access to cash records should not handle cash.Prepare cash budgets (or forecasts) of planned cash receipts, cash payments, and cash balances, scheduled month-by-month for the coming year.Prepare a control listing of cash receipts at the time and place the money is received.Require that all cash receipts be deposited daily in the bank. (B) Student may choose two of the following:Make all payments by check. The only exception should be for small payments to be made in cash from what is often referred to as a petty cash fund.Require that every expenditure be verified before a check is issued in payment. Separate the function of approving expenditures from the function of signing checks.Promptly reconcile bank statements with the accounting records. The person who reconciles the bank statements should not physically handle cash.

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9) (A) (1) Cash equivalents are very short-term investments that are so liquid that they are considered equivalent to cash. Examples include money market funds, U.S. Treasury bills, certificates of deposit, and commercial paper. These investments must mature within three months of acquisition.(A) (2) In the current asset section of the balance sheet, assets are listed in the order of their liquidity. Cash (and cash equivalents) is listed first because it is the most liquid asset owned by a business.(B) Neither the amount on the bank statement nor the balance in the accounting records is the appropriate amount to include in the balance sheet with respect to this bank account. The amount to be included in cash reported in the balance sheet is the adjusted cash balance determined in the bank reconciliation, and which usually is different from both the balance per bank statement and the balance per depositor's records. 10) Items B (1) Collection of a note receivable which you left with the bank for collection; proceeds were deposited in your account. D (2) Deposit in transit at month-end. A (3) Bank service charges. C (4) Checks outstanding at month-end. A (5) Customer check deposited in the bank but returned as NSF. B (6) Error in check number 924, which was drawn in the amount of $817 but was recorded in the accounting records as $871. B (7) Interest earned on the average balance during the month. D (8) A check drawn by another depositor that the bank erroneously deducted from your account.

11) Items a 1. Bank service charges for printing new checks ordered by Aladdin's, Incorporated d 2. Deposits in transit at the end of the month. b 3. A deposit of $4,364.21 recorded in the accounting records as $4,346.21.

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b 4. Collection of rent from one of Aladdin's tenants who makes payment directly to the bank. b 5. Interest earned on the average balance during the month. c 6. Checks outstanding at the end of the month. a 7. Customer checks deposited in the bank but returned as NSF. d 8. Check Number 153, which was written in the amount of $475 but recorded by the bank as $745.

12) (A) Adjusted cash balance = $9,936 + $4,902 − $2,600 = $12,238 (B) NSF check = $13,307 − $36 − $12,238 = $1,033 (C) Date 20__

General Journal

Debit

March 31

Accounts Receivable, L. Ball

1,033

Bank Service Charge

Credit

Cash

1,069

13) (A) Balance per books Less: Bank service charge Less: NSF check Less: Effect of error on check number 970 Adjusted cash balance, Year 1

$ 11,925 (32) (126) (450) $ 11,317

(B) $10,440 (balance per bank statement) + $1,813 (deposit in transit) = $12,253. $12,253 − $11,317 (adjusted cash balance from (a) above) = $936. (C) Date Year 1 December 31

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General Journal

Debit

Bank Service Charges

Accounts Receivable, L. Diamond

126

Utilities Expense

450

Credit

Cash

608

14) Fisher Company Bank Reconciliation March 31 Balance per bank statement, March 31

$ 8,798

Add: Deposit in transit at March 31

6,772 15,570

Deduct: Outstanding checks: Number 120

$ 140

Number 121

932

Number 127

307

Number 134

2,200

(3,579)

Adjusted balance

$ 11,991

Balance per depositor's records

$ 7,261

Add: Note receivable collected by bank

5,050 $ 12,311

Deduct: Service charge

$ 50

NSF check of S. Sands

Error on check number 480

180

Adjusted balance (as above)

(320) $ 11,991

15) (A) SILVER COMPANY Bank Reconciliation June 30, 20__ Balance per bank statement, June 30 Add: Deposit in transit

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$ 9,079 2,325

$ 11,404 Deduct: Outstanding checks: Number 479

$ 527

Number 486

390

Number 490 Adjusted balance

650

($ 1,567) $9,837

Balance per depositor's records, June 30

$8,967

Add: Note receivable collected by bank

2,000 $ 10,967

Deduct: Error-Check Number 485

$ 90

NSF check of D. Chan

995

Bank service charge Adjusted balance (as above)

(1,130) $9,837

Debit 870

Credit

(B) Date 20__

General Journal Cash

June 30

Repair Expense

Accounts Receivable, D. Chan

995

Bank Service Charges

Notes Receivable

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2,000

16) (A) Investments in marketable equity securities appear in the balance sheet at their current market values as of the balance sheet date. Using fair value accounting, the balance sheet valuation is adjusted to market value at the balance sheet date. (B) Fair value accounting valuation represents a departure from the cost principle, since the investment in marketable securities is reported at current market value. The fair value accounting valuation is consistent with the objectivity principle. Marketable equity securities are traded daily on organized securities exchanges and they can be purchased or sold immediately at quoted market prices. These market prices are the basis for the fair value accounting valuation adjustments and are both objective and readily verifiable. (C) The Unrealized Holding Loss on Investments account balance represents the difference (as of the balance sheet date) between the cost and the current market value of the portfolio of marketable securities owned. This account reduces net income in the same manner as a loss from the sale of marketable securities. 17) (A)Balance Sheet Current Assets: Marketable Securities (cost $350,000)

$ 395,000

(B) Unrealized Holding Gain on Investments = Current Market Value of $395,000 − Cost of $350,000 = $45,000This unrealized holding gain increases net income in the same manner as a gain from the sale of marketable securities.(C) (1) Sales proceeds of $100,000 − Cost of $50,000 (or 5,000 share sold × $10 per share) = $50,000 gain(C) (2) Sales proceeds of $45,000 − Cost of $50,000 (or 1,000 share sold × $50 per share) = ($5,000 loss)(D) At December 31, Year 2

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Cost

Current Market Value

Crown, Incorporated (5,000 shares; cost of $10 per share, market value of $21 per share) Plastic Dots (4,000 shares; cost of $50 per share, market value $42 per share)

$ 50,000

$ 105,000

$ 200,000

$ 168,000

(E)Balance Sheet Current Assets: Marketable Securities (cost $250,000)

$ 273,000

(F)Crown: 5,000 shares × (Current Market Value per share at end of Year 2 of $21 − Current Market Value per share at end of Year 1 of $16) = 5,000 shares × $5 = $25,000 unrealized holding gain Plastic Dots: 4,000 shares × (Current Market Value per share at end of Year 2 of $42 − Current Market Value per share at end of Year 1 of $47) = 4,000 shares × ($5) = ($20,000 unrealized holding loss) Total: $25,000 − $20,000 = $5,000 unrealized holding gain 18) (A) An uncollectible account is an account receivable that a business is unable to collect. An account receivable that has been determined to be uncollectible is no longer an asset. A business suffers a loss from an uncollectible account because it has provided services or exchanged merchandise for an asset (the account receivable) that now is worthless.(B) This statement is false. If the credit manager becomes overly cautious and conservative in extending credit in order to avoid all credit losses, he or she might lose a greater amount of profitable business by rejecting many acceptable customers. 19) Event (A)

Account Title Uncollectible Accounts Expense

Debit 2,170

Allowance for Doubtful Accounts

(B)

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To increase the valuation account to the required level. ($5,020 − $2,850 = $2,170) Uncollectible Accounts Expense

Credit

2,170

5,945

Allowance for Doubtful Accounts

5,945

To increase the valuation account to the required level. ($5,020 + $925 = $5,945)

20) (A) $7,325 − $635 = $6,690(B) $7,325 + $720 = $8,045 21) (A) $6,075 − $1,218 = $4,857(B) 0.01 × (0.80 × $780,575) = $6,244.60 22) (A) Date 20__ January 11

General Journal

Debit

Allowance Doubtful Accounts

3,400

Accounts Receivable, Len Palmer

Credit

3,400

To write off account receivable from Len Palmer

(B)(1) January 10: $220,000 − $7,200 = $212,800.(B)(2) January 11: $216,600 − $3,800 = $212,800. 23) (A) ($100,000 × 85%) × 2% = $1,700 (B) $2,200 − $2,000 = $200 (C) $9,000 − $2,200 = $6,800 (D) ($9,000 − $450) − ($2,200 − $450) = $6,800 24) (a) $70,000 × 14% × 100 ÷ 360 = $2,722.22 (b) $80,000 × 14% × 90 ÷ 360 = $2,800 (c) $3,200 × 18% × 45 ÷ 360 = $72.00 (d) December 19 (e) $9,000 ÷ 15% = $60,000 (f) $40,000 principal plus $800 in interest ($40,000 × 12% × 60 ÷ 360) = $40,800 25) Date (A) Year 1

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General Journal

Debit

Credit

December 31

Interest Receivable

14,000

Interest Revenue

14,000

To accrue interest for September through December ($350,000 × 12% × 4 ÷ 12). (B) Year 2 March 1

Cash

371,000

Notes Receivable

350,000

Interest Receivable

14,000

Interest Revenue

7,000

Collected 12% six-month note ($350,000 × 12% × 6 ÷ 12 = $21,000 interest, of which $7,000 was earned in 2019). (C) Year 2 March 1

Accounts Receivable

371,000

Note Receivable

350,000

Interest Receivable

14,000

Interest Revenue

7,000

To record default by maker on a 12% six-month note.

26) There are a number of reasons that a company would accept a note receivable in lieu of an account receivable for the same amount. First, the note receivable is more formal, legal evidence of the receivable. Second, the note includes interest, which would ordinarily not be the case with an account receivable. Third, if the maker of the note is an established customer, the payee may want to retain that company’s business and be willing to delay payment another 90 days while the maker of the note is able to obtain the funds needed to make payment.

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27) (A) $6,780,000 ÷ 750,000 = 9.04 times (B) 365 days ÷ 9.04 (from part a) = 40 days 28) (A) The financial statements of publicly traded corporations, such as Modern Books, are audited by CPA firms. In the annual audit of a company by a CPA firm, the independent auditors will verify, or confirm, receivables by communicating directly with the customers of the company. This confirmation process is designed to provide evidence that the customers actually exist, and that they acknowledge owing the amount of the receivable to Modern Books. The CPA firms frequently verify the credit ratings of those customers owing significant amounts.(B) The accounts receivable turnover rate is computed by dividing annual net sales (ideally net credit sales) by average accounts receivable. This accounts receivable turnover rate indicates how many times the receivables were converted into cash during the year, i.e., how many times they were collected.

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CHAPTER 7 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Financial assets may be current or long-term assets. ⊚ ⊚

The term "financial asset" is synonymous with the term "cash equivalent." ⊚ ⊚

true false

Cash equivalents are the most liquid of all assets. ⊚ ⊚

true false

U.S. Treasury bills that mature within a period of four to six months are cash equivalents. ⊚ ⊚

true false

5) A line of credit is an advance agreement by a bank to lend a company any amount of money up to a specified limit. ⊚ ⊚

true false

6) Financial assets describe not just cash, but all assets that are easily and directly convertible into known amounts of cash, except marketable securities. ⊚ ⊚

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true false

7) Cash equivalents include money market funds, U.S. Treasury bills, and high-grade commercial paper that mature within 90 days of acquisition. ⊚ ⊚

A line of credit creates a liability for the borrower when it is granted by the bank. ⊚ ⊚

true false

Compensating balances are not included in the amount of cash listed on a balance sheet. ⊚ ⊚

12)

true false

A compensating balance is often required by a bank as a condition for granting a loan. ⊚ ⊚

11)

true false

Restricted cash may be available to meet the normal operating needs of a company. ⊚ ⊚

10)

true false

Internal control will aid in achieving accurate accounting for cash transactions. ⊚ ⊚

true false

13) If the account Cash Over and Short has a debit balance, it is reported in the balance sheet as a current asset. ⊚ ⊚

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true false

14) Internal control is strengthened by a policy of making payments by check, from cash receipts, or from a petty cash fund. ⊚ ⊚

true false

15) An example of good internal control over cash is to have the person responsible for physically handling all cash perform the bank statement reconciliations. ⊚ ⊚

true false

16) The first step in a bank reconciliation is to update the depositor's accounting records for any deposits in transit. ⊚ ⊚

true false

17) Deposits in transit would not appear on a company's bank reconciliation but would appear on the company's bank statement. ⊚ ⊚

true false

18) Entries made in the general journal after preparing a bank reconciliation are called closing entries. ⊚ ⊚

true false

19) Service charges are an example of a transaction that appears in the bank statement but which may not yet have been recorded by the company. ⊚ ⊚

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true false

20) Charges for depositing NSF checks are an example of a transaction that has been recorded by the depositor but may not have been recorded by the bank. ⊚ ⊚

true false

21) The balance shown on a bank statement is always less than the month-end balance of a company's cash account in the general ledger. ⊚ ⊚

true false

22) In order for a company's accounting records to be up-to-date and accurate after a bank reconciliation has been completed, journal entries should be made for any service charges by the bank and for deposits in transit. ⊚ ⊚

23)

true false

When doing a bank reconciliation, an NSF check will reduce the bank's balance. ⊚ ⊚

true false

24) In the bank reconciliation, every adjustment to the balance per depositor's records requires a journal entry. ⊚ ⊚

true false

25) A basic characteristic of all marketable securities is that they can be purchased or sold quickly and easily at quoted market prices. ⊚ ⊚

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true false

26)

Marketable securities include investments in securities of publicly traded corporations. ⊚ ⊚

true false

27) An unrealized holding gain on investments in marketable equity securities will increase net income. ⊚ ⊚

true false

28) An unrealized holding loss on investments in marketable equity securities will reduce net income. ⊚ ⊚

true false

29) Gains (or losses) on sales of marketable equity securities, as well as any unrealized holding gains (or losses) on investments in marketable equity securities, are reported in the income statement. ⊚ ⊚

true false

30) Dividend revenue is reported in the income statement as a component of a company's net income. ⊚ ⊚

true false

31) Short-term investments in marketable securities may not be reported in the balance sheet at values higher than original cost. ⊚ ⊚

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true false

32) Effective internal control over receivables is designed to ensure that customers' payments are promptly deposited. ⊚ ⊚

true false

33) One of the major steps in achieving internal control over accounts receivable is that the Billing department reviews the sales order, the customer's credit file, and decides whether and how much credit should be extended. ⊚ ⊚

true false

34) In order to maximize sales and profits, effective internal control over receivables ensures that credit is extended to all customers who request credit. ⊚ ⊚

35) zero.

true false

To "write-off" an account receivable is to reduce the balance of the customer's account to ⊚ ⊚

true false

36) The direct write-off method is more conservative than the allowance method for valuation of receivables. ⊚ ⊚

true false

37) An account receivable that arose from normal sales activity has a 16-month credit term. This receivable will be classified as a noncurrent asset.

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⊚ ⊚

true false

38) If the allowance method is used, the recovery of an account receivable previously written-off results in a gain being recorded on the income statement. ⊚ ⊚

true false

39) The income statement approach used to estimate uncollectible receivables uses a percentage of net sales without considering the current balance in the Allowance account. ⊚ ⊚

true false

40) The Allowance for Doubtful Accounts is called a valuation account, or contra-asset account, and normally has a credit balance. ⊚ ⊚

true false

41) When an Allowance for Doubtful Accounts is used, accounts receivable are valued in the balance sheet at their estimated net realizable value. ⊚ ⊚

true false

42) A major purpose of using an Allowance for Doubtful Accounts is to recognize uncollectible accounts expense in the same accounting period as the related sales that caused the expense. ⊚ ⊚

true false

43) When the direct write-off method is used to recognize uncollectible accounts expense, an Allowance for Doubtful Accounts is not required. Version 1

⊚ ⊚

true false

44) The Allowance for Doubtful Accounts is a contra-asset account and appears on the balance sheet. ⊚ ⊚

true false

45) The Allowance for Doubtful Accounts should be listed on the balance sheet as a current liability. ⊚ ⊚

true false

46) Factoring allows a business to obtain immediate cash instead of waiting to collect the account receivable. ⊚ ⊚

true false

47) In general, the longer an account receivable is outstanding, the greater the likelihood it will be collected. ⊚ ⊚

true false

48) When a company makes a sale by accepting a bank-issued credit card from the customer, the sale is recorded as a cash sale. ⊚ ⊚

true false

49) If the maker of a note defaults, an entry is made to debit Accounts Receivable and credit Notes Receivable.

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⊚ ⊚

true false

50) If the note receivable bears interest, the amount debited to Notes Receivable is for the maturity amount of the note. ⊚ ⊚

51)

true false

The maker of a note is the party to whom payment is to be made. ⊚ ⊚

true false

52) When interest is collected, it is debited to the Interest Revenue account and credited to the Notes Receivable account. ⊚ ⊚

true false

53) The lower the accounts receivable turnover rate, the longer a company must wait to collect from its credit customers. ⊚ ⊚

true false

54) The higher a company's accounts receivable turnover rate, the more liquid the company's receivables. ⊚ ⊚

true false

55) Industries with relatively high accounts receivable turnover rates include restaurants and hotels.

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⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 56) Financial assets include all of the following except: A) B) C) D)

Cash. Marketable securities. Inventories. Accounts receivable.

57) Each of these categories of assets is normally shown in the balance sheet at current value, except: A) B) C) D)

58)

Inventories. Accounts receivable. Short-term investments in marketable securities. Cash.

Financial assets: A) Only consist of cash and cash equivalents. B) Are reported at cost in the balance sheet. C) Include short-term investments in marketable securities and receivables, as well as

cash. D) Are not very productive assets and should be kept to a minimum in a well-managed company.

59)

Which of the following is not considered a cash equivalent?

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A) B) C) D)

60)

U.S. Treasury bills Money market funds Accounts receivable High-grade commercial paper

The term cash equivalent refers to:

A) An item such as a money order, travelers' check, or check from a customer. B) An account receivable from a reliable customer who has always paid bills within the discount period. C) A guaranteed line of credit at the company's bank. D) Very liquid short-term investments such as U.S. Treasury Bills and commercial paper.

61) When short-term investments appear in the balance sheet at their current market values, it is an exception to the ______ principle. A) B) C) D)

62)

The unused portion of a line of credit: A) B) C) D)

63)

Revenue recognition Matching Cost Relevance

Is reported as a current liability in the balance sheet. Decreases a company's liquidity. Can be used at any time by drawing a check on a special bank account. Requires a compensating balance in order to keep the line of credit open.

With a line of credit, a liability arises:

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A) B) C) D)

As soon as the line is created. As soon as any money is borrowed. Upon repayment of the debt. At the maturity date.

64) In handling of daily cash transactions, a few minor errors inevitably will occur. Which of the following is used to adjust the accounting records for these small errors? A) B) C) D)

65)

Which of the following is not an example of internal control over cash? A) B) C) D)

66)

The bank reconciliation The Petty Cash account The Cash Over and Short account The cash budget

Preparation of a cash budget Daily deposits of cash receipts at the bank Combining the functions of signing checks with the approval of expenditures Preparation of bank reconciliation

The purpose of establishing a petty cash fund is to:

A) Achieve internal control over small cash disbursements not made by check. B) Keep track of expenditures paid out of cash receipts from customers prior to deposit. C) Ensure that the amount of cash in the bank does not become excessive. D) Keep enough cash on hand in the office to cover all normal operating expenses of the business for a period of time.

67)

A good system of internal control will include all of the following except:

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A) B) C) D)

68)

Preparing a pro-forma financial statement on a monthly basis. Separating the handling of cash from the maintenance of accounting records. Making all major payments by check. Reconciling bank statements with accounting records.

Which of the following does not contribute toward achieving internal control over cash?

A) The practice of making small cash disbursements directly from the current day's cash receipts B) The preparation of cash budgets C) The use of a petty cash fund D) The practice of approving every expenditure before the cash disbursement is made

69)

Which of the following practices best illustrates efficient management of cash?

A) The accountant records all cash receipts and payments when reconciling the bank account at the end of each month. B) Management arranges for a loan to cover projected cash shortages during the production phase of the business cycle each year. C) Cash budgets (forecasts) are prepared only one month in advance in order to avoid the need for constant revision. D) All cash resources are held in the checking account to maximize liquidity.

70)

Efficient management of cash includes which of the following concepts? A) B) C) D)

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Pay each bill as soon as the invoice is received. Deposit all cash receipts and make all cash disbursements at the end of each week. Prepare a control listing of cash receipts at the time and place the money is received. Pay suppliers in cash out of cash sales receipts before depositing them in the bank.

71) Which of the following is not a basic means of achieving internal control over cash receipts? A) B) C) D)

Separate the functions of cash handling and maintenance of accounting records. Prepare a daily listing of cash received through the mail. Deposit all cash receipts daily in the petty cash fund. Promptly reconcile bank statements with the accounting records.

72) As of December 31, Year 1, Valley Company has $17,020 cash in its checking account, as well as several other items listed below: Bank credit card slips signed by customers Money market fund balance Investment in U.S. Treasury bills, mature within 90 days Checks received from customers, but not yet deposited in the bank Investment in 4,500 shares of Coca-Cola capital stock

$ 1,100 $ 15,000 $ 40,000 $ 1,480 $ 44,000

What amount should be shown in Valley's December 31, Year 1, balance sheet as "Cash and cash equivalents"? A) B) C) D)

$57,580. $74,600. $118,600. $101,580.

73) As of December 31, Year 1, Valley Company has $16,920 cash in its checking account, as well as several other items listed below: Bank credit card slips signed by customers Money market fund balance Investment in U.S. Treasury bills, mature within 90 days Checks received from customers, but not yet deposited in the bank Investment in 4,500 shares of Coca-Cola capital stock

$ 1,400 $ 10,000 $ 40,000 $ 1,800 $ 60,000

What amount should be shown in Valley's December 31, Year 1, balance sheet as "Cash and cash equivalents"?

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A) B) C) D)

$53,200 $70,120 $130,120 $113,200

74) As of December 31, Year 1, Chippewa Company has $26,440 cash in its checking account, as well as several other items listed below: Bank credit card slips signed by customers Money market fund balance Investment in U.S. Treasury bills, mature within 90 days Checks received from customers, but not yet deposited in the bank Investment in 4,500 shares of Coca-Cola capital stock

$ 3,600 $ 25,000 $ 80,000 $ 4,600 $ 70,000

What amount should be shown in Chippewa's December 31, Year 1, balance sheet as "Cash and cash equivalents"? A) B) C) D)

$30,040 $139,640 $209,640 $59,640

75) The bookkeeper prepared a check for $68 but accidentally recorded it as $86. When preparing the bank reconciliation, this should be corrected by: A) B) C) D)

Adding $18 to the bank balance. Subtracting $18 from the bank balance. Adding $18 to the book balance. Subtracting $18 from the book balance.

76) After preparing a bank reconciliation, a journal entry would be required for which of the following:

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A) B) C) D)

A deposit in transit. A check for $48 given to a supplier but not yet recorded by the company's bank. Interest earned on the company's checking account. A deposit made by a company with a similar name and credited to your account.

77) Which of the following items on a bank reconciliation would have been known to the depositor before the bank statement arrived? A) B) C) D)

78)

When preparing a bank reconciliation, outstanding checks will: A) B) C) D)

79)

Increase the balance per depositor's records. Decrease the balance per depositor's records. Increase the balance per the bank statement. Decrease the balance per the bank statement.

When preparing a bank reconciliation, an NSF check will: A) B) C) D)

80)

Bank service charges An NSF check A credit for interest earned A deposit in transit

Increase the balance per depositor's records. Decrease the balance per depositor's records. Increase the balance per the bank statement. Decrease the balance per the bank statement.

A bank reconciliation explains the differences between:

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A) Cash receipts and cash disbursements for the period. B) The balance of cash in the bank and the budgeted expenditures for the upcoming accounting period. C) The balance per bank statement and the cash balance per the accounting records of the depositor. D) The balance per bank statement and cash expected to be on hand according to the cash forecast.

81) In reconciling a bank statement, which of the following items could cause the cash per the bank statement to be greater than the balance of cash shown in the depositor's accounting records? A) B) C) D)

82)

An outstanding check A check returned to the depositor marked NSF Check 457 written for $643 was recorded by the depositor as $463 A bank service charge

When preparing a bank reconciliation, deposits in transit will: A) B) C) D)

Increase the balance per depositor's records. Decrease the balance per depositor's records. Increase the balance per the bank statement. Decrease the balance per the bank statement.

83) An NSF check returned by the bank should be entered in the depositor's accounting records by a debit to: A) B) C) D)

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Accounts Receivable. An expense account. Cash. Cash Over and Short.

84) be:

In preparing a bank reconciliation, a service charge shown on the bank statement should

A) B) C) D)

Added to the balance per the bank statement. Deducted from the balance per the bank statement. Added to the balance per the depositor's records. Deducted from the balance per the depositor's records.

85) Enclosed with the bank statement received by Sydney Company at October 31 was an NSF check for $300. No entry has yet been made by the company to reflect the bank's action in charging back the NSF check. During preparation of the bank reconciliation, the NSF check should be: A) B) C) D)

Deducted from the balance per the depositor's records. Deducted from the balance per the bank statement. Added to the balance per the bank statement. Added to the balance per the depositor's records.

86) When a bank reconciliation has been satisfactorily completed, the only related entries to be made in the depositor's records are: A) To correct errors made by the bank in recording the dollar amounts of cash transactions during the period. B) To reconcile items that explain the difference between the balance per the books and the balance per the bank statement. C) To record outstanding checks and bank service charges. D) To record items that explain the difference between the balance per the accounting records and the adjusted cash balance.

87) Which of the following transactions will appear in the bank statement but generally not have been recorded by the depositor?

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A) B) C) D)

Outstanding checks. Service charges. Deposits in transit. Accounts receivable.

88) Which of the following items would cause cash per the bank statement to be smaller than the balance of cash shown in the accounting records? A) B) C) D)

Outstanding checks Interest earned on the average balance of the checking account Check number 824, in the amount of $620.30, is recorded by the bank as $602.30 Deposits in transit

89) Which of the following items would cause cash per the bank statement to be larger than the balance of cash shown in the accounting records? A) B) C) D)

Bank service charges Deposits in transit Outstanding checks NSF check from one of the depositor's customers

90) In preparing the bank reconciliation, certain transactions recorded by the depositor may not have been recorded by the bank. Which of the following is an example of this type of transaction? A) B) C) D)

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Service charges Outstanding checks Credit for interest earned Charges for NSF checks

91) When reading a bank statement, which reference indicates an increase in the cash balance? A) B) C) D)

Debit Memorandum Credit Memorandum NSF Check Service Charge

92) While preparing the bank reconciliation, an accountant discovered that a $426 check returned with the bank statement had been recorded erroneously in the depositor's accounting records as $462. In preparing the bank reconciliation the appropriate action to correct this error would be to: A) B) C) D)

Add $36 to the balance per the depositor's records. Add $36 to the balance per the bank statement. Deduct $36 from the balance per the bank statement. Deduct $36 from the balance per the depositor's records.

93) The accounting records of Golden Company showed cash of $15,250 at June 30. The balance per the bank statement at June 30 was $15,125. The only reconciling items were deposits in transit of $3,200, outstanding checks totaling $4,100, an NSF check for $1,000 returned by the bank which Golden had not yet charged back to the customer, and a bank service charge of $25. The preparation of the bank reconciliation should indicate that Golden's adjusted cash balance at June 30 is: A) B) C) D)

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$14,475. $15,375. $14,225. $15,525.

94) A bank statement shows a balance of $8,065 at June 30. The bank reconciliation is prepared and includes outstanding checks of $2,105, deposits in transit of $1,490, and a bank service charge of $35. Among the paid checks returned by the bank was check number 900 in the amount of $530, which the company had erroneously recorded in the accounting records as $60. The "adjusted cash balance" at June 30 is: A) B) C) D)

$7,070. $6,490. $7,450. $5,430.

95) A bank statement shows a balance of $8,445 at June 30. The bank reconciliation is prepared and includes outstanding checks of $2,790, deposits in transit of $1,350, and a bank service charge of $30. Among the paid checks returned by the bank was check number 900 in the amount of $600, which the company had erroneously recorded in the accounting records as $60. The "adjusted cash balance" at June 30 is: A) B) C) D)

$6,975. $6,465. $7,005. $7,575.

96) The Cash account in the records of Hensley, Incorporated showed a balance of $4,750 at June 30. The bank statement, however, showed a balance of $7,750 at the same date. The only reconciling items consisted of a $900 deposit in transit, a bank service charge of $14, and a large number of outstanding checks.What is the "adjusted cash balance" at June 30? A) B) C) D)

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$7,750. $4,736. $3,914. $3,850.

97) The Cash account in the records of Hensley, Incorporated showed a balance of $3,100 at June 30. The bank statement, however, showed a balance of $3,900 at the same date. The only reconciling items consisted of a $700 deposit in transit, a bank service charge of $7, and a large number of outstanding checks.What is the "adjusted cash balance" at June 30? A) B) C) D)

$3,900. $3,093. $7,600. $2,400.

98) The Cash account in the records of Hensley, Incorporated showed a balance of $5,650 at June 30. The bank statement, however, showed a balance of $9,850 at the same date. The only reconciling items consisted of a $1,200 deposit in transit, a bank service charge of $20, and a large number of outstanding checks.What is the total amount of the outstanding checks at June 30? A) B) C) D)

$5,400. $4,450. $5,420. $3,210

99) The Cash account in the records of Hensley, Incorporated showed a balance of $3,100 at June 30. The bank statement, however, showed a balance of $3,900 at the same date. The only reconciling items consisted of a $700 deposit in transit, a bank service charge of $7, and a large number of outstanding checks.What is the total amount of the outstanding checks at June 30? A) B) C) D)

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$1,500. $1,513. $1,486. $1,507.

100) The Cash account in the records of Hensley, Incorporated showed a balance of $3,100 at June 30. The bank statement, however, showed a balance of $3,900 at the same date. The only reconciling items consisted of a $700 deposit in transit, a bank service charge of $7, and a large number of outstanding checks.Upon completion of the bank reconciliation, a journal entry will be required to update the depositor's accounting records. This entry will include a: A) B) C) D)

Credit to Cash for $700. Debit to Cash for $700. Debit to Cash for $7. Debit to Bank Service Charge Expense for $7.

101) The Cash account in the records of Clear Windows shows a balance of $14,065 at September 30. The bank statement, however, shows a balance of $16,903 at the same date. The only reconciling items consist of a bank service charge of $22, a large number of outstanding checks totaling $4,490, and a deposit in transit.What is the adjusted cash balance in the September 30 bank reconciliation? A) B) C) D)

$16,881. $14,043. $12,413. $8,075.

102) The Cash account in the records of Clear Windows shows a balance of $12,596 at September 30. The bank statement, however, shows a balance of $16,253 at the same date. The only reconciling items consist of a bank service charge of $16, a large number of outstanding checks totaling $6,740, and a deposit in transit.What is the adjusted cash balance in the September 30 bank reconciliation? A) B) C) D)

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$16,237. $12,580. $9,513. $5,856.

103) The Cash account in the records of Clear Windows shows a balance of $15,631 at September 30. The bank statement, however, shows a balance of $17,003 at the same date. The only reconciling items consist of a bank service charge of $24, a large number of outstanding checks totaling $4,830, and a deposit in transit.What is the amount of the deposits in transit? A) B) C) D)

$12,173. $3,458. $3,434. $10,801.

104) The Cash account in the records of Clear Windows shows a balance of $12,596 at September 30. The bank statement, however, shows a balance of $16,253 at the same date. The only reconciling items consist of a bank service charge of $16, a large number of outstanding checks totaling $6,740, and a deposit in transit.What is the amount of the deposits in transit? A) B) C) D)

$5,856. $9,513. $3,067. $3,083.

105) Cardinal Company's bank statement showed a balance at May 31 of $184,974. The only reconciling items consisted of a large number of outstanding checks totaling $49,450. At May 31, what balance should Cardinal's Cash account show? A) B) C) D)

$234,424. $135,524. $86,074. $184,974.

106) Cardinal Company's bank statement showed a balance at May 31 of $180,974. The only reconciling items consisted of a large number of outstanding checks totaling $51,847. At May 31, what balance should Cardinal's Cash account show?

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A) B) C) D)

107)

$232,821. $129,127. $77,280. $180,794.

All the following are steps included in the preparation of the bank reconciliation except:

A) Comparing deposits listed on the bank statement with the deposits shown in the accounting records. B) Comparing checks listed on the bank statement with corresponding entries in the accounting records. C) Deducting any debit memoranda from the balance on the bank statement. D) Preparing journal entries for any adjustments to the depositor's records.

108)

Marketable securities are: A) B) C) D)

Listed immediately after Inventory on the balance sheet. Almost as liquid as cash. Originally recorded at cost less any broker's commission. Sold for a gain when cash received is less than the cost basis.

109) The financial statements of Baxter Corporation include an Unrealized Holding Gain on Investments. This item: A) Is reported in the statement of cash flows. B) Reduces net income. C) Indicates that Baxter's marketable securities have a current market value higher than cost. D) Indicate that Baxter Corporation sold marketable securities during the period at a gain.

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110)

The adjustment of marketable equity securities to their current market value affects: A) B) C) D)

111)

The balance sheet and the income statement. The balance sheet and the cash flow statement. The income statement and the cash flow statement. The statement of retained earnings.

Unrealized holding gains and losses on marketable equity securities are: A) B) C) D)

Not reported until recognized. Reported on the income statement. Reported as an unearned revenue on the balance sheet. Reported in the stockholders' equity section of the balance sheet.

112) The valuation principle of "fair value accounting" applied to investments classified as marketable equity securities: A) Affects the current period income statement, but not the balance sheet. B) Enhances usefulness of the balance sheet in evaluating the financial position of a business. C) Applies to marketable securities and inventories. D) Requires a corporation to adjust its capital stock account to reflect current market value of its outstanding capital stock.

113) Each of the following transactions would be reflected in both the income statement and the statement of cash flows for the current period, except: A) B) C) D)

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The adjustment of marketable securities to their current market value. Receipt of dividends earned on investments. Cash sales made to customers. Sale of merchandise for cash.

114)

Investments in marketable securities:

A) Only include investments in the capital stock of publicly traded corporations. B) May be reported in the balance sheet at market values lower than cost, but never at values in excess of original cost. C) Are adjusted to current market value at the end of each accounting period. D) Are carried in the accounting records at current market values, and therefore do not generate gains or losses when sold at market values.

115)

The purpose of the fair value adjustment for marketable equity securities is to: A) Adjust the valuation of a company's investment in those securities to current market

value. B) Recognize the proper amount of gain or loss on fluctuations in the market value of these securities in the current period income statement. C) Adjust a corporation's capital stock account to reflect the current market value of the outstanding capital stock. D) Compute the amount of taxes payable on unrealized gains and losses.

116)

The fair value accounting adjustment:

A) Affects both the balance sheet and the current period income statement. B) Is not made when the current market value of investments in marketable securities is higher than original cost. C) May result in a gain reported in the current period income statement, but never a loss. D) Is in conformity with the cost principle.

117)

An Unrealized Holding Gain (or Loss) on Investments:

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A) Is reported in the asset section of the balance sheet, as an adjustment to the carrying value of the marketable securities. B) Is reported in the stockholders' equity section of the balance sheet, as either an increase or decrease in total stockholders' equity. C) Is reported in the current period income statement in that same manner as realized gains and losses from sales of marketable securities. D) Indicates the amount of cash a company would receive if the marketable securities were sold as of the balance sheet date.

118) On December 30, Year 3, Varsity Corporation sold its investment in marketable equity securities costing $800,000 for $860,000 cash. The securities were purchased on January 2, Year 1, and the market value of the securities was $820,000 and $780,000 on December 31, Year 1 and Year 2, respectively. How much gain or loss will Varsity report in its income statement for the year ending December 31, Year 3? A) B) C) D)

A $40,000 gain. A $20,000 loss. A $60,000 gain. An $80,000 gain.

119) Fisher Corporation invested $320,000 cash in marketable equity securities in early December. On December 31, the quoted market price for these securities is $337,000. Which of the following statements is correct? A) Fisher's December income statement includes a $17,000 loss on investments. B) If Fisher sells these investments on January 2 for $300,000, it will report a loss of $37,000. C) Fisher's December 31 balance sheet reports marketable equity securities at $320,000 in the asset section. D) Fisher's December 31 balance sheet reports marketable securities at $337,000 in the asset section.

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120) On October 12, Year 1, Neptune Corporation invested $700,000 in marketable equity securities. The market value of this investment was $730,000 at December 31, Year 1, but had slipped to $725,000 by December 31, Year 2.In financial statements prepared on December 31, Year 1, Neptune Corporation reports: A) Investments in Marketable Securities of $700,000 in assets on its balance sheet with footnote disclosure of the market value of $730,000. B) Investments in Marketable Securities at $730,000 in assets and a $30,000 Unrealized Holding Gain in stockholders' equity on its balance sheet. C) Investments in Marketable Securities at $730,000 in assets on its balance sheet and a $30,000 unrealized gain, which increases net income reported on its income statement. D) Investments in Marketable Securities at $700,000 in assets and a $30,000 Unrealized Holding Gain in stockholders' equity on its balance sheet.

121) On October 12, Year 1, Neptune Corporation invested $700,000 in marketable equity securities. The market value of this investment was $730,000 at December 31, Year 1, but had slipped to $725,000 by December 31, Year 2.Assuming Neptune does not sell this investment, the fair value accounting adjustment necessary at December 31, Year 2, includes: A) B) C) D)

A $5,000 debit to Unrealized Holding Gain on Investments. A $25,000 credit to Unrealized Holding Gain on Investments. A $5,000 debit to Investments in Marketable Securities. A $725,000 debit to Investments in Marketable Securities.

122) On October 12, Year 1, Neptune Corporation invested $700,000 in marketable equity securities. The market value of this investment was $730,000 at December 31, Year 1, but had slipped to $725,000 by December 31, Year 2.Assuming Neptune does not sell this investment, the financial statements prepared at December 31, Year 2, will report:

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A) Investments in Marketable Securities of $700,000 in assets on its balance sheet. B) Investments in Marketable Securities of $700,000 in assets on its balance sheet, and a $25,000 Unrealized Holding Loss on Investments, which reduces net income on the income statement. C) Investments in Marketable Securities of $725,000 in assets on its balance sheet and a $5,000 Unrealized Holding Loss, which reduces net income on its income statement. D) Investment in Marketable Securities of $725,000 in assets and a $25,000 Unrealized Holding Gain on Investments in stockholders' equity on its balance sheet.

123)

Effective internal control over accounts receivable ensures:

A) B) C) balances. D)

124)

The availability of adequate cash for conducting business operations.

Effective internal control over accounts receivable ensures all of the following except: A) B) C) D)

125)

That credit is only extended to customers that meet the company's credit standards. That an approved factor is used when the company sells its accounts receivable. There is an accurate accounting for cash receipts, cash disbursements, and cash

All shipments of goods during the period are recorded. The sale transaction is recorded for the correct dollar amount. That cash collections from customers are promptly deposited. The availability of adequate cash for conducting business operations.

Effective internal control includes all the following steps except:

A) The Customer Order department prepares a sales order upon receipt of an order. B) The Billing department compares what was shipped with what was ordered and prepares and mails a sales invoice. C) The Accounting department receives the checks and the mailroom listing of checks received and prepares the daily bank deposit. D) The Accounting department reconciles the bank statement with accounting records.

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126) The _______________ department compares what was shipped with what was ordered and prepares and mails an invoice. A) B) C) D)

Customer Order Billing Accounting Credit

127) The _______________ department ensures that the goods shipped match those ordered by the customer. A) B) C) D)

128)

Customer Order Billing Accounting Shipping

The Allowance for Doubtful Accounts will appear on the: A) B) C) D)

Income statement. Balance sheet. Cash flow statement. Statement of retained earnings.

129) Under the allowance method, when a receivable that had been previously written off is collected: A) B) C) D)

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Net income is increased. Net assets are increased. Neither net income nor net assets are affected. Both net assets and net income are increased.

130) When the account Allowance for Doubtful Accounts is used, writing off an uncollectible accounts receivable will: A) B) C) D)

131)

Reduce income. Reduce an expense. Not change income or total assets. Increase total assets.

Accounts receivable are classified as current assets:

A) Only if convertible into cash within 60 days or sooner. B) Only if the allowance method is used to estimate the uncollectible accounts. C) Only if convertible into cash within one year. D) Whenever the accounts receivable arise from "normal" sales of merchandise to customers, regardless of the credit terms.

132)

Uncollectible accounts expense:

A) Should not occur if the credit department properly investigates prospective customers who wish to purchase merchandise on credit. B) Is the amount of cash a business must pay each time a credit customer fails to pay his or her account. C) Is the amount a business must pay to a collection agency to recover amounts on overdue accounts receivable. D) Represents the loss in value of accounts receivable that are estimated to be uncollectible.

133)

The Allowance for Doubtful Accounts represents:

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A) Cash set aside to make up for bad debt losses. B) The amount of uncollectible accounts written off to date. C) The difference between total credit sales and collections on credit sales. D) The difference between the face value of accounts receivable and the net realizable value of accounts receivable.

134) When determining the uncollectible accounts expense in computing taxable income, income tax regulations: A) B) C) D)

135) not:

Require the allowance method. Require the direct write-off method. Require the income statement approach. Require the same method be used for both tax and financial statement purposes.

The aging of the accounts receivable approach to estimating uncollectible accounts does

A) Take into consideration the existing balance in the Allowance for Doubtful Accounts. B) Utilize a percentage of probable uncollectible accounts for each age group of accounts receivable. C) Stress the relationship between uncollectible accounts expense and net sales. D) Tend to give a reliable estimate of uncollectible accounts because of the consideration given to the collectability of specific accounts receivable.

136) If a company uses a percentage of net sales in computing the amount of uncollectible accounts expense:

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A) No valuation allowance will be required. B) The relationship between revenue and expenses is being stressed more than the valuation of receivables at the balance sheet date. C) The existing balance in the Allowance for Doubtful Accounts will be increased sufficiently to equal the probable loss indicated by the percentage of net sales computation. D) Any past-due accounts will be listed as a separate item in the balance sheet.

137) Randall, Inc. uses the allowance method supported by an aging of its accounts receivable to recognize uncollectible accounts expense in its financial statements. What method of recognizing this expense does Randall use in its income tax return? A) B) C) D) purposes.

138)

It must use the same method. The direct write-off method. Either the balance sheet or income statement approach is acceptable. None, since uncollectible accounts expense is not deductible for income tax

The direct write-off method of recognizing uncollectible accounts expense:

A) Is acceptable only when most of the company's sales are on credit. B) Records uncollectible accounts expense when individual accounts receivable are determined to be worthless. C) Records uncollectible accounts expense when customers exceed their credit limits. D) Uses a valuation account to record specific customer accounts deemed uncollectible.

139) Joe Costello handles cash receipts from customers and also has responsibility for issuing credit memoranda, writing off uncollectible accounts, and maintaining the accounts receivable records. When customers pay their accounts, Costello occasionally issues a credit memorandum and steals the cash received from the customer. This fraud should come to light if an employee other than Costello:

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A) Reconciles the bank statement to the accounting records. B) Reconciles the accounts receivable subsidiary ledger to the accounts receivable controlling account. C) Investigates weekly all accounts written off as uncollectible. D) Reconciles credit memoranda for sales returns to returned merchandise accepted by the receiving department.

140) Shrek Cyclery sells a bicycle to W. O'Connor, a customer who uses Empress Charge (a national credit card, but not issued by a bank). In recording this sale, Shrek Cyclery should record: A) B) C) D)

An account receivable from W. O'Connor. A cash receipt. An account receivable from Empress Charge. A small increase in the allowance for doubtful accounts.

141) The Kansas Company makes credit sales to customers who use bank credit cards (such as Visa or MasterCard) as well as to customers who use non-bank credit cards (such as American Express or Diner's Club). In this situation: A) Sales to customers using bank credit cards are recorded as cash sales. B) Regardless of the type of credit card used by the customer, Kansas records a receivable from the credit card company when a credit sale is made. C) Regardless of the type of credit card used by the customer, Kansas estimates uncollectible accounts related to these credit sales using the allowance method. D) The fees charged by the credit card company reduce the dollar amount of sales recorded.

142)

Sales to customers using bank credit cards, such as Visa or MasterCard, are recorded as:

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A) B) C) D)

Cash sales. An account receivable from the cardholder. An account receivable from the bank. Credit card discount expense.

143) Under the allowance method, when a receivable that had been previously written off is collected: A) B) C) D)

Income is recognized. An expense is reduced. Net income is not affected. Net assets are increased.

144) Which of the following activities affects net income, but has no immediate impact upon cash flows? A) B) C) D)

Collection of an account receivable Making the end-of-period adjustment to record estimated uncollectible accounts Investing excess cash in marketable securities Write-off of an uncollectible account receivable against the allowance

145) Taylor, Incorporated had accounts receivable of $260,000 and an allowance for doubtful accounts of $14,700 just before writing off as worthless an account receivable from Burton Company of $1,240. The net realizable value of the accounts receivable before and after the write-off were: A) B) C) D)

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$245,300 before and $244,060 after. $245,300 before and $245,300 after. $260,000 before and $258,760 after. $274,700 before and $273,460 after.

146) Taylor, Incorporated had accounts receivable of $310,000 and an allowance for doubtful accounts of $19,500 just before writing off as worthless an account receivable from Burton Company of $1,300. The net realizable value of the accounts receivable before and after the write-off were: A) B) C) D)

$290,500 before and $289,200 after. $290,500 before and $290,500 after. $310,000 before and $308,700 after. $329,500 before and $328,200 after.

147) Bert had accounts receivable of $365,000 and an allowance for doubtful accounts of $12,900 just before writing off as worthless an account receivable from Ernie Company of $2,800. After writing off this receivable what would be the balance in Bert's Allowance for Doubtful Accounts? A) B) C) D)

$12,900 credit balance. $15,700 credit balance. $10,100 credit balance. $10,100 debit balance.

148) Bert had accounts receivable of $280,000 and an allowance for doubtful accounts of $10,800 just before writing off as worthless an account receivable from Ernie Company of $1,600. After writing off this receivable what would be the balance in Bert's Allowance for Doubtful Accounts? A) B) C) D)

$10,800 credit balance. $12,400 credit balance. $9,200 credit balance. $9,200 debit balance.

149) At December 31, before adjusting and closing the accounts had occurred, the Allowance for Doubtful Accounts of Seaboard Corporation showed a debit balance of $3,200. An aging of the accounts receivable indicated the amount probably uncollectible to be $2,100. Under these circumstances, a year-end adjusting entry for uncollectible accounts expense would include a: Version 1

A) B) C) D)

Debit to the Allowance for Doubtful Accounts for $1,100. Credit to the Allowance for Doubtful Accounts for $1,100. Debit to Uncollectible Accounts Expense of $2,100. Debit to Uncollectible Accounts Expense of $5,300.

150) Kennedy Company uses the balance sheet approach in estimating uncollectible accounts expense. The company prepares an adjusting entry to recognize this expense at the end of each month. During the month of July, the company wrote-off a $5,300 receivable and made no recoveries of previous write-offs. Following the adjusting entry for July, the credit balance in the Allowance for Doubtful Accounts was $4,400 larger than it was on July 1. What amount of uncollectible account expense was recorded for July? A) B) C) D)

$3,750. $1,550. $2,200. $9,700.

151) Kennedy Company uses the balance sheet approach in estimating uncollectible accounts expense. The company prepares an adjusting entry to recognize this expense at the end of each month. During the month of July, the company wrote-off a $3,500 receivable and made no recoveries of previous write-offs. Following the adjusting entry for July, the credit balance in the Allowance for Doubtful Accounts was $3,000 larger than it was on July 1. What amount of uncollectible account expense was recorded for July? A) B) C) D)

$2,500. $1,000. $1,500. $6,500.

152) Oceanside Company uses the balance sheet approach in estimating uncollectible accounts expense. Its Allowance for Doubtful Accounts has a $1,700 credit balance prior to adjusting entries. It has just completed an aging analysis of accounts receivable at December 31, Year 1. This analysis disclosed the following information:

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Not yet due 1-30 days past due 31-60 past due

Age

Percentage

Group

Considered

Total

Uncollectible

$ 62,000 $ 32,000 $ 18,000

1% 4% 4%

What is the appropriate balance for Oceanside’s Allowance for Doubtful Accounts at December 31, Year 1? A) B) C) D)

$112,000. $48,000. $1,340. $2,620.

153) Oceanside Company uses the balance sheet approach in estimating uncollectible accounts expense. Its Allowance for Doubtful Accounts has a $1,200 credit balance prior to adjusting entries. It has just completed an aging analysis of accounts receivable at December 31, Year 1. This analysis disclosed the following information:

Not yet due 1-30 days past due 31-60 past due

Age

Percentage

Group

Considered

Total

Uncollectible

$ 52,000 $ 30,000 $ 13,000

1% 2% 8%

What is the appropriate balance for Oceanside's Allowance for Doubtful Accounts at December 31, Year 1? A) B) C) D)

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$95,000. $960. $3,360. $2,160.

154) At the start of the current year, Minuteman Corporation had a credit balance in the Allowance for Doubtful Accounts of $2,900. During the year a monthly provision of 3% of sales was made for uncollectible accounts. Sales for the year were $930,000, and $6,000 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the year. The year-end financial statements should show: A) B) C) D)

Uncollectible accounts expense of $30,800. Allowance for Doubtful Accounts with a credit balance of $24,800. Allowance for Doubtful Accounts with a credit balance of $8,900. Uncollectible accounts expense of $6,000.

155) At the start of the current year, Minuteman Corporation had a credit balance in the Allowance for Doubtful Accounts of $1,800. During the year a monthly provision of 2% of sales was made for uncollectible accounts. Sales for the year were $600,000, and $5,600 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the year. The year-end financial statements should show: A) B) C) D)

Uncollectible accounts expense of $13,800. Allowance for Doubtful Accounts with a credit balance of $8,200. Allowance for Doubtful Accounts with a credit balance of $6,400. Uncollectible accounts expense of $5,600.

156) Dynamic, Incorporated had credit sales of $615,000 for March. Accounts receivable of $10,500 were determined to be worthless and were written off during March. Accounts receivable total $533,000 at March 31. Management feels that based on past experience, approximately 2% of net credit sales will prove to be uncollectible.Assuming Dynamic, Incorporated uses the direct write-off method of accounting for uncollectible accounts, uncollectible accounts expense for March is: A) B) C) D)

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$12,300. $10,500. $10,660. $21,160.

157) Dynamic, Incorporated had credit sales of $675,000 for March. Accounts receivable of $6,000 were determined to be worthless and were written off during March. Accounts receivable total $575,000 at March 31. Management feels that based on past experience, approximately 2% of net credit sales will prove to be uncollectible.Assuming Dynamic, Incorporated uses the direct write-off method of accounting for uncollectible accounts, uncollectible accounts expense for March is: A) B) C) D)

$13,500. $6,000. $11,500. $17,500.

158) Dynamic, Incorporated had credit sales of $655,000 for March. Accounts receivable of $12,500 were determined to be worthless and were written off during March. Accounts receivable total $545,000 at March 31. Management feels that based on past experience, approximately 2% of net credit sales will prove to be uncollectible.Assuming Dynamic, Incorporated uses the income statement approach (an allowance method) to account for uncollectible accounts, uncollectible accounts expense for March is: A) B) C) D)

$10,900. $23,400. $25,600. $13,100.

159) Dynamic, Incorporated had credit sales of $675,000 for March. Accounts receivable of $6,000 were determined to be worthless and were written off during March. Accounts receivable total $575,000 at March 31. Management feels that based on past experience, approximately 2% of net credit sales will prove to be uncollectible.Assuming Dynamic, Incorporated uses the income statement approach (an allowance method) to account for uncollectible accounts, uncollectible accounts expense for March is:

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A) B) C) D)

$11,500. $17,500. $19,500. $13,500.

160) At the end of January, the unadjusted trial balance of Windsor, Incorporated included the following accounts: Account Title Sales (80% represent credit sales) Accounts Receivable

Debit

Credit $ 500,000

$ 340,000

Allowance for Doubtful Accounts

$ 800

Windsor uses the balance sheet approach in estimating uncollectible accounts expense, and aging the accounts receivable indicates the estimated uncollectible portion to be $7,400. What is the amount of uncollectible accounts expense recognized in Windsor's income statement for January? A) B) C) D)

$7,400. $6,600. $8,200. $800.

161) At the end of January, the unadjusted trial balance of Windsor, Incorporated included the following accounts: Account Title Sales (80% represent credit sales) Accounts Receivable Allowance for Doubtful Accounts

Debit

Credit $ 500,000

$ 340,000 $ 800

Windsor uses the balance sheet approach in estimating uncollectible accounts expense, and aging the accounts receivable indicates the estimated uncollectible portion to be $7,400. The net realizable value of Windsor's accounts receivable in the January 31 balance sheet is:

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A) B) C) D)

$331,800. $340,000. $332,600. $347,400.

162) At the end of January, the unadjusted trial balance of Windsor, Incorporated included the following accounts: Account Title Sales (80% represent credit sales) Accounts Receivable

Debit

Credit $ 500,000

$ 340,000

Allowance for Doubtful Accounts

$ 800

Windsor uses the income statement approach in estimating uncollectible accounts expense, and uncollectible accounts expense is estimated to be 2% of credit sales. What is the amount of uncollectible accounts expense recognized in Windsor's income statement for January? A) B) C) D)

$8,000. $10,000. $9,200. $7,200.

163) At the end of January, the unadjusted trial balance of Windsor,Incorporated included the following accounts: Account Title Sales (80% represent credit sales) Accounts Receivable Allowance for Doubtful Accounts

Debit

Credit $ 500,000

$ 340,000 $ 800

Windsor uses the income statement approach in estimating uncollectible accounts expense, and uncollectible accounts expense is estimated to be 2% of credit sales. The net realizable value of Windsor's accounts receivable in the January 31 balance sheet is:

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A) B) C) D)

$332,800. $332,000. $331,200. $340,000.

164) At the beginning of the year, Robert Company's Allowance for Doubtful Accounts had a $3,200 credit balance. During January, a provision of 2% of sales was made for uncollectible accounts expense. During January, sales totaled $350,000, and $2,900 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the month. Robert's financial statements for January show: A) B) C) D)

Allowance for Doubtful Accounts with a credit balance of $10,200. Allowance for Doubtful Accounts with a credit balance of $7,300. Uncollectible Accounts Expense of $9,900. Uncollectible Accounts Expense of $4,100.

165) At the end of March, the unadjusted trial balance of Tutor, Incorporated included the following accounts: Account Title Sales (75% represent credit sales) Accounts Receivable Allowance for Doubtful Accounts

Debit

Credit $ 600,000

$ 240,000 $ 1,800

Tutor uses the balance sheet approach in estimating uncollectible accounts expense, and aging the accounts receivable indicates the estimated uncollectible portion to be $8,600. What is the amount of uncollectible accounts expense recognized in Tutor's income statement for March? A) B) C) D)

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$8,600. $6,800. $10,400. $1,800.

166) At the end of March, the unadjusted trial balance of Tutor, Incorporated included the following accounts: Account Title Sales (75% represent credit sales) Accounts Receivable

Debit

Credit $ 600,000

$ 240,000

Allowance for Doubtful Accounts

$ 1,800

Tutor uses the balance sheet approach in estimating uncollectible accounts expense, and aging the accounts receivable indicates the estimated uncollectible portion to be $7,400. The net realizable value of Tutor's accounts receivable in the March 31 balance sheet is: A) B) C) D)

$247,400. $240,000. $232,600. $352,600.

167) At the end of March, the unadjusted trial balance of Tutor, Incorporated included the following accounts: Account Title Sales (75% represent credit sales) Accounts Receivable Allowance for Doubtful Accounts

Debit

Credit $ 600,000

$ 240,000 $ 1,800

Tutor uses the income statement approach in estimating uncollectible accounts expense, and uncollectible accounts expense is estimated to be 3% of credit sales. What is the amount of uncollectible accounts expense recognized in Tutor's income statement for March? A) B) C) D)

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$13,500. $18,000. $8,600. $7,200.

168) At the end of March, the unadjusted trial balance of Tutor, Incorporated included the following accounts: Account Title Sales (75% represent credit sales) Accounts Receivable Allowance for Doubtful Accounts

Debit

Credit $ 600,000

$ 240,000 $ 1,800

Tutor uses the income statement approach in estimating uncollectible accounts expense, and uncollectible accounts expense is estimated to be 3% of credit sales. The net realizable value of Tutor's accounts receivable in the March 31 balance sheet is: A) B) C) D)

169)

$251,800. $253,500. $224,700. $255,300.

A promissory note:

A) Is a conditional promise in writing to pay on demand or at a future date a definite sum of money. B) Is recorded by the maker by crediting Note Receivable. C) Is signed by the person promising to pay the note, called the payee. D) Will be recorded on both the books of the payee and the maker.

170) J. Lennon borrows a sum of money from Y. Ono. A promissory note is used to document the terms of the transaction. In this situation: A) J. Lennon is considered the maker of the note. B) J. Lennon is considered the payee of the note. C) J. Lennon records the note as an asset in his accounting records. D) The maker of the note could be either Y. Ono or J. Lennon depending on which party actually draws up the document.

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171) Anthony loaned $2,000 to Cleopatra for one year at 10% interest, all due at maturity. He insisted the terms of the transaction be formalized in a promissory note. In this situation: A) The maturity value of the note is $2,000. B) Anthony is considered the maker of the note and records the note as an asset in his accounting records. C) Anthony is considered the maker of the note and records the note as a liability in his accounting records. D) Cleopatra is considered the maker of the note and records the note as a liability in her accounting records.

172)

When a promissory note is issued, you would expect to find:

A) Notes payable and interest expense in the financial statements of the maker of the note throughout the life of the note. B) Notes receivable and interest revenue in the financial statements of the maker of the note throughout the life of the note. C) Notes receivable in the financial statements of the maker of the note throughout the life of the note, but interest revenue only when interest payments are received. D) Notes payable in the financial statements of the payee of the note throughout the life of the note, but interest expense only when interest payments are made.

173)

When the maker of a note defaults: A) The amount transferred into account receivable is the principal amount of the note

only. B) The amount transferred into account receivable includes both principal and interest through the maturity date. C) Any interest earned for the current period is not recorded, since the maker has defaulted. D) Any interest earned in a previous period that has already been recorded as interest receivable is written off as a loss due to the maker's default.

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174) On November 1, Year 1, Salem Corporation sold land priced at $680,000 in exchange for a 3%, six-month note receivable.The journal entry made by Salem to record this transaction on November 1, Year 1, includes: A) B) C) D)

A debit to Notes Receivable of $690,200. A debit to Interest Receivable of $10,200. A credit to Interest Revenue of $10,200. A debit to Notes Receivable of $680,000.

175) On November 1, Year 1, Salem Corporation sold land priced at $900,000 in exchange for a 6%, six-month note receivable.The journal entry made by Salem to record this transaction on November 1, Year 1, includes: A) B) C) D)

A debit to Notes Receivable of $927,000. A debit to Interest Receivable of $27,000. A credit to Interest Revenue of $27,000. A debit to Notes Receivable of $900,000.

176) On November 1, Year 1, Salem Corporation sold land priced at $540,000 in exchange for a 6%, six-month note receivable.Salem's balance sheet at December 31, Year 1, includes which of the following as a result of the sale of land on November 1? A) B) C) D)

Notes Receivable of $540,000 and Interest Receivable of $5,400. Notes Receivable of $556,200 and Interest Receivable of $5,400. Notes Receivable of $540,000 and Interest Receivable of $16,200. Notes Receivable of $540,000 only.

177) On November 1, Year 1, Salem Corporation sold land priced at $900,000 in exchange for a 6%, six-month note receivable.Salem's balance sheet at December 31, Year 1, includes which of the following as a result of the sale of land on November 1?

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A) B) C) D)

Notes Receivable of $900,000 and Interest Receivable of $9,000. Notes Receivable of $927,000 and Interest Receivable of $9,000. Notes Receivable of $900,000 and Interest Receivable of $27,000. Notes Receivable of $900,000 only.

178) On November 1, Year 1, Salem Corporation sold land priced at $520,000 in exchange for a 6%, six-month note receivable.On May 1, Year 2 (maturity date), the note is collected in full by Salem Corporation. Assuming a fiscal year-end of December 31, Salem recognizes which of the following in its income statement for Year 2 with regard to this note? A) B) C) D)

$535,600 sales revenue. $15,600 interest revenue. $10,400 interest revenue. $5,200 interest revenue.

179) On November 1, Year 1, Salem Corporation sold land priced at $900,000 in exchange for a 6%, six-month note receivable.On May 1, Year 2 (maturity date), the note is collected in full by Salem Corporation. Assuming a fiscal year-end of December 31, Salem recognizes which of the following in its income statement for Year 2 with regard to this note? A) B) C) D)

$927,000 sales revenue. $27,000 interest revenue. $18,000 interest revenue. $9,000 interest revenue.

180) On November 1, Year 1, Salem Corporation sold land priced at $380,000 in exchange for a 3%, six-month note receivable.Assuming the maker of the note defaults on May 1, Year 2, Salem will record on this date:

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A) An accounts receivable of $380,000 from the maker of the note. B) An accounts receivable in the amount of $380,000, as well as interest expense of $5,700. C) An accounts receivable in the amount of $385,700, as well as interest revenue of $3,800. D) An accounts receivable in the amount of $380,000, as well as interest revenue of $3,800.

181) On November 1, Year 1, Salem Corporation sold land priced at $900,000 in exchange for a 6%, six-month note receivable.Assuming the maker of the note defaults on May 1, Year 2, Salem will record on this date: A) B) $27,000. C) 18,000. D) 18,000.

An accounts receivable of $900,000 from the maker of the note. An accounts receivable in the amount of $900,000, as well as interest expense of An accounts receivable in the amount of $927,000, as well as interest revenue of $ An accounts receivable in the amount of $900,000, as well as interest revenue of $

182) On June 1, Year 1, Jensen Company acquired an 4.0%, ten-month note receivable from a customer in settlement of an existing account receivable of $160,000. Interest and principal are due at maturity.The proper adjusting entry at December 31, Year 1, with regard to this note receivable includes a: A) B) C) D)

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Debit to Cash of $3,733. Debit to Notes Receivable of $6,400. Credit to Interest Revenue of $6,400. Debit to Interest Receivable of $3,733.

183) On June 1, Year 1, Jensen Company acquired an 8%, ten-month note receivable from a customer in settlement of an existing account receivable of $130,000. Interest and principal are due at maturity.The proper adjusting entry at December 31, Year 1, with regard to this note receivable includes a: A) B) C) D)

Debit to Cash of $6,067. Debit to Notes Receivable of $10,400. Credit to Interest Revenue of $10,400. Debit to Interest Receivable of $6,067.

184) On June 1, Year 1, Jensen Company acquired an 6.8%, ten-month note receivable from a customer in settlement of an existing account receivable of $300,000. Interest and principal are due at maturity.Jensen’s entry to record the collection of this note at maturity includes a: A) B) C) D)

Credit to Interest Receivable of $11,900. Credit to Interest Revenue of $11,900. Credit to Interest Receivable of $5,100. Credit to Notes Receivable of $320,400.

185) On June 1, Year 1, Jensen Company acquired an 8%, ten-month note receivable from a customer in settlement of an existing account receivable of $130,000. Interest and principal are due at maturity.Jensen's entry to record the collection of this note at maturity includes a: A) B) C) D)

Credit to Interest Receivable of $6,067. Credit to Interest Revenue of $6,067. Credit to Interest Receivable of $2,600. Credit to Notes Receivable of $140,400.

186) If a 15%, two-month note receivable is acquired from a customer in settlement of an existing account receivable of $5,000, the accounting entry for acquisition of the note will:

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A) B) C) D)

Include a debit to Notes Receivable for $5,750. Include a debit to Notes Receivable for $5,062.50. Include a credit to Interest Revenue for $62.50. Include a debit to Notes Receivable for $5,000 and no entry for interest.

187) Gold Company received a two-month, 12% note for $8,000 on June 16. Which of the following statements is true? A) B) C) D)

Gold will receive $8,000 plus interest of $960 at maturity. Gold should record a total receivable due of $8,080 on June 16. The principal of the note plus interest is due on August 15. The maturity value of this note is $8,000.

188) On November 1, Willis Corporation sold merchandise in return for a 6%, three-month note receivable in the amount of $60,000. The proper adjusting entry at December 31 (end of Willis's fiscal year) includes a: A) B) C) D)

Credit to Interest Revenue of $600. Debit to Cash of $600. Debit to Interest Receivable of $300. Credit to Notes Receivable of $900.

189) If a 5%, four-month note receivable is acquired from a customer in settlement of an existing account receivable of $50,000, the accounting entry for acquisition of the note will: A) B) C) D)

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Include a debit to Notes Receivable for $50,822. Include a debit to Notes Receivable for $50,208. Include a credit to Interest Revenue for $822. Include a debit to Notes Receivable for $50,000 and no entry for interest.

190) Silver Company received a two-month, 6% note for $16,000 on August 5. Which of the following statements is true? A) B) C) D)

191)

Silver will receive $16,000 plus interest of $960 at maturity. Silver should record a total receivable due of $16,080 on August 5. The principal of the note plus interest is due on October 15. The maturity value of this note is $16,160.

The accounts receivable turnover rate: A) Indicates how many times the receivables were converted into cash during the year. B) Is computed by dividing average receivables by sales. C) Indicates the average number of days a business waits to make collection on a credit

sale. D) Indicates the proportion of a company's accounts receivable that the independent auditors were unable to confirm.

192) The accounts receivable turnover rate for Baldwin Corporation is 8, and for Basinger Company the turnover rate is 10. These statistics indicate that: A) Basinger collects its accounts receivable within 10 days on average; Baldwin collects its accounts receivable in 8 days on average. B) Basinger writes off as uncollectible a greater percentage of its accounts receivable than does Baldwin Company. C) Basinger collects its accounts receivable faster than does Baldwin Company. D) Basinger makes on average 10 credit sales annually to each of its customers, while Baldwin makes 8 credit sales to each customer.

193)

In regard to the accounts receivable turnover rate:

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A) B) C) D)

The higher the better. The lower the better. In some industries, it is better higher, and in some industries, it is better to be lower. The auto industry prefers a lower rate.

194) Deegan Industries has an accounts receivable turnover rate of 8. Which of the following statements is not true? A) Deegan's accounts receivable are more liquid than those of a business whose accounts receivable turnover rate is 5. B) Deegan waits approximately 46 days to make collections of its credit sales. (Use 365 days in a year.) C) Deegan writes off accounts receivable as uncollectible if they are over 45 days old. D) Deegan's net credit sales are about eight times the amount of its average accounts receivable.

195) Stanley, Incorporated's Year 1 income statement reported net sales of $6,000,000, uncollectible accounts expense of $160,000, and net income of $700,000. Stanley's average accounts receivable during Year 1 amounted to $1,200,000. Using 360 days to a year, Stanley's A) B) C) D)

Accounts receivable turnover rate is approximately 4.4 times. Accounts receivable turnover rate is approximately 2.5 times. Average number of days to collect an account receivable is 72 days. Accounts receivable turnover rate is approximately 2 times.

196) Assuming a 365-day year, Gore Industries calculated an average of 53 days to collect its accounts receivable in Year 1. During Year 1, Gore's accounts receivable turnover rate: A) B) C) D)

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Was approximately 6.89. Was equal to 53 times its average accounts receivable. Was approximately 0.15. Can't be determined from this information alone.

197) Dorfman Industries has an accounts receivable turnover rate of 12. Which of the following statements is not true? A) Dorfman’s accounts receivable are more liquid than those of a business whose accounts receivable turnover rate is 8. B) Dorfman waits approximately 30 days to make collections of its credit sales. (Use 365 days in a year.) C) Dorfman writes off accounts receivable as uncollectible if they are over 30 days old. D) Dorfman’s net credit sales are about twelve times the amount of its average accounts receivable.

198) Watkins, Incorporated's Year 1 income statement reported net sales of $5,000,000. Watkin’s average accounts receivable during Year 1 amounted to $450,000. Using 360 days to a year, Watkin’s: A) B) C) D)

Accounts receivable turnover rate is approximately 13.8 times. Accounts receivable turnover rate is approximately 1.25 times. Average number of days to collect an account receivable is 32 days. Accounts receivable turnover rate is approximately 2 times.

199) Assuming a 365-day year, Bush Industries calculated an average of 47 days to collect its accounts receivable in Year 1. During Year 1, Bush's accounts receivable turnover rate: A) B) C) D)

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Was approximately 7.77. Was equal to 47 times its average accounts receivable. Was approximately 0.13. Can't be determined from this information alone.

Answer Key Test name: Chapter 07 Test Bank - Algorithmic and Static 1) FALSE 2) FALSE 3) TRUE 4) FALSE 5) TRUE 6) FALSE 7) TRUE 8) FALSE 9) FALSE 10) TRUE 11) FALSE 12) TRUE 13) FALSE 14) FALSE 15) FALSE 16) FALSE 17) FALSE 18) FALSE 19) TRUE 20) FALSE 21) FALSE 22) FALSE 23) FALSE 24) TRUE 25) TRUE 26) TRUE Version 1

27) TRUE 28) TRUE 29) TRUE 30) TRUE 31) FALSE 32) TRUE 33) FALSE 34) FALSE 35) TRUE 36) FALSE 37) FALSE 38) FALSE 39) TRUE 40) TRUE 41) TRUE 42) TRUE 43) TRUE 44) TRUE 45) FALSE 46) TRUE 47) FALSE 48) TRUE 49) TRUE 50) FALSE 51) FALSE 52) FALSE 53) TRUE 54) TRUE 55) TRUE 56) C Version 1

57) A 58) C 59) C 60) D 61) C 62) C 63) B 64) C 65) C 66) A 67) A 68) A 69) B 70) C 71) C 72) B 73) B 74) B 75) C 76) C 77) D 78) D 79) B 80) C 81) A 82) C 83) A 84) D 85) A 86) D Version 1

87) B 88) D 89) C 90) B 91) B 92) A 93) C 94) C 95) C 96) B 97) B 98) C 99) D 100) D 101) B 102) B 103) C 104) C 105) B 106) B 107) C 108) B 109) C 110) A 111) B 112) B 113) A 114) C 115) A 116) A Version 1

117) C 118) C 119) D 120) C 121) A 122) C 123) A 124) D 125) C 126) B 127) D 128) B 129) C 130) C 131) D 132) D 133) D 134) B 135) C 136) B 137) B 138) B 139) D 140) C 141) A 142) A 143) C 144) B 145) B 146) B Version 1

147) C 148) C 149) D 150) D 151) D 152) D 153) D 154) B 155) B 156) B 157) B 158) D 159) D 160) B 161) C 162) A 163) C 164) B 165) B 166) C 167) A 168) C 169) D 170) A 171) D 172) A 173) B 174) D 175) D 176) A Version 1

177) A 178) C 179) C 180) C 181) C 182) D 183) D 184) A 185) A 186) D 187) C 188) A 189) D 190) D 191) A 192) C 193) A 194) C 195) C 196) A 197) C 198) C 199) A

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CHAPTER 8: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms introduced in this chapter: 1. Just-in-time 2. Average-cost method 3. LIFO method 4. Gross profit method 5. Shrinkage losses 6. FIFO method 7. Retail method 8. Inventory turnover Required: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. _______ a. The cost flow assumption in which the oldest units purchased are assumed to have remained in inventory. _______ b. A method of estimating the cost of goods sold and ending inventory based upon cost relationships from prior periods. _______ c. The practice of valuing inventory in the balance sheet at expected sales prices, rather than at cost. _______ d. An inventory cost flow assumption involving only one "cost layer." _______ e. The inventory cost flow assumption likely to result in the highest reported amount of gross profit during a period of rising prices. _______ f. A technique for minimizing a company's investment in inventory, particularly inventories of raw materials and finished goods. _______ g. A measure of a company's ability to sell its inventory quickly.

2) Flat TV uses a perpetual inventory system. Shown below are Flat TV's beginning inventory of a particular product and purchases during January:

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Quantity

Unit Cost

Total Cost

6 12 12

$ 195 $ 225 $ 230

$ 1,170 2,700 2,760

Beginning inventory (January 1) Purchase (January 6) Purchase (January 25) Total

$ 6,630

On January 23 (prior to the purchase on January 25), Flat TV sold 13 units of this product. Required: Determine the cost of goods sold relating to the sale on January 23 under each of the following flow assumptions. (Show your computations.)

(a) LIFO (b) FIFO (c) Average cost (or moving average)

$ _________ $ _________ $ _________

3) The perpetual inventory records of Handy Hardware show 150 units of a particular product on hand, acquired at the following dates and costs: Date May 10 June 1 Total on hand

Purchase Quantity 50 100 150

Unit Cost

Total Cost

$ 85 100

$ 4,250 10,000 $ 14,250

On June 3, Handy sold 120 units of this product. Required: Prepare a journal entry to record the cost of goods sold relating to the sale on June 3, assuming that Handy uses: (Show your computations in the journal entry explanations.) (a) A LIFO flow assumption. (b) A FIFO flow assumption. (c) The average cost (or moving average) flow assumption. Version 1

4) Arrow, Incorporated uses a perpetual inventory system. On January 22, Year 1, the company had 200 units of a particular product on hand, with a total cost of $2,400. The per-unit costs were: Date Ending inventory, Year 1 January 10 purchase Total on hand

Purchase Quantity 50 150 200

Unit Cost

Total Cost

$ 9 $ 13

$ 450 1,950 $ 2,400

On January 24, Year 1, Arrow sold 65 units of this product. Required: Using the three flow assumptions listed below, compute (1) the cost of goods sold, and (2) the cost of the inventory of this product on hand after this sale. Show your computations as per below format.

(a) Average cost: (1) Cost of goods sold (2) Inventory remaining after sale (b) LIFO:

$ _________ $ _________

(1) Cost of goods sold (2) Inventory remaining after sale (c) FIFO:

$ _________ $ _________

(1) Cost of goods sold (2) Inventory remaining after sale

$ _________ $ _________

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5) Both Company X and Company Y sell the same product. The cost of this product has been rising steadily throughout the year. Both companies reported the same net income for the year, although Company X used the first-in, first-out (FIFO) method of pricing inventory, while Company Y used the last-in, first-out (LIFO) method. Required: Answer each of the following questions: (a) Which company's valuation of ending inventory in the balance sheet is more likely to approximate replacement cost? (b) Which company uses the most conservative inventory pricing method? (c) Which company is most likely minimizing the income taxes it must pay? (d) Which company would have reported the higher net income?

Briefly discuss the factors management should consider in deciding:

Required: (A) Whether to use specific identification or a cost flow assumption in measuring the cost of goods sold. (B) Whether to use FIFO or LIFO. (Assume a long-run trend of slowly rising prices.)

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7) At year-end, the perpetual inventory records of James Products indicate 105 units of a particular product in inventory, acquired at the following dates and unit costs: Acquisition Date May 3 September 9 Total on hand

Quantity 45 60

Unit Cost $ 25 $ 39

105

Total Cost $ 1,125 2,340 $ 3,465

A complete physical inventory taken at year-end indicates only 93 units of this product actually are on hand. Required: Determine the dollar amount of the shrinkage loss assuming that James uses: (a) A LIFO flow assumption. (b) A FIFO flow assumption.

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$ _________ $ _________

8) Elite Systems sells a single product. At December 31, the company's perpetual inventory records indicate 2,500 units on hand with a total cost (FIFO basis) of $155,000. The replacement cost of this product at this date is $35 per unit. Required: Prepare journal entries to record: (a) The write-down of the inventory to the lower-of-cost-or-market value at December 31. (b) the cash sale of 100 units on January 4 at a retail price of $50 per unit. (Hint: Include both of the related journal entries.)

9) Funky Fashions uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows: January 1

Beginning inventory

400

February 15 Purchase

1,050

June 30

Purchase

1,400

November 25 Purchase

1,200

Total available for sale in year

4,000

units @ $7.00 = units @ $7.50 = units @ $8.00 = units @ $8.25 =

$ 2,800

units

$ 31,400

7,500 11,200 9,900

At December 31, the ending inventory of this product consisted of 1,300 units. Required: Determine the cost of the year-end inventory and the cost of goods sold for this product under each of the following methods of inventory valuation:

(a) Average cost (b) First-in, first-out (c) Last-in, first-out

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Inventory at December 31 $ _______ $ _______ $ _______

Cost of Goods Sold $ _______ $ _______ $ _______

10) Tres Chic uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows: January 1

Beginning inventory

1,000

March 9

Purchase

1,050

August 11

Purchase

950

December 23 Purchase

500

Total available for sale in year

3,500

units @ $14.00 = units @ $14.50 = units @ $15.00 = units @ $15.75 =

$ 14,000

units

$ 51,350

15,225 14,250 7,875

At December 31, the ending inventory of this product consisted of 850 units. Required: Determine the cost of the year-end inventory and the cost of goods sold for this product under each of the following methods of inventory valuation: (Round your answers to two decimal points.)):

(a) Average cost (b) First-in, first-out (c) Last-in, first-out

11)

Inventory at December 31 $ ________ $ ________ $ ________

Cost of Goods Sold $ ________ $ ________ $ ________

The Valley Garden Company had the following transactions:

July 1 Purchased merchandise on credit for $3,600. July 7 Purchased merchandise for cash for $6,300.

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July 9 Sold merchandise costing $7,050 for $11,250 on credit.

Required: (A) Prepare journal entries for Valley Garden assuming the company uses a perpetual inventory. (B) Prepare journal entries for Valley Garden assuming the company uses a periodic inventory.

12) Errors made by a company in determining the amount of its ending inventory are listed below. Required: Show the effect, if any, of each of the following errors on ending inventory, cost of goods sold, gross profit on sales, and net income by placing the appropriate symbol in each column. In use is the periodic inventory system. Use the following symbols: O = Overstated, U = Understated, NE = No Effect. Ending Inventory

Cost of Gross Goods Profit on Sold Sales

Net Income

(a) Ending inventory is overstated (b) Purchases are understated (c) Beginning inventory is overstated (d) Net sales are overstated (e) Beginning inventory is understated (f) Ending inventory is understated

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13) Horizon Company had sales of $1,750,000 during the current period and a gross profit rate of 40%. The company's cost of goods available for sale during the period was $1,400,000. Required: What is the amount of the company's ending inventory?

14) On April 30, Greenfield Sales, Incorporated lost its entire inventory in a flood. The following information is available from the company's accounting records, which were recovered from the waterproof safe: Inventory, January 1 Purchases, January 1 through April 30 Net sales, January 1 through April 30

$ 325,000 $ 675,000 $ 975,000

The gross profit of Greenfield Sales, Incorporated over the past several years has consistently averaged 35% of net sales. Required: Using the gross profit method, estimate the cost of the inventory lost in the flood on April 30.

15) The Walnut Shop is a furniture company that uses a periodic inventory system. On February 8, Year 2, a fire destroyed all the furniture on display in the company's main showroom. Fortunately, $35,000 of the company's inventory was located in a separate warehouse and was not damaged by the fire.Walnut Shop now is attempting to determine the cost of the merchandise destroyed in the fire from the following information:

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Net sales during Year 2, through February 8 Ending inventory, December 31, Year 1 Purchases in Year 2 through February 8 Historical rate of gross profit

$ 450,000 $ 130,000 $ 225,000 45%

Required: Compute the following (a) The cost of goods available for sale through February 8, Year 2. (b) The cost of goods sold in Year 2 through February 8. (c) The estimated total inventory on hand on February 8, prior to the fire. (d) The cost of the inventory lost in the fire.

$ _______ $ _______ $ _______ $ _______

16) Omega Signs uses the retail method to estimate ending inventory in its monthly financial statements. The following information is available for the month ended April 30: Cost Sales

Retail $ 750,000

Inventory, April 1 Net purchases

$ 300,000 250,000

500,000 500,000

Goods available for sale

$ 550,000

$ 1,000,000

Required: Using the retail method:(a) Determine the cost ratio that should be used in estimating the Inventory at April 30. ________%(b) Estimate the cost of the inventory at April 30. $________(c) Estimate the cost of goods sold for April. $________

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17) Global Office Supply uses the retail method to estimate ending inventory in its monthly financial statements. The following information is available for the month ended July 31: Cost Sales

Retail $ 600,000

Inventory, July 1 Net purchases

$ 274,800 369,600

396,000 546,000

Goods available for sale

$ 644,400

$ 942,000

Required: Using the retail method (round the cost ratio to two decimal places): (a) Determine the cost ratio that should be used in estimating the Inventory at July 31. (b) Estimate the cost of the inventory at July 31. (c) Estimate the cost of goods sold for July.

________ % $ ________ $ ________

18) Many large retailers take a physical inventory near year-end and state in their annual report that inventory has been valued by the "retail method."Required: What does this mean? (Your answer should address [1] whether inventory is valued in the financial statements at cost or retail prices, and [2] how this dollar amount is determined.)

19) The Multi-Tech Company uses the gross profit method to estimate inventories. Required: Fill in the missing amounts represented by the letters in the table set forth below: Version 1

Gross Sales

(a)

Less Returns and Allowances

1,500

Less Sales Discounts

3,250

Net Sales

$ 300,000

Cost of Goods Sold: Beginning Inventory

$ 60,000

Purchases

175,000

Goods Available for Sale

(b)

Less Ending Inventory

(c)

Cost of Goods Sold

(d)

Gross Profit (43%)

(e)

20) In the spaces provided, indicate the likely effect of each of the following events or strategies upon the inventory turnover rate in the coming period. Use the following code letters: I for Increase, D for Decrease, and NE for No Effect. Required: ______ (a) Reduced sales prices in order to increase sales volume. ______ (b) Ordered substantially larger amounts of merchandise in order to receive a volume discount from the supplier. ______ (c) Switched from the FIFO flow assumptions to LIFO during a period of rising prices. ______ (d) Placed sales clerks on commission, rather than a fixed monthly salary. ______ (e) Decided to offer customers a wider selection of merchandise available for immediate delivery.

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21) In the spaces provided, indicate the likely effect of each of the following events or strategies upon the inventory turnover rate. Use the following code letters: I for Increase, D for Decrease, and NE for No Effect. Required: ______ (a) Switched from the LIFO flow assumption to FIFO during a period of rising prices. ______ (b) Dramatically increased advertising expense. ______ (c) Increased the sales price of merchandise that is so popular it is difficult to keep in stock. ______ (d) Implemented internal control procedures to reduce a serious inventory shrinkage problem. ______ (e) Switched from a restrictive credit policy to offering liberal terms to credit customers.

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Answer Key Test name: Chapter 08 Test Bank (Problem Material) 1) (a) LIFO method (b) Gross profit method (c) None (d) Average cost method (e) FIFO method (f) Just-in-time (g) Inventory turnover 2) (a) $2,895 (12 units @ $225 + 1 units @ $195)(b) $2,745 (6 units @ $195 + 7 units @ $225)(c) $2,795 [13 units @ ($1,170 + $2,700) ÷ 18] 3) Date 20__

General Journal

Debit

Credit

June 3 (a)

Cost of Goods Sold

11,700

Inventory

(b)

To record cost of units sold using LIFO: (100 @ $100) + (20 @ $85) Cost of Goods Sold

11,700

11,250

Inventory

(c)

To record cost of units sold using FIFO: (50 @ $85) + (70 @ $100) Cost of Goods Sold Inventory

11,250

11,400 11,400

To record cost of units sold using average cost method ($14,250 ÷ 150 units) = $95 average cost.

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4) (a) (1) $780(a) (2) $1,620(b) (1) $845(b) (2) $1,555(c) (1) $645(c) (2) $1,755(a)(1) $ 780 [65 units @ ($2,400 ÷ 200)(2) $ 1,620 ($2,400 − $780)(b)(1) $ 845 (65 units @ $13)(2) $ 1,555 ($2,400 − $845)(c)(1) $ 45 (50 units @ $9) + (15 units @ $13)(2) $ 1,755 ($2,400 − $645) 5) (a) Company X (b) Company Y (c) Company Y (d) Company X (a) A conceptual advantage of the FIFO method (used by Company X) is that in the balance sheet inventory is valued at recent purchase costs. Therefore, this asset appears in the balance sheet at an amount more closely approximating its current replacement cost.(b) During periods of rising inventory replacement costs, the LIFO method results in the lowest valuation of inventory and measurement of net income. Therefore, LIFO (used by Company Y) is regarded as the most conservative of the inventory pricing methods. FIFO, on the other hand, is the least conservative method.(c) By reporting a higher cost of goods sold than results from other inventory valuation methods, the LIFO method (used by Company Y) usually results in lower taxable income.(d) By reporting a lower cost of goods sold than results from other inventory valuation methods, the FIFO method (used by Company X) usually results in higher net income.

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6) (A) In large part, the decision of whether to use specific identification or a cost flow assumption depends upon the nature of the inventory. If the individual items comprising the inventory are unique, specific identification is the logical choice. If the inventory consists of items similar in cost, function, and sales value, either specific identification or a cost flow assumption may be used. A cost flow assumption usually is used in these circumstances, as this eliminates the need for tracing each item sold into the accounting records to determine its specific cost. Also, cost flow assumptions may accomplish specific managerial objectives, such as minimizing income taxes, more effectively than would specific identification. (B) The decision of whether to use LIFO or FIFO depends upon management's financial reporting objectives. In a period of rising prices, LIFO will assign more recent (and higher) costs to the cost of goods sold, therefore minimizing reported income. For this reason, LIFO is popular for income tax purposes. However, the IRS requires companies that use LIFO for income tax purposes also to use the LIFO method in their financial statements. The FIFO method, in contrast, assigns older (and lower) costs to the cost of goods sold, thereby enabling the company to report a higher gross profit. This method may be preferred by a management that is concerned with creating a superficial impression of profitability. 7) (a) 12 units @ $39 = $468 (b) 12 units @ $25 = $300 8) Date 20__

General Journal

Debit

Credit

December 31

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(a)

Cost of Goods Sold

67,500

Inventory

67,500

To reduce carrying value of yearend inventory to replacement cost (2,500 units × $35 = $87,500 market) (b) January 4

Cash

5,000

Sales

5,000

Sold 100 units @ $50 cash. January 4

Cost of Goods Sold

3,500

Inventory

3,500

To record cost of selling 100 units carried in inventory at replacement cost of $35 per unit

9) (a) Average cost (b) First-in, first-out (c) Last-in, first-out

Inventory at December 31 $ 10,205 $ 10,700 $ 9,550

Cost of Goods Sold $ 21,195 $ 20,700 $ 21,850

(a) Average cost:Inventory $ 10,205 [1,300 units @ ($31,400 ÷ 4,000)Cost of goods sold $ 21,195 ($31,400 − $10,205)(b) First-in, firstout:Inventory $ 10,700 (1,200 @ $8.25 + 100 @ $8)Cost of goods sold $ 20,700 ($31,400 − $10,700)(c) Last-in, first-out:Inventory $ 9,550 (400 @ $7) + (900 @ $7.50)Cost of goods sold $ 21,850 ($31,400 − $9,550) 10) (a) Average cost (b) First-in, first-out (c) Last-in, first-out

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Inventory at December 31 $ 12,469.50 $ 13,125.00 $ 11,900.00

Cost of Goods Sold $ 38,880.50 $ 38,225.00 $ 39,450.00

(a) Average cost:Inventory $ 12,469.50 [850 × ($51,350 ÷ 3,500)]Cost of goods sold $ 38,880.50 ($51,350 − $12,469.50)(b) First-in, firstout:Inventory $ 13,125 (500 @ $15.75) + (350 @ $15)Cost of goods sold $ 38,225 ($51,350 − $13,125)(c) Last-in, first-out:Inventory $ 11,900 (850 @ $14)Cost of goods sold $ 39,450 ($51,350 − $11,900) 11) Date A. July 1

Account Title

Debit

Inventory

3,600

Accounts Payable July 7

3,600

Inventory

6,300

Cash July 9

6,300

Cost of Goods Sold

7,050

Inventory

7,050

Accounts Receivable

11,250

Sales Revenue B. July 1

11,250

Purchases

3,600

Accounts Payable July 7

3,600

Purchases

6,300

Cash July 9

Credit

6,300

Accounts Receivable

11,250

Sales Revenue

11,250

12) Ending Inventory (a) Ending inventory is overstated (b) Purchases are understated

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O NE

Cost of Gross Goods Profit on Sold Sales U O U

Net Income O O

(c) Beginning inventory is overstated (d) Net sales are overstated (e) Beginning inventory is understated (f) Ending inventory is understated

NE NE

NE U

O O

13) $350,000Ending inventory = $1,400,000 − ($1,750,000 × 60%)= $1,400,000 − $1,050,000= $350,000 14) $366,250 Cost of goods available for sale: Beginning inventory, January 1

$ 325,000

Purchases, January 1—April 30

675,000

Cost of goods available for sale

1,000,000

Deduct: Estimated cost of goods sold: Net sales Cost percentage (100% − 35%) Estimated costs of goods sold Estimated inventory, April 30, lost in the flood

$ 975,000 × 65% 633,750 $ 366,250

15) (a) $355,000 (b) $247,500 (c) $107,500 (d) $72,500(a) Cost of goods available for sale:$355,000 ($130,000 + $225,000)(b) Cost of goods sold:$247,500 ($450,000 net sales × 55%*)* Cost ratio = 100% − 45% gross profit rate(c) Total inventory at February 8:$107,500 [$355,000 (a) − $247,500 (b)](d) Inventory lost in fire:$72,500 [($107,500 − $35,000 (c) in warehouse] Version 1

16) (a) 55%(b) $137,500(c) $412,500(a)Cost ratio at April 30: 55%($550,000 ÷ $1,000,000)(b)Estimate the cost of the inventory at April 30: $ 137,500Ending inventory at retail = $1,000,000 − $750,000 = $ 250,000Ending inventory at cost = $250,000 × 0.55 = $ 137,500(c)Estimate the cost of goods sold for April: $ 412,500($550,000 − 137,500) = $412,500 17) (a) 68%(b) $232,560(c) $411,840(a)Cost ratio at July 31: 68%($644,400 ÷ $942,000)(b)Estimate the cost of the inventory at July 31: $ 232,560Ending inventory at retail = $942,000 − $600,000 = $ 342,000Ending inventory at cost = $342,000 × 0.68 = $ 232,560(c)Estimate the cost of goods sold for July: $ 411,840$644,400 − $232,560 inventory = $ 411,840 18) The retail method may be used as a valuation method in conjunction with the taking of a physical inventory. In these cases, the inventory is counted and priced at retail prices, but the cost of the inventory is then estimated by applying the cost ratio to this retail price. In the balance sheet, the inventory is shown at the estimated cost figure.

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19) (a) $304,750 (b) $235,000 (c) $64,000 (d) $171,000 (e) $129,000 Determine the unknowns in the following order: (a) Gross sales = $300,000 + $1,500 + $3,250 = $204,750 (b) Goods available for sale = $60,000 + $175,000 = $235,000 (e) Gross profit = Net sales of $300,000 × 0.43 = $129,000 (d) Cost of goods sold = $300,000 − $129,000 [from (e)] = $171,000 (c) Ending inventory = $235,000 [from (b)] − $171,000 [from (d)] = $64,000 20) I D I I D

(a) Reduced sales prices in order to increase sales volume. (b) Ordered substantially larger amounts of merchandise in order to receive a volume discount from the supplier. (c) Switched from the FIFO flow assumptions to LIFO during a period of rising prices. (d) Placed sales clerks on commission, rather than a fixed monthly salary. (e) Decided to offer customers a wider selection of merchandise available for immediate delivery.

21) D I D

(a) Switched from the LIFO flow assumption to FIFO during a period of rising prices. (b) Dramatically increased advertising expense. (c) Increased the sales price of merchandise that is so popular it is difficult to keep in stock.

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D I

(d) Implemented internal control procedures to reduce a serious inventory shrinkage problem. (e) Switched from a restrictive credit policy to offering liberal terms to credit customers.

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CHAPTER 8 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records. ⊚ ⊚

true false

2) The specific identification method is usually limited to inventory items with a relatively low cost per unit, and the company maintains a relatively small number of inventory items. ⊚ ⊚

true false

3) The specific identification method requires that a record of the cost of each individual inventory item be maintained. ⊚ ⊚

true false

4) An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs. ⊚ ⊚

true false

5) An advantage to the LIFO method of accounting for inventory is that it values the cost of goods sold at current replacement costs. ⊚ ⊚

true false

6) During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.

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⊚ ⊚

true false

7) Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption, rather than the specific identification method. ⊚ ⊚

true false

8) During periods of inflation, the FIFO cost flow assumption will yield a higher cost of goods sold than LIFO. ⊚ ⊚

true false

9) The cost flow assumption selected by a company must correspond to the actual physical movement of the company's merchandise. ⊚ ⊚

true false

10) The inventory method used by a company will affect profitability by affecting the amount of income tax a company owes. ⊚ ⊚

true false

11) The LIFO conformity requirement permits a company to use LIFO for tax purposes only if the company also uses LIFO for internal reporting purposes. ⊚ ⊚

true false

12) The principle of consistency prohibits a company from changing an inventory valuation method once one is selected.

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⊚ ⊚

true false

13) Just-in-time inventory systems cannot be used in conjunction with the LIFO cost flow assumption. ⊚ ⊚

true false

14) A company could use FIFO in its financial statements and average-cost in its income tax returns. ⊚ ⊚

true false

15) Companies with perpetual inventories need not take physical inventory counts because inventory amounts are perpetually available. ⊚ ⊚

16)

true false

A physical inventory is usually taken during a period of high activity. ⊚ ⊚

true false

17) A write-down of inventory due to obsolescence reduces the amount in the Inventory account and may increase the amount in the Cost of Goods Sold account. ⊚ ⊚

18)

true false

Merchandise sold F.O.B. destination belongs to the buyer while in transit. ⊚ ⊚

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true false

19)

Because of the consistency principle, inventory should never be written down below cost. ⊚ ⊚

true false

20) If the terms of a sale are F.O.B. shipping point, the sale should not be recorded until the goods are delivered to the buyer. ⊚ ⊚

true false

21) In a periodic system, the only account with regard to inventory that is kept up-to-date is the Inventory account. ⊚ ⊚

true false

22) In order to obtain the maximum tax benefit, companies that use a perpetual inventory system can restate their year-end inventory at costs indicated by periodic LIFO costing procedures. ⊚ ⊚

true false

23) When the periodic inventory system is used, determining the cost of the year-end inventory involves two distinct steps: counting the units and pricing the units. ⊚ ⊚

true false

24) In a periodic inventory system, understating the amount of ending inventory will cause an understatement of gross profit in the current year. ⊚ ⊚

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true false

25) In a periodic inventory system, overstating the amount of ending inventory will cause an understatement of gross profit in the following year. ⊚ ⊚

true false

26) Overstating the ending inventory will result in understating the cost of goods sold and overstating profits. ⊚ ⊚

true false

27) Assume ending inventory is overstated at the end of Year 1 and correctly stated at the end of Year 2. Owners' equity will be correctly stated at the end of Year 2. ⊚ ⊚

28)

true false

The gross profit method can be used for both interim and year-end financial reporting. ⊚ ⊚

true false

29) The retail method requires a company to state inventory on the year-end balance sheet at its retail value. ⊚ ⊚

30) sold.

true false

The inventory turnover rate is equal to the average inventory divided by the cost of goods ⊚ ⊚

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true false

31)

The higher a company's inventory turnover rate, the higher its gross profit. ⊚ ⊚

true false

32) A clothing store would logically have a higher inventory turnover rate than would a doughnut shop. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 33) Which of the following is generally not true about inventory? A) B) C) D)

Inventory consists of all goods owned and held for sale to customers. Inventory is a non-financial asset. Inventory must be managed on a unit-by-unit (i.e., specific identification) method. Inventory is usually shown on the balance sheet at cost.

34) Which of the following is not considered an acceptable inventory cost method according to GAAP? A) B) C) D)

First-in, first-out First-in, last-out Last-in, first-out Average cost

35) When prices are increasing, which inventory method will produce the highest cost of goods sold?

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A) B) C) D)

FIFO LIFO Average cost Cost of goods sold will be the same under these methods.

36) Kent Company has used the same inventory method for many years. This is an example of which principle? A) B) C) D)

Matching Realization Cost Consistency

37) In which of these inventory approaches is it important to determine the actual cost of a particular inventory item being sold in order to determine cost of goods sold? A) B) C) D)

LIFO FIFO Specific identification Average cost

38) In a perpetual inventory system, two entries are normally made to record each sales transaction. The purpose of these entries is best described as follows: A) One entry recognizes the sales revenue and the other recognizes the cost of goods sold. B) One entry records the purchase of merchandise and the other records the sale. C) One entry records the cost of goods sold and the other reduces the balance in the Inventory account. D) One entry updates the subsidiary ledger and the other updates the general ledger.

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39) Which of the four inventory approaches is best suited to inventories of high-priced, lowvolume items? A) B) C) D)

LIFO FIFO Average cost Specific identification

40) In a perpetual inventory system, an inventory cost flow assumption is used primarily for determining which costs to use in: A) B) C) D)

Recording purchases of inventory. Recording the cost of goods sold. Recording sales revenue. Forecasts of future operating results.

41) Which of the four inventory approaches transfers the most recent purchase cost to the cost of goods sold and the remaining items in inventory are valued at the oldest acquisition costs? A) B) C) D)

LIFO FIFO Average cost Specific identification

42) Harris Corporation's inventory of a particular product includes 200 units purchased at a per-unit cost of $50, and another 100 units purchased at a unit cost of $60. If Harris sells 10 units of this product, the cost of goods sold will be:

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A) B) C) D)

43)

$500. $550. $660. The answer will depend upon the inventory cost flow assumption in use.

During periods of inflation, when comparing LIFO with FIFO: A) B) C) D)

LIFO inventory and cost of sales would be higher. LIFO inventory and cost of sales would be lower. LIFO inventory would be lower and cost of sales would be higher. LIFO inventory would be higher and cost of sales would be lower.

44) The specific identification method is more appropriate than a cost flow assumption method: A) B) C) D)

45)

For a large inventory of identical low-priced items. If each item in the inventory is unique. If purchase costs are rising. If purchase costs are falling.

When the LIFO costing method is in use, the seller: A) B) C) D)

Must sell the most recently acquired units first. Must sell the oldest unit in inventory first. Assumes that the most recently acquired units are sold first. Assumes that the oldest units in inventory are sold first.

46) Which of the following statements is not a characteristic of the LIFO method of pricing inventory?

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A) During a period of rising prices, LIFO tends to minimize the amount of income taxes owed. B) The cost of goods sold is measured in relatively current costs. C) Inventory is valued at relatively current costs. D) During a period of falling prices, LIFO tends to maximize the amount of income taxes owed.

47) Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise? A) B) C) D)

48)

LIFO FIFO Average cost Specific identification

In a perpetual inventory system, the flow of inventory cost is: A) B) C) D)

First through the income statement, then through the balance sheet. First through the balance sheet, then through the income statement. Only through the balance sheet and not the income statement. Only through the income statement and not the balance sheet.

49) Which of the following results in the cost of goods sold being stated at the most current acquisition costs? A) B) C) D)

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Average cost Specific identification FIFO LIFO

50) Which of the following results in the inventory being stated at the most current acquisition costs? A) B) C) D)

Specific identification LIFO FIFO Average cost

51) During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit? A) B) C) D)

Specific identification Average cost LIFO FIFO

52) During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in the lowest taxable income? A) B) C) D)

LIFO FIFO Average cost Specific identification

53) In a period of rising prices, a company is most likely to use the specific identification method of pricing inventory if:

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A) Each item in the inventory is unique. B) Management wants the same unit cost assigned to items sold and items remaining in inventory. C) Management's primary objective is to minimize income taxes. D) Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

54) During periods of inflation, which method will yield the smallest ending inventory and the largest cost of goods sold? A) B) C) D)

LIFO FIFO Average cost Specific identification

55) In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if: A) Each item in the inventory is unique. B) Management wants the same unit cost assigned to items sold and items remaining in inventory. C) Management's primary objective is to minimize income taxes. D) Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.

56) Which of the following inventory approaches is not in accord with the physical flow of merchandise in most businesses? A) B) C) D)

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LIFO FIFO Specific identification Average cost

57) A store that sells expensive custom-made jewelry is most likely to determine its cost of goods sold using: A) B) C) D)

Specific identification. Average cost. First-in, first-out. Last-in, last-out.

58) The choice of inventory valuation method can help achieve each of the following independent goals, except: A) B) C) D)

Reduce cost of merchandise acquired from suppliers. Increase reported net income. Increase the inventory turnover rate. Reduce the amount of income taxes owed.

59) With respect to the valuation of inventory and measurement of the cost of goods sold, the principle of consistency means that the same method should be applied: A) B) C) D)

In successive accounting periods. By all companies in a given industry. To all products in the inventory. In financial statements and income tax returns.

60) In a manufacturing company, the "just-in-time" concept of inventory management is best illustrated by:

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A) Receiving deliveries of materials from suppliers just before the materials are used in the production process. B) Completing the manufacturing process just before the deadline established by the customer. C) An automated factory that reduces production time below that of other companies in the industry. D) Selling finished products before they go out of style.

61)

The "just-in-time" concept of inventory management is best illustrated by: A) A clothing manufacturer that sells all of its finished goods before they go out of

style. B) A defense contractor that completes its projects within the deadlines set by its customer (the federal government). C) A pharmaceutical firm that consistently brings new products to market ahead of its competitors. D) A homebuilder who has its suppliers deliver lumber and other building materials to the building site the night before these materials will be used by the company's construction crews.

62)

The primary advantage of a just-in-time inventory system is:

A) The amount of money tied up in inventory is minimized. B) Customers are afforded a wider selection of merchandise available for immediate delivery. C) The company is able to use the specific identification method of inventory pricing. D) The risks of losing sales opportunities or of having to shut down manufacturing operations because of inventory shortages are minimized.

63)

The principle of consistency states that:

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A) Companies are prohibited from ever changing their accounting methods. B) Every company in the same industry must use the same accounting principle. C) There must be a consistent blend to the accounting principles. D) If changes in accounting principles are made, the reasons for the change and the effects on the company's net income must be disclosed.

64) From an accounting point of view, one implication of an effective just-in-time inventory system is that: A) Sales transactions must be recorded using on-line point-of-sale terminals. B) Inventories are less material in dollar amount and alternative inventory flow assumptions will produce more similar results. C) The cost of goods sold is significantly reduced. D) Purchases of merchandise are recorded as cash payments are made, and sales transactions are recorded as cash is received.

65) If all things are equal, except one company uses LIFO during inflation and the other uses FIFO, then: A) B) C) D)

66)

The LIFO company will have a higher inventory turnover. The FIFO company will have a higher inventory turnover. The two companies will have the same inventory turnover. The two companies will rely upon an industry inventory turnover measurement.

An advocate of the just-in-time inventory system would advocate: A) B) C) D)

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Maintaining a large inventory selection for customers. Leaving extra time in order to make inventory deadlines. Maintaining a small inventory supply. LIFO over FIFO.

67) During periods of rising prices, and being primarily concerned with tax implications, most of the companies would select: A) B) C) D)

LIFO. FIFO. Specific identification. The inventory valuation does not affect taxation.

68) For the purpose of delaying income taxes, during an inflationary period, which method would be best? A) B) C) D)

LIFO FIFO Average cost Taxes would be the same under each assumption

69) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

24 23 34

$ 22 $ 28 $ 30

$ 528 644 1,020

Total

$ 2,192

On January 14, Beech Soda, Incorporated sold 36 units of this product. The other 45 units remained in inventory at January 31.Assuming that Beech Soda uses the FIFO cost flow assumption, the cost of goods sold to be recorded at January 14 is: A) B) C) D)

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$930. $864. $1,202. $2,192.

70) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

16 14 23

$ 10 $ 12 $ 15

$ 160 168 345

Total

$ 673

On January 14, Beech Soda, Incorporated sold 25 units of this product. The other 28 units remained in inventory at January 31.Assuming that Beech Soda uses the FIFO cost flow assumption, the cost of goods sold to be recorded at January 14 is: A) B) C) D)

$278. $268. $393. $673.

71) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

23 26 37

$ 25 $ 31 $ 33

$ 575 806 1,221

Total

$ 2,602

On January 14, Beech Soda, Incorporated sold 39 units of this product. The other 47 units remained in inventory at January 31.Assuming that Beech Soda uses the LIFO cost flow assumption, the cost of goods sold to be recorded at January 14 is: A) B) C) D)

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$1,071. $2,602. $1,131. $1,427.

72) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

16 14 23

$ 10 $ 12 $ 15

$ 160 168 345

Total

$ 673

On January 14, Beech Soda, Incorporated sold 25 units of this product. The other 28 units remained in inventory at January 31.Assuming that Beech Soda uses the LIFO cost flow assumption, the cost of goods sold to be recorded at January 14 is: A) B) C) D)

$393. $268. $278. $673.

73) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

20 12 23

$ 11 $ 17 $ 19

$ 220 204 437

Total

$ 861

On January 14, Beech Soda, Incorporated sold 25 units of this product. The other 30 units remained in inventory at January 31.Assuming that Beech Soda uses the average cost flow assumption, the cost of goods sold to be recorded at January 14 is: (Round your intermediate calculation to one decimal place and final answer to the nearest cent).

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A) B) C) D)

$861.00 $397.50 $391.36 $332.50

74) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

16 14 23

$ 10 $ 12 $ 15

$ 160 168 345

Total

$ 673

On January 14, Beech Soda, Incorporated sold 25 units of this product. The other 28 units remained in inventory at January 31.Assuming that Beech Soda uses the average cost flow assumption, the cost of goods sold to be recorded at January 14 is: (Round your intermediate calculation to one decimal place and final answer to the nearest cent). A) B) C) D)

$317.50. $308.25. $272.50. $673.00.

75) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

22 21 32

$ 20 $ 26 $ 28

$ 440 546 896

Total

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$ 1,882

On January 14, Beech Soda, Incorporated sold 34 units of this product. The other 41 units remained in inventory at January 31.Assuming that Beech Soda uses the FIFO cost flow assumption, the 41 units of this product in inventory at January 31 have a total cost of: A) B) C) D)

$1,102. $1,130. $1,482. $1,076.

76) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

16 14 23

$ 10 $ 12 $ 15

$ 160 168 345

Total

$ 673

On January 14, Beech Soda, Incorporated sold 25 units of this product. The other 28 units remained in inventory at January 31.Assuming that Beech Soda uses the FIFO cost flow assumption, the 28 units of this product in inventory at January 31 have a total cost of: A) B) C) D)

$400. $395. $405. $410.

77) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows:

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

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Quantity

Unit Cost

Total Cost

16 8 19

$ 7 $ 13 $ 15

$ 112 104 285

Total

$ 501

On January 14, Beech Soda, Incorporated sold 21 units of this product. The other 22 units remained in inventory at January 31.Assuming that Beech Soda uses the LIFO cost flow assumption, the 22 units of this product in inventory at January 31 have a total cost of: A) B) C) D)

$324. $306. $319. $312.

78) Beech Soda, Incorporated uses a perpetual inventory system. The company's beginning inventory of a particular product and its purchases during the month of January were as follows: Quantity

Unit Cost

Total Cost

Beginning inventory (January 1) Purchase (January 11) Purchase (January 20)

16 14 23

$ 10 $ 12 $ 15

$ 160 168 345

Total

$ 673

On January 14, Beech Soda, Incorporated sold 25 units of this product. The other 28 units remained in inventory at January 31.Assuming that Beech Soda uses the LIFO cost flow assumption, the 28 units of this product in inventory at January 31 have a total cost of: A) B) C) D)

$400. $395. $405. $410.

79) At year-end, the perpetual inventory records of Anderson Company indicate 60 units of a particular product in inventory, acquired at the following dates and unit costs: Purchased in August: 30 units at $750 per unit. Purchased in November: 30 units at $700 per unit. A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand.Assuming that Anderson uses the LIFO cost flow assumption, it should record this inventory shrinkage by: Version 1

A) B) C) D)

Debiting Cost of Goods Sold $7,000. Crediting Cost of Goods Sold $7,500. Debiting Cost of Goods Sold $7,500. Crediting Cost of Goods Sold $7,000.

80) At year-end, the perpetual inventory records of Anderson Company indicate 60 units of a particular product in inventory, acquired at the following dates and unit costs: Purchased in August: 30 units at $750 per unit. Purchased in November: 30 units at $700 per unit. A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand.Assuming that Anderson uses the FIFO cost flow assumption, it should record this inventory shrinkage by: A) B) C) D)

Crediting Cost of Goods Sold $7,500. Debiting Cost of Goods Sold $7,000. Crediting Cost of Goods Sold $7,000. Debiting Cost of Goods Sold $7,500.

81) At year-end, the perpetual inventory records of Anderson Company indicate 60 units of a particular product in inventory, acquired at the following dates and unit costs: Purchased in August: 30 units at $750 per unit. Purchased in November: 30 units at $700 per unit. A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand.Under the FIFO cost flow assumption, the cost of these items to be included in inventory in the company's year-end balance sheet is: A) B) C) D)

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$36,000. $36,500. $42,000. $37,500.

82) At year-end, the perpetual inventory records of Anderson Company indicate 60 units of a particular product in inventory, acquired at the following dates and unit costs: Purchased in August: 30 units at $750 per unit. Purchased in November: 30 units at $700 per unit. A complete physical inventory taken at year-end indicates only 50 units of this product actually are on hand.Under the LIFO cost flow assumption, the cost of these items to be included in inventory in the company's year-end balance sheet is: A) B) C) D)

$36,000. $42,000. $36,500. $37,500.

83) At the end of last year, Games-2-Use had merchandise costing $160,000 in inventory. During January of the current year, the company purchased merchandise costing $108,000, and sold merchandise that it had purchased at a total cost of $92,000. Games-2-Use uses a perpetual inventory system. The total amount debited to the Inventory account during January was: A) B) C) D)

$0. $92,000. $108,000. $160,000.

84) At the end of last year, Games-2-Use had merchandise costing $140,000 in inventory. During January of the current year, the company purchased merchandise costing $102,000, and sold merchandise that it had purchased at a total cost of $84,000. Games-2-Use uses a perpetual inventory system.The total amount debited to the Inventory account during January was: A) B) C) D)

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$0. $84,000. $102,000. $140,000.

85) At the end of last year, Games-2-Use had merchandise costing $330,000 in inventory. During January of the current year, the company purchased merchandise costing $260,000, and sold merchandise that it had purchased at a total cost of $216,000. Games-2-Use uses a perpetual inventory system. The balance in the Inventory account at January 31 was: A) B) C) D)

$216,000. $590,000. $374,000. $330,000.

86) At the end of last year, Games-2-Use had merchandise costing $140,000 in inventory. During January of the current year, the company purchased merchandise costing $102,000, and sold merchandise that it had purchased at a total cost of $84,000. Games-2-Use uses a perpetual inventory system.The balance in the Inventory account at January 31 was: A) B) C) D)

$84,000. $140,000. $158,000. $242,000.

87) At the end of last year, Games-2-Use had merchandise costing $330,000 in inventory. During January of the current year, the company purchased merchandise costing $260,000, and sold merchandise that it had purchased at a total cost of $216,000. Games-2-Use uses a perpetual inventory system. The amount of goods transferred from the Inventory account to the Cost of Goods Sold account during January was: A) B) C) D)

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$0. $216,000. $260,000. $114,000.

88) At the end of last year, Games-2-Use had merchandise costing $140,000 in inventory. During January of the current year, the company purchased merchandise costing $102,000, and sold merchandise that it had purchased at a total cost of $84,000. Games-2-Use uses a perpetual inventory system.The amount of goods transferred from the Inventory account to the Cost of Goods Sold account during January was: A) B) C) D)

$0. $84,000. $102,000. $56,000.

89) Castle TV, Incorporated purchased 2,500 monitors on January 5 at a per-unit cost of $203, and another 2,500 units on January 31 at a per-unit cost of $290. In the period from February 1 through year-end, the company sold 4,400 units of this product. At year-end, 600 units remained in inventory.Assume that Castle TV, Incorporated uses the FIFO flow assumption. The cost of the 600 units in inventory at year-end is: A) B) C) D)

$147,900. $174,000. $121,800. $295,800.

90) Castle TV, Incorporated purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory.Assume that Castle TV, Incorporated uses the FIFO flow assumption. The cost of the 200 units in inventory at year-end is: A) B) C) D)

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$41,500. $46,000. $37,000. $83,000.

91) Castle TV, Incorporated purchased 2,900 monitors on January 5 at a per-unit cost of $231, and another 2,900 units on January 31 at a per-unit cost of $306. In the period from February 1 through year-end, the company sold 5,300 units of this product. At year-end, 500 units remained in inventory.Assume that Castle TV, Incorporated uses the LIFO flow assumption. The cost of the 500 units in the year-end inventory is: A) B) C) D)

$115,500. $134,250. $268,500. $153,000.

92) Castle TV, Incorporated purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory.Assume that Castle TV, Incorporated uses the LIFO flow assumption. The cost of the 200 units in the year-end inventory is: A) B) C) D)

$37,000. $46,000. $41,500. $83,000.

93) Castle TV, Incorporated purchased 2,200 monitors on January 5 at a per-unit cost of $182, and another 2,200 units on January 31 at a per-unit cost of $278. In the period from February 1 through year-end, the company sold 4,100 units of this product. At year-end, 300 units remained in inventory.Assume that the replacement cost of this monitor at year-end is $270 per unit. Using the FIFO flow assumption and the lower-of-cost-or-market rule, Castle TV should write down the carrying value of this inventory by: A) B) C) D)

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$0. $1,200. $2,400. $3,600.

94) Castle TV, Incorporated purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory.Assume that the replacement cost of this monitor at year-end is $220 per unit. Using the FIFO flow assumption and the lower-of-cost-or-market rule, Castle TV should write down the carrying value of this inventory by: A) B) C) D)

$0. $1,000. $2,000. $3,000.

95) Castle TV, Incorporated purchased 2,200 monitors on January 5 at a per-unit cost of $182, and another 2,200 units on January 31 at a per-unit cost of $278. In the period from February 1 through year-end, the company sold 4,100 units of this product. At year-end, 300 units remained in inventory.Assume that the replacement cost of this monitor at year-end is $260 per unit. Using LIFO flow assumption and the lower-of-cost-or-market rule, the ending inventory amounts to: A) B) C) D)

$83,400. $138,000. $54,600. $78,000.

96) Castle TV, Incorporated purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory.Assume that the replacement cost of this monitor at year-end is $210 per unit. Using LIFO flow assumption and the lower-of-cost-or-market rule, the ending inventory amounts to:

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A) B) C) D)

$46,000. $42,000. $37,000. $83,000.

97) Venus Wholesale Company started carrying a new product in December. Purchases and sales of this product during the month were: December 20 December 26 December 28

Purchased 120 units at $82 per unit. Sold 100 units. Purchased 120 units at $90 per unit.

Assuming the LIFO flow assumption is in use, the perpetual inventory records will indicate an ending inventory of this product of: A) B) C) D)

$11,640. $12,440. $12,640. $9,840.

98) Venus Wholesale Company started carrying a new product in December. Purchases and sales of this product during the month were: December 20 December 26 December 28

Purchased 100 units at $80 per unit. Sold 80 units. Purchased 100 units at $90 per unit.

Assuming the LIFO flow assumption is in use, the perpetual inventory records will indicate an ending inventory of this product of: A) B) C) D)

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$9,800. $10,600. $10,800. $8,000.

99) Venus Wholesale Company started carrying a new product in December. Purchases and sales of this product during the month were: December 20 December 26 December 28

Purchased 130 units at $83 per unit. Sold 120 units. Purchased 130 units at $90 per unit.

At year-end, Venus restates the carrying value of its inventory using periodic LIFO costing procedures. Under periodic costing procedures, the LIFO cost of the inventory is: A) B) C) D)

$11,690. $10,790. $12,530. $11,245.

100) Venus Wholesale Company started carrying a new product in December. Purchases and sales of this product during the month were: December 20 December 26 December 28

Purchased 100 units at $80 per unit. Sold 80 units. Purchased 100 units at $90 per unit.

At year-end, Venus restates the carrying value of its inventory using periodic LIFO costing procedures. Under periodic costing procedures, the LIFO cost of the inventory is: A) B) C) D)

101)

$9,800. $10,600. $10,800. $8,000.

The primary reason a physical inventory is taken is to:

A) Adjust the perpetual inventory record for unrecorded shrinkage losses. B) Ensure the periodic inventory record is valued correctly. C) Both ensure the periodic inventory record is being stored securely and that it is valued correctly. D) Ensure the perpetual inventory record is being stored in a secure manner.

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102) As a result of taking an annual physical inventory, it usually is necessary in a perpetual inventory system to make an entry: A) B) C) D)

103)

The write-down of inventory: A) B) C) D)

104)

Reducing assets and increasing the cost of goods sold. Reducing assets and increasing liabilities. Reducing the cost of goods sold. Increasing assets and increasing the cost of goods sold.

Only affects the balance sheet and not the income statement. Only affects the income statement and not the balance sheet. Affects both the income statement and the balance sheet. Affects neither the income statement nor the balance sheet.

Green Leaf Company had the following information available on December 31: Item

#Units

Cost

Wheelbarrows

100

Shovels Gloves Hoses

320 80 140

$ 32.10 14.00 8.60 11.00

Total Cost $ 3,210 4,480 688 1,540 $ 9,918

Market Value $ 33.00 12.00 9.40 10.50

Total Market Value $ 3,300 3,840 752 1,470 $ 9,362

Management applies the LCM rule on the basis of inventory category and includes wheelbarrows and hoses in the large implement category and shovels and gloves in the small implement category. What is the write-down required? A) B) C) D)

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$864. $556. $576. $710.

105)

Green Leaf Company had the following information available on December 31: Item

#Units

Cost

Wheelbarrows

100

Shovels Gloves Hoses

320 80 140

$ 32.10 14.00 8.60 11.00

Total Cost $ 3,210 4,480 688 1,540

Market Value $ 33.00 12.00 9.40 10.50

$ 9,918

Total Market Value $ 3,300 3,840 752 1,470 $ 9,362

Management applies the LCM rule on the basis of individual inventory items. What is the writedown required? A) B) C) D)

106)

$864. $556. $576. $710.

Green Leaf Company had the following information available on December 31: Item

#Units

Cost

Wheelbarrows

100

Shovels Gloves Hoses

320 80 140

$ 32.10 14.00 8.60 11.00

Total Cost $ 3,210 4,480 688 1,540 $ 9,918

Market Value $ 33.00 12.00 9.40 10.50

Total Market Value $ 3,300 3,840 752 1,470 $ 9,362

Management applies the LCM rule on the basis of the total inventory. What is the write-down required?

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A) B) C) D)

$864. $556. $576. $710.

107) The lower-of-cost-or-market rule may be applied by comparing the market value of the inventory to the cost of the inventory based on any of the following except: A) B) C) D)

108)

Individual inventory items. Major inventory categories. The entire inventory. Industry inventory standards.

The logic behind the lower-of-cost-or-market rule is: A) B) C) D)

Inventory gradually becomes obsolete. Inventory that is unsalable should be written down to zero (or its scrap value). An asset is not worth more than it would cost the owner to replace it. Inventory that is unsalable should be written down to its replacement cost.

109) Many companies state in their annual reports that inventory is shown at the lower of its cost or market value. This means that the inventory: A) B) C) D)

110)

Is obsolete. Has been written down to a carrying value below cost. Is shown at the lesser of cost or sales value. Is valued at current replacement cost or historical cost, whichever is less.

The lower-of-cost-or-market rule:

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A) B) C) D)

111)

Is used in conjunction with any inventory cost flow assumptions. Cannot be used if LIFO or FIFO is also used. Can be used in conjunction with LIFO, but not with FIFO. Can only be used with specific identification.

Goods in transit between the buyer and the seller belong to:

A) The seller. B) The buyer. C) The freight company. D) The answer depends upon whether the goods were shipped F.O.B. shipping point or F.O.B. destination.

112) In a periodic inventory system, recording a sale on account involves debiting which of the following accounts? A) B) C) D)

Only Accounts Receivable. Accounts Receivable and Inventory. Accounts Receivable and Cost of Goods Sold. Accounts Receivable, Cost of Goods Sold, and Inventory.

113) In a periodic inventory system, recording a sale on account involves crediting which of the following accounts? A) B) C) D)

114)

Only Sales. Sales and Inventory. Sales and Cost of Goods Sold. Sales, Inventory, and Cost of Goods Sold.

In a periodic inventory system, the cost of goods sold is determined as follows:

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A) Year-end inventory, plus purchases during the year, less the inventory at the beginning of the year. B) Net sales, less the balance in the Gross Profit account. C) Cost of goods available for sale during the year, less the ending inventory. D) A physical count is made of all items sold throughout the year, and a cost flow assumption is applied at year-end.

115) Harding Systems, Incorporated uses a periodic inventory system. The purchases of a particular product during the year are shown below: January 1 February 7 July 10 November 25

Beginning inventory Purchase Purchase Purchase

1,100 1,450 1,600 1,000

Total

5,150

units@ $7.25 units@ $7.50 units@ $ 8.00 units@ $ 8.50

$ 7,975 10,875 12,800 8,500 $ 40,150

At December 31 the ending inventory consisted of 1,500 units.Compute the cost of the ending inventory based on the LIFO method of inventory valuation. A) B) C) D)

$12,500 $27,650 $10,975 $29,175

116) Harding Systems, Incorporated uses a periodic inventory system. The purchases of a particular product during the year are shown below: January 1 February 7 July 10 November 25

Beginning inventory Purchase Purchase Purchase

1,100 1,450 1,600 1,000

Total

5,150

units@ $7.25 units@ $7.50 units@ $ 8.00 units@ $ 8.50

$ 7,975 10,875 12,800 8,500 $ 40,150

At December 31 the ending inventory consisted of 1,500 units.Compute the cost of goods sold for the current year based on the LIFO method of inventory valuation.

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A) B) C) D)

$12,500 $29,175 $10,975 $27,650

117) Harding Systems, Incorporated uses a periodic inventory system. The purchases of a particular product during the year are shown below: January 1 February 7 July 10 November 25

Beginning inventory Purchase Purchase Purchase

1,100 1,450 1,600 1,000

Total

5,150

units@ $7.25 units@ $7.50 units@ $ 8.00 units@ $ 8.50

$ 7,975 10,875 12,800 8,500 $ 40,150

At December 31 the ending inventory consisted of 1,500 units.Compute the cost of the ending inventory based on the FIFO method of inventory valuation. A) B) C) D)

$12,500 $29,175 $10,975 $27,650

118) Harding Systems, Incorporated uses a periodic inventory system. The purchases of a particular product during the year are shown below: January 1 February 7 July 10 November 25

Beginning inventory Purchase Purchase Purchase

1,100 1,450 1,600 1,000

Total

5,150

units@ $7.25 units@ $7.50 units@ $ 8.00 units@ $ 8.50

$ 7,975 10,875 12,800 8,500 $ 40,150

At December 31 the ending inventory consisted of 1,500 units.Compute the cost of goods sold for the current year based on the FIFO method of inventory valuation.

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A) B) C) D)

$12,500 $29,175 $10,975 $27,650

119) Harding Systems, Incorporated uses a periodic inventory system. The purchases of a particular product during the year are shown below: January 1 February 7 July 10 November 25

Beginning inventory Purchase Purchase Purchase

1,100 1,450 1,600 1,000

Total

5,150

units@ $7.25 units@ $7.50 units@ $ 8.00 units@ $ 8.50

$ 7,975 10,875 12,800 8,500 $ 40,150

At December 31 the ending inventory consisted of 1,500 units.Compute the cost of the ending inventory based on the average-cost method of inventory valuation. (Round your final answer to the nearest dollar value.) A) B) C) D)

$14,512 $11,694 $29,560 $28,450

120) Harding Systems, Incorporated uses a periodic inventory system. The purchases of a particular product during the year are shown below: January 1 February 7 July 10 November 25

Beginning inventory Purchase Purchase Purchase

1,100 1,450 1,600 1,000

Total

5,150

units@ $7.25 units@ $7.50 units@ $ 8.00 units@ $ 8.50

$ 7,975 10,875 12,800 8,500 $ 40,150

At December 31 the ending inventory consisted of 1,500 units.Compute the cost of goods sold for the current year based on the average-cost method of inventory valuation.

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A) B) C) D)

121)

$10,590 $11,694 $29,560 $28,456

If the ending inventory is overstated in the current year: A) B) C) D)

Net income will be understated in the current year. Next year's beginning inventory will also be overstated. Next year's net income will be overstated. Next year's beginning inventory will be understated.

122) If the beginning inventory of the current year and the ending inventory of the past year were overstated by the same amount: A) B) C) D)

123)

Retained earnings at the end of the current year would be correct. Retained earnings at the end of the current year would be overstated. Retained earnings at the end of the current year would be understated. Net income for the current year would be correct.

Which of the following will cause net income to be overstated for the following year? A) B) C) D)

The current year's ending inventory is understated. The current year's ending inventory is overstated. Next year's beginning inventory is overstated. Next year's ending inventory is understated.

124) If the inventory at the end of the current year is understated and the error is never caught, the effect is to:

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A) B) C) D)

Understate income this year and overstate income next year. Overstate income this year and understate income next year. Understate income this year with no effect on income next year. Overstate the cost of goods sold, but have no effect on net income.

125) The CPA firm auditing Capri Corporation found that net income had been overstated. Which of the following could be the cause? A) Failure to take advantage of purchase discounts by paying within the discount period. B) Overstatement of inventory at year-end. C) Use of the last-in, first-out (LIFO) method of valuing inventory in a period of rising prices. D) Failure to record payment of an account payable to a supplier on the last day of the year.

126)

If an error in valuing inventory occurs in one year: A) B) C) D)

It has no effect upon income in the following year. It has no effect upon the income statement, only on the balance sheet. It is self-correcting after two years. Retained earnings will be adversely affected until corrected.

127) On Saturday, June 30, BD Pool Supplies sold merchandise to E. Luang on account. The sales price was $5,700, and the cost of goods sold was $4,830. The sales revenue was recorded immediately, but the entry recording the cost of goods sold was dated Monday, July 2. As a result, net income for June was:

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A) B) C) D)

Overstated by $5,700. Overstated by $4,830. Overstated by $870. Not affected, but the net income for July is understated.

128) On Saturday, June 30, BD Pool Supplies sold merchandise to E. Luang on account. The sales price was $6,400, and the cost of goods sold was $5,300. The sales revenue was recorded immediately, but the entry recording the cost of goods sold was dated Monday, July 2. As a result, net income for June was: A) B) C) D)

129)

Gross profit rate is equal to: A) B) C) D)

130)

Overstated by $6,400. Overstated by $5,300. Overstated by $1,100. Not affected, but the net income for July is understated.

Net sales divided by gross profit. Gross sales divided by gross profit. Gross profit divided by net sales. Gross profit divided by gross sales.

Which of the following inventory valuation methods is only an estimate of actual costs? A) B) C) D)

Only the retail method. Only the gross profit method. Both retail and gross profit methods are only estimations. Neither the retail nor the gross profit methods are estimations.

131) Companies with periodic inventory systems often use techniques such as the gross profit method and the retail method to: Version 1

A) B) C) D)

132)

Prepare interim financial statements without taking a complete physical inventory. Increase gross profit. Value inventory at its sales price instead of its cost. Reduce taxable income during a period of rising prices.

The gross profit method of valuing inventory:

A) Is the most accurate of the commonly used methods. B) Is a satisfactory substitute for taking a physical inventory for annual financial statements. C) Assumes that the gross profit rate will remain the same for the current year as it has in the past year or so. D) Is not an acceptable method under GAAP.

133) For the last several years Conway Corporation has operated with a gross profit rate of 32%. On January 1 of the current year, the company had on hand inventory with a cost of $540,000. Purchases of merchandise during January amounted to $104,000, and sales for the month were $390,000. Using the gross profit method, what is the estimated inventory at January 31? A) B) C) D)

$390,000 $265,200 $124,800 $378,800

134) For the last several years Conway Corporation has operated with a gross profit rate of 40%. On January 1 of the current year, the company had on hand inventory with a cost of $600,000. Purchases of merchandise during January amounted to $150,000, and sales for the month were $360,000. Using the gross profit method, what is the estimated inventory at January 31?

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A) B) C) D)

$144,000 $216,000 $360,000 $534,000

135) During the month of January, Sundown Corporation had sales of $420,000 and a cost of goods available for sale of $840,000. The company consistently earns a gross profit rate of 41%. Using the gross profit method, the estimated inventory at January 31 amounts to: A) B) C) D)

$247,800. $592,200. $172,200. $667,800.

136) During the month of January, Sundown Corporation had sales of $300,000 and a cost of goods available for sale of $600,000. The company consistently earns a gross profit rate of 45%. Using the gross profit method, the estimated inventory at January 31 amounts to: A) B) C) D)

$135,000. $435,000. $165,000. $465,000.

137) Colonial uses the retail method to estimate its monthly cost of goods sold and month-end inventory. At August 31, the accounting records indicate the cost of goods available for sale during the month (beginning inventory plus purchases) totaled $270,000. These goods had been priced for resale at $675,000. Sales in August totaled $450,000. The estimated inventory at August 31 is:

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A) B) C) D)

$48,000. $90,000. $120,000. $270,000.

138) Garden World uses the retail method to estimate its monthly cost of goods sold and month-end inventory. At May 31, the accounting records indicate the cost of goods available for sale during the month (beginning inventory plus purchases) totaled $500,000. These goods had been priced for resale at $1,000,000. Sales in May totaled $400,000. The estimated inventory at May 31 is: A) B) C) D)

$500,000. $300,000. $200,000. $400,000.

139) Garden World uses the retail method to estimate its monthly cost of goods sold and month-end inventory. At May 31, the accounting records indicate the cost of goods available for sale during the month (beginning inventory plus purchases) totaled $540,000. These goods had been priced for resale at $900,000. Sales in May totaled $480,000. The estimated inventory at May 31 is: A) B) C) D)

$540,000. $252,000. $420,000. $288,000.

140) Midwest Office Products uses the retail method to estimate ending inventory in its monthly financial statements. The following information is available for the month ended May 31: Cost

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Retail

Sales

$ 300,000

Inventory, May 1 Net purchases

$ 137,400 $ 184,800

$ 198,000 $ 273,000

Goods available for sale

$ 322,200

$ 471,000

Determine the cost ratio that should be used in estimating the May 31 inventory using the retail method. (Round your final answer percentage to one decimal point) A) B) C) D)

63.8% 69.4% 66.0% 68.4%

141) Midwest Office Products uses the retail method to estimate ending inventory in its monthly financial statements. The following information is available for the month ended May 31: Cost Sales

Retail $ 300,000

Inventory, May 1 Net purchases

$ 137,400 $ 184,800

$ 198,000 $ 273,000

Goods available for sale

$ 322,200

$ 471,000

Estimate the cost of the May 31 inventory using the retail method. A) B) C) D)

$116,964 $137,400 $150,425 $204,000

142) Midwest Office Products uses the retail method to estimate ending inventory in its monthly financial statements. The following information is available for the month ended May 31: Cost

Version 1

Retail

Sales

$ 300,000

Inventory, May 1 Net purchases

$ 137,400 $ 184,800

$ 198,000 $ 273,000

Goods available for sale

$ 322,200

$ 471,000

Estimate the cost of goods sold for May using the retail method. (Round your final answer to the nearest dollar value.) A) B) C) D)

$116,964 $150,400 $205,236 $319,600

143) Soriano Company had net sales of $300,000 for the month (after returns and allowances of $1,500 and sales discounts of $3,250). Beginning inventory for the month was $60,000; purchases for the month were $175,000; and gross profit was 43%.What were the gross sales for the month? A) B) C) D)

$129,000 $171,000 $300,000 $304,750

144) Soriano Company had net sales of $300,000 for the month (after returns and allowances of $1,500 and sales discounts of $3,250). Beginning inventory for the month was $60,000; purchases for the month were $175,000; and gross profit was 43%.What were the goods available for sale for the month? A) B) C) D)

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$129,000 $171,000 $235,000 $304,750

145) Soriano Company had net sales of $300,000 for the month (after returns and allowances of $1,500 and sales discounts of $3,250). Beginning inventory for the month was $60,000; purchases for the month were $175,000; and gross profit was 43%.What was the gross profit for the month? A) B) C) D)

$129,000 $171,000 $235,000 $304,750

146) Soriano Company had net sales of $300,000 for the month (after returns and allowances of $1,500 and sales discounts of $3,250). Beginning inventory for the month was $60,000; purchases for the month were $175,000; and gross profit was 43%.What was the cost of goods sold for the month? A) B) C) D)

$129,000 $171,000 $235,000 $304,750

147) Soriano Company had net sales of $300,000 for the month (after returns and allowances of $1,500 and sales discounts of $3,250). Beginning inventory for the month was $60,000; purchases for the month were $175,000; and gross profit was 43%.What was the ending inventory for the month? A) B) C) D)

148)

$60,000 $64,000 $129,000 $175,000

A company with a liquid inventory will have:

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A) B) C) D)

A high inventory turnover and a high average number of days to sell inventory. A high inventory turnover and a low average number of days to sell inventory. A low inventory turnover and a high average number of days to sell inventory. A low inventory turnover and a low average number of days to sell inventory.

149) The inventory turnover rate provides an indication of how quickly the average quantity of inventory on hand: A) B) C) D)

Spoils. Sells. Increases. Converts into cash.

150) Busch, Incorporated is a successful company, but has a lower inventory turnover rate than the industry average. Of the following, the most likely explanation is that Busch: A) B) C) D)

Has a just-in-time inventory system. Uses LIFO (assume rising purchase costs). Offers its customers an unusually large selection of merchandise. Sells unusually popular items.

151) Short-term creditors are likely to view a higher-than-average inventory turnover rate as indicating that: A) B) C) D)

A company is in financial difficulty. The company is able to sell its inventory quickly. The company probably has an excessive amount of inventory. The company has a longer-than-average operating cycle.

152) Which of the following types of businesses would you expect to have the highest inventory turnover? Version 1

A) B) C) D)

An antique shop. An electronics store. A dairy store. A boat manufacturer.

153) During the current year, Carl Equipment Stores had net sales of $720 million, a cost of goods sold of $620 million, average accounts receivable of $82 million, and average inventory of $62 million.Carl Equipment's inventory turnover rate is: A) B) C) D)

1.2 times. 10.0 times. 12.0 times. 7.6 times.

154) During the current year, Carl Equipment Stores had net sales of $600 million, a cost of goods sold of $500 million, average accounts receivable of $75 million, and average inventory of $50 million.Carl Equipment's inventory turnover rate is: A) B) C) D)

6.7 times. 10 times. 12 times. 1.2 times.

155) During the current year, Carl Equipment Stores had net sales of $660 million, a cost of goods sold of $504 million, average accounts receivable of $76 million, and average inventory of $56 million.Assuming a 365-day year, the average number of days required for Carl Equipment to sell its inventory is: (Round your final answer to the nearest whole number.) A) B) C) D)

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41 days. 281 days. 55 days. 30 days.

156) During the current year, Carl Equipment Stores had net sales of $600 million, a cost of goods sold of $500 million, average accounts receivable of $75 million, and average inventory of $50 million.Assuming a 365-day year, the average number of days required for Carl Equipment to sell its inventory is: (Round your final answer to the nearest whole number.) A) B) C) D)

37 days. 73 days. 24 days. 304 days.

157) During the current year, Carlin Equipment Stores had net sales of $500 million, a cost of goods sold of $400 million, average accounts receivable of $60 million, and average inventory of $50 million.Carlin Equipment's inventory turnover rate is: A) B) C) D)

6.7 times. 8 times. 10 times. 1.25 times.

158) During the current year, Carlin Equipment Stores had net sales of $500 million, a cost of goods sold of $400 million, average accounts receivable of $60 million, and average inventory of $50 million.Assuming a 365-day year, the average number of days required for Carlin Equipment to sell its inventory is: (Round your final answer to the nearest whole number.) A) B) C) D)

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37 days. 46 days. 54 days. 292 days.

Answer Key Test name: Chapter 08 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) TRUE 4) FALSE 5) TRUE 6) TRUE 7) TRUE 8) FALSE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) FALSE 14) TRUE 15) FALSE 16) FALSE 17) TRUE 18) FALSE 19) FALSE 20) FALSE 21) FALSE 22) TRUE 23) TRUE 24) TRUE 25) TRUE 26) TRUE Version 1

27) TRUE 28) FALSE 29) FALSE 30) FALSE 31) FALSE 32) FALSE 33) C 34) B 35) B 36) D 37) C 38) A 39) D 40) B 41) A 42) D 43) C 44) B 45) C 46) C 47) D 48) B 49) D 50) C 51) C 52) B 53) A 54) A 55) D 56) A Version 1

57) A 58) A 59) A 60) A 61) D 62) A 63) D 64) B 65) A 66) C 67) A 68) A 69) B 70) B 71) C 72) C 73) D 74) C 75) B 76) C 77) B 78) B 79) A 80) D 81) A 82) C 83) C 84) C 85) C 86) C Version 1

87) B 88) B 89) B 90) B 91) A 92) A 93) C 94) C 95) C 96) C 97) B 98) B 99) A 100) A 101) A 102) A 103) C 104) C 105) D 106) B 107) D 108) C 109) D 110) A 111) D 112) A 113) A 114) C 115) C 116) B Version 1

117) A 118) D 119) B 120) D 121) B 122) A 123) A 124) A 125) B 126) C 127) B 128) B 129) C 130) C 131) A 132) C 133) D 134) D 135) B 136) B 137) B 138) B 139) B 140) D 141) A 142) C 143) D 144) C 145) A 146) B Version 1

147) B 148) B 149) B 150) C 151) B 152) C 153) B 154) B 155) A 156) A 157) B 158) B

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CHAPTER 9: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine technical accounting terms introduced in this chapter:Half-year conventionCapital expenditureMACRSRevenue expenditureStraight-lineGoodwillAccumulated depreciationResearch and developmentAccelerated depreciationRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or Answer "None" if the statement does not correctly describe any of the terms.

_______(a.) An expenditure that will benefit only the current accounting period. _______(b.) The accelerated depreciation system used in federal income tax returns for depreciable assets purchased after 1986. _______(c.) A policy that fractional-period depreciation on assets acquired or sold during the period should be computed to the nearest month. _______(d.) An intangible asset representing the present value of future earnings in excess of normal return on net identifiable assets. _______(e.) Expenditures that could lead to the introduction of new products, but which, according to the FASB, should be viewed as an expense when incurred. _______(f.) Depreciation methods that take less depreciation in the early years of an asset's useful life, and more depreciation in the later years. _______(g.) An account showing the portion of the cost of a plant asset that has been written off to date as depreciation expense.

2) New equipment was purchased by Hunter Corporation at a list price of $94,000, with credit terms of 2/10, n/30. Payment was made within the discount period and included $7,800 sales tax in addition to the net purchase price. The company also paid delivery charges of $940 and labor costs of $1,380 for installing the new equipment at the appropriate location. During installation, an inexperienced employee punctured several containers with a forklift, causing damage to the equipment. Cost to repair the damage was $1,960. Required: Compute the total cost of Hunter's equipment.

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3) The following expenditures are related to land, land improvements, and buildings, which were acquired on November 1, Year 1.Cost of real estate acquired for a new manufacturing plant $365,000The land is appraised for $262,800 and the building for $102,200.Real estate taxes paid by the purchaser $20,000Cost of removing a barn $8,500Architect's fees for updating building $6,750Attorney's fees for closing sale $12,500Grading land $3,500Paving parking lot $7,000Planting trees and shrubs $9,250Cost of repairs to building due to storm during construction $1,300Lights placed on driveway $750Fee to real estate broker $2,500Required: (A) Determine the cost of the land, the building and the improvements (Round to the nearest dollar.) (B) Prepare journal entries on December 31, Year 1, for the depreciation. Assuming the building will have a useful life of 20 years and no residual value and use the double-declining-balance method and the half-year convention. Assume a 5-year life, with zero residual value and use the straight- line method for the land improvements and the fractional-period depreciation computed to the nearest month. (Round to the nearest dollar.)

4) Prepare journal entries for the following:(A) On November 1, Year 1, purchased machinery for $93,600 with a $7,200 residual value and a six-year life by paying $14,400 down and the balance with a note payable. (B) Adjusting entry for depreciation for Year 1 using the straight-line method to the nearest month. (Ignore the adjusting entry for interest.) (C) On July 1, Year 2, sold the equipment for $81,600 cash and paid off the note payable. (Ignore the portion of the entry relating to the payment of interest.)

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Briefly explain the difference between a revenue expenditure and a capital expenditure.

6) In its financial statements, Flysafe Airlines has for many years depreciated its aircraft over an estimated useful life of 12 years. In preparing this year's financial statements, management decided to revise the estimate from 12 years to 15.Required: Briefly explain how this revision in estimated life is likely to affect this year's: (A) Net income. (B) Net cash flow. (C) Taxable income.

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7) Dynasty Company uses straight-line depreciation in its financial statements, with depreciation for a partial year rounded to the nearest full month.Required: On September 28, Year 1, Dynasty purchased equipment at a cost of $140,000. For financial reporting purposes, the useful life of this equipment was estimated at 5 years, with a $30,000 salvage value. Compute the depreciation expense relating to this equipment that Dynasty will recognize in its financial statements in each of the following years. If no depreciation will be recognized in a particular year, write zero.During the Year ended December 31:Year 1: $ _______ Year 2: $ _______ Year 3: $ _______ Year 4: $ _______ Year 5: $ _______ Year 6: $ _______

8) On September 5, Year 1, Apollo purchased equipment costing $40,000, with an estimated life of 6 years and an estimated salvage value of $4,000.Required: Compute the depreciation expense Apollo would recognize on this equipment in Year 1, assuming: (a) Straight-line depreciation with fractional periods $________ rounded to the nearest full month (b) 200%-declining-balance, using the half-year convention $________ (c)150%-declining-balance with fractional periods rounded to $________ the nearest full month

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9) On March 24, Year 1, Tastee Ice Cream Company purchased equipment costing $140,000, with an estimated life of 5 years and an estimated salvage value of $20,000.Required: Compute the depreciation expense Tastee would recognize on this equipment in Year 1, assuming: (a) Straight-line depreciation using the half-year convention $________ (b) 200% declining balance with fractional periods rounded to $________ the nearest full month. (c) 150%-declining-balance, using the half-year convention $________

10) On September 6, Year 1, East River Tug Company purchased a new tugboat for $400,000. The estimated life of the boat was 20 years, with an estimated residual value of $40,000.Required: Compute the depreciation on this tugboat in Year 1 and Year 2 using the following methods. Apply the half-year convention. (If necessary, round to the nearest dollar.)

(A) Straight-line (B) 200%-declining-balance (C) 150%-declining-balance

Year 1

Year 2

$________ $________ $________

11) On July 6, Year 1, Grayson purchased new machinery with an estimated useful life of 10 years. The cost of the equipment was $80,000, with a residual value of $8,000.Required: Compute the depreciation on this machinery in Year 1 and Year 2 using each of the following methods. Year 1

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Year 2

(A) 150%-declining-balance, using the halfyear convention (B) 200%-declining-balance, using the halfyear convention

$________

12) In Year 1, Amalfi, Incorporated purchased equipment with an estimated 10-year life for $42,600. The residual value was estimated at $9,900. Amalfi uses straight-line depreciation and applies the half-year convention. On April 18, Year 3, Amalfi closed one of its plants and sold this equipment for $33,600. Under these assumptions, compute the following for this equipment:(a) Depreciation expense in Year 1 (b) Depreciation expense in Year 2 (c) Depreciation expense in Year 3 (d) Book value at the date of sale in Year 3 (e) Gain (or loss) on the sale in Year 3

13) Dietz owned a delivery van with a book value of $2,000. It traded this old van for a new one that cost $16,000. The dealer allowed Dietz a trade-in allowance of $3,500 on the old van, and Dietz paid the remainder in cash.Required: Compute each of the following:(A) The amount of cash Dietz must pay to purchase the new van (B) The gain on the disposal of the old van to be reported in Dietz’s financial statements (C) The cost assigned to the new van

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14) Domino Incorporated uses straight-line depreciation with a half-year convention in its financial statements. On March 10, Year 1, Domino acquired a computer system at a cost of $98,800. Estimated useful life is six years, with residual value of $5,200.Required: (A) Complete the following schedule, showing depreciation expense Domino expects to recognize each year in the financial statements. Depreciation for the Years Ended 12/31: Year 1 $ Year 2 $ Year 3 $ Year 4 $ Year 5 $ Year 6 $ Year 7 $

(B) Assume Domino sells the computer system on October 3, Year 4, for $26,650.For financial statement purposes, compute the book value of the computer system at date of disposal and the gain or loss on disposal. (Indicate gain or loss.) Book value (date of sale) Gain or loss on disposal

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$________ $________

15) Four events pertaining to plant assets are described below: (a) Computed depreciation for use in the annual income tax return (a different method is used in the financial statements). (b) Made a year-end adjusting entry to record depreciation expense for financial reporting purposes. (c) Sold old equipment for cash at a price below its book value, but above its income tax basis. (d) Traded an old automobile in on a new one. The dealer granted a trade-in allowance on the old vehicle that was substantially above its book value and its tax basis. However, the trade-in allowance amounted to only a small portion of the price of the new car; most of the purchase price was paid in cash. Indicate the immediate effects of each of these events upon the financial measurements in the four column headings listed below.Required: Indicate the effects of each transaction on the financial statement items indicated by completing the table below using the code letters: I for increase, D for decrease, and NE for no effect. (Note: Indicate only the immediate effects of each transaction. Do not attempt to anticipate how changes in taxable income will affect future cash flows.) Transaction

(a) (b) (c) (d)

Current Assets

Net Income

Taxable Income

______ ______ ______ ______

Net Cash Flow (All Activities Combined) ______ ______ ______ ______

16) Explain why the amount of gain or loss resulting from the sale of a depreciable asset usually differs between the seller's financial statements and income tax return. In which of these accounting reports is the gain usually larger (or the loss smaller)? Explain your reasoning.

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17) The income of Greystone Incorporated during the last several years has averaged $765,000 annually. The company is now being offered for sale as a going concern. The value of Greystone's net identifiable assets (total assets minus all liabilities) at the present time is $4,675,000. One of several corporations interested in buying Greystone, offers to pay an amount equal to the value of the net identifiable assets and to assume all liabilities. In addition, this prospective buyer is willing to pay for goodwill an amount equal to net earnings in excess of 10% on net assets, expected to continue four years.Required: Compute the price that the investing corporation will offer for Greystone Incorporated.

18) Chopin Corporation has net assets (total assets minus total liabilities) valued at $880,000 and has earned an average net income of $132,000 per year for the past several years. Sands Company is negotiating the purchase of the company and has agreed to pay an amount equal to the value of the net identifiable assets, assume the liabilities, and pay a sum for goodwill equal to the earnings in excess of 12% on net assets, expected to continue for five years.Required: Compute the amount for goodwill Sands is including in its offer.

19) Cabot Corporation's balance sheet at December 31, Year 1, includes an asset entitled goodwill in the amount of $900,000.Required: (A) Briefly explain what is meant by the term goodwill. (B) Under what circumstances is goodwill recorded in the accounting records? (C) How would Cabot have determined the amount of goodwill that is recorded?

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20) Alert Industries has spent $5 billion over the last three years in developing a new drug labeled BJ13. FDA approval is expected by the end of the month, at which time the drug will be available for sale. None of Alert's competitors has a product similar to BJ13, and the medical community is anxiously awaiting availability of this drug. Although BJ13 promises to be a "wonder drug" with huge financial success, Alert's income statements for the last few years have shown substantial losses and Alert's balance sheet does not include product BJ13 among the assets of the business.Required: Explain why one of Alert's seemingly most valuable assets apparently has been omitted from the balance sheet, and why Alert's income statements for the past few years reported substantial losses.

21) Cana purchased the Stokes Mine for $60 million. The mine was estimated to contain 6 million tons of anthracite coal and to have a residual value of $12 million. During the first year of mining operations of the Stokes Mine, 800,000 tons of anthracite were mined of which 600,000 tons was sold. Compute the following: (a) Depletion recognized in the first year. $________ (b) Amount of the first year depletion recognized as cost of $________ goods sold.

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Answer Key Test name: Chapter 09 Test Bank (Problem Material) 1) (a) Revenue expenditure(b) MACRS(c) None(d) Goodwill(e) Research and development(f) None(g) Accumulated depreciation(c) The statement describes the alternative to the half-year convention.(f) Accelerated depreciation methods take more depreciation in the early years and less in later years. 2) $102,240The cost of a plant asset includes all expenditures that are reasonable and necessary for acquiring the asset and bringing it to the desired location and ready for use. However, only the reasonable and necessary costs are included in the cost of a plant asset.Cost = [$94,000 − ($94,000 × 2%)] + $7,800 + $940 + $1,380 = $102,240 3) (A) Land: $309,800 Building: $110,250 Land improvements: $17,000(B) Date Account Title December 31, Year Depreciation Expense - Building 1 Accumulated Depreciation

Depreciation Expense - Land Improvements Accumulated Depreciation

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Debit 5,513

Credit

5,513

567 567

A) The cost of a plant asset includes all expenditures that are reasonable and necessary for acquiring the asset and bringing it to the desired location and ready for use. However, only the reasonable and necessary costs are included in the cost of a plant asset. Cost of: Land = $262,800 + $20,000 + $8,500 + $12,500 + $3,500 + $2,500 = $309,800 Building = $102,200 + $6,750 + $1,300 = $110,250 Land improvements = $7,000 + $9,250 + $750 = $17,000 (B) Depreciation expense: Building = $110,250 × 2/20 × ½ = $5,513 Land Improvements = $17,000 × 2/60 = $567 4) Transaction (A)

(B)

Account Title Machinery

Debit 93,600

Cash

14,400

Note Payable

79,200

Depreciation Expense

2,400

Accumulated Depreciation (C)

Depreciation Expense

2,400 7,200

Accumulated Depreciation

7,200

Cash

81,600

Accumulated Depreciation

9,600

Loss on Sale

2,400

Equipment Note Payable

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Credit

93,600 79,200

Cash

79,200

Interest charges after the asset is ready for use are recorded as interest expense, not as part of the cost of the asset. 5) Capital expenditures are recorded as assets on the balance sheet and are depreciated over time, eventually becoming an expense on the income statement. Revenue expenditures are recorded as an expense on the income statement in the current period. 6) (A) By increasing the estimated useful life of depreciable assets, management reduces the amount of depreciation expense recognized for the current year. Therefore, this change in estimated useful life will increase the amount of net income reported for the current year. (B) The recognition of depreciation expense involves no immediate cash outlay. Therefore, changing the assumptions underlying the computation of depreciation expense has no effect upon cash flows of the current period. (C) The useful life used to depreciate assets in financial statements has no effect upon the depreciation reported for tax purposes or, therefore, upon taxable income. For tax purposes, Flysafe Airlines will continue to depreciate its aircraft over the stipulated Modified Accelerated Cost Recovery System (MACRS) recovery period.

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7) During the Year ended December 31: Year 1: $ 5,500 Year 2: $22,000 Year 3: $22,000 Year 4: $22,000 Year 5: $22,000 Year 6: $16,500During the Year ended December 31: Year 1: $110,000 × 1/5 × 3/12 = $ 5,500 Year 2: $110,000 × 1/5 = $22,000 Year 3: $110,000 × 1/5 = $22,000 Year 4: $110,000 × 1/5 = $22,000 Year 5: $110,000 × 1/5 = $22,000 Year 6: $110,000 × 1/5 × 9/12 = $16,500 8) (a) $2,000 (b) $6,667 (c) $3,333(a) $2,000 = [($40,000 − $4,000) × 1/6 × 4/12](b) $6,667 = ($40,000 × 1/3 × 1/2)(c) $3,333 = ($40,000 × 1.5/6 × 4/12) 9) (a) $12,000 (b) $42,000 (c) $21,000(a) ($140,000 − $20,000) ÷ 5 years × 1/2 = $12,000 (b) $140,000 × 40% × 9/12 = $42,000 (c) $140,000 × 30% × 1/2 = $21,000 10) Depreciation Expense

Year 1

Year 2

(A) Straight-line Year 1: [($400,000 − $40,000) ÷ 20 years × ½] Year 2: [($360,000) × 1 ÷ 20]

$ 9,000 $18,000

(B) 200% declining-balance

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Year 1: [($400,000 × 10% × ½]

$20,000

Year 2: [($400,000 − $20,000) × 10%] (C) 150%-declining-balance:

$38,000 $15,000

Year 1: [($400,000 × 7.5% × ½] Year 2: [($400,000 − $15,000) × 7.5%]

$28,875

11) (A) 150%-declining-balance, using the halfyear convention (B) 200% declining-balance, using the halfyear convention

Depreciation Expense (A) 150%-declining-balance, using the half-year convention: Year 1: [$80,000 × 15% × 1/2]

Year 1

Year 2

$6,000

$11,100

$8,000

$14,400

Year 1

$6,000

Year 2: [($80,000 − $6,000) × 15%] (B) 200% declining-balance, using the half-year convention: Year 1: [$80,000 × 20%) × 1/2]

Year 2

$11,100

$8,000

Year 2: [($80,000 − $8,000) × 20%]

$14,400

12) (a) $1,635 (b) $3,270 (c) $1,635 (d) $36,060 (e) $(2,460) (a) Depreciation expense in Year 1: [($42,600 − $9,900) ÷ 10 years × ½] (b) Depreciation expense in Year 2: ($32,700 ÷ 10 years)

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$ 1,635 $ 3,270

(c) Depreciation expense in Year 3: ($32,700 ÷ 10 years × ½) (d) Book value at the date of sale in Year 3: ($42,600 − $1,635 − $3,270 − $1,635) (e) Loss on the sale in Year 3: ($33,600 sales price − $36,060 book value)

$ 1,635 $ 36,060 $(2,460)

13) (A) $12,500 (B) $1,500 (C) $16,000(A) Amount of cash payment = $16,000 cost less $3,500 trade-in allowance = $12,500 (B) Gain on the disposal of the old van = $3,500 trade-in allowance less $2,000 book value = $1,500 (C) Cost assigned to the new van = Fair value or $12,500 cash payment + $3,500 trade-in allowance = $16,000 14) (A) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

$ 7,800 $15,600 $15,600 $15,600 $15,600 $15,600 $ 7,800

(B) (1) $52,000 (B) (2) $(25,350) (A) Depreciation for the Years Ended 12/31: Year 1 $ 7,800 ($93,600 × 1/6 × ½) Year 2 $15,600 ($93,600 × 1/6) Year 3 $15,600 ($93,600 × 1/6) Year 4 $15,600 ($93,600 × 1/6) Year 5 $15,600 ($93,600 × 1/6) Year 6 $15,600 ($93,600 × 1/6) Year 7 $ 7,800 ($93,600 × 1/6 × ½)

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Cost Accumulated depreciation $7,800 + $15,600 + $15,600 + $7,800 (for 1/2 year in Year 4) Book value, October 3, Year 4

$ 98,000 (46,800)

$ 52,000

(B)(2) Sales price Less book value Financial statement loss on disposal

$ 26,650 52,800 $ (25,350)

15) Transaction

(a) (b) (c) (d)

Current Assets

Net Income

Taxable Income

NE NE I D

NE D D I

D NE I NE

Net Cash Flow (All Activities Combined) NE NE I D

16) The gain or loss on disposal of a plant asset for financial reporting purposes is the difference between the sales price and the asset's book value. For tax purposes, the gain or loss is the difference between sales price and the asset's tax basis. Because different depreciation methods generally are used for financial reporting purposes and tax purposes, book value and tax basis often are different amounts. This, in turn, leads to different amounts of gain or loss upon disposal of the asset. Most companies use straight-line depreciation for financial reporting purposes and accelerated methods such as MACRS in their income tax returns. Thus, tax basis tends to be lower than book value, resulting in a larger gain (or smaller loss) being reported in the income tax return. 17) $5,865,000 Average earnings of Greystone Incorporated Normal earnings (10% × $4,675,000) Excess earnings Goodwill ($297,500 × 4) Net assets Price to be offered for Greystone, Incorporated

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$ 765,000 467,500 297,500 1,190,000 4,675,000 $ 5,865,000

18) $132,000 Average earnings Normal earnings [12% of net assets]

$ 132,000 105,600

Excess earnings

Goodwill ($26,400 × 5)

$ 132,000

26,400

19) (A) Goodwill represents an amount that a company paid to acquire certain favorable intangible attributes as part of an acquisition of another company. It represents the amount of the future expected earnings of a business in excess of the earnings normally realized in the industry. (B) Goodwill is recorded in the accounting records only when one company buys another company. (C) Cabot would have computed the amount of goodwill as the excess of the price that it paid to purchase another business over the fair value of the net identifiable net assets that were acquired. The term, net identifiable assets, means all assets except goodwill, minus liabilities. 20) Generally accepted accounting principles currently require that amounts spent for research and development be expensed as incurred. This would result in $5 billion of expenses for R&D over the last three years, which contributed to and may have been responsible for the substantial losses reported by Alert. Because amounts spent on R&D must be expensed, these amounts are not capitalized or reported as assets. In the case of firms heavily involved in R&D activities, there are frequently no dollar amounts, or very insignificant amounts, in the balance sheet representing these companies' most valuable assets. 21) (a) $6,400,000 (b) $4,800,000 (a) Depletion recognized in first year = [($60,000,000 − $12,000,000)/6,000,000 tons] × 800,000 tons = $6,400,000 (b) Cost of goods sold = $8 per ton × 600,000 tons = $4,800,000

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CHAPTER 9 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Incidental costs incurred in the purchase of land that are charged to Land Improvements will affect net income at some future time. ⊚ ⊚

true false

2) The term "plant assets" refers to long-lived assets acquired for use in business operations, rather than for resale to customers. ⊚ ⊚

true false

3) If a piece of equipment is dropped and damaged during installation, the cost of repairing the damage should be added to the cost of the equipment. ⊚ ⊚

Natural resources such as oil or minerals are categorized as intangible assets. ⊚ ⊚

true false

Sales tax on equipment is not part of the acquisition cost and should not be capitalized. ⊚ ⊚

true false

Land improvements are not subject to depreciation. ⊚ ⊚

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true false

To "capitalize" an expenditure means to charge it to an asset account. ⊚ ⊚

true false

A revenue expenditure is recorded in an expense account. ⊚ ⊚

true false

9) Charging an expenditure directly to an expense account is based on the assumption that the benefits of that expenditure have been used up in the current period. ⊚ ⊚

true false

10) It is an acceptable accounting practice to treat an expenditure that is not material in dollar amount as an expense of the current period even though the expenditure may benefit several periods. ⊚ ⊚

true false

11) The erroneous recording of a revenue expenditure as a capital expenditure will cause an overstatement of net income for the period. ⊚ ⊚

true false

12) Physical deterioration refers to the process of an asset becoming outdated as a result of the availability of improved, more efficient assets. ⊚ ⊚

13)

true false

Maintenance and fuel costs are types of revenue expenditures.

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⊚ ⊚

true false

14) A revenue expenditure is deducted from revenues in determining the net income for the period. ⊚ ⊚

15)

A capital expenditure is charged to owners' capital. ⊚ ⊚

16)

true false

Assets are shown in the balance sheet at their book value. ⊚ ⊚

true false

17) The journal entry to record depreciation expense consists of a debit to the asset being depreciated and a credit to Accumulated Depreciation. ⊚ ⊚

18)

The book value of an asset is equal to its cost plus its accumulated depreciation. ⊚ ⊚

19)

true false

Book value represents the cost of an asset that has already been allocated to expense. ⊚ ⊚

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true false

20) The half-year convention permits a company to take six months depreciation during the first year of an asset's life even if the asset was purchased on January 25th. ⊚ ⊚

true false

21) The formula for the double-declining balance method of computing depreciation expense is: Remaining book value times the straight-line rate. ⊚ ⊚

true false

22) The rule of consistency is violated when a company uses one method of depreciation for financial statements and another method of depreciation for tax purposes. ⊚ ⊚

true false

23) In the early years of an asset's life, straight-line depreciation will cause a company to report higher profits than would be reported with an accelerated depreciation method. ⊚ ⊚

true false

24) Just as there are depreciation methods to calculate the decline in market value of assets, there are appreciation methods to record the increase in market value of assets. ⊚ ⊚

true false

25) If an accelerated depreciation method is used for an asset with a useful life of five years, more depreciation expense will be recorded in Year Three than in Year Five. ⊚ ⊚

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true false

26) Under the half-year convention, six months' depreciation is recorded on an asset in the year of acquisition and in the year of retirement regardless of the month in which the asset is actually purchased or retired. ⊚ ⊚

27)

Once the estimated life is determined for a depreciable asset it can never be changed. ⊚ ⊚

28)

true false

Annual depreciation expense is increased when salvage values are small. ⊚ ⊚

true false

29) Most companies benefit by using accelerated depreciation methods for income tax purposes. ⊚ ⊚

true false

30) Straight-line is the most widely used depreciation method in financial statements, and MACRS is the most widely used method in federal income tax returns. ⊚ ⊚

true false

31) In the early years of an asset's life, an accelerated depreciation method results in a more conservative balance sheet amount for the asset and a more conservative net income amount. ⊚ ⊚

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true false

32) Estimating the useful life and residual value of an asset is the responsibility of the firm of independent accountants that audit the company. ⊚ ⊚

true false

33) Any rational, systematic method of depreciation is acceptable, as long as costs are allocated to expense in a reasonable manner. ⊚ ⊚

true false

34) Sum-of-the-years' digits is a decelerated method of depreciation which produces less depreciation expense in the early years of the asset's life and more expense in the later years. ⊚ ⊚

true false

35) Sum-of-the-years' digits is a popular depreciation method for small businesses due to its simplicity. ⊚ ⊚

true false

36) Material gains and losses from the disposal of plant and equipment are shown on the income statement as part of income from operations. ⊚ ⊚

true false

37) Ding Company traded in one of its automobiles for a newer model. This transaction may result in a gain or a loss being recorded on Ding's financial statements. ⊚ ⊚

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true false

38) Under international accounting standards, companies may revalue their plant and equipment rather than using historical cost throughout the assets' lives. ⊚ ⊚

39)

true false

The systematic write-off of intangible assets to expense is called depletion. ⊚ ⊚

true false

40) Goodwill is only recorded when the value of a company increases and not when it decreases in value. ⊚ ⊚

true false

41) U.S. GAAP requires a company to capitalize goodwill and adjust its value if subject to impairment. ⊚ ⊚

42)

true false

An oil reserve is depreciated because of physical deterioration or obsolescence. ⊚ ⊚

true false

43) A coal mine is regarded as an underground inventory of coal and is recorded as a current asset, Underground Coal Inventory, in the balance sheet. ⊚ ⊚

true false

44) Accumulated depletion is a contra-equity account and is recorded in the stockholders' equity section of the balance sheet.

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⊚ ⊚

true false

45) Amortization expense increases net income and reduces cash flows from investing activities. ⊚ ⊚

46)

true false

The write-down of an impaired asset is treated as a cash outflow from investing activities. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 47) Land is purchased for $215,000. Additional costs include a $15,000 fee to a broker, a survey fee of $2,400, $2,300 to construct a fence, and a legal fee of $9,600. What is the cost of the land? A) B) C) D)

$215,000 $241,900 $244,400 $242,000

48) Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land? A) B) C) D)

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$256,000 $271,300 $283,950 $282,200

49) Which of the following would not be considered as part of the cost of equipment recently purchased? A) B) C) D)

Sales tax Transportation charges Installation and setup charges The cost to repair damage incurred after dropping the equipment

50) Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account? A) Insurance coverage purchased by Armstrong to cover the computer during shipment from the manufacturer B) Wages paid to system programmers hired to prepare the new computer for use C) Replacement of several circuit boards damaged during installation D) Installation of new electrical power supplies required for the computer

51) Tomasa Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation: A) The purchase price should be apportioned among the Land, Land Improvement, and Building accounts. B) The entire purchase price should be debited to the Land account only. C) Land, Land Improvement, and Building accounts should each be credited for the respective appraisal value of each item. D) Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.

52) Which of the following assets is not subject to depreciation and does not decline in usefulness over time?

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A) B) C) D)

Patents Copyrights Land Coal mine

53) Harvard Company purchased equipment having an invoice price of $17,500. The terms of sale were 4/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $140 delivery charge, $210 installation charge, and $941 sales tax. The amount recorded as the cost of this equipment is: A) B) C) D)

$17,850. $18,791. $17,150. $18,091.

54) Harvard Company purchased equipment having an invoice price of $11,500. The terms of sale were 2/10, n/30, and Harvard paid within the discount period. In addition, Harvard paid a $160 delivery charge, $185 installation charge, and $931 sales tax. The amount recorded as the cost of this equipment is: A) B) C) D)

$11,845. $12,776. $11,615. $12,546.

55) Land and a warehouse were acquired for $820,000. What amounts should be recorded in the accounting records for the land and for the warehouse if an appraisal showed the estimated values to be $420,000 for the land and $700,000 for the warehouse? (Round intermediate percentage calculations to 1 decimal place.)

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A) B) C) D)

$420,000 for land; $820,000 for warehouse $307,500 for land; $512,500 for warehouse $420,000 for land; $700,000 for warehouse $120,000 for land; $700,000 for warehouse

56) Land and a warehouse were acquired for $890,000. What amounts should be recorded in the accounting records for the land and for the warehouse if an appraisal showed the estimated values to be $400,000 for the land and $700,000 for the warehouse? (Round intermediate percentage calculations to 1 decimal place.) A) B) C) D)

$400,000 for land; $490,000 for warehouse $323,960 for land; $566,040 for warehouse $400,000 for land; $700,000 for warehouse $190,000 for land; $700,000 for warehouse

57) Land is purchased for $456,000. Additional costs include a $30,300 fee to a broker, a survey fee of $3,400, $2,750 to construct a fence, and a legal fee of $12,500. What is the cost of the land? A) B) C) D)

$456,000 $486,300 $502,200 $504,950

58) Yale Company purchased equipment having an invoice price of $21,500. The terms of sale were 2/10, n/30, and Yale paid within the discount period. In addition, Yale paid a $320 delivery charge, $350 installation charge, and $1,183 sales tax. The amount recorded as the cost of this equipment is:

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A) B) C) D)

59)

$21,070. $21,500. $21,740. $22,923.

Which of the following is a capital expenditure?

A) Sales tax paid in conjunction with the purchase of office equipment B) Monthly rent of a delivery truck C) Monthly fuel costs for a truck owned by the company D) Small expenditures to acquire long-lived assets, such as $13 to purchase a wastebasket

60)

The cost of a new windshield wiper on a delivery vehicle would be classified as: A) B) C) D)

61)

Which of the following should not be treated as a revenue expenditure? A) B) C) D)

62)

A capital expenditure. A revenue expenditure. Part of the cost of goods sold. An unusual and infrequent expense.

Delivery costs on newly purchased equipment Annual fire insurance premiums on plant and equipment Repair to an elevator of a five-year-old building The purchase of a pencil sharpener for $10 used in an office

Which of the following is not a capital expenditure?

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A) B) C) D)

Advertising expenditures to introduce a new product line Sales tax paid in conjunction with the purchase of new machinery Installation of elevators to replace escalators An amount paid to acquire a patent with a remaining life of only three years

63) The application of the matching principle to depreciation of plant and equipment can best be described as: A) The matching of the book value of an asset with its market value. B) Offsetting the revenue of an accounting period with the estimated decline in market value of plant and equipment during the accounting period. C) Offsetting revenue of an accounting period with the portion of the cost of plant and equipment estimated to have been used up during the accounting period. D) The matching of the depreciation expense reported in the income statement for an accounting period with the accumulated depreciation reported in the balance sheet.

64)

Capital expenditures are recorded as: A) B) C) D)

65)

Revenue expenditures are recorded as: A) B) C) D)

66)

An expense. An asset. A liability. Income.

If an asset is determined to be impaired, it should be:

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A) B) C) D)

67)

Depreciated only using the straight-line method. Written up to its historical cost. Reclassified as a liability. Written down to its fair market value.

When straight-line depreciation is in use, the depreciation rate of an asset is equal to: A) B) C) D)

1 divided by the life of the asset. 1 divided by the cost of the asset. The cost of the asset divided by the life of the asset. The cost of the asset less its salvage value divided by the life of the asset.

68) If the 150% declining balance method is being used and an asset has a useful life of 20 years. What is the accelerated depreciation rate? A) B) C) D)

7.5%. 10%. 15%. 150%.

69) Machinery is purchased on May 15, Year 1, for $55,000 with a $5,000 salvage value and a five-year life. The half-year convention is followed. What method of depreciation will give the highest amount of depreciation expense in Year 2? A) B) C) D)

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Straight line Double-declining balance 150% declining balance Amount cannot be determined

70) Machinery is purchased on May 15, Year 1, for $50,000 with a $5,000 salvage value and a five-year life. The half-year convention is followed. What method of depreciation will give the highest amount of depreciation expense in Year 2? A) B) C) D)

Straight line Double-declining balance 150% declining balance Amount cannot be determined

71) When comparing the units-of-output method of depreciation with straight-line depreciation: A) The depreciation expense in the first year will always be greater under units-ofoutput method. B) The depreciation expense in the first year will always be less under the units-ofoutput method. C) The depreciation expense in the first year will always be the same under both the methods. D) The depreciation expense in the first year may be greater than, equal to, or less under the units-of-output method.

72)

The term "accumulated depreciation" as used in accounting is best defined as:

A) The portion of a plant asset recognized as expense since the asset was acquired. B) Funds (or cash) set aside to replace the asset being depreciated. C) Earnings retained in the business that will be used to purchase another asset when the present asset is depreciated. D) An expense of doing business.

73)

Which depreciation method is most commonly used among publicly owned corporations?

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A) B) C) D)

74)

Straight-line Double-declining balance Units-of-output All of the various depreciation methods are used equally

The book value of an asset in the plant and equipment category is: A) B) C) D)

The undepreciated cost of the asset. The current replacement cost of the asset. The original cost of the asset. The accumulated depreciation on the asset to date.

75) In the fixed-percentage-of-declining-balance depreciation method, the book value of the asset is multiplied by: A) B) C) D)

76)

An increasing depreciation rate. A constant depreciation rate. A decreasing depreciation rate. A rate that changes each year but is determined from a table.

Which of the following situations is impossible? A) B) C) D)

Book value is greater than residual value. Book value is equal to the residual value. Book value is less than residual value. Book value is less than the original cost.

77) Responsibility for selection of the depreciation methods used in financial reporting rests with:

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A) B) C) D)

78)

Company management. The FASB. The IRS. The CPA firm that audits the company's financial statements.

With respect to depreciation policies, the principle of consistency means:

A) A company should use the same depreciation methods in its financial statements that it uses in its income tax returns. B) A company should use the same depreciation methods as other companies in the same industry. C) A company should use the same depreciation method from year to year for a given plant asset. D) A company should use the same depreciation method in computing depreciation expense on all its assets.

79)

The book value of equipment: A) B) C) D)

Increases with the passage of time. Decreases with the passage of time. Remains the same with the passage of time. May increase or decrease depending upon the economy.

80) Which of the following statements is not correct with respect to an asset with a five-year life owned by a company that uses straight-line depreciation and the half-year convention? A) It will have the same depreciation expense in the first and last years. B) It will be depreciated over six accounting years. C) It will have a book value that exceeds its salvage value at the end of its economic life. D) It will have a smaller depreciation expense in Year 4 than it does in Year 2.

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81) The adjusting entries to record depreciation or amortization expense or to write down assets that have become impaired: A) B) C) D)

Reduce both net income and cash balances. Reduce net income, but have no direct effect on cash balances. Decrease cash balances, but have no direct effect upon net income. Affect neither net income nor cash balances.

82) On March 2, Year 1, Glen Industries purchased a fleet of automobiles at a cost of $460,000. The cars are to be depreciated by the straight-line method over five years with no salvage value. Glen uses the half-year convention to compute depreciation for fractional periods. The book value of the fleet of automobiles at December 31, Year 2, will be: A) B) C) D)

$414,000. $138,000. $368,000. $322,000.

83) On March 2, Year 1, Glen Industries purchased a fleet of automobiles at a cost of $550,000. The cars are to be depreciated by the straight-line method over five years with no salvage value. Glen uses the half-year convention to compute depreciation for fractional periods. The book value of the fleet of automobiles at December 31, Year 2, will be: A) B) C) D)

$165,000. $330,000. $495,000. $385,000.

84) On April 8, Year 1, Jupiter Corporation acquired equipment at a cost of $740,000. The equipment is to be depreciated by the straight-line method over six years with no provision for salvage value. Depreciation for fractional years is computed by rounding the ownership period to the nearest month. Depreciation expense recognized in Year 1 will be: (Do not round your intermediate computations.) Version 1

A) B) C) D)

$123,333. $82,222. $92,500. $61,667.

85) On April 8, Year 1, Jupiter Corporation acquired equipment at a cost of $480,000. The equipment is to be depreciated by the straight-line method over six years with no provision for salvage value. Depreciation for fractional years is computed by rounding the ownership period to the nearest month. Depreciation expense recognized in Year 1 will be: A) B) C) D)

$53,333. $66,667. $60,000. $80,000.

86) Machinery acquired new on January 1 at a cost of $210,000 was estimated to have a useful life of 12 years and a residual salvage value of $30,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after five years, that is, at the end of the eleventh year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be: A) B) C) D)

$18,000. $90,000. $30,000. $15,000.

87) Machinery acquired new on January 1 at a cost of $80,000 was estimated to have a useful life of 10 years and a residual salvage value of $20,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after three years, that is, at the end of the ninth year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be:

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A) B) C) D)

$8,000. $10,000. $13,000. $24,000.

88) On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $260,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting.Assume that in its financial statements, Victor uses straight-line depreciation and rounds depreciation for fractional years to the nearest whole month. Depreciation recognized on this equipment in Year 1 and Year 2 will be: A) B) C) D)

$60,000 in Year 1 and $60,000 in Year 2. $65,000 in Year 1 and $48,750 in Year 2. $20,000 in Year 1 and $60,000 in Year 2. $45,000 in Year 1 and $60,000 in Year 2.

89) On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting.Assume that in its financial statements, Victor uses straight-line depreciation and rounds depreciation for fractional years to the nearest whole month. Depreciation recognized on this equipment in Year 1 and Year 2 will be: A) B) C) D)

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$23,333 in Year 1 and $35,000 in Year 2. $40,000 in Year 1 and $30,000 in Year 2. $20,000 in Year 1 and $35,000 in Year 2. $26,250 in Year 1 and $35,000 in Year 2.

90) On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $500,000 with a residual value of $30,000 at the end of its estimated useful lifetime of 5 years. Victor uses a calendar year-end for financial reporting.Assume that in its financial statements, Victor uses straight-line depreciation and the half-year convention. Depreciation recognized on this equipment in Year 1 and Year 2 will be: A) B) C) D)

$100,000 in Year 1 and $80,000 in Year 2. $30,000 in Year 1 and $94,000 in Year 2. $47,000 in Year 1 and $94,000 in Year 2. $70,500 in Year 1 and $80,000 in Year 2.

91) On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting.Assume that in its financial statements, Victor uses straight-line depreciation and the half-year convention. Depreciation recognized on this equipment in Year 1 and Year 2 will be: A) B) C) D)

$40,000 in Year 1 and $30,000 in Year 2. $23,333 in Year 1 and $30,000 in Year 2. $17,500 in Year 1 and $35,000 in Year 2. $20,000 in Year 1 and $35,000 in Year 2.

92) On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $500,000 with a residual value of $30,000 at the end of its estimated useful lifetime of 5 years. Victor uses a calendar year-end for financial reporting.If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, Year 2 will be: A) B) C) D)

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$312,000. $359,000. $376,000. $312,500.

93) On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting.If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, Year 2 will be: A) B) C) D)

$90,000. $107,500. $106,667. $105,000.

94) On April 30, Year 1, Tilton Products purchased machinery for $154,000. The useful life of this machinery is estimated at 8 years, with an $10,000 residual value. Tilton uses a calendar year-end for financial reporting.Assume that in its financial statements, Tilton Products uses straight-line depreciation and the half-year convention. Depreciation expense recognized on this machinery in Year 1 and Year 2 will be: A) B) C) D)

$9,375 in Year 1 and $19,250 in Year 2. $10,250 in Year 1 and $20,500 in Year 2. $9,000 in Year 1 and $18,000 in Year 2. $19,250 in Year 1 and $9,625 in Year 2.

95) On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar yearend for financial reporting.Assume that in its financial statements, Tilton Products uses straightline depreciation and the half-year convention. Depreciation expense recognized on this machinery in Year 1 and Year 2 will be: A) B) C) D)

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$7,500 in Year 1 and $11,000 in Year 2. $6,000 in Year 1 and $12,000 in Year 2. $5,000 in Year 1 and $10,000 in Year 2. $5,500 in Year 1 and $11,000 in Year 2.

96) On April 30, Year 1, Tilton Products purchased machinery for $264,000. The useful life of this machinery is estimated at 8 years, with an $24,000 residual value. Tilton uses a calendar year-end for financial reporting.Assume that in its financial statements, Tilton Products uses straight-line depreciation and rounds depreciation for fractional years to the nearest month. Depreciation expense recognized on this machinery in Year 1 and Year 2 will be: A) B) C) D)

$16,000 in Year 1 and $30,000 in Year 2. $12,000 in Year 1 and $30,000 in Year 2. $20,000 in Year 1 and $30,000 in Year 2. $30,000 in Year 1 and $30,000 in Year 2.

97) On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar yearend for financial reporting.Assume that in its financial statements, Tilton Products uses straightline depreciation and rounds depreciation for fractional years to the nearest month. Depreciation expense recognized on this machinery in Year 1 and Year 2 will be: A) B) C) D)

$2,333 in Year 1 and $7,000 in Year 2. $5,833 in Year 1 and $10,000 in Year 2. $6,667 in Year 1 and $10,000 in Year 2. $10,000 in Year 1 and $10,000 in Year 2.

98) On April 30, Year 1, Tilton Products purchased machinery for $55,000. The useful life of this machinery is estimated at 8 years, with an $15,000 residual value. Tilton uses a calendar year-end for financial reporting.Assume that in its financial statements, Tilton Products uses the 200%-declining-balance method and the half-year convention. Depreciation expense in Year 1 and Year 2 will be: A) B) C) D)

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$6,875 in Year 1 and $12,031 in Year 2. $13,750 in Year 1 and $12,031 in Year 2. $13,750 in Year 1 and $10,313 in Year 2. $6,875 in Year 1 and $13,750 in Year 2.

99) On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar yearend for financial reporting.Assume that in its financial statements, Tilton Products uses the 200%-declining-balance method and the half-year convention. Depreciation expense in Year 1 and Year 2 will be: A) B) C) D)

$11,000 in Year 1 and $19,250 in Year 2. $22,000 in Year 1 and $12,571 in Year 2. $22,000 in Year 1 and $7,857 in Year 2. $11,000 in Year 1 and $22,000 in Year 2.

100) On April 30, Year 1, Tilton Products purchased machinery for $55,000. The useful life of this machinery is estimated at 8 years, with an $5,000 residual value. Tilton uses a calendar yearend for financial reporting.Assume that in its financial statements, Tilton Products uses the 150%-declining-balance method and the half-year convention. Depreciation expense in Year 1 and Year 2 will be: A) B) C) D)

$5,157 in Year 1 and $9,346 in Year 2. $10,313 in Year 1 and $9,346 in Year 2. $10,313 in Year 1 and $10,313 in Year 2. $9,375 in Year 1 and $8,555 in Year 2.

101) On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar yearend for financial reporting.Assume that in its financial statements, Tilton Products uses the 150%-declining-balance method and the half-year convention. Depreciation expense in Year 1 and Year 2 will be: A) B) C) D)

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$8,250 in Year 1 and $14,953 in Year 2. $16,500 in Year 1 and $12,964 in Year 2. $16,500 in Year 1 and $16,500 in Year 2. $15,000 in Year 1 and $11,786 in Year 2.

102) On April 30, Year 1, Tilton Products purchased machinery for $165,000. The useful life of this machinery is estimated at 8 years, with an $15,000 residual value. Tilton uses a calendar year-end for financial reporting.In Year 7, Tilton Products sells this machinery for $7,000. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $15,000. This sale results in: A) B) C) D)

A $8,000 loss in both the company's financial statements and its income tax return. No gain or loss in either the financial statements orthe income tax return. A $8,000 loss in the financial statements; a $8,000 gain in the income tax return. A $8,000 loss in the financial statements, but no gain or loss in the income tax

return.

103) On April 30, Year 1, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Tilton uses a calendar yearend for financial reporting.In Year 7, Tilton Products sells this machinery for $4,500. At the date of sale, the machinery had been depreciated by Tilton Products to its estimated residual value of $8,000. This sale results in: A) B) C) D)

A $3,500 loss in both the company's financial statements and its income tax return. No gain or loss in either the financial statements or the income tax return. A $3,500 loss in the financial statements; a $3,500 gain in the income tax return. A $3,500 loss in the financial statements, but no gain or loss in the income tax

return.

104)

An accelerated depreciation method:

A) Results in reporting higher earnings every year. B) Depreciates an asset over a shorter life than does the straight-line method. C) Recognizes more depreciation expense in the early years of an asset's useful life and less in the later years. D) Is required for assets that become technologically obsolete before they physically wear out.

105)

Accelerated depreciation methods are used primarily in:

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A) B) C) D)

106)

Income tax returns. The financial statements of small businesses. The financial statements of publicly owned corporations. Companies with computer-based accounting systems.

For depreciable property other than real estate, MACRS is based upon:

A) The declining-balance method. B) The straight-line method. C) A 10-year recovery period. D) The depreciation method and recovery period used by the company in its financial statements.

107)

Which of the following statements about MACRS is not correct?

A) MACRS is the only accelerated depreciation method that may be used on newly acquired assets for federal income tax purposes. B) The method permits "depreciating" the asset to a tax basis of $0 over a specified recovery period. C) If a company uses MACRS in its income tax returns, it also must use MACRS in its financial statements. D) Most businesses would benefit from using MACRS rather than straight-line depreciation in their income tax returns.

108) The gain or loss on the disposal of a depreciable asset reported in financial statements often differs from that reported for income tax purposes. The principal reason for the difference is:

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A) The cost of the asset is different for financial reporting and income tax purposes. B) The sales price of the asset is different for financial reporting and income tax purposes. C) Different depreciation methods have been used in financial statements and in income tax returns. D) The company has made an error because the same amount of gain or loss should appear in the income tax return as in the financial statements.

109)

For the financial statements of publicly traded companies, MACRS: A) B) C) D)

is recommended. is required. is optional. is not considered to be in conformity with GAAP.

110) An asset that costs $22,000 and has accumulated depreciation of $7,500 is sold for $13,200. What amount of gain or loss will be recognized when the asset is sold? A) B) C) D)

A gain of $1,300. A loss of $1,300. A loss of $8,800. A gain of $8,800.

111) An asset that costs $97,600 and has accumulated depreciation of $82,000 is sold for $18,000. What amount of gain or loss will be recognized when the asset is sold? A) B) C) D)

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A gain of $15,600. A loss of $15,600. A loss of $2,400. A gain of $2,400.

112) An asset that costs $14,400 and has accumulated depreciation of $8,000 is sold for $5,600. What amount of gain or loss will be recognized when the asset is sold? A) B) C) D)

A gain of $800. A loss of $800. A loss of $2,400. A gain of $2,400.

113) An asset that costs $28,800 and has accumulated depreciation of $6,000 is sold for $21,600. What amount of gain or loss will be recognized when the asset is sold? A) B) C) D)

A gain of $1,200. A loss of $1,200. A loss of $7,200. A gain of $7,200.

114) An asset that costs $18,800 and has accumulated depreciation of $6,000 is sold for $11,600. What amount of gain or loss will be recognized when the asset is sold? A) B) C) D)

A gain of $1,200. A loss of $1,200. A loss of $7,200. A gain of $7,200.

115) When a depreciable asset is sold at a price equal to its book value, a journal entry would include: A) B) C) D)

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A credit to the asset account for its book value. A debit to accumulated depreciation. A credit to accumulated depreciation. A credit to cash.

116)

A gain is recognized on the disposal of plant assets when: A) B) C) D)

117)

The sales price is greater than the residual value but less than the book value. The sales price is less than both the book value and the residual value. The sales price is greater than the book value and greater than the residual value. The sales price is greater than the book value and less than the residual value.

The gain on the disposal of equipment is recognized when: A) B) C) D)

The book value of the equipment is greater than the value received. The book value of the equipment is less than the value received. A salvage value exists. A gain should not be recognized on the disposal of an asset.

118) For financial reporting purposes, the gain or loss on the sale of a plant asset is determined by comparing the asset's: A) B) C) D)

cost with its book value. sales price with its book value. tax basis with its book value. sales price with its tax basis.

119) Clark Imports sold a depreciable plant asset for cash of $67,000. The accumulated depreciation amounted to $85,000, and a loss of $3,600 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: A) B) C) D)

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$81,400. $88,600. $148,400. $155,600.

120) Clark Imports sold a depreciable plant asset for cash of $35,000. The accumulated depreciation amounted to $70,000, and a loss of $5,000 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: A) B) C) D)

$65,000. $75,000. $100,000. $110,000.

121) Mayer Instrumentation sold a depreciable asset for cash of $320,000. The original cost of the asset was $1,240,000. Mayer recognized a gain of $27,000 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale? A) B) C) D)

$947,000. $293,000. $1,213,000. $974,000.

122) Mayer Instrumentation sold a depreciable asset for cash of $300,000. The original cost of the asset was $1,200,000. Mayer recognized a gain of $45,000 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale? A) B) C) D)

$945,000. $255,000. $1,155,000. $990,000.

123) Suffolk Associates sold office furniture for cash of $67,000. The accumulated depreciation at the date of sale amounted to $46,000, and a gain of $20,000 was recognized on the sale. The original cost of the asset must have been:

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A) B) C) D)

$66,000. $93,000. $26,000. $87,000.

124) Suffolk Associates sold office furniture for cash of $42,000. The accumulated depreciation at the date of sale amounted to $38,000, and a gain of $18,000 was recognized on the sale. The original cost of the asset must have been: A) B) C) D)

$56,000. $62,000. $84,000. $59,000.

125) Lewis Imports sold a depreciable plant asset for cash of $135,000. The accumulated depreciation amounted to $170,000, and a loss of $15,000 was recognized on the sale. Under these circumstances, the original cost of the asset must have been: A) B) C) D)

$120,000. $155,000. $185,000. $320,000.

126) Cranston Instrumentation sold a depreciable asset for cash of $150,000. The original cost of the asset was $600,000. Cranston recognized a gain of $22,500 on the sale. What was the amount of accumulated depreciation on the asset at the time of its sale? A) B) C) D)

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$472,500 $127,500 $577,500 $495,000

127) Gloucester Associates sold office equipment for cash of $142,000. The accumulated depreciation at date of sale amounted to $138,000, and a gain of $18,000 was recognized on the sale. The original cost of the asset must have been: A) B) C) D)

128)

The entry to record amortization on a copyright would include: A) B) C) D)

129)

$260,000. $262,000. $280,000. $156,000.

A debit to amortization expense. A debit to accumulated amortization. A debit to copyright. A credit to amortization expense.

Coca-Cola's famous name printed in distinctive typeface is an example of: A) B) C) D)

A trademark. A patent. A copyright. Goodwill.

130) The fair market value of Lewis Company's net identifiable assets is $5,000,000. Martin Corporation purchases Lewis' entire business for $5,800,000. Which of the following statements is not correct?

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A) Martin Corporation paid $800,000 for goodwill generated by Lewis Company. B) Martin feels that Lewis Company has the ability to generate earnings in excess of a normal return on net identifiable assets. C) Martin will record amortization expense over a period not to exceed 40 years. D) Martin Corporation will record $800,000 to goodwill, an intangible asset, which will be reported in its balance sheet.

131)

The legal life of most patents is: A) B) C) D)

132)

The term net identifiable assets means: A) B) C) D)

133)

All assets except goodwill, minus all liabilities. All assets except goodwill, plus all liabilities. All assets except intangibles, minus all liabilities. All fixed assets less liabilities.

All of the following may be considered intangible assets except: A) B) C) D)

134)

5 years. 20 years. 40 years. 50 years.

Accounts receivable. Copyrights. Franchises. Goodwill.

International standards require that goodwill:

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A) Be capitalized and amortized over 20 years or less. B) Be capitalized and amortized over 40 years or less. C) Be capitalized and reviewed annually and its value should be adjusted if subject to impairment. D) Be expensed immediately.

135)

Which of the following would not be amortized? A) B) C) D)

136)

Goodwill. Copyright. Franchise fee. Patent.

Intangible assets: A) B) C) D)

Lack physical properties. Cannot be sold. Have been depreciated below their estimated salvage values. Cannot be specifically identified.

137) The inclusion of the intangible asset goodwill in the financial statements of a company indicates: A) That the company has a favorable reputation with its customers. B) A monopoly position in the industry or superior management. C) An unbroken record of annual earnings and dividends. D) That the company has purchased a going business at a price in excess of the fair market value of the net identifiable assets.

138) Expenditures for research and development intended to lead to new products of commercial value: Version 1

A) Should be recorded as intangible assets and amortized during the years in which benefits are expected. B) Should be charged to expense when incurred. C) Should be capitalized only if patents are expected to be granted. D) Should be classified as deferred charges.

139) The basic purpose of the matching principle is to allocate the cost of an asset to expense over the years in which the asset contributes to revenue. Current accounting practice does not strictly apply this principle to expenditures for: A) B) C) D)

Natural resources. Research and development. Trademarks. Equipment.

140) Total stockholders' equity of Tucker Company is $4,000,000. The fair market value of Tucker 's net identifiable assets (assets less liabilities) is $5,000,000. Empire Corporation makes an offer to purchase Tucker 's entire business for $5,800,000. In this situation: A) Tucker Company should report goodwill of $800,000 in its balance sheet. B) Tucker Company should report goodwill of $1,800,000 in its balance sheet. C) Empire Corporation is willing to pay $1,800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized. D) Empire Corporation is willing to pay $800,000 for goodwill generated by Tucker, and Empire will report this goodwill in its balance sheet if the purchase is finalized.

141) Early in the current year, Tokay Company purchased the Silverton Mine at a cost of $35,280,000. The mine was estimated to contain 320,000 tons of ore and to have a residual value of $2,000,000 after mining operations are completed. During the year, 305,000 tons of ore were removed from the mine. At year-end, the book value of the mine (cost minus accumulated depletion) is:

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A) B) C) D)

$33,280,000. $3,560,000. $31,720,000. $31,280,000.

142) Early in the current year, Tokay Company purchased the Silverton Mine at a cost of $20,000,000. The mine was estimated to contain 200,000 tons of ore and to have a residual value of $5,000,000 after mining operations are completed. During the year, 105,000 tons of ore were removed from the mine. At year-end, the book value of the mine (cost minus accumulated depletion) is: A) B) C) D)

$15,000,000. $12,125,000. $7,875,000. $9,500,000.

143) In February Year 1, Brilliant Industries purchased the Topaz Mine at a cost of $10,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual value of $500,000 after mining operations are completed. During Year 1, 50,000 carats of stone were removed from the mine and sold. In this situation: A) The book value of the mine is $9,000,000 at the end of Year 1. B) The amount of depletion deducted from revenue during Year 1 is $950,000. C) The amount of depletion deducted from revenue during Year 1 is $1,000,000. D) The mine is classified as an intangible asset and amortized over a period not to exceed 40 years.

144) Early in the current year, Amazon Company purchased the Rio Silver Mine at a cost of $30,000,000. The mine was estimated to contain 400,000 tons of ore and to have a residual value of $7,500,000 after mining operations are completed. During the year, 115,000 tons of ore were removed from the mine. At year-end, the book value of the mine is:

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A) B) C) D)

$22,500,000. $6,468,750. $23,531,250. $30,000,000.

145) In February Year 1, Gemstone Industries purchased the Opal Mine at a cost of $20,000,000. The mine is estimated to contain 500,000 carats of stone and to have a residual value of $1,000,000 after mining operations are completed. During Year 1, 50,000 carats of stone were removed from the mine and sold. In this situation: A) The book value of the mine is $19,000,000 at the end of Year 1. B) The amount of depletion deducted from revenue during Year 1 is $1,900,000. C) The amount of depletion deducted from revenue during Year 1 is $1,000,000. D) The mine is classified as an intangible asset and amortized over a period not to exceed 40 years.

146) Wilbur Company purchased $10,000 of equipment on December 20, Year 1 on terms 2/15, net 30. Wilbur paid for the equipment on the 15th day following purchase and took advantage of the discount. Which of the following statements is correct? A) Wilbur will record a cash outflow from investing activities of $10,000 in its Year 1 financial statements. B) Wilbur will record a cash outflow from investing activities of $9,800 in its Year 1 financial statements. C) Wilbur will record a cash outflow from investing activities of $10,000 in its Year 2 financial statements. D) Wilbur will record a cash outflow from investing activities of $9,800 in its Year 2 financial statements.

147) Wilbur Company purchased $10,000 of equipment on January 20, Year 1. Wilbur uses the straight-line method to depreciate the equipment. The equipment has a 5-year useful life with no salvage value. Which of the following statements is correct?

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A) Wilbur will record a cash inflow from operating activities of $2,000 in its Year 2 financial statements. B) Wilbur will record a cash outflow from operating activities of $2,000 in its Year 2 financial statements. C) Wilbur will record a cash outflow from investing activities of $2,000 in its Year 2 financial statements. D) Wilbur will record no cash flows related to this asset on its Year 2 statement of cash flows.

148) Wanda Company sold an asset for $10,000 on September 6, Year 1. The historical cost of the asset was $22,000, and the asset's accumulated depreciation at the date of sale was $14,500. Which of the following statements is correct? A) Wanda will record a cash inflow from operating activities of $10,000 in its Year 1 financial statements. B) Wanda will record a cash inflow from investing activities of $10,000 in its Year 1 financial statements. C) Wanda will record a cash inflow from investing activities of $2,500 in its Year 1 financial statements. D) Wanda will record no cash flows related to this asset on its Year 1 statement of cash flows.

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Answer Key Test name: Chapter 09 Test Bank - Algorithmic and Static 1) TRUE 2) TRUE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) TRUE 8) TRUE 9) TRUE 10) TRUE 11) TRUE 12) FALSE 13) TRUE 14) TRUE 15) FALSE 16) TRUE 17) FALSE 18) FALSE 19) FALSE 20) TRUE 21) FALSE 22) FALSE 23) TRUE 24) FALSE 25) TRUE 26) TRUE Version 1

27) FALSE 28) TRUE 29) TRUE 30) TRUE 31) TRUE 32) FALSE 33) TRUE 34) FALSE 35) FALSE 36) FALSE 37) TRUE 38) TRUE 39) FALSE 40) FALSE 41) TRUE 42) FALSE 43) FALSE 44) FALSE 45) FALSE 46) FALSE 47) D 48) D 49) D 50) C 51) A 52) C 53) D 54) D 55) B 56) B Version 1

57) C 58) D 59) A 60) B 61) A 62) A 63) C 64) B 65) A 66) D 67) A 68) A 69) B 70) B 71) D 72) A 73) A 74) A 75) B 76) C 77) A 78) C 79) B 80) D 81) B 82) D 83) D 84) C 85) C 86) A Version 1

87) A 88) D 89) D 90) C 91) C 92) B 93) B 94) C 95) C 96) C 97) C 98) A 99) A 100) A 101) A 102) A 103) A 104) C 105) A 106) A 107) C 108) C 109) D 110) B 111) D 112) B 113) B 114) B 115) B 116) C Version 1

117) B 118) B 119) D 120) D 121) A 122) A 123) B 124) B 125) D 126) A 127) B 128) A 129) A 130) C 131) B 132) A 133) A 134) C 135) A 136) A 137) D 138) B 139) B 140) D 141) B 142) B 143) B 144) C 145) B 146) D Version 1

147) D 148) B

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CHAPTER 10: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) On September 1, Year 1, Charles Associates borrowed $600,000 from Diana Credit Union and signed a 9% one-year note payable with all interest and principal due at maturity.Required: (A) Compute the amount Charles must pay on September 1, Year 2, when the note matures. (B) Compute the interest expense that Charles will recognize on this note in Year 2. (C) Determine Charles Associates' liability to the credit union at December 31, Year 1. (D) In the space provided below, give the adjusting entry made by Charles Associates on December 31, Year 1, with respect to this note. (No explanation is needed.) December 31

General Journal

Debit

Credit

2) On September 1, Year 1, George Hamby borrowed $100,000 from The Actors' Credit Union and signed a 6% one-year note payable with all interest and principal due at maturity. The interest on this loan is stated separately.(A) Compute the amount that Hamby must pay on September 1, Year 2, when the note matures. (B) Compute the amount of interest expense that Hamby will recognize on this note in Year 2. (C) Determine George Hamby’s overall liability for this loan at December 31, Year 1. (D) In the space provided, give the adjusting entry made by George Hamby on December 31, Year 1, with respect to this note. (No explanation is needed.) December 31

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General Journal

Debit

Credit

3) Five events relating to liabilities are described below:A. Recorded a bi-weekly payroll, including the issuance of paychecks to employees. Amounts withheld from employees' pay and payroll taxes will be forwarded to appropriate agencies in the near future. (Ignore post-retirement costs.) B. Made a monthly payment on a 12-month installment note payable, including interest and a partial repayment of the principal amount. C. Shortly before the maturity date of a six-month bank loan, made arrangements with the bank to refinance the loan on a long-term basis. D. Made an adjusting entry to record accrued interest payable on a 2-year bank loan. (Interest is paid quarterly.) E. Made a year-end adjusting entry to amortize a portion of the discount on long-term bonds payable.Required: Indicate the immediate effects of each transaction or adjusting entry upon the financial measurements in the five column headings listed below. Transaction

Current Liabilities

Long-Term Liabilities

Net Income

Net Cash Flow (All Activities Combined)

A B C D E

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Shown below is a summary of the annual payroll data of Revere Ironworks:

Wages and salaried expense (gross pay)

$1,225,000

Amounts withheld from employees’ pay: Federal and State Withholding taxes

$65,000

Social Security and Medicare

50,000

115,000

Payroll taxes expense: Social Security and Medicare

$50,000

Unemployment taxes

12,000

62,000

Workers’ compensation premiums

45,000

Group health insurance premiums (paid by employer) Contributions to employees pension plan (paid by employer and fully funded) Cost of other postretirement benefits:

106,000 45,000

Funded

$20,000

Unfunded

35,000

55,000

Required: (A) Compute Revere's total payroll-related expense for the year. (B) Compute the company's cash outlays during the year for payroll-related expenses. (Assume short-term obligations such as insurance premiums and payroll taxes have been paid.) (C) Compute the annual take-home pay of Revere's employees. (D) (1) How were the costs of postretirement benefits determined? (2) Which of these amounts results in a liability to Revere Ironworks, and when will this liability be paid? (3) Will the amount of the payments be more or less than the amount now shown as a liability? Explain.

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5) On October 31, Year 1, Seldon Company incurs a 30-year $600,000 mortgage liability in conjunction with the purchase of a motel. This mortgage is payable in equal monthly installments of $6,485, which include interest computed at an annual rate of 12%. The first monthly payment is made on November 30, Year 1. This mortgage is fully amortizing over 360 months.Required: (A) Complete the amortization table for the first two payments by entering the correct dollar amounts in the blank spaces provided. (Round your calculations to the nearest whole number.) Payment Date Issuance November 30 December 31

Monthly Payment — $6,485 $6,485

Interest Expense — $______ $______

Repayment of Principal — $______ $______

Unpaid Balance $600,000 $______ $______

(B) With respect to this mortgage, Seldon's Year 1 income statement includes interest expense of $ ________, and Seldon's balance sheet at December 31, Year 1, includes a total liability for this mortgage of ________. (Do not separate into current and long-term portions.) (C) The aggregate monthly cash payments Seldon will make over the 30-year life of the mortgage amount to $ ________. (D) Over the 30-year life of the mortgage, the amount Seldon will pay for interest amounts to $ ________.

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6) On October 31, Year 1, Ronald signed a 2-year installment note in the amount of $50,000 in conjunction with the purchase of equipment. This note is payable in equal monthly installments of $2,354, which include interest computed at an annual rate of 12%. The first monthly payment is made on November 30, Year 1. This note is fully amortizing over 24 months.Required: (A) Complete the amortization table for the first two payments by entering the correct dollar amounts in the blank spaces provided. (Round your calculations to the nearest whole number.) Payment Date Issuance November 30, Year 1 December 31, Year 1

Monthly Payment — $2,354 $2,354

Interest Expense — $______ $______

Repayment of Principal — $______ $______

Unpaid Balance $50,000 $______ $______

(B) With respect to this note, Ronald's Year 1 income statement includes interest expense of $ ________ and Ronald's balance sheet at December 31, Year 1, includes a total liability for this note payable of ________. (Do not separate into current and long-term portions.) (C) The aggregate monthly cash payments Ronald will make over the 2-year life of the note payable amount to $ ________. (D) Over the 2-year life of the note, the amount Ronald will pay for interest amounts to $ ________.

7) When Sue Meadow purchased a home, she signed a $150,000, 12%, fully amortizing mortgage note, payable at $1,543 per month. After making the first monthly payment, Meadow received a notice from the bank stating that $1,500 of the payment had applied to interest, and only $43 reduced the principal amount of the loan. Meadow does not understand how this loan is fully amortizing over a period of 30 years. She computes that at $43 per month, it will take approximately 3,488 months (or 290 years) to repay this loan.Required: Evaluate Meadow's analysis.

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8) The LBB Company recently took a mortgage on a property for $100,000. The interest is 12% and the monthly payment is $1,020.Required: Complete the first four months of the following amortization table. (Round your calculations to two decimal places.) Payment Number

Payment

Interest Expense

Principal Reduction

Balance $100,000.00

1 2 3 4

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9) On April 1, Year 1, Olsen Products, Incorporated issued at par $25 million of 10%, 10year bonds payable. Interest is payable semiannually each April 1 and October 1.Required: (A) Calculate the amount of cash that will be paid to bondholders for interest during Year 1? (B) Prepare the adjusting entry necessary at December 31, Year 1 (if any), regarding this bond issue. (C) Calculate the amount of interest expense on this bond issue reported in Olsen Products' Year 1 income statement. (D) Determine the amount of the (1) bonds payable and (2) bond interest payable that will be reported Olsen Products' balance sheet at December 31, Year 1. (E) Prepare the journal entry made by Olsen Products on April 1, Year 2, to record the semiannual payment of interest to bondholders.

10) Several years ago, Clear-Air Systems issued $100 million of 30-year, 8% bonds payable at a small premium. Since the bonds were issued, Clear-Air's financial strength and credit rating have actually improved, but today the bonds are trading among investors at a price of 98.Required: (A) Explain the most likely reason why the market price of these bonds has declined, even though Clear-Air‘s credit rating has improved. (B) How will the drop in the market value of these bonds be reported (if at all) in Clear-Air's income statements and balance sheets? Explain.

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11) On March 1, Year 1, Hubbard Company issued at a price of 100 $20 million of 8%, 25year bonds payable. Interest is payable semiannually each March 1 and September 1.Required: (A) What is the amount of cash paid to bondholders for interest during Year 1? (B) Prepare the adjusting entry necessary at December 31, year 1 (if any), regarding this bond issue. (C) What is the amount of interest expense on this bond issue reported in Hubbard's Year 1 income statement is? (D) Determine the amount of the (1) bonds payable and (2) bond interest payable that will be reported Hubbard’s balance sheet at December 31, Year 1. (E) Prepare the journal entry made by Hubbard on March 1, Year 2, to record the semiannual payment of interest to bondholders. (Round your calculations to the nearest whole number)

12) Barney Corporation received authorization on December 31, Year 1, to issue $2,500,000 of 6%, 10-year bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at a price of 100, plus accrued interest, on February 28, Year 2, two months after the authorization of the bond issue.Required: Compute the following amounts: (a) The amount of cash received by Barney Corporation from $_________ issuance of the bonds on February 28, Year 2, is: (b) The amount of cash paid to bondholders on June 30, $_________ Year 2, is: (c) Bond interset expense reported in Barney's year 2 $_________ income statement is:

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13) Deegan Imports received authorization on December 31, Year 1, to issue $4,500,000 face value of 8%, 20-year bonds. The interest payment dates are June 30 and December 31. All the bonds were issued at par, plus accrued interest on February 1, Year 2. The bonds are callable by Deegan at any time at 105.Required: (A) Prepare the journal entry to record the issuance of the bonds on February 1, Year 2. (B) Prepare the journal to record the first interest payment on the bonds at June 30, Year 2. (C) What is the amount of bond interest expense reported in Deegan Imports' Year 2 income statement relating to these bonds? (D) What is the amount of bond interest payable appearing in Deegan Imports' balance sheet at December 31, Year 2, with respect to these bonds? (E) Deegan exercises the call provision and retires one-third of the bond issue on July 1, Year 3. Prepare the journal entry to record this transaction on July 1, Year 3.

14) On March 31, Year 1, Louis Company issued $20,000,000 face amount of 7%, 5-year bonds payable, with interest payable each June 30 and December 31. The company received cash of $20,200,000, including the accrued interest from December 31, Year 1. Louis uses the straight-line method of amortizing any discount or premium over the remaining life of the bonds, which is 57 months.Required: (A) What was the amount of accrued interest received by Louis on March 31, Year 1 when the bonds were issued? (Do not assume the bonds were issued at par.) (B) What was the amount of discount or premium on the bonds at issuance date? (Indicate whether it is a discount or premium.) (C) What amount of cash is paid to bondholders for interest during Year 1? (D) What is Louis ' total interest expense for Year 1 related to this bond issue? (E) What is the carrying value of this bond issue as of December 31, Year 1?

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15) Listed below are nine technical accounting terms introduced in this chapter:Postretirement benefits expenseDeferred income taxesInterest coverage ratioCapital/Type A leaseMaturity valueLoss contingencyOperating/Type B leaseApplying leverageEstimated liabilityEach of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.____(a) Operating income divided by annual interest expense. ____(b) The amount paid during the current period to retired employees. ____(c) A lease contract that is viewed as providing the lessee with use of the property over most of its useful life. ____(d) Using borrowed money to finance business operations. ____(e) The risk of a loss occurring in a future period. ____(f) A permanent reduction in the amount of income taxes owed which results from the tax deductions for depreciation. ____(g) The amount that must be paid to settle a liability at the date it becomes due.

16) Berkeley Corporation wants to expand operations and is considering various leasing arrangements for additional equipment. Berkeley's management has heard the terms capital/Type A lease and operating/Type B lease mentioned by the accounting department and wants clarification of these terms before signing any lease contracts.Required: (A) Briefly explain the difference between a capital/Type A lease and an operating/Type B lease from a lessee's (Berkeley's) point of view. Your answer should include the financial statement impact of each type of lease. (Ignore any related disclosure requirements.) (B) Which of the above two types of leases is sometimes referred to as "off-balance-sheet financing?" Briefly explain.

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17) At the end of its first year of operations, Harding Construction, Incorporated, included in its balance sheet a long-term liability entitled "Deferred Income Taxes."Required: (A) Briefly explain what deferred income taxes represents, including how this liability came into existence and whether such an item is generally perceived as favorable or unfavorable from company management's point of view. (B) If Harding Construction, Incorporated, is a successful, growing business, would you expect the liability for deferred income taxes to increase or decrease over the next few years? Explain.

18) Ocean to Coast Airlines could, at any time, incur a large loss if one of its airplanes were to crash.Required: Is this an example of a loss contingency that should be disclosed in the company's financial statements? Explain your answer.

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Answer Key Test name: Chapter 10 Test Bank (Problem Material) 1) (A) $654,000 (B) $36,000 (C) $618,000 (D) Date December 31

General Journal Interest Expense

Debit 18,000

Interest Payable

Credit

18,000

(A) $600,000 + ($600,000 × 9%) = $654,000 (B) $600,000 × 9% × 8/12 = $36,000 (C) $600,000 + ($600,000 × 0.09 × 4/12 = $618,000 (D) $600,000 × 0.09 × 4/12 = $18,000 2) (A) $106,000 (B) $4,000 (C) $102,000 (D) Date December 31

General Journal Interest Expense

Debit 2,000

Interest Payable

Credit

2,000

(A) $100,000 + ($100,000 × 0.06) = $106,000 (B) $100,000 × 0.06 × 8/12 = $4,000 (C) $100,000 + $2,000 (four months' interest payable) = $102,000 (D) $100,000 × 0.06 × 4/12 = $2,000 3) Transaction

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Current Liabilities

Long-Term Liabilities

Net Income

Net Cash Flow (All Activities Combined)

A B C D E

Increase Decrease Decrease Increase No effect

No effect No effect Increase No effect Increase

Decrease Decrease No effect Decrease Decrease

Decrease Decrease No effect No effect No effect

4) (A) $1,538,000 (B) $1,503,000 (C) $1,110,000 (D) (1) The costs of postretirement benefits were determined by estimating the present value of the future costs of retirement benefits earned during the year by today's workforce. (D) (2) Only the unfunded portion of these costs represents a liability to Revere Ironworks. This liability will be paid either when it funds the plan or pays for the promised benefits after today's workers have retired. (D) (3) The liability reflects only the present value of unfunded benefits to be made in the distant future. The actual payments will be substantially larger than their present value at this time.(a) $1,538,000 ($1,225,000 + $62,000 + $45,000 + $106,000 + $45,000 + $55,000)(b) $1,503,000 ($1,538,000 from part a, less $35,000 in unfunded postretirement benefits)(c) $1,110,000 ($1,225,000 gross pay, less $115,000 in amounts withheld) 5) (A) Payment Date Issuance November 30 December 31

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Monthly Payment — $6,485 $6,485

Interest Expense — $6,000 $5,995

Repayment of Principal — $485 $490

Unpaid Balance $600,000 $599,515 $599,025

(B) With respect to this mortgage Seldon's Year 1 income statement includes interest expense of $11,995, and Seldon's balance sheet at December 31, Year 1, includes a total liability for this mortgage of $599,025.(C) The aggregate monthly cash payments Seldon will make over the 30-year life of the mortgage amount to $2,334,600.(D) Over the 30-year life of the mortgage, the amount Seldon will pay for interest amounts to $1,734,600.(A) November 30: Interest expense = $600,000 × 0.12 × 1/12 = $6,000 Repayment of principal = $6,485 − $6,000 = $485 December 31: (3) $599,515 × 0.12 × 1/12 = $5,995.15 (rounded) (4) $6,485 − $5,995 = 490 (B) Interest expense for Year 1 = $6,000 + $5,995 = $11,995 Remaining principal = $600,000 − $485 (per table) − $490 (per table) = $599,025 (C) Aggregate monthly cash payments = $6,485 × 30 years × 12 payments per year = $2,334,600 (D) Amount paid for interest = $2,334,600 aggregate payments − $600,000 principal = $1,734,600 6) (A) Payment Date Issuance November 30, Year 1 December 31, Year 1

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Monthly Payment —

Interest Expense —

Repayment of Unpaid Balance Principal — $50,000

$2,354

$500

$1,854

$48,146

$2,354

$481

$1,873

$46,273 (rounded)

(B) With respect to this note, Ronald's Year 1 income statement includes interest expense of $981 (per table); and Ronald's balance sheet at December 31, Year 1, includes a total liability for this note payable of $46,273 (per table)(C) The aggregate monthly cash payments Ronald will make over the 2-year life of the note payable amount to $56,496.(D) Over the 2-year life of the note, the amount Ronald will pay for interest amounts to $6,496.(A) November 30: $50,000 × 0.12 × 1/12 = $500 $2,354 − $500 = $1,854 December 31: $48,146 × 0.12 × 1/12 = $481.46 (rounded) $2,354 − $481 = $1,873 (B) Interest expense for Year 1 = $500 + $481 = $981 Remaining principal = $50,000 − $1,854 − $1,873 = $46,273 (C) Aggregate monthly cash payments = $2,354 monthly payment × 24 months = $56,496 (D) Amount paid for interest = $56,496 aggregate payments − $50,000 principal = $6,496 7) Meadow's analysis is incorrect, because the unpaid balance (principal amount) of the mortgage note will not be repaid at a constant rate of $43 per month. The portion of each payment representing interest expense is based upon the unpaid balance of the loan. Since this unpaid balance is reduced each month, the portion of each successive payment representing interest will decrease, and the portion applied to repayment of the principal amount will increase. Thus, the unpaid balance of the loan is repaid at an ever-increasing rate. 8) Payment Number

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Payment

Interest Expense

Principal Reduction

Balance

$100,000.00 1 2 3 4

$1,020.00 $1,020.00 $1,020.00 $1,020.00

$1,000.00 999.80 999.60 999.39

$20.00 20.20 20.40 20.61

99,980.00 99,959.80 99,939.40 99,918.79

9) (A) $1,250,000 (B) Date December 31

General Journal Bond Interest Expense

Debit 625,000

Bond Interest Payable

Credit

625,000

General Journal Bond Interest Expense

Debit 625,000

Bond Interest Payable

625,000

Cash

Credit

1,250,000

(A) Cash paid to bondholders for interest on October 1 = $25,000,000 × 0.10 × 6/12 = $1,250,000 (B) $25 million × 0.10 × 3/12 = $625,000 (C) $25 million × 0.10 × 9/12 = $1,875,000 (E) Bond interest expense recorded on April 1, Year 2 = $25,000,000 × 0.10 × 3/12 = $625,000

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10) (A) The interest rates available to investors have likely increased since Clear-Air issued these bonds. Bonds provide investors with a return that is fixed in dollar amount. Therefore, as the interest rates available from alternative investment opportunities rise, the price of a given bond issue tends to fall. In summary, bond prices vary inversely with fluctuations in market interest rates. (B) After bonds have been issued, they belong to the bondholders, not to the issuing corporation. Therefore, changes in the market price of bonds subsequent to their issuance do not affect the amounts shown in the financial statements of the issuing company. (However, the FASB presently requires companies to disclose the fair values of financial instruments (including bonds payable) in footnotes to the financial statements whenever the fair value is (1) reasonably determinable, and (2) significantly different from the carrying value in the financial statements.) 11) (A) $800,000 (B) Date December 31

General Journal Bond Interest Expense

Debit 533,333

Bond Interest Payable

Credit

533,333

General Journal Bond Interest Expense

Debit 266,667

Bond Interest Payable

533,333

Cash

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Credit

800,000

(A) $20,000,000 × 8% × 6/12 = $800,000 (B) $20,000,000 × 8% × 4/12 = $533,333 (rounded) (C) $800,000 (from part A) + $533,333 (from part B) = $1,333,333 12) (a) $2,525,000 (b) $75,000 (c) $125,000(a) $2,500,000 + (2,500,000 × 0.06 × 2/12) = $2,525,000 (b) $2,500,000 × 0.06 × 6/12 = $75,000 (c) ($2,500,000 × 0.06 × 4/12) + ($2,500,000 × 0.06 × 6/12) = $50,000 + $75,000 = $125,000 13) (A) Date February 1

General Journal Cash

Debit 4,530,000

Bond Payable

Credit

4,500,000

Bond Interest Payable

30,000

(B) Date June 30

General Journal Bond Interest Payable

Debit 30,000

Bond Interest Payable

150,000

Cash

Credit

180,000

General Journal Bond Payable Loss on Early Retirement of Debt Cash

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Debit 1,500,000

Credit

75,000 1,575,000

(A) $4,500,000 × 0.08 × 1/12 = $30,000 (B) $4,500,000 × 0.08 × 6/12 = $180,000 (C) Since the bonds were issued at par, interest expense is equal to the contractual interest for the period that the bonds were outstanding. Interest expense = $4,500,000 × 0.08 × 11/12 = $330,000 (D) The interest payment date is December 31; therefore, interest for the last six months of a year is paid and does not appear as a liability in the balance sheet at December 31. (E) Cash paid = Book value of bonds of $1,500,000 × 1.05 = $1,575,000 Loss on early retirement of debt = Cash of $1,575,000 − Book value of bonds of $1,500,000 = $75,000 14) (A) $350,000 (B) $150,000 discount (C) $1,400,000 (D) $1,073,684 (E) $19,873,684(A) $20,000,000 × 7% × 3/12 = $350,000 (B) Cash of $20,200,000 − Accrued interest of $350,000 = Cash received for bonds of $19,850,000 Par value of $20,000,000 − Cash received for bonds of $19,850,000 = Discount of $150,000 (C) Semiannual amount of cash paid for interest = $20,000,000 × 0.07 × 6/12 = $700,000 $700,000 (June 30) + $700,000 (December 31) = $1,400,000 (D) Contract interest ($20,000,000 × 0.07 × 9/12) Discount amortization ($150,000 × 9/57) Total interest expense

$ 1,050,000 23,684 $ 1,073,684

(E) Bond face amount Less: Unamortized discount ($150,000 − $23,684)

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$ 20,000,000 126,316

Carrying value at December 31, Year 1

$ 19,873,684

15) (a) Interest coverage ratio (b) None (c) Capital/Type A lease (d) Applying leverage (e) None (f) None (g) Maturity value(b) Postretirement benefit expense is the present value of future benefits earned by the workforce, not the amount paid to workers already retired. (e) A loss contingency is a loss that already may have occurred, not a loss that may occur in the future. (f) Deferred income taxes have been postponed, not eliminated.

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16) (A) A capital/Type A lease is intended to provide financing to the lessee (renter) for the eventual purchase of the property or to provide the lessee with use of the property over most of its useful life. From an accounting point of view, capital/Type A leases are regarded as essentially equivalent to the sale (lessor) and purchase (lessee) of the property. When equipment is acquired through a capital/Type A lease, the lessee includes an asset, Leased Equipment, and a liability, Lease Payment Obligation, in its balance sheet. Lease payments made by the lessee are allocated between Interest Expense and a reduction in the liability Lease Payment Obligation, much like any other series of debt payments. The portion of the lease payment obligation that will be repaid within the next year is classified as a current liability, and the remainder is classified as a long-term liability. No rent expense is recorded by the lessee in a capital lease. The asset account Leased Equipment is depreciated by the lessee over the estimated useful life of the equipment or the length of the lease term, depending on the circumstances surrounding the capitalization of the lease. In an operating/Type B lease, the lessor (owner) transfers to the lessee (renter) the right to use leased property for a limited period of time, but retains the usual risks and rewards of ownership. No asset or liability relating to the lease appears in the balance sheet of the lessee; lease payments are simply reported as rental expense.(B) Operating/Type B leases are sometimes referred to as "off-balance-sheet financing" because neither the asset that is rented nor the obligation for future lease payments appears in the balance sheet of the lessee.

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17) (A) For Harding Construction, Incorporated, deferred income taxes represent a portion of the current-year income tax expense whose payment is postponed until future periods. Deferred income taxes arise when items of revenue are included in the income statement in the current period, but are not taxed until some future period. Deferred income taxes also arise when expenses recognized in the financial statements are smaller than the expenses deducted in the current year's tax return. In both of these situations, pretax accounting income is larger than the taxable income reported in the current-year income tax return. In general, deferred income taxes arise because the income tax expense recognized for accounting purposes is larger than the amount of taxes owed for the current period (based upon the current-year tax return). In most cases, the existence of deferred income taxes would be regarded as a favorable situation, as it indicates that the cash outlay for income taxes to date is smaller than the amount of income tax expense reported in the income statement. (B) Although some of the income taxes deferred in prior years constantly are coming due, the liability for deferred taxes usually increases as a company grows and prospers. 18) The risk of a future airplane crash is not a loss contingency. Loss contingencies relate to events which have already occurred, but for which the financial impact is uncertain. The risk of a future airplane crash is a potential future loss. Potential future losses are not disclosed in financial statements.

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CHAPTER 10 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A liability that is known to exist but the precise dollar amount is not known is called a possible liability. ⊚ ⊚

true false

Working capital is equal to current assets minus current liabilities. ⊚ ⊚

true false

3) Current liabilities are obligations that must be repaid within the shorter of one year or the operating cycle. ⊚ ⊚

true false

4) Accounts payable are often subdivided into the categories of trade accounts payable and notes payable. ⊚ ⊚

true false

5) When money is borrowed by issuing a note payable, the borrower records a liability equal to the maturity value of the note. ⊚ ⊚

true false

6) Since payment is due within one year, the current portion of long-term debt should be reported separately in the long-term liabilities section of the balance sheet. ⊚ ⊚

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true false

7) The fact that a company has accrued liabilities in its balance sheet means that the company is delinquent in its payments. ⊚ ⊚

true false

8) Take-home pay equals gross pay minus withholdings tax minus prepaid worker's compensation insurance. ⊚ ⊚

true false

9) The amount of FICA tax and Medicare tax withheld from an employee is used to pay the employer's percentage of the tax and is mailed to the government quarterly. ⊚ ⊚

true false

10) The most common types of payroll deductions are taxes, insurance premiums, employee savings, and union dues. ⊚ ⊚

11)

true false

Worker's compensation premiums are deducted from each employee's gross pay. ⊚ ⊚

true false

12) The withholding of Federal, State, and Social Security and Medicare taxes from an employee's pay is recorded as a liability to the company. ⊚ ⊚

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true false

13) Federal unemployment taxes apply to a set dollar amount of employee wages and tend to decline dramatically as the year progresses. ⊚ ⊚

true false

14) If a long-term debt is to be paid off in monthly installments over a five-year period, the entire principal should be classified as a long-term debt. ⊚ ⊚

true false

15) An amortization table for a note payable shows decreasing amounts of interest and an increasing amount of unpaid balance each period. ⊚ ⊚

true false

16) The unpaid balance column on an amortization table for a note payable shows the amount the debtor could pay to settle the liability at a particular point in time. ⊚ ⊚

17)

true false

Bonds secured by a pledge of specific assets are called debenture bonds. ⊚ ⊚

true false

18) Junk bonds are attractive to investors because they carry a high rate of interest and are convertible into a specified number of shares of capital stock. ⊚ ⊚

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true false

19) Dividends paid by a corporation to its stockholders are tax deductible by the corporation, but interest paid on bonds is not tax deductible. ⊚ ⊚

true false

20) When bonds are sold by one investor to another, they sell at market price plus accrued interest since the last payment date. ⊚ ⊚

true false

21) When a company sells bonds, the bondholders are permitted to vote for the board of directors. ⊚ ⊚

22)

true false

There is a tax advantage for a company to issue bonds in lieu of stocks. ⊚ ⊚

true false

23) Bonds payable are a means of dividing a very large, long-term liability among many creditors, some of whom may participate in the loan only for a short period of time. ⊚ ⊚

true false

24) The market value of a convertible bond tends to move inversely to the market value of an equivalent number of shares of common stock. ⊚ ⊚

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true false

25)

Convertible bonds can be exchanged for common stock at the option of the company. ⊚ ⊚

26)

Sinking funds make a bond issue less attractive to the investor. ⊚ ⊚

27)

true false

If a bond is callable, the call price is usually lower than the face value of the bond. ⊚ ⊚

true false

28) The underwriter guarantees the issuing corporation a specific price for the entire bond issue and sells the bonds to the investing public at a higher price. ⊚ ⊚

true false

29) A bond sinking fund serves to reduce the net amount of future resources that will be required to retire the debt at maturity. ⊚ ⊚

true false

30) The dollar amount of a bond sinking fund is offset against the amount of bonds payable outstanding in the balance sheet. ⊚ ⊚

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true false

31) The amount that corporations actually receive from the issuance of bonds is the future value of the principal and interest payments that will be paid. ⊚ ⊚

true false

32) When bonds are issued at a discount, the borrower must pay more at maturity than the amount originally received. ⊚ ⊚

true false

33) The account Discount on Bonds Payable actually represents interest expense and will be amortized over the life of the bond. ⊚ ⊚

true false

34) If a bond is issued at a premium, the company receives more money for the bond than it will have to pay back at the end of the bond's life, and as a result the company records no interest expense over the life of the bond. ⊚ ⊚

true false

35) A bond with a $100,000 face value that is issued at a premium will have a higher maturity value than a bond with a $100,000 face value that is issued at a discount. ⊚ ⊚

true false

36) The account Discount on Bonds Payable has a debit balance and should appear on the balance sheet as an asset; the account Premium on Bonds Payable has a credit balance and should be classified as a liability. ⊚ ⊚

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true false

37) The amortization of discount on bonds payable reduces the amount of interest expense recognized during the period. ⊚ ⊚

true false

38) The amortization of bond discount by the issuing company decreases the carrying value of its bonds payable. ⊚ ⊚

39)

The future value will always be less than the present value. ⊚ ⊚

40)

true false

When interest rates rise, the price of a given bond issue will fall. ⊚ ⊚

true false

41) A loss contingency is recorded in the accounting records when it is probable that, based on past events, a loss has been incurred and the amount of the loss is known. ⊚ ⊚

true false

42) A commitment, such as a contract to pay a baseball player $5,000,000 a year for five years, should be listed as a long-term liability. ⊚ ⊚

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true false

43) Estimated liabilities, contingencies, and commitments are usually reported in the longterm liability section of the financial statements. ⊚ ⊚

44)

true false

Loss contingencies stem from past events. ⊚ ⊚

true false

45) Loss contingencies should be recorded in the accounting records whenever it is probable that, based on past events, a loss has been incurred and the amount of loss might be material in amount. ⊚ ⊚

true false

46) Commitments that are material in amount are not recordable transactions until certain events occur in the future. ⊚ ⊚

47)

The quick ratio is a more stringent measure of solvency than the current ratio. ⊚ ⊚

48)

true false

A high interest coverage ratio is a sign of creditworthiness. ⊚ ⊚

true false

49) The debt ratio measures how quickly a company pays off the long-term liabilities it has incurred.

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⊚ ⊚

true false

50) A pension fund is an independent entity managed by a trustee (usually a bank or insurance company). ⊚ ⊚

true false

51) If a lease transfers ownership of the property to the lessee at the end of the lease term, it should be regarded as an operating/Type B lease. ⊚ ⊚

true false

52) When a company has a fully funded pension plan, they only need to record the present value of pension payments as a current liability. ⊚ ⊚

true false

53) Payments of pensions and other benefits to retired workers are recognized as expense in the period payment is made. ⊚ ⊚

true false

54) The portion of income taxes expense that is deferred to future tax returns is credited to a noncurrent asset account entitled Deferred Income Taxes. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 55) Assets that have been pledged as security for a loan: Version 1

A) B) C) D)

56)

All of the following are examples of current liabilities except: A) B) C) D)

57)

Probable and reasonably estimated. Known to exist and precise amount unable to be determined until a later date. Probable and non-interest bearing. Known to exist and interest bearing.

If a business ceases operations and liquidates, which of the following will be paid last? A) B) C) D)

59)

Accounts payable. Pledged assets. Unearned revenue. Income taxes payable.

The two basic characteristics of estimated liabilities are: A) B) C) D)

58)

Are reported as liabilities on the balance sheet. Must be sold when the loan matures. Become the property of the lender until the loan is paid in full. Are disclosed in the notes to the financial statements.

Owners. General creditors. Employees. Creditors who have collateral for their loans.

A measure of a company's liquidity is:

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A) B) C) D)

Total assets divided by total equity. The current ratio. The dollar amount of liabilities that bear interest. The dollar amount of assets used as collateral for a loan.

60) On November 1, Year 1, Master's Company borrows $500,000 from its bank for five years at an annual interest rate of 10%. According to the terms of the loan, the principal amount will not be due for five years. Interest accrues monthly on the first day of each month, beginning November 1, Year 1. With respect to this borrowing, Master's balance sheet, dated December 31, Year 1, included only a long-term note payable of $500,000. As a result: A) B) C) D)

61)

The December 31, Year 1, financial statements are accurately presented. Liabilities are understated by $12,500 accrued interest payable. Liabilities are understated by $8,333 accrued interest payable. Liabilities are understated by $4,167 accrued interest payable.

Interest payable on a loan becomes a liability: A) B) C) D)

When the note payable is issued. As it accrues. At the maturity date. When the borrowed money is received.

62) On November 1, Year 1, Metro Corporation borrowed $55,000 from a bank and signed a 12%, 90-day note payable in the amount of $55,000. The adjusting entry, dated November 30, Year 1, will be (assume 360 days in year): A) B) C) D)

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Debit Interest Expense $550 and credit Notes Payable $550. Debit Interest Expense $550 and credit Interest Payable $550. Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100. Debit Interest Expense $550 and credit Cash $550.

63) On November 1, Year 1, Noble Company borrowed $108,000 from South Bank and signed a 9%, six-month note payable, all due at maturity. The interest on this loan is stated separately.How much must Noble pay South Bank on May 1, Year 2, when the note matures? A) B) C) D)

$108,000. $110,430. $112,860. $117,720.

64) On November 1, Year 1, Noble Company borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.How much must Noble pay South Bank on May 1, Year 2, when the note matures? A) B) C) D)

$4,800. $80,000. $89,600. $84,800.

65) On November 1, Year 1, Noble Company borrowed $72,000 from South Bank and signed a 11%, six-month note payable, all due at maturity. The interest on this loan is stated separately.How much interest expense will Noble recognize on this note in Year 2? A) B) C) D)

$7,920. $1,980. $3,960. $2,640.

66) On November 1, Year 1, Noble Company borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.How much interest expense will Noble recognize on this note in Year 2?

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A) B) C) D)

$9,600. $4,800. $2,400. $3,200.

67) On November 1, Year 1, Noble Company borrowed $64,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.At December 31, Year 1, Noble Company's overall liability for this loan amounts to: A) B) C) D)

$64,000. $65,280. $66,560. $67,840.

68) On November 1, Year 1, Noble Company borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.At December 31, Year 1, Noble Company's overall liability for this loan amounts to: A) B) C) D)

$80,000. $81,600. $83,200. $84,800.

69) On November 1, Year 1, Noble Company borrowed $112,000 from South Bank and signed a 6%, six-month note payable, all due at maturity. The interest on this loan is stated separately.At December 31, Year 1, the adjusting entry with respect to this note includes a: A) B) C) D)

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Credit to Interest Payable for $1,120. Credit to Notes Payable for $1,120. Debit to Interest Expense for $2,240. Credit to Cash for $2,240.

70) On November 1, Year 1, Noble Company borrowed $80,000 from South Bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately.At December 31, Year 1, the adjusting entry with respect to this note includes a: A) B) C) D)

Credit to Interest Payable for $1,600. Credit to Notes Payable for $1,600. Debit to Interest Expense for $3,200. Credit to Cash for $3,200.

71) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $280,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 8% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 8%, due September 1, Year 2

$6,800 $255,000

How much must Able pay Regal Corporation on September 1, Year 2, when the note matures? A) B) C) D)

$255,000 $261,800 $275,400 $535,000

72) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 9%, due September 1, Year 2

$18,000 $600,000

How much must Able pay Regal Corporation on September 1, Year 2, when the note matures?

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A) B) C) D)

$600,000 $618,000 $654,000 $636,000

73) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $420,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 10% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 10%, due September 1, Year 2

$14,000 $420,000

What is the amount of the interest expense Able will recognize on this note in Year 2? A) B) C) D)

$42,000 $14,000 $28,000 $24,500

74) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 9%, due September 1, Year 2

$18,000 $600,000

What is the amount of the interest expense Able will recognize on this note in Year 2? A) B) C) D)

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$18,000 $31,500 $36,000 $54,000

75) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $260,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 9%, due September 1, Year 2

$6,900 $230,000

What is the total cash (including interest) paid for the building purchased by Able? A) B) C) D)

$490,000 $503,800 $510,700 $477,800

76) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 9%, due September 1, Year 2

$18,000 $600,000

What is the total cash (including interest) paid for the building purchased by Able? A) B) C) D)

$800,000 $836,000 $854,000 $816,000

77) On September 1, Year 1, Able Company purchased a building from Regal Corporation by paying $200,000 cash and issuing a one-year note payable for the balance of the purchase price. Interest on the note is stated at an annual rate of 9% and is paid at maturity. In its December 31, Year 1, balance sheet, Able correctly presented the note and interest payable as follows: Interest payable Notes payable, 9%, due September 1, Year 2

$18,000 $600,000

The adjusting entry at December 31, Year 1, with respect to this note included:

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A) B) C) D)

A debit to Interest Expense for $18,000. A credit to Cash for $18,000. A credit to Notes Payable for $18,000. A credit to Interest Expense for $18,000.

78) On September 1, Year 1, Select Company borrowed $690,000 from a bank and signed a 11%, six-month note payable, with interest on the note due at maturity.The total amount of the current liability (including interest payable) for this loan that appears in Select Company's balance sheet at December 31, Year 1, is: A) B) C) D)

$765,900. $715,300. $37,950. $690,000.

79) On September 1, Year 1, Select Company borrowed $600,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity.The total amount of the current liability (including interest payable) for this loan that appears in Select Company's balance sheet at December 31, Year 1, is: A) B) C) D)

$600,000. $624,000. $636,000. $672,000.

80) On September 1, Year 1, Select Company borrowed $600,000 from a bank and signed a 12%, six-month note payable, with interest on the note due at maturity.Assume Select made no adjusting entry with respect to this note before preparing the financial statements at December 31, Year 1. What is the effect of this error on the financial statements for Year 1?

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A) B) C) D)

Total liabilities are overstated. Net income is overstated. Owners' equity is understated. Interest Payable is overstated.

81) Sanford Corporation borrowed $84,000 by issuing a 16%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to: A) B) C) D)

$84,000. $84,560. $85,120. $86,240.

82) Sanford Corporation borrowed $90,000 by issuing a 12%, six-month note payable, all due at the maturity date. After one month, the company's total liability for this loan amounts to: A) B) C) D)

$90,000. $90,450. $90,900. $91,800.

83) On November 1 of the current year, Garcia Company borrowed $96,000 by issuing a 5%, six-month note payable, all due at maturity date. Interest expense on this note to be recognized during the current year amounts to: A) B) C) D)

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$1,600. $800. $4,800. $960.

84) On November 1 of the current year, Garcia Company borrowed $50,000 by issuing a 9%, six-month note payable, all due at maturity date. Interest expense on this note to be recognized during the current year amounts to: A) B) C) D)

85)

$500. $750. $1,500. $4,500.

The current portion of long-term debt should be reported:

A) Separately in the long-term liabilities section of the balance sheet. B) In the long-term liabilities section of the balance sheet, along with the other longterm debt. C) In the current liabilities section of the balance sheet. D) In a separate section of the balance sheet, between long-term liabilities and shareholders' equity.

86) Employers are required to pay all of the following on the wages paid to each employee except: A) B) C) D)

87)

Social security taxes. Worker's compensation insurance. Medicare taxes. Pension plan benefits.

The Social Security tax paid by an employer is: A) B) C) D)

Greater than the amount paid by the employee. Less than the amount paid by the employee. Equal to the amount paid by the employee. The employer does not pay Social Security tax, only the employee pays the tax.

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88) Which of the following payroll costs are shared equally by the employer and the employee? A) B) C) D)

State unemployment taxes. Workers' compensation. Social security. Federal unemployment taxes.

89) An employer's total payroll-related costs always exceed the wages and salaries earned by employees by: A) Amounts withheld from employees' pay. B) Payroll taxes plus mandated programs such as workers' compensation insurance. C) 50%. D) Employers' payroll-related costs actually are less than the gross wages and salaries earned by employees, because of amounts withheld from employees' checks.

90) The amounts that a business withholds as Federal, State, and Social Security and Medicare taxes from an employee's earnings: A) B) C) D)

Represent payroll taxes expense to the employer. Are deposited in an interest-bearing account until the employee is terminated. Represent miscellaneous revenue to the employer. Represent current liabilities to the employer.

91) Which of the following payroll taxes do not stop once an employee reaches a certain level of income:

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A) B) C) D)

Medicare taxes. Social security taxes. Unemployment taxes. Medicare, Social security, and unemployment taxes.

92) Stone Corporation has 21 employees and incurs total wages and salaries expense of $672,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $360 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and Employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

The company's annual payroll-related expenses amount to approximately: A) B) C) D)

$672,000. $894,768. $961,968. $819,840.

93) Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

The company's annual payroll-related expenses amount to approximately: Version 1

A) B) C) D)

$1,085,600. $1,181,850. $1,250,700. $900,000.

94) Stone Corporation has 23 employees and incurs total wages and salaries expense of $828,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $380 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and Employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

Employees' annual "take-home-pay," totals approximately: A) B) C) D)

$745,200. $723,120. $477,618. $681,858.

95) Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

Employees' annual "take-home-pay," totals approximately: Version 1

A) B) C) D)

$672,300. $762,300. $675,000. $741,150.

96) Stone Corporation has 24 employees and incurs total wages and salaries expense of $912,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $390 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and Employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

Some of the payroll-related expenses incurred by Stone Corporation are mandated by law, rather than negotiated with employees. During the current year, these mandated amounts increased Stone's payroll-related expenses by approximately: A) B) C) D)

$69,768. $179,208. $133,608. $160,968.

97) Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes

5% 15.3%

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5% 10%

Unemployment taxes expense

$68,850. $200,700. $131,850. $176,850.

98) Stone Corporation has 25 employees and incurs total wages and salaries expense of $900,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: In addition, Stone provides group health insurance for its entire workforce. The cost of this insurance is $350 per month per employee. Workers compensation insurance Social security and Medicare (employees' share and employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

Assume that the federal government implements a 10% payroll tax upon employers to finance health insurance for all citizens and residents. Stone will pay this tax instead of purchasing group health insurance. This will cause Stone 's total annual payroll-related expenses to: A) B) C) D)

Decrease by $15,000. Increase by $15,000. Decrease by $32,500. No change, because payroll taxes are withheld from employees' pay.

99) Rockland Corporation has 22 employees and incurs total wages and salaries expense of $800,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: Workers compensation insurance Social security and Medicare (employees' share and employer's

5% 15.3%

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share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 10% 2%

In addition, Rockland provides group health insurance for its entire workforce. The cost of this insurance is $450 per month per employee.The company's annual payroll-related expenses amount to approximately: A) B) C) D)

$1,137,200. $1,076,000. $980,000. $800,000.

100) Rockland Corporation has 22 employees and incurs total wages and salaries expense of $800,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: Workers compensation insurance Social security and Medicare (employees' share and employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

In addition, Rockland provides group health insurance for its entire workforce. The cost of this insurance is $450 per month per employee.Employees' annual "take-home-pay," totals approximately: A) B) C) D)

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$642,800. $760,000. $681,200. $658,800.

101) Rockland Corporation has 22 employees and incurs total wages and salaries expense of $800,000 per year. The following table shows various payroll amounts as a percentage of this annual wage and salaries expense: Workers compensation insurance Social security and Medicare (employees' share and employer's share combined) Pension and other postretirement benefits expense (paid by employer) Employee Federal and State withholding taxes Unemployment taxes expense

5% 15.3% 5% 10% 2%

In addition, Rockland provides group health insurance for its entire workforce. The cost of this insurance is $450 per month per employee.Some of the payroll-related expenses incurred by Rockland Corporation are mandated by law, rather than negotiated with employees. During the current year, these mandated amounts increased Rockland's payroll-related expenses by approximately: A) B) C) D)

102)

$101,200. $96,000. $117,200. $118,800.

In preparing an amortization table, it is necessary to include:

A) The original amount of the liability, the amount of periodic payments, and the interest rate. B) The original amount of the liability, the amount of periodic payments, and the amount of past payments. C) The monthly payment, the total amount of past payments, and the original amount of the liability. D) The total amount of past payments, the interest rate, and the amount of periodic payments.

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103) Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation: A) The aggregate amount of the monthly payments is $700,000. B) Each monthly payment is greater than the amount of interest accruing each month. C) The portion of each payment representing interest expense will increase over the 10year period, since principal is being paid off, yet the payment amount does not decrease. D) The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.

104) When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage): A) The portion of each payment allocated to interest expense is the same each month. B) The sum of the monthly payments is equal to the amount of the installment note (mortgage). C) The difference between the sum of all monthly payments and the principal amount of the note constitutes interest. D) The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.

105) On December 1, Year 1, Bradley Corporation incurs a 21-year $260,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $1,800, which include interest computed at the rate of 6% per year. The first monthly payment is made on December 31, Year 1.Compute the total amount to be paid by Bradley over the 21-year life of the mortgage. A) B) C) D)

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$260,000 $480,816 $453,600 $297,800

106) On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.Compute the total amount to be paid by Bradley over the 15-year life of the mortgage. A) B) C) D)

$200,000 $562,000 $432,000 $474,000

107) On December 1, Year 1, Bradley Corporation incurs a 15-year $270,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,200, which include interest computed at the rate of 8% per year. The first monthly payment is made on December 31, Year 1.How much of the first payment made on December 31, Year 1, represents interest expense? (Do not round intermediate calculations.) A) B) C) D)

$400 $2,200 $1,440 $1,800

108) On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.How much of the first payment made on December 31, Year 1, represents interest expense? A) B) C) D)

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$2,400 $400 $2,304 $2,000

109) On December 1, Year 1, Bradley Corporation incurs a 19-year $210,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $1,600, which include interest computed at the rate of 8% per year. The first monthly payment is made on December 31, Year 1.The total liability related to this mortgage reported in Bradley's balance sheet at December 31, Year 1, is: A) B) C) D)

$210,000. $209,800. $364,800. $208,400.

110) On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.The total liability related to this mortgage reported in Bradley's balance sheet at December 31, Year 1, is: A) B) C) D)

$432,100. $199,600. $194,923. $200,000.

111) On December 1, Year 1, Bradley Corporation incurs a 16-year $330,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $3,900, which include interest computed at the rate of 13% per year. The first monthly payment is made on December 31, Year 1.Over the 16-year life of the mortgage, the total amount Bradley will pay for interest charges is: A) B) C) D)

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$418,800. $748,800. $330,000. $624,000.

112) On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.Over the 15-year life of the mortgage, the total amount Bradley will pay for interest charges is: A) B) C) D)

$232,000. $360,000. $200,000. $432,060.

113) On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1.The portion of the second monthly payment (made on January 31, Year 2) that represents repayment of principal is: A) B) C) D)

$400. $404. $2,400. $1,996.

114) When a company sells bonds between interest dates, they will pay which of the following at the first interest payment date? A) An amount less than the stated interest rate times the principal. B) An amount more than the stated interest rate times the principal. C) An amount equal to the stated interest rate times the principal. D) The company may skip the first interest payment date since the appropriate time has not passed.

115)

If a bond is issued at par between interest dates:

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A) B) C) D)

116)

The term "junk bonds" describes bonds with: A) B) C) D)

117)

The cash received by the corporation will be less than the face value of the bond. The cash received by the corporation will be greater than the face value of the bond. The cash received by the corporation will be the same as the face value of the bond. Interest receivable will be debited.

Low interest rates. Indefinite maturity dates. Low maturity values. High risk.

One advantage of issuing bonds instead of stock is that: A) B) C) D)

Interest is tax deductible, whereas dividends are not. Bonds have a longer maturity date. Interest rates are lower than dividend rates. Borrowing funds by issuing bonds does not affect earnings per share.

118) Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock: A) The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax. B) Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible. C) A corporation must pay tax on the sales price of stock issued, but is not taxed on the amount received when bonds are issued. D) Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.

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119) Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result, the prices of bonds payable increased. What would be the likely impact on market interest rates? A) B) C) D) change.

120)

Market interest rates will be unaffected. Market interest rates will increase. Market interest rates will fall. Although interest rates will change, it is impossible to predict the direction of

Sinking funds usually appear on the balance sheet as: A) B) C) D)

Current asset. Long-term investment. Current liability. Appropriation of retained earnings.

121) A company issues $50 million of bonds at par on January 1, Year 1. The bonds pay 10% interest semi-annually on 12/31 and 6/30 and mature in 20 years. The journal entry when the bonds are sold is: A) Account Title Cash

Debit 50,000,000

Bonds Payable

Credit

50,000,000

B) Account Title Cash

Debit 50,000,000

Interest Expense

2,500,000

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Credit

Bonds Payable

50,000,000

Interest Payable

2,500,000

C) Account Title Cash

Debit 50,000,000

Interest Expense

5,000,000

Credit

Bonds Payable

50,000,000

Interest Payable

5,000,000

D) Account Title Cash Interest Expense Bonds Payable Interest Payable

122)

Debit 50,000,000

Credit

500,000 50,000,000 500,000

Bonds that may be exchanged for a specified number of shares of capital stock are called: A) B) C) D)

Junk bonds. Convertible bonds. Debenture bonds. Mortgage bonds.

123) Which of the following is not an accurate statement regarding the distinction between debt and equity?

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A) Only equity is considered a source of financing for operations of the business, since debt must be repaid at a specified maturity date. B) If a business ceases operation and liquidates, claims of all creditors have legal priority over claims of the stockholders. C) Most debt requires the borrower to pay interest; equity financing does not obligate the company to make a specified payment. D) The providers of equity are owners of the business; the providers of borrowed funds are creditors.

124) When a corporation has a right to redeem bonds in advance of the maturity date, the bond is considered a: A) B) C) D)

125)

A bond that is not secured is also known as: A) B) C) D)

126)

Convertible bond. Callable bond. Junk bond. Debenture bond.

A sinking fund. A mortgage. A debenture. A junk bond.

In relation to a bond issue, the role of the underwriter is to:

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A) Guarantee payment to bondholders of both the periodic interest payments and the maturity value. B) Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public. C) Represent the interests of the bondholders and, if necessary, to take legal action on their behalf. D) Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks.

127) Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report: A) B) C) D)

128)

Lower net income and lower income taxes expense than if it issues capital stock. Higher net income and higher income taxes expense than if it issues capital stock. Lower net income and higher income taxes expense than if it issues capital stock. Higher net income and lower income taxes expense than if it issues capital stock.

Which of the following does not affect the market price of an outstanding bond issue? A) B) C) D)

Fluctuations in the current market rate of interest. The credit rating of the issuing corporation. The price at which the bonds were originally issued. The length of time remaining until the bonds' maturity date.

129) On April 1, year 1, Cricket Corporation issues $52 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.The amount of cash paid to bondholders for interest during Year 1, is:

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A) B) C) D)

$6,240,000. $1,560,000. $3,120,000. $4,680,000.

130) On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.The amount of cash paid to bondholders for interest during Year 1, is: A) B) C) D)

$6,600,000. $5,400,000. $3,600,000. $1,800,000.

131) On April 1, year 1, Cricket Corporation issues $42 million of 10%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.Interest expense on this bond issue reported in Cricket's Year 1, income statement is: A) B) C) D)

$1,400,000. $2,800,000. $3,150,000. $4,200,000.

132) On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.Interest expense on this bond issue reported in Cricket's Year 1, income statement is: A) B) C) D)

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$2,400,000. $4,800,000. $5,400,000. $7,200,000.

133) On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.The adjustment necessary at December 31, Year 1 (if any), related to this bond issue involves: A) B) C) D)

Recognition of interest expense of $3,600,000. Recognition of interest expense of $1,800,000. Payment of cash of $1,800,000. There is no adjustment necessary.

134) On April 1, year 1, Cricket Corporation issues $60 million of 12%, 10-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.With respect to this bond issue, Cricket Corporation's balance sheet at December 31, Year 1, will include: A) B) C) D)

Bonds payable of $61,800,000. Bonds payable of $63,600,000. Bonds payable of $60 million, as well as interest payable of $1,800,000. Bonds payable of $60 million, as well as interest payable of $3,600,000.

135) On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.The journal entry to record the first cash payment to bondholders on October 1, year 1, will include: A) B) C) D)

A credit to Cash of $2,000,000. A debit to Bonds Payable of $1,000,000. A debit to Interest Expense of $1,000,000. A credit to Interest Payable of $1,000,000.

136) On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.The adjusting entry (if any) required on December 31, Year 1, related to this bond issue involves:

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A) B) C) D)

Recognition of interest expense of $1,000,000. Recognition of interest expense of $500,000. A credit to Interest Payable of $2,000,000. A credit to Cash of $500,000.

137) On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.In Year 2, Greenway's income statement will report interest expense arising from this bond issue of: A) B) C) D)

$1,000,000. $2,000,000. $500,000. $1,500,000.

138) On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.On April 1, Year 1, the journal entry to record issuance of the bonds will include: A) B) C) D)

A credit to Interest Payable of $1,000,000. A debit to Cash of $20,000,000. A credit to Bonds Payable of $2,100,000. A debit to Cash of $21,000,000.

139) On April 1, Year 1, Greenway Corporation issues $20 million of 10%, 20-year bonds payable at par. Interest on the bonds is payable semiannually each April 1 and October 1.With respect to this bond issue, Greenway's balance sheet at December 31, Year 1, will include: A) B) C) D)

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Bonds payable of $20,500,000. Bonds payable of $19,500,000. Bonds payable of $20 million, as well as interest payable of $1,500,000. Bonds payable of $20 million, as well as interest payable of $500,000.

140) Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31.The total amount of cash received by Austin Corporation upon issuance of the bonds on April 30, Year 2, is: A) B) C) D)

$6,000,000. $6,200,000. $6,150,000. $6,300,000.

141) Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31.The entry to record the issuance of bonds payable on April 30, Year 2, includes: A) B) C) D)

A credit to Premium on Bonds Payable of $200,000. A debit to Cash of $150,000. A debit to Bond Interest Expense of $200,000. A credit to Bond Interest Payable of $200,000.

142) Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31.The journal entry made by Austin Corporation to record the first semiannual interest payment on the bonds includes: A) B) C) D)

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A debit to Bond Interest Expense of $300,000. A debit to Bond Interest Payable of $100,000. A debit to Bond Interest Expense of $100,000. A debit to Bond interest Expense of $200,000.

143) Austin Corporation issues $6,000,000 of 10%, 10-year bonds, dated December 31, Year 1. The bonds are issued on April 30, Year 2, at 100 plus accrued interest. Interest on the bonds is payable semiannually each June 30 and December 31.The amount of Austin's interest expense on this bond issue during Year 2 amounts to: A) B) C) D)

$400,000. $450,000. $360,000. $600,000.

144) Salem Company has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.If Salem Company retires $10 million of these bonds by purchasing them from bondholders at current market price, the company will report: A) B) C) D)

A $600,000 gain. A $500,000 loss. A $700,000 gain. Neither gains nor losses are recognized on early retirements of debt.

145) Salem Company has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.If Salem Company calls $10 million of these bonds it will report: A) B) C) D)

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A $700,000 gain. A $400,000 loss. A $600,000 gain. Neither gains nor losses are recognized on early retirements of debt.

146) Salem Company has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.The amortization of a bond discount: A) B) C) D)

Decreases the carrying value of a bond and increases interest expense. Decreases the carrying value of a bond and decreases interest expense. Increases the carrying value of a bond and increases interest expense. Increases the carrying value of a bond and decreases interest expense.

147) Salem Company has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.A $1,000 bond that sells for 104 has a selling price of: A) B) C) D)

$1,004. $1,040. $1,400. $1,000.

148) Salem Company has outstanding $100 million of 7% bonds, due in 7 years, and callable at 104. The bonds were issued at par and are selling today at a market price of 94.If a bond is selling at 103, it is selling at: A) B) C) D)

149)

Maturity value and yields a 2% interest rate. A discount. A premium. $103 per bond.

Bonds, with the same face value, issued at a premium will:

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A) Have a greater maturity value than a bond issued at a discount. B) Have a lesser maturity value than a bond issued at a discount. C) Have the same maturity value as a bond issued at a discount. D) Have a different maturity value than a bond issued at a discount, depending upon the interest rate and maturity date.

150)

The amortization of a bond premium: A) B) C) D)

151)

A discount on bonds payable is best described as:

A) An element of future interest expense. B) A bonus paid by the bondholders to the issuing corporation because of the unusually high interest rate stated in the bonds. C) The present value of the future interest payments of bond interest and principal. D) An amount below par that the bondholders may be called upon to make good.

152)

Amortizing a discount on bonds payable: A) B) C) D)

153)

Increases interest expense. Increases periodic cash payments to bondholders. Decreases interest expense. Decreases periodic cash payments to bondholders.

Premium on bonds payable:

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A) B) C) D)

154)

Is an asset account. Increases the carrying value of the liability. Is a contra-asset account. Is disclosed by a footnote.

Amortizing a premium on bonds payable: A) B) C) D)

Increases interest expense. Increases periodic cash payments to bondholders. Decreases interest expense. Decreases periodic cash payments to bondholders.

155) On February 28, Year 2, $5,000,000 of 6%, 10-year bonds payable, dated December 31, Year 1, are issued. Interest on the bonds is payable semiannually each June 30 and December 31. If the total amount received (including accrued interest) by the issuing corporation is $5,060,000, which of the following is correct? A) B) $300,000. C) $50,000. D)

The bonds were issued at a premium. The amount of cash paid to bondholders on the next interest date, June 30, Year 2, is The amount of cash paid to bondholders on the next interest date, June 30, Year 2, is The bonds were issued at a discount.

156) Webster Company issues $1,000,000 face value, 6%, 5-year bonds payable on December 31, Year 1. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Webster uses the straight-line method of amortizing bond discount or premium.The entry made by Webster Company to record issuance of the bonds payable at December 31, Year 1, includes:

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A) B) C) D)

A debit to Cash of $1,000,000. A debit to Discount on Bonds Payable of $30,000. A credit to Bonds Payable of $970,000. A credit to Bond Interest Payable of $30,000.

157) Webster Company issues $1,000,000 face value, 6%, 5-year bonds payable on December 31, Year 1. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Webster uses the straight-line method of amortizing bond discount or premium.Webster's entry at June 30, Year 2, to record the first semiannual payment of interest and amortization of discount on the bonds includes a: A) B) C) D)

Debit to Bond Interest Expense of $30,000. Credit to Cash of $33,000. Debit to Discount on Bonds Payable of $3,000. Debit to Bond Interest Expense of $33,000.

158) Webster Company issues $1,000,000 face value, 6%, 5-year bonds payable on December 31, Year 1. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Webster uses the straight-line method of amortizing bond discount or premium.The amount of bond interest expense recognized by Webster Company in Year 2 with respect to these bonds is: A) B) C) D)

$60,000. $63,000. $120,000. $66,000.

159) Webster Company issues $1,000,000 face value, 6%, 5-year bonds payable on December 31, Year 1. Interest is paid semiannually each June 30 and December 31. The bonds sell at a price of 97; Webster uses the straight-line method of amortizing bond discount or premium.The carrying value of this liability in Webster Company's balance sheet at December 31, Year 2, is:

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A) B) C) D)

$1,000,000. $970,000. $976,000. $967,000.

160) Trego Company issued, on December 31, Year 1, $1,000,000 face value, 4%, 5-year bonds. Interest will be paid semiannually each June 30 and December 31. The bonds sold at a price of 102; Trego uses the straight-line method of amortizing bond discount or premium.The entry made by Trego Company to record issuance of the bonds payable at December 31, Year 1, includes: A) B) C) D)

A debit to Cash of $1,000,000. A credit to Premium on Bonds Payable of $20,000. A credit to Bonds Payable of $1,020,000. A credit to Bond Interest Payable of $20,000.

161) Trego Company issued, on December 31, Year 1, $1,000,000 face value, 4%, 5-year bonds. Interest will be paid semiannually each June 30 and December 31. The bonds sold at a price of 102; Trego uses the straight-line method of amortizing bond discount or premium.Trego's entry at June 30, Year 2, to record the first semiannual payment of interest and amortization of discount/premium on the bonds includes a: A) B) C) D)

Debit to Bond Interest Expense of $20,000. Credit to Cash of $22,000. Credit to Premium on Bonds Payable of $2,000. Debit to Bond Interest Expense of $18,000.

162) Trego Company issued, on December 31, Year 1, $1,000,000 face value, 4%, 5-year bonds. Interest will be paid semiannually each June 30 and December 31. The bonds sold at a price of 102; Trego uses the straight-line method of amortizing bond discount or premium.The amount of bond interest expense recognized by Trego Company in Year 2 with respect to these bonds is:

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A) B) C) D)

$44,000. $42,000. $38,000. $36,000.

163) Trego Company issued, on December 31, Year 1, $1,000,000 face value, 4%, 5-year bonds. Interest will be paid semiannually each June 30 and December 31. The bonds sold at a price of 102; Trego uses the straight-line method of amortizing bond discount or premium.The carrying value of this liability in Trego Company's December 31, Year 2, balance sheet is: A) B) C) D)

164)

After bonds have been issued, their market value can be expected to: A) B) C) D)

165)

$1,000,000. $1,016,000. $1,020,000. $1,024,000.

Rise as any premium is amortized. Fall if interest rates rise. Fall as any discount is amortized. Rise if interest rates rise.

The amount of the present value of a future cash receipt will depend upon:

A) Only the length of time until the money is received. B) Only the amount of money to be received. C) Only the required rate of return. D) The amount of money to be received, the length of time until the money is received, and the required rate of return.

166)

The price at which a bond sells is equal to the:

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A) payments. B) C) D)

167)

Maturity value of the bonds plus the present value to investors of the future interest Sum of the future interest payments, minus the maturity value of the bonds. Present value to investors of the future principal and interest payments. Sum of the future interest payments, plus the maturity value of the bonds.

The present value of an amount is:

A) Always greater than the future value. B) Always less than the future value. C) Always equal to the future value. D) Greater than, less than, or equal to the future value depending upon interest rates and the time period involved.

168)

A call provision on a bond: A) B) C) D)

Permits the corporation to redeem the bonds at a specified price. Allows the corporation to revise the stated interest rate. Allows the corporation to revise the maturity date. Always creates the lowest price at which the bond will sell for.

169) Sand, Incorporated has outstanding $5,000,000, 10%, 20-year bonds. The bonds are callable at 104 on any interest date. The bonds were issued at par and mature in 10 years. Recently, interest rates have declined to 5% and the market price of the bonds has increased to 107. If the company exercises the call provision, the company will record: A) A credit to cash of $5,350,000. B) A loss of $200,000 on its income statement in the year the bonds are called. C) A loss of $20,000 in the year the bonds are called and a $20,000 loss for the next 9 years. D) A gain of $150,000 in the year the bonds are called.

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170) Which of the following is an example of a loss contingency that should be disclosed in a footnote to a company's financial statements? A) The president of the company has threatened to resign if the board of directors does not vote to increase executive salaries. B) A lawsuit has been brought against the company, but the company hopes to prevail in the suit and thereby avoid any liability. C) The allowance for uncollectible accounts receivable is estimated at $200,000. D) The company owns special-purpose machinery that, if sold, would probably bring a price less than its current book value.

171)

Which of the following is not a characteristic of an estimated liability?

A) The liability is known to exist. B) The precise dollar amount cannot be determined until a later date. C) The liability should not be recorded in the accounting records until future events have determined the exact amount. D) The liability stems from past transactions.

172)

Commitments, such as contracts for future transactions: A) B) C) D)

173)

Are classified as liabilities. Are classified as assets. Are footnoted in financial statements, if material. Are only disclosed if negative due to the principle of conservatism.

Which of the following is an example of a contingent liability?

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A) A lawsuit pending against a restaurant chain for improper storage of perishable food items. B) The liability for future warranty repairs on computers sold during the current period. C) A corporation's long-term employment contract with its chief executive officer. D) A liability for notes payable with interest included in the face amount.

174) Ultimate Company is a defendant in a lawsuit alleging damages of $3 billion. The litigation is expected to continue for several years, and no reasonable estimate can be made at this time of Ultimate Company's ultimate financial responsibility. This situation is an example of: A) Off-balance-sheet financing. B) A loss contingency that should be disclosed in notes to Ultimate Company's financial statements. C) An estimated liability that must appear in Ultimate Company's balance sheet. D) A loss in purchasing power caused by inflation.

175) The Music House issues a contract to a new recording artist to produce a number of albums over the next five years at $1 million per album. This situation is an example of: A) A contingent liability that should be recorded in the accounting records. B) A contingent liability requiring footnote disclosure. C) An estimated liability, since the number of albums to be produced is not yet determined. D) A commitment that, if material, may be disclosed in a footnote.

176)

The interest coverage ratio:

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A) Is computed by dividing total liabilities by annual interest expense. B) Is computed by dividing liquid assets by annual required interest payment. C) Indicates the percentage of total assets that are financed with borrowed money. D) Measures the number of times the annual interest expense could be covered by annual income from operations.

177)

The interest coverage ratio is computed by dividing: A) B) C) D)

Net income by interest expense. Operating income by interest expense. Interest expense by net income. Interest expense by operating income.

178) Which of the following statistics is of more significance to a long-term creditor than to a short-term creditor? A) B) C) D)

Interest coverage ratio Receivables turnover rate Working capital Quick ratio

179) The basic measure of the amount of leverage being applied within the capital structure of an organization is the: A) B) C) D)

Interest coverage ratio. Debt ratio. Return on assets. Return on equity.

180) Which of the following ratios and rates that measure debt-paying ability focuses on the long-term position of a company? Version 1

A) B) C) D)

Quick ratio Inventory turnover Current ratio Debt ratio

181) The current balance sheet of Apex reports total assets of $20 million, total liabilities of $2 million, and stockholders’ equity of $18 million. Apex is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.What will be the effect on Apex's debt ratio if Apex's owner invests an additional $2 million to finance its expansion? A) The debt ratio will decrease from 0.1 (or $2 million ÷ $20 million) to approximately 0.09 (or $2 million ÷ $22 million) after the additional investment. B) The debt ratio will decrease from approximately 0.22 (or $2 million ÷ $9 million) before to approximately 0.18 (or $2 million ÷ $11 million) after the additional investment. C) The debt ratio will increase from 20 before to 22 after the additional investment. D) Additional investment by owner will have no effect on the debt ratio.

182) The current balance sheet of Apex reports total assets of $36 million, total liabilities of $10 million, and stockholders’ equity of $26 million. Apex is considering several financing possibilities in order to expand operations.Assume Apex borrows $4 million to finance its expansion. Apex's debt ratio immediately after the borrowing will be: A) B) C) D)

0.11. 0.39. 0.69 (rounded). 0.35 (rounded).

183) The current balance sheet of Apex reports total assets of $20 million, total liabilities of $2 million, and stockholders’ equity of $18 million. Apex is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.Assume Apex borrows $2 million to finance its expansion. Apex's debt ratio immediately after the borrowing will be: Version 1

A) B) C) D)

0.10. 0.20. 0.33 (rounded). 0.18 (rounded).

184) The current balance sheet of Apex reports total assets of $20 million, total liabilities of $2 million, and stockholders’ equity of $18 million. Apex is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.What is the approximate maximum additional amount Apex can borrow and not exceed a debt ratio of 0.3? A) B) C) D)

$4,000,000 $5,500,000 $5,000,000 $600,000

185) At the end of Year 1, it is discovered that the accountant for Gower Company failed to record $60,000 of interest payable that had accrued since the last interest payment date. The current ratio debt ratio, and interest coverage ratio had already been computed using the erroneous data. Correction of the accounting records will have which of the following effects? A) Net income as formerly computed will not be affected by the correction of the error. B) The interest coverage ratio as formerly computed will not change as a result of the correction. C) The debt ratio as formerly computed will decrease as a result of the correction. D) The current ratio as formerly computed will decrease as a result of the correction.

186) The current balance sheet of Gamma reports total assets of $30 million, total liabilities of $3 million, and owners' equity of $27 million. Gamma is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.What will be the effect on Gamma's debt ratio if Gamma's owner invests an additional $5 million to finance its expansion?

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A) The debt ratio will decrease from 0.1 (or $3 million ÷ $30 million) to 0.0857 (or $3 million ÷ $35 million) after the additional investment. B) The debt ratio will decrease from 3/27 before to 3/32 after the additional investment. C) The debt ratio will increase from 30 before to 35 after the additional investment. D) Additional investment by owner will have no effect on the debt ratio.

187) The current balance sheet of Gamma reports total assets of $30 million, total liabilities of $3 million, and owners' equity of $27 million. Gamma is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.Assume Gamma borrows $5 million to finance its expansion. Gamma's debt ratio immediately after the borrowing will be (rounded): A) B) C) D)

0.11. 0.23. 0.30. 0.35.

188) The current balance sheet of Gamma reports total assets of $30 million, total liabilities of $3 million, and owners' equity of $27 million. Gamma is considering several financing possibilities in order to expand operations. Each question based on this data is independent of any others.What is the maximum amount Gamma can borrow and not exceed a debt ratio of 0.2? A) B) C) D)

189)

$3,750,000 $600,000 $6,000,000 $5,750,000

Off balance sheet financing may involve:

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A) B) C) D)

190)

An operating/Type B lease. A pension plan. Deferred income taxes. A capital/Type A lease.

The pension expense of the current period is equal to: A) Amounts paid to retired workers during the current period. B) The estimated future pension benefits earned by today's workers during the current

period. C) The present value of the estimated future pension benefits earned by today's workers during the current period. D) Cash payments made during the period to the trustee of the pension plan.

191)

An operating/Type B lease: A) B) C) D)

Creates an asset and a liability on the balance sheet. Is a form of off-balance sheet financing. Is always preferable to a capital/Type A lease. Transfers title to the asset being leased.

192) Which one of the following would cause a lease to be accounted for as a capital/Type A lease? A) The lease payments are greater than $10,000 per month. B) The leased property is located on premises owned by the lessee. C) The lease contract is intended to provide the lessee with the use of the property over most of its useful life. D) The value of the leased property is greater than 10% of the net assets of the lessee.

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193) A capital/Type A lease is recorded in the accounting records of the lessee (renter) with an entry that: A) Increases Rent Expense and decreases Cash each time a lease payment is made. B) Increases Cash and increases Rental Revenue each time a lease payment is received. C) Creates an asset account, Lease Equipment, and establishes a liability account, Lease Payment Obligation, for the present value of the future lease payments. D) Creates an asset account, Lease Equipment, and recognizes Sales Revenue for the present value of the future lease payments.

194)

A company with a fully funded pension plan:

A) Recognizes no pension expense. B) Reports no long-term liability for future pension payments. C) Does not utilize the services of a trustee to operate the pension plan. D) Recognizes pension expense equal to the cash payments made to retirees during the current period.

195) In estimating annual pension expense, which of the following factors would not be taken into consideration? A) B) C) D)

196)

Current financial condition of the company. Expected rate of return to be earned on pension fund assets. Employee turnover rates. Compensation levels and estimated rate of pay increases.

Pension expense is:

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A) The present value of the estimated future pension benefits earned by employees as a result of their services during the period. B) The amount funded to the pension in a given year. C) The future value of rights granted to employees as a result of their services during the period. D) The amount withdrawn from the pension fund to pay retirees during the period.

197)

Which of the following is not true about post-retirement benefits?

A) Post-retirement costs should be recognized as expense as the workers earn the right to receive the benefits. B) Most corporations have fully funded their post-retirement benefits. C) Unfunded post-retirement costs are a non-cash expense. D) A corporation's liability for post-retirement benefits is equal to the present value of estimated future payments.

198)

A liability for deferred income taxes represents:

A) Income taxes on earnings already reported in the income statement, but that will be taxed in future periods. B) Income taxes already paid on earnings that have not yet been reported in the company's income statement. C) Income tax obligations being disputed with the Internal Revenue Service. D) Income taxes levied in prior years that are now past due.

199)

Using different accounting methods on financial statements and tax returns will create: A) B) C) D)

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No effect on the balance sheet, only the income statement. No effect on the balance sheet or the income statement. A deferred tax liability. An illegal situation.

200)

Deferred taxes are classified as: A) B) C) D)

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Only a liability. Only an asset. Either an asset or liability, depending upon the situation. A non-operating expense.

Answer Key Test name: Chapter 10 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) FALSE 8) FALSE 9) FALSE 10) TRUE 11) FALSE 12) TRUE 13) TRUE 14) FALSE 15) FALSE 16) TRUE 17) FALSE 18) FALSE 19) FALSE 20) TRUE 21) FALSE 22) TRUE 23) TRUE 24) FALSE 25) FALSE 26) FALSE Version 1

27) FALSE 28) TRUE 29) TRUE 30) FALSE 31) FALSE 32) TRUE 33) TRUE 34) FALSE 35) FALSE 36) FALSE 37) FALSE 38) FALSE 39) FALSE 40) TRUE 41) FALSE 42) FALSE 43) FALSE 44) TRUE 45) FALSE 46) TRUE 47) TRUE 48) TRUE 49) FALSE 50) TRUE 51) FALSE 52) FALSE 53) FALSE 54) FALSE 55) D 56) B Version 1

57) B 58) A 59) B 60) C 61) B 62) B 63) C 64) D 65) D 66) D 67) B 68) B 69) A 70) A 71) C 72) C 73) C 74) C 75) C 76) C 77) A 78) B 79) B 80) B 81) C 82) C 83) B 84) B 85) C 86) D Version 1

87) C 88) C 89) B 90) D 91) A 92) B 93) B 94) D 95) D 96) C 97) C 98) A 99) B 100) D 101) C 102) A 103) B 104) C 105) C 106) C 107) D 108) D 109) B 110) B 111) A 112) A 113) B 114) C 115) B 116) D Version 1

117) A 118) B 119) C 120) B 121) A 122) B 123) A 124) B 125) C 126) B 127) A 128) C 129) C 130) C 131) C 132) C 133) B 134) C 135) C 136) B 137) B 138) B 139) D 140) B 141) D 142) C 143) A 144) A 145) B 146) C Version 1

147) B 148) C 149) C 150) B 151) A 152) A 153) B 154) C 155) A 156) B 157) D 158) D 159) C 160) B 161) D 162) D 163) B 164) B 165) D 166) C 167) B 168) A 169) B 170) B 171) C 172) C 173) A 174) B 175) D 176) D Version 1

177) B 178) A 179) B 180) D 181) A 182) D 183) D 184) B 185) D 186) A 187) B 188) A 189) A 190) C 191) B 192) C 193) C 194) B 195) A 196) A 197) B 198) A 199) C 200) C

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CHAPTER 11: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine technical accounting terms introduced in this chapter:CorporationPreferred stockCommon stockPar valueTreasury stockUnderwriterDividendPaid-in capitalRetained earningsRequired:Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms._____ (a) The type of stock whose owners have little say in management of the corporation and whose annual dividend is limited to a preset amount._____ (b) Distribution of cash or other company assets to the owners of a corporation._____ (c) An investment banking firm that guarantees an issuing corporation a specific price for a stock issue and then makes a profit by selling the shares to the investing public at a higher price._____ (d) Shares of a corporation's stock that have been issued and then reacquired, but not cancelled._____ (e) An element of stockholders' equity arising from the profitable operations of a business._____ (f) The type of stock most likely to increase dramatically in value if the issuing corporation is extremely successful._____ (g) Amounts invested in a corporation by its stockholders.

2) Shown below are selected account balances from the accounting records of Hyde Corporation at December 31, Year 1: Additional paid-in capital: Common Retained Earnings Organization Costs 9% Cumulative preferred stock, $100 par value, authorized, issued, and outstanding 6,000 shares Dividends Payable Notes Payable Income Taxes Payable Common Stock, $5 par value; authorized, 100,000 shares; issued and outstanding, 60,000 shares

$ 600,000 $ 1,350,000 $ 25,700 $ 600,000 $ 300,000 $ 570,000 $ 86,000 $ 300,000

Required:Prepare the stockholders' equity section of Hyde Corporation’s balance sheet as of December 31, Year 1, using the data provided above.

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3) The stockholders' equity section of the balance sheet of Benson Corporation (with certain details omitted) appears below: Stockholders' equity: 6% preferred stock, $100 par value; authorized, 50,000 shares; issued and outstanding, ?? shares Common Stock, $25 par value; authorized, 50,000 shares; issued and outstanding, ?? shares Additional paid-in capital:

$ 700,000 625,000

Preferred stock Common stock Total paid-in capital Retained earnings

35,000 375,000 $ 1,735,000 740,000

Total stockholders' equity

$ 2,475,000

Answer the following questions based on the stockholders' equity section given above.(A) What is the total amount of legal capital?(B) What is the specified amount of dividends that would be paid annually to the preferred stockholders before any dividend can be paid to common stock investors?(C) How many preferred shares have been issued?(D) How many common shares have been issued?(E) What is the average issue price of a share of common stock?(F) The balance in retained earnings at the beginning of the current year was $575,000, and there were no dividends in arrears. Net income for the current year was $360,000. What is the amount of the dividends declared on each share of common stock during the current year?

4) The stockholders' equity section of the balance sheet of Powell Corporation (with certain details omitted) appears below:

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Stockholders' equity: 8% cumulative preferred stock, $100 par value; authorized 100,000 shares; issued and outstanding, ?? shares Common Stock, $5 par value; authorized, 200,000 shares; issued and outstanding, ?? shares Additional paid-in capital:

$ 1,900,000

Preferred stock Common stock Total paid-in capital Retained earnings

106,000 1,970,000 $ 4,926,000 1,170,000

Total stockholders' equity

$ 6,096,000

950,000

Required:(A) What is the total amount of legal capital?(B) What is the total amount of dividends paid annually to the preferred stockholders?(C) What is the average issue price of a share of common stock?(D) The balance in retained earnings at the beginning of the current year was $1,351,500, and there were no dividends in arrears. Net income for the current year was $700,000. What is the amount of the dividends declared on each share of common stock during the current year?

5) When Haven Corporation was incorporated in Year 1, authorization was obtained to issue 200,000 shares of $5 par value common stock and 6,000 shares of 8% cumulative preferred stock. The preferred stock has a par value of $100. All the preferred stock was issued at $107 per share, and 110,000 shares of the common stock were sold for $9 per share. The operations of the company resulted in a net loss of $19,000 in Year 1 and net income of $125,000 in Year 2. In Year 3, net income was $352,000, and the cash position was sufficient to allow the board of directors to declare a cash dividend of $1 per share to the common shareholders, as well as satisfy all preferred stock dividend requirements.Required:(A) Determine the amount of retained earnings at the end of Year 3.(B) Complete in good form the following stockholders' equity section of Haven Corporation's balance sheet at December 31, Year 3: Stockholders' equity:

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8% cumulative preferred stock, $100 par value; authorized, issued, and outstanding, 6,000 shares Common Stock, $5 par value; authorized, 200,000 shares; issued and outstanding, 110,000 shares Additional paid-in capital: Preferred stock Common stock Total paid-in capital Retained earnings (from Part A)earnings Total stockholders' equity

6) A partial list of the ledger accounts of Skyway Corporation is shown below, followed by a list of transactions. 1 2 3 10 20 21 25 26 30 40

Cash Land Organization costs Dividends Payable Preferred stock, $100 par Common stock, $10 par Additional paid-in capital Donated capital Retained earnings Income summary

Required:For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.) Transactions

Account(s) Account(s) Debited Credited Example: Issued preferred stock for cash 1 20, 25

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(a) (b)

at a price above par Declared a cash dividend on common stock 10,000 shares of $10 par common stock are issued in exchange for land appraised at $1 million Paid attorney for services relating to formation of the corporation Shares of common stock are sold for cash at a price above par The dividend declared in (a), above, is paid Income Summary account is closed at the end of a profitable period Land is donated to the corporation by the City of Chicago

7) A partial list of the ledger accounts of Hellman Company is shown below, followed by a list of transactions. 1 2 3 10 20 21 25 26 30 40

Cash Land Organization costs Dividends Payable Preferred stock, $100 par Common Stock, $2 Par Additional paid-in capital Donated capital Retained earnings Income summary

Required:For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.) Transactions

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Account(s) Account(s) Debited Credited

(a)

(b) (c) (d)

(e)

(f)

Example: Issued preferred stock for cash at a price above par. The City of Hartford donated land to Hellman Company to be used as a building site. Declared a cash dividend on common stock. 10,000 shares of common stock are issued at price above par. 1,000 shares of $2 par common stock are issued in exchange for attorney services relating to formation of corporation; the services are valued at $3,750. Income Summary account is closed at the end of a period in which Hellman Company reported a net loss. The dividend declared in (b) above is paid.

20, 25

8) Shown below is information relating to the stockholders' equity of Churchill, Incorporated: 6% cumulative preferred stock, $100 par Common stock, $10 par 1,000,000 shares authorized Additional paid-in capital; common stock Deficit (negative retained earnings) Dividends in arrears on preferred stock, 1 full year

$ 1,200,000 $ 3,000,000 $ 6,000,000 $ (1,200,000) ?

Required:From the above information, compute the following: (A) Number of shares of preferred stock issued and outstanding (B) Average issue price per share of common stock (C) Total paid-in capital (D) Total stockholders' equity (E) Book value per share of common stock

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9) Stock values Presented below is an excerpt from the stock listings of a recent issue of the Wall Street Journal.

Russell Corporation

Dividend Yield % 1.55 2.4

Volume High Low 100s 20 1640 22 18 1/4

Close 18

Net Charge -4 1/4

Required:Answer the following questions based on the information about the Russell Corporation given above: (A) How many shares of Russell Corporation stock were sold on this day? (B) If you had purchased 10 shares of Russell Corporation stock at the lowest price of the day, what would be the total price that you would have paid for the stock? (C) What was the closing price of Russell Corporation Stock on the previous day? (D) If the board of directors of Russell Corporation increased the amount of the annual dividends to $1.00 per share, what would be the amount of the yield percentage on the stock?

10) Shown below is the stockholders' equity section of Jones' balance sheet at December 31, Year 1. Stockholders' equity: Common stock, $5 par value, authorized 500,000 shares, issued 120,000 shares Additional paid-in capital Total paid-in capital Retained earnings

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$ 600,000 360,000 $ 960,000 750,000

Total stockholders' equity

$ 1,710,000

During Year 2, the following events occurred:Jones issued 2,000 shares of $5 par value common stock in exchange for legal services; the value of these services was set at $19,500.Jones issued 8,000 of its 10,000 authorized shares of 8% cumulative preferred stock, $100 par value, for $108 per share.The board of directors declared and paid dividends of $8 per share to preferred stockholders and $0.50 per share to common stockholders.The company's net income is $450,000. Required: (A)Calculate the retained earnings balance at the end of Year 2.(B) Prepare in good form the stockholders' equity section of a balance sheet prepared for Jones at December 31, Year 2.

11) Shown below is the stockholders’ equity section of Farrell Corporation's balance sheet at December 31, Year 1: Stockholders' equity: Common stock, $3 par value, authorized 200,000 shares, issued 100,000 shares Additional paid-in capital Total paid-in capital Retained earnings Total stockholders' equity

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$ 300,000 450,000 $ 750,000 650,000 $ 1,400,000

During Year 2, the following events occurred:Farrell Corporation issued 1,000 shares of $3 par common stock in exchange for land. Although several real estate appraisers disagree on the value of the land, Farrell's stock is currently selling on a stock exchange for $32 per share.Farrell Corporation issued 3,000 shares of 5% cumulative preferred stock, $100 par value, for $108 per share.The board of directors declared a dividend of $1 per share on the common stock.Farrell's net income is $375,000. Required: (A) Calculate the retained earnings balance at the end of Year 2. (B) Complete in good form the stockholders' equity section of a balance sheet prepared for Farrell Corporation at December 31, Year 2.

12) The Year 3 annual report of Kirtland Products disclosed net income of approximately $87 million for the fiscal year ending March 31, Year 3, and retained earnings of approximately $485 million as of March 31, Year 3.

(A) Which financial statement shows computation of net income? (B) Which financial statement includes the retained earnings figure of $485 million? (C) Explain why Kirtland reports $87 million as net income, but a much larger amount, $485 million, as retained earnings.

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13) A recent annual report of Dobbs, Incorporated reported a net loss of approximately $63 million and retained earnings of approximately $1.6 billion.

Required: (A) Which financial statement shows computation of the $63 million net loss? (B) Which financial statement includes the retained earnings figure of $1.6 billion? (C) Explain how it is possible for Dobbs to report both a net loss of $63 million and retained earnings of $1.6 billion in a single set of financial statements.

14) Blake Corporation has the following accounts on December 31, Year 1: Common Stock $.25 par value, 1,000,000 authorized, 400,000 issued.Preferred stock 6%, $100 par value, cumulative, 5,000 shares authorized, 3,000 issued.Treasury stock, 1,500 shares purchased at market value of $6 per share Paid-in capital - Preferred Paid-in capital - Common Dividends Payable Retained Earnings

$ 190,000 $ 2,400,000 $ 415,000 $ 2,335,000

Required: (1) Prepare the stockholders' equity section of the balance sheet. (2) Prepare the journal entry for the purchase of the treasury stock. (3) Blake paid the liability for dividends on March 1. Prepare the journal entry for the payment.

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15) Raymond, Incorporated has two classes of capital stock outstanding: 25,000 shares of 5%, $100 par value cumulative preferred and 30,000 shares of $10 par value common. The company had a deficit (negative balance in retained earnings) of $160,000 at the beginning of the current year, and preferred dividends were three years in arrears. During the current year, the company earned net income of $970,000. What will be the balance in the Retained Earnings account at the end of the current year if the company takes all the actions necessary to pay a dividend of $2.50 per share on the common stock?

16) Most preferred stocks do not have voting power, a basic right of common stock. Required: Identify at least two features of most preferred stocks that justify or support use of the term preferred in describing these types of stock issues.

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17)

Manson Corporation has outstanding several different stock issues.

Required: (A) For each of the types of stock listed below, briefly describe a situation or circumstance that would cause the market price of that type of stock to increase. (1) Preferred stock (2) Common stock (3) Convertible preferred stock (B) How would the increase in market value of any of Manson's stock be reflected in Manson's financial statements?

18) Shown below is information relating to the stockholders' equity of Silver Waste Management at December 31, Year 2: 8% cumulative preferred stock, $150 par value; authorized, 10,000 shares; issued and outstanding, 6,000 shares Common stock, $6.50 par value; authorized, 500,000 shares; issued and outstanding, 400,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

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$ 900,000

$ 2,600,000 $ 132,000 $ 2,970,000 $ 1,551,000

There are no dividends in arrears. The balance in Retained Earnings at the beginning of Year 2 was $1,237,500, and net income for Year 2 was $1,600,500.Required: Determine the following amounts: (A) Silver Waste's total legal capital at December 31, Year 2 (B) The total amount of Silver's paid-in capital at December 31, Year 2 (C) The average issue price per share of Silver's preferred stock (D) The book value per share of common stock (E) The amount of dividend declared on each share of common stock during Year 2

19) Bainbridge Corporation recently patented an extraordinary invention that will allow average homeowners to cheaply generate a large fraction of the electricity consumed in their houses. As a result, the market price of Bainbridge's common stock has soared to $160 per share. Bainbridge is about to announce a 4-for-1 stock split.

Required: Explain why the company would take this action?

20) Jackson Corporation engaged in the following treasury stock transactions during the current year:

June 11 Purchased 2,000 shares of treasury stock at $62 per share. August 10 Reissued 800 shares of the treasury stock acquired on June 11 at a price of $67 per share.

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December Reissued 600 shares of treasury stock at a price of $60 11 per share.

Required: Complete the following three general journal entries to record these treasury stock transactions. Date 20__

General Journal

Debit

Credit

June 11

Purchases 2,000 shares of treasury stock at a price of $62 per share

August 10

Reissued 800 shares of treasury stock (cost $62 per share) at a price of $67 per share.

December 11

Reissued 600 shares of treasury stock (cost $62 per share) at a price of $60 per share

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Answer Key Test name: Chapter 11 Test Bank (Problem Material) 1) (a) Preferred stock(b) Dividend(c) Underwriter(d) Treasury Stock(e) Retained earnings(f) Common stock(g) Paid-in capital 2) Stockholders' equity: 9% cumulative preferred stock, $100 par value: authorized, issued and outstanding, 6,000 shares Common Stock, $5 par value; authorized, 100,000 shares; issued and outstanding, 60,000 shares Additional paid-in capital:

$ 600,000 300,000

Common stock Total paid-in capital Retained earnings

600,000 $ 1,500,000 1,350,000

Total

$ 2,850,000

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3) (A) $1,325,000(B) $42,000(C) 7,000 shares(D) 25,000 shares(E) $40 per share(F) $6.12 per shareFeedback:(A) Par value (or stated value) represents the legal capital per share.Preferred stock par value of $700,000 + Common stock par value of $625,000 = $1,325,000(B) Specified annual dividends = $700,000 × 0.06 = $42,000(C) Number of preferred shares issued = Total par value of $700,000 ÷ Par value per share of $100 = 7,000(D) Number of common shares issued = Total par value of $625,000 ÷ Par value per share of $25 = 25,000(E) Average issue price of common shares = ($625,000 + $375,000) ÷ 25,000 shares = $40 per share(F) Ending retained earnings of $740,000 = Beginning retained earnings of $575,000 + Net income of $360,000 − Total amount of dividends declared Total amount of dividends declared = $575,000 + $360,000 − $740,000 = $195,000 Dividends declared on common stock = Total amount of dividends declared of $195,000 − Dividends declared on preferred stock of $42,000 (from part B) = $153,000 Dividend per share of common stock = Dividends declared on common stock of $153,000 ÷ Number of shares of common stock issued of 25,000 = $6.12 per share 4) (A) $2,850,000(B) $152,000(C) $15.37 per share(D) $3.84 per share (A)

Par value of preferred stock Par value of common stock

$ 1,900,000 950,000

Total legal capital

$ 2,850,000

(B)

8% × $1,900,000 = $152,000

(C)

Par value of common stock Paid-in capital in excess of par-common stock Total issue price of common stock Number of shares of common stock issued ($950,000 ÷ $5)

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$ 950,000 1,970,000 $ 2,920,000 190,000

Average issue price per share ($2,920,000 ÷ 190,000 shares)

(D)

Retained earnings, beginning of year Add: Net income for the year

$ 15.37

$ 1,351,500 $ 700,000 $ 2,051,500

Less: Retained earnings, end of year

1,170,000

Total dividends declared during the year

$ 881,500

Less: Total dividend declared to preferred Stockholders (part b)

(152,000)

Total dividend declared to common stockholders

$ 729,500

Dividend declared per share of common stock ($729,500 ÷ 190,000)

$ 3.84

5) (A) $204,000(B) Stockholders' equity: 8% cumulative preferred stock, $100 par value; authorized, issued, and outstanding, 6,000 shares Common Stock, $5 par value; authorized, 200,000 shares; issued and outstanding, 110,000 shares Additional paid-in capital:

$ 600,000 550,000

Preferred stock Common stock Total paid-in capital Retained earnings (from Part A)

42,000 440,000 $ 1,632,000 204,000

Total stockholders' equity

$ 1,836,000

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Feedback:(A)Preferred dividends declared during Year 3 = 6,000 shares × ($100 par value × 0.08) × 3 years = $144,000Total common dividends declared during Year 3 = 110,000 shares × $1 per share = $110,000Total dividends declared during Year 3 = Preferred dividends declared of $144,000 + Common dividends declared of $110,000 = $254,000Retained earnings at end of Year 3 = Year 1 net loss of $(19,000) + Year 2 net income of $125,000 + Year 3 net income of $352,000 − Total dividends declared during Year 3 of $254,000 = $204,000 6) Transactions

(a) (b)

Example: Issued preferred stock for cash at a price above par Declared a cash dividend on common stock 10,000 shares of $10 par common stock are issued in exchange for land appraised at $1 million Paid attorney for services relating to formation of the corporation Shares of common stock are sold for cash at a price above par The dividend declared in (a), above, is paid Income Summary account is closed at the end of a profitable period Land is donated to the corporation by the City of Chicago

Account(s) Account(s) Debited Credited 1 20, 25 30 2

10 21, 25

21, 25

7) Transactions

(a)

(b)

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Example: Issued preferred stock for cash at a price above par. The City of Hartford donated land to Hellman Company to be used as a building site. Declared a cash dividend on common

Account(s) Account(s) Debited Credited 1 20, 25 2

10 19

(e)

(f)

stock. 10,000 shares of common stock are issued at price above par. 1,000 shares of $2 par common stock are issued in exchange for attorney services relating to formation of corporation; the services are valued at $3,750. Income Summary account is closed at the end of a period in which Hellman Company reported a net loss. The dividend declared in (b) above is paid.

21, 25

8) (A) 12,000 shares (B) $30 per share (C) $10,200,000 (D) $9,000,000 (E) $25.76(A) Number of shares of preferred stock issued and outstanding = $1,200,000 ÷ $100 par value = 12,000 shares(B) Average issue price per share of common stock = ($3,000,000 + $6,000,000) ÷ 300,000 shares = $30 per share(C) Total paid-in capital = $1,200,000 + $3,000,000 + $6,000,000 = $1,200,000(D) Total stockholders' equity = $10,200,000 − $1,200,000 = $9,000,000(E) Book value per share of common stock = [9,000,000 − $1,200,000 − ($1,200,000 × 6%)] ÷ 300,000 = $25.76 per share 9) (A) 1,640 × 100 = 164,000 (B) 10 × $18 = $180 (C) $18 + 4 1/4 = $22 1/4 (D) $1.00 ÷ $18.00 = 5.56% (rounded)Feedback: (A) 1,640 × 100 = 164,000 (B) 10 × $18 = $180 (C) $18 + 4 1/4 = $22 1/4 (D) $1.00 ÷ $18.00 = 5.56% (rounded) 10) (A) $1,075,000(B)

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Stockholders' equity: 8% cumulative preferred stock, $100 par value, 10,000 shares authorized and 8,000 issued Common stock, $5 par value, authorized 500,000 shares, issued 122,000 shares Additional paid-in capital:

$ 800,000 610,000

Preferred Common Total paid-in capital Retained earnings

64,000 369,500 $ 1,843,500 1,075,000

Total stockholders' equity

$ 2,918,500

Feedback:(A)Common dividends = (120,000 shares + 2,000 shares) × $0.50 per share = $61,000Preferred dividends = 8,000 shares × $100 par value × 0.08 = $64,000 Retained earnings, beginning of Year 2 Add: Net income for Year 2 Less: Dividends declared ($61,000 common + $64,000 preferred) Retained earnings, December 31, Year 2

$ 750,000 450,000 (125,000) $ 1,075,000

(B)Par value of preferred shares issued = 8,000 × $100 par value = $800,000 Number of common shares issued = 120,000 at end of Year 1 + 2,000 during Year 2 = 122,000 Par value of common shares issued = $600,000 at end of Year 1 + (2,000 × $5 par value) = $610,000 Additional paid-in capital preferred stock = (Issue price of $108 − Par value of $100) × 8,000 shares = $64,000 Additional paid-in capital common stock = $360,000 at end of Year 1 + [(Market value of shares issued of $19,500 − (Par value of $5 × 2,000 shares] = $360,000 + $9,500 = $369,500 11) (A) $909,000(B) Stockholders' equity: 5% cumulative preferred stock, $100 par value;

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$ 300,000

authorized, 10,000 shares, issued and outstanding, 3,000 Common stock, $3 par value; authorized, 200,000 shares; issued and outstanding, 101,00 shares Additional paid-in capital:

303,000

Preferred Common Total paid-in capital Retained earnings

24,000 479,000 $ 1,106,000 909,000

Total stockholders' equity

$ 2,015,000

Feedback: (A) Common dividends = (100,000 shares + 1,000 shares) × $1 per share = $101,000 Preferred dividends = 3,000 shares × $100 par value × 0.05 = $15,000 Retained earnings, beginning of Year 2 Add: Net income for Year 1 Less: Dividends declared ($101,000 common + $15,000 preferred)

$ 650,000 375,000 (116,000)

Retained earnings, December 31, Year 2

$ 909,000

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(B) Par value of preferred shares issued = 3,000 × $100 par value = $300,000 Number of common shares issued = 100,000 at end of Year 1 + 1,000 during Year 2 = 101,000 Par value of common shares issued = 101,000 × $3 par value = $303,000 Additional paid-in capital preferred stock = (Issue price of $108 − Par value of $100) × 3,000 shares = $24,000 Additional paid-in capital common stock = $450,000 at end of Year 1 + [(Market value of $32 − Par value of $3) × 1,000 shares] = $450,000 + $29,000 = $479,000 12) (A) Income statement (or statement of operations)<br> <br> (B) Balance sheet (or statement of retained earnings)<br> <br> (C) Net income represents the increase in owners' equity resulting from profitable operations for a single period. Kirtland Products generated net income of $87 million for the fiscal year ending March 31, Year 3. Retained earnings represents the cumulative amount of net income and losses over the entire life of the business, less all amounts that have been distributed to owners (stockholders) as dividends. Since Kirtland Products began operations, the cumulative amount of income in excess of amounts paid out as dividends amounts to $485 million as of March 31, Year 3.

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13) (A) Income statement (or statement of operations).<br><br>(B) Balance sheet (or statement of retained earnings, although this statement is not introduced until the next chapter).<br><br>(C) Net loss represents the decrease in owners' equity resulting from unprofitable operations for a single period. Dobbs, Incorporated operations generated a net loss of $63 million for the current year. Retained earnings represents the cumulative net income and losses over the entire life of the business, less all amounts that have been distributed to owners (stockholders) as dividends. Since Dobbs, Incorporated began operations, the cumulative amount of income in excess of amounts paid out as dividends amounts to $1.6 billion. 14) (A) Blake Corporation Stockholders' Equity December 31, Year 1 Stockholders' equity: 6% preferred stock, $100 par value, cumulative; authorized, 5,000 shares; issued and outstanding, 3,000 shares Common stock, $0.25 par value; authorized, 1,000,000 shares; issued and outstanding, 400,000 shares Paid-in capital:

$ 300,000

Preferred Common Total paid-in capital Retained earnings Less: Treasury stock (1,500 shares of common stock, at $6 cost)

190,000 2,400,000 $ 2,990,000 $ 2,335,000 (9,000)

Total stockholders' equity

$ 5,316,000

100,000

(B) Debit Treasury Stock

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Credit

9,000

Cash

9,000

Credit

415,000 415,000

15) $235,000 Deficit at beginning of current year Net income for current year Retained earnings at end of current year before declaration of dividends Dividends in arrears on 5% preferred stock (3 Years x 25,000 shares x $5 per share) Dividends for current year on 5% preferred stock Dividends for common stock (30,000 shares x $2.50 per share) Retained earnings at end of current year

$ (160,000) 970,000 $ 810,000 (375,000) (125,000) (75,000) $ 235,000

16) The answer should include two of the following features of most preferred stocks that justify the term preferred:Preferred as to dividends: Preferred stock is entitled to receive each year a dividend of specified amount before any dividend is paid on the common stock.Cumulative as to dividend rights: If any or all of the regular dividend on cumulative preferred stock is omitted in a given year, the amount omitted is in arrears and must be paid in a subsequent year before any dividend can be paid on the common stock.Preferred as to assets in event of liquidation: If a business is terminated, the preferred stock is entitled to payment in full of its par value or a higher stated liquidation value before any payment is made to common stockholders. (Although not as common, student may also list conversion privilege as a "preferred" feature of some preferred stock.)

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17) (A)(1) Since the market price of preferred stock varies inversely with interest rates, a decline in interest rates would cause the market price of preferred stock to increase.<br> <br> (A)(2) Investors' increased confidence in future profitability of Murdock 's operations would result in a price increase in Murdock 's common stock. An increase in market value of common stock might also result from expected higher common stock dividends in the future or from a decline in interest rates.<br> <br> (A)(3) An increase in the market value of common stock would cause a corresponding increase in the market value of convertible preferred stock.<br> <br> (B) After shares have been issued, they belong to the stockholders, not to the issuing corporation. Increases (and decreases) in the market value of shares after issuance are not recorded in the corporation's accounting records.

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18) (A) $3,500,000 (B) $6,602,000 (C) $172 (D) $17.80 per share (E) $3.04 Feedback: (A) $900,000 + $2,600,000 = $3,500,000 total legal capital (B) $900,000 + $2,600,000 + $132,000 + $2,970,000 = $6,602,000 total paid-in capital (C) ($900,000 + $132,000) ÷ 6,000 shares = $172 per share issue price (D) $2,600,000 + $2,970,000 + $1,551,000 = $7,121,000 common stockholders' equity $7,121,000 equity allocable to common stock ÷ 400,000 shares = $17.80 per share (E) Retained earnings, beginning of year Net income Subtotal Less: Retained earnings, end of year Retained earnings declared as dividends Less: Dividends on preferred stock

$ 1,237,500 1,600,500 $ 2,838,000 $(1,551,000) $ 1,287,000 (72,000)

Total dividends to common stockholders

$ 1,215,000

$1,215,000 ÷ 400,000 shares = $3.04 per share of common stock 19) The purpose of a stock split is to bring the per-share market price of the company's stock down into a more appropriate "trading range" - that is, a price that is appealing to a greater number of potential investors. 20) Date

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General Journal

Debit

Credit

20__ June 11

Treasury Stock

124,000

Cash

124,000

Purchases 2,000 shares of treasury stock at a price of $62 per share

August 10

Cash

53,600

Treasury Stock

49,600

Additional Paid-in Capital: Treasury Stock Transactions

4,000

Reissued 800 shares of treasury stock (cost $62 per share) at a price of $67 per share.

December 11

Cash

36,000

Additional Paid-in Capital: Treasury Stock Transactions Treasury Stock

1,200 37,200

Reissued 600 shares of treasury stock (cost $62 per share) at a price of $60 per share.

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CHAPTER 11 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A corporation is a legal entity separate from its owners; it may sue and be sued, but it may not own property in its own name. ⊚ ⊚

true false

2) A corporation continues its operations even if a stockholder dies, sells their shares, or are no longer owners for other reasons. ⊚ ⊚

true false

3) Stockholders of a corporation are personally liable for the debts of the corporation if all shares of stock are owned by the officers of the corporation. ⊚ ⊚

true false

It is illegal for the government to tax corporate earnings twice. ⊚ ⊚

true false

5) Stockholders in a corporation elect the board of directors, pass the bylaws of the corporation, and hire top corporate officers and managers. ⊚ ⊚

true false

6) The costs to organize a corporation (organization costs) are reported as an intangible asset in the balance sheet and amortized to expense over the 5-year life used by the IRS. ⊚ ⊚

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true false

7) When a stockholder sends in a proxy statement to a corporation in which he or she owns stock, the stockholder is granting management the voting rights associated with their shares. ⊚ ⊚

true false

8) A stockholders' subsidiary ledger will have entries made for each stockholder showing the number of shares held. ⊚ ⊚

true false

9) The board of directors is at the top of a corporate organization chart, followed by the stockholders, then the CEO or president of the corporation. ⊚ ⊚

true false

10) The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission. ⊚ ⊚

true false

11) The par value of a stock is the minimum amount of capital of the corporation existing for the protection of creditors. ⊚ ⊚

true false

12) When a corporation issues capital stock, most state laws require the corporation to credit Retained Earnings for the par value of shares of stock issued. ⊚ ⊚

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true false

13) The additional paid-in capital account represents profit to the corporation and, as such, it is credited to Retained Earnings. ⊚ ⊚

true false

14) When no-par stock is issued, the entire proceeds are credited to Capital Stock and this amount is viewed as legal capital not subject to withdrawal. ⊚ ⊚

true false

15) If capital stock is issued by a corporation at a price less than par value, the difference represents a loss in the period in which the shares of stock are issued. ⊚ ⊚

true false

16) When par value capital stock is issued, capital stock is credited with the par value of the shares issued, regardless of whether the issuance price is equal to par value, more than par value, or less than par. ⊚ ⊚

true false

17) An underwriter is a bank or trust company that maintains a corporation's stockholder records. ⊚ ⊚

18)

true false

Authorization of a stock issue creates an asset on the books of the issuing corporation. ⊚ ⊚

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true false

19) Preferred stockholders generally do not have the same voting rights in a corporation as common stockholders. ⊚ ⊚

true false

20) When a corporation fails to pay a dividend one year on its common stock, it is said to be "in arrears." ⊚ ⊚

true false

21) Cumulative preferred stock means the stock is entitled to its regular dividend plus an additional share of the total amount of declared dividends. ⊚ ⊚

true false

22) The payment of cash dividends to common stockholders is classified as a financing activity on the statement of cash flows whereas payment of a cash dividend to preferred stockholders is classified as an investing activity. ⊚ ⊚

true false

23) Book value per share of preferred stock is computed as total stockholders' equity less the amount assigned to common stock plus any dividends in arrears divided by the number of shares of preferred stock outstanding. ⊚ ⊚

true false

24) In the Stockholders' Equity section of a balance sheet, par value of common stock is presented first, followed by par value of preferred stock, followed by additional paid-in capital on common stock, followed by additional paid-in capital on preferred stock. Version 1

⊚ ⊚

true false

25) International accounting standards require mandatory redeemable preferred stock to be classified as a liability on the balance sheet and not as equity. ⊚ ⊚

true false

26) To be consistent with international standards, the FASB has changed reporting requirements for redeemable preferred stock to require it to be reported in the equity section. ⊚ ⊚

27)

true false

A corporation must always have more than one class of stock. ⊚ ⊚

true false

28) Interest rates impact the market value of common stock more than they impact the market value of preferred stock. ⊚ ⊚

true false

29) The most important factor affecting the market price of common stock is the stated dividend rate. ⊚ ⊚

true false

30) The relationship between book value and market price of capital stock is a measure of investors' confidence in a company's management.

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⊚ ⊚

true false

31) A stock split will normally increase the market price of the stock and decrease the number of shares on the market. ⊚ ⊚

32)

A stock split will decrease the par value per share of the stock. ⊚ ⊚

33)

true false

Treasury stock is stock that is issued and outstanding but not authorized. ⊚ ⊚

true false

34) The purchase of treasury stock creates an asset for the corporation and is recorded at the cost of the shares purchased. ⊚ ⊚

true false

35) Treasury stock is stock of a corporation that has been issued and then reacquired and then cancelled. ⊚ ⊚

36)

true false

The purchase of treasury stock for cash causes no change in total assets. ⊚ ⊚

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true false

37) The sale of treasury stock at a price in excess of its cost results in a realized gain that should be presented as a non-operating item in the income statement. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 38) The advantages of corporations going public include all of the following except: A) B) C) D)

39)

Professional management. Transferability of ownership. Limited shareholder liability. Ability to remove assets.

Which of the following is not a characteristic of the corporate form of organization?

A) The owners of a corporation cannot lose more than the amount of their investment. B) Shares of stock in a corporation are more readily transferable than is an interest in a partnership. C) Stockholders have authority to decide by majority vote the amount of dividends to be paid. D) The corporation is a very efficient vehicle for obtaining large amounts of capital required for large-scale production.

40)

A primary disadvantage of the corporate form of organization is:

A) Unlimited personal liability for business debts. B) Ownership is difficult to transfer. C) Corporate earnings are subject to double taxation. D) Corporations may continue its operations without disruption despite the death of an individual stockholder.

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41) Public corporations are required by law or regulation to perform all of the following except: A) B) C) D)

42)

Submit much of their financial information to the SEC for review. Make regularly scheduled dividend payments to all stockholders. Have their annual financial statements audited by an independent CPA. Disclose their financial information to the public.

Which of the following apply to closely held corporations?

A) There is no organized market for buying and selling the company's shares. B) The company must prepare and issue its financial statements in conformity with generally accepted accounting principles. C) The company must have its financial statements audited by an independent firm of CPAs. D) The company's financial information must be submitted to the Securities and Exchange Commission.

43)

In a corporation's organization chart, who has/have the highest position? A) B) C) D)

Stockholders. Board of directors. CEO. President.

44) The ownership of common stock in a corporation usually carries all of the following rights except:

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A) B) C) D)

45)

The board of directors' primary functions include all of the following except: A) B) C) D)

46)

Hiring corporate officers. Setting officers' salaries. Declaring dividends. Transacting corporate business.

Which of the following is not a right of stockholders? A) B) C) D)

47)

To vote for directors. To participate in dividends. To share in a distribution of assets if the corporation is to be liquidated. To set corporate policies.

To vote for directors and on key issues. To participate in dividends declared. To share in the distribution of assets if the corporation is liquidated. To select the chief executive officer.

The rights of a common stockholder do not include the right:

A) To vote for directors. B) To withdraw a share of corporate net assets proportionate to the person's stockholdings. C) To receive a proportionate share of corporate assets upon liquidation, after creditors have been paid. D) To share in profits when the board of directors declares a dividend.

48)

The directors of a corporation:

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A) B) C) D)

49)

Shares that have been sold and are in the hands of stockholders are called: A) B) C) D)

50)

Preferred stock Common stock Preferred stock and treasury stock Retained earnings and treasury stock

The term paid-in capital means: A) B) C) D)

52)

Outstanding. Issued. Treasury. Underwritten.

Which of the following is not an addition to total paid-in-capital? A) B) C) D)

51)

Are hired by the officers to run the business on a day-to-day basis. May not own stock in the same corporation or be officers of the same corporation. Are responsible for formulating corporate policy and for hiring corporate officers. Are elected by the shareholders to run day-to-day operations.

All assets other than retained earnings. Legal capital plus retained earnings. Total stockholders' equity minus retained earnings. Legal capital minus retained earnings.

Which of the following best describes retained earnings?

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A) Cash available for dividends. B) The amount initially invested in the business by stockholders. C) Cash available for expansion and growth. D) Income that has been reinvested in the business rather than distributed as dividends to stockholders.

53)

Which of the following would usually be the greatest amount? A) B) C) D)

The number of shares authorized The number of shares issued The number of shares outstanding The number of shares of Treasury Stock

54) Which of the following best describes the relationship between revenue and retained earnings? A) Revenue increases net income, which in turn increases retained earnings. B) Revenue represents a cash receipt; retained earnings is an element of stockholders' equity. C) Revenue represents the price of goods sold or services rendered; retained earnings represents cash available for paying dividends. D) Retained earnings is equal to assets minus expenses.

55) If a corporation has only common stock outstanding, which of the following constitutes legal capital at a particular date? A) B) C) D)

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The amount in the Common Stock account. The sum of the Common Stock account and any additional paid-in capital. The total amount of stockholders' equity. The sum of the Common Stock account and retained earnings.

56)

The entry to record the issuance of common stock at a price above its par value includes:

A) A credit to Cash. B) A credit to a liability account for the difference between the price paid by the stockholders and the par value of the stock. C) A credit to Additional Paid-in Capital: Common Stock. D) A debit to Common Stock.

57)

When a corporation issues capital stock at a price higher than the par value:

A) The amount received over par value increases retained earnings. B) The entire issue price is credited to the Capital Stock account. C) The amount received in excess of par value constitutes profit to the issuing corporation. D) The amount received in excess of par value becomes part of paid-in capital.

58)

When no-par stock is issued:

A) The entire amount received is credited to the Additional Paid-in Capital account. B) The issue price is credited to the Capital Stock account. C) There is no legal capital created because there is no par or stated value. D) The transaction usually involves only an exchange for non-cash assets or services, since the stock has no value on the stock exchanges.

59) Zigma Corporation is authorized to issue 9,000,000 shares of $4 par value capital stock. The corporation issued half the stock for cash at $7 per share, earned $456,000 during the first three months of operation, and declared a cash dividend of $50,000. The total paid-in capital of Zigma Corporation after three months of operation is:

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A) B) C) D)

$31,450,000. $31,956,000. $31,500,000. $31,906,000.

60) Zigma Corporation is authorized to issue 2,000,000 shares of $4 par value capital stock. The corporation issued half the stock for cash at $8 per share, earned $336,000 during the first three months of operation, and declared a cash dividend of $60,000. The total paid-in capital of Zigma Corporation after three months of operation is: A) B) C) D)

$7,940,000. $8,000,000. $8,276,000. $8,336,000.

61) Thurman Corporation issued 580,000 shares of $0.50 par value capital stock at its date of incorporation for cash at a price of $4.5 per share. During the first year of operations, the company earned $200,000 and declared a dividend of $49,000. At the end of this first year of operations, the balance of the Common Stock account is: A) B) C) D)

$290,000. $2,761,000. $2,634,500. $2,610,000.

62) Thurman Corporation issued 450,000 shares of $0.50 par value capital stock at its date of incorporation for cash at a price of $4 per share. During the first year of operations, the company earned $100,000 and declared a dividend of $40,000. At the end of this first year of operations, the balance of the Common Stock account is:

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A) B) C) D)

$1,800,000. $1,860,000. $225,000. $1,820,000.

63) Century Corporation issued 900,000 shares of $4 par value common stock at the time of its incorporation. The stock was issued for cash at a price of $14 per share. During the first year of operations, the company sustained a net loss of $180,000. The year-end balance sheet would show the balance of the Common Stock account to be: A) B) C) D)

$12,600,000. $3,420,000. $3,600,000. $12,420,000.

64) Century Corporation issued 400,000 shares of $4 par value common stock at the time of its incorporation. The stock was issued for cash at a price of $16 per share. During the first year of operations, the company sustained a net loss of $100,000. The year-end balance sheet would show the balance of the Common Stock account to be: A) B) C) D)

$1,600,000. $1,500,000. $6,300,000. $6,400,000.

65) Shore and Gardiner each own 10,000 shares of S&G Corporation $12 par value stock, which they purchased for $38 per share directly from the corporation. If Shore sells his stock to Gardiner for $475,000:

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A) B) C) D)

Stockholders' equity of S&G Corporation increases. Assets of S&G Corporation increase. Stockholders' equity of S&G Corporation decreases. No account of S&G Corporation is affected.

66) On January 1, Year 1, Juniper Corporation issued 60,000 shares of its total 200,000 authorized shares of $4 par value common stock for $8 per share. On December 31, Year 1, Juniper Corporation's common stock is trading at $12 per share.Assuming Juniper Corporation did not issue any more common stock in Year 1, how does the increase in value of its outstanding stock affect Juniper? A) Juniper should recognize additional net income for Year 1 of $4 per share, or $240,000. B) Paid-in capital at December 31, Year 1, is $720,000 (i.e., 60,000 shares times $12 per share). C) This increase in market value of outstanding stock is not recorded in the financial statements of Juniper Corporation. D) Each shareholder must pay an additional $4 per share to Juniper.

67) On January 1, Year 1, Juniper Corporation issued 60,000 shares of its total 200,000 authorized shares of $4 par value common stock for $8 per share. On December 31, Year 1, Juniper Corporation's common stock is trading at $12 per share.Assume Juniper Corporation decides to issue an additional 1,000 shares of its common stock on December 31, Year 1. How will the above increase in value affect Juniper? A) Juniper can issue the 1,000 shares at a higher price than the initial 60,000 shares. B) Juniper can sell the 1,000 shares for $12 each, as well as collect an additional $4 per share for each of the 60,000 shares sold initially. C) Juniper reports a gain of $4 per share on all stock sold during the year. D) Paid-in capital at the end of Year 1 will be $732,000 (i.e., 61,000 shares times $12 per share).

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68) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 3.0% cumulative preferred stock, $100 par value; authorized, 16,000 shares; issued and outstanding, 8,000 shares Common stock, $3 par value; authorized, 320,000 shares; issued and outstanding, 192,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 800,000

$ 576,000 $ 96,000 $ 1,400,000 $ 910,000

Dividends have been declared and paid for Year 1.Grant's total legal capital at December 31, Year 1, is: A) B) C) D)

$1,866,000. $1,376,000. $934,000. $2,776,000.

69) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 6% cumulative preferred stock, $100 par value; authorized, 10,000 shares; issued and outstanding, 6,000 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 300,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 600,000

$ 900,000 $ 60,000 $ 1,900,000 $ 1,090,000

Dividends have been declared and paid for Year 1.Grant's total legal capital at December 31, Year 1, is: A) B) C) D)

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$3,160,000. $3,000,000. $2,590,000. $1,500,000.

70) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 4.5% cumulative preferred stock, $100 par value; authorized, 22,000 shares; issued and outstanding, 11,000 shares Common stock, $3 par value; authorized, 380,000 shares; issued and outstanding, 228,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 1,100,000

$ 684,000 $ 66,000 $ 1,700,000 $ 940,000

Dividends have been declared and paid for Year 1.The total amount of Grant's paid-in capital at December 31, Year 1, is: A) B) C) D)

$940,000. $2,080,000. $1,766,000. $3,550,000.

71) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 6% cumulative preferred stock, $100 par value; authorized, 10,000 shares; issued and outstanding, 6,000 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 300,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 600,000

$ 900,000 $ 60,000 $ 1,900,000 $ 1,090,000

Dividends have been declared and paid for Year 1.The total amount of Grant's paid-in capital at December 31, Year 1, is: A) B) C) D)

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$1,960,000. $1,090,000. $3,460,000. $3,050,000.

72) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 7.0% cumulative preferred stock, $100 par value; authorized, 44,000 shares; issued and outstanding, 22,000 shares Common stock, $5 par value; authorized, 600,000 shares; issued and outstanding, 360,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 2,200,000

$ 1,800,000 $ 110,000 $ 2,800,000 $ 1,050,000

Dividends have been declared and paid for Year 1.The average issue price per share of Grant's preferred stock was: A) B) C) D)

$107.00. $100.00. $105.00. $52.50.

73) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 6% cumulative preferred stock, $100 par value; authorized, 10,000 shares; issued and outstanding, 6,000 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 300,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 600,000

$ 900,000 $ 60,000 $ 1,900,000 $ 1,090,000

Dividends have been declared and paid for Year 1.The average issue price per share of Grant's preferred stock was: A) B) C) D)

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$112. $100. $110. $66.

74) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 8.0% cumulative preferred stock, $100 par value; authorized, 42,000 shares; issued and outstanding, 21,000 shares Common stock, $4 par value; authorized, 580,000 shares; issued and outstanding, 348,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 2,100,000

$ 1,392,000 $ 105,000 $ 2,700,000 $ 1,040,000

Dividends have been declared and paid for Year 1.The book value per share of common stock is: A) B) C) D)

$14.75. $15.05. $6.67. $11.76.

75) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 6% cumulative preferred stock, $100 par value; authorized, 10,000 shares; issued and outstanding, 6,000 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 300,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 600,000

$ 900,000 $ 60,000 $ 1,900,000 $ 1,090,000

Dividends have been declared and paid for Year 1.The book value per share of common stock is: A) B) C) D)

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$7.90. $13.17. $ 9.10. $15.17.

76) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 5.0% cumulative preferred stock, $100 par value; authorized, 30,000 shares; issued and outstanding, 15,000 shares Common stock, $4 par value; authorized, 460,000 shares; issued and outstanding, 276,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 1,500,000

$ 1,104,000 $ 120,000 $ 2,100,000 $ 980,000

Dividends have been declared and paid for Year 1.The balance in Retained Earnings at the beginning of the year was $890,000, and there were no dividends in arrears. Net income for Year 1 was $600,000. What was the amount of dividend declared on each share of common stock during Year 1? A) B) C) D)

$1.58. $1.11. $1.85. $0.33.

77) Shown below is information relating to the stockholders' equity of Grant Corporation at December 31, Year 1: 6% cumulative preferred stock, $100 par value; authorized, 10,000 shares; issued and outstanding, 6,000 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 300,000 shares Additional paid-in capital: preferred stock Additional paid-in capital: common stock Retained earnings

$ 600,000

$ 900,000 $ 60,000 $ 1,900,000 $ 1,090,000

Dividends have been declared and paid for Year 1.The balance in Retained Earnings at the beginning of the year was $950,000, and there were no dividends in arrears. Net income for Year 1 was $980,000. What was the amount of dividend declared on each share of common stock during Year 1?

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A) B) C) D)

$2.50. $2.08. $2.00. $2.68.

78) Shown below is information relating to the stockholders' equity of Brookdale Corporation at December 31, Year 1: 11% cumulative preferred stock, $130 par value; authorized, 100,000 shares; issued and outstanding, 10,000 shares Common stock, $1.25 par value; authorized, 1,000,000 shares; issued, 600,000 shares (of which 6,000 are held in treasury) Additional paid-in capital: Preferred stock Common stock Treasury stock transactions Treasury stock (at cost: 6,000 common shares) Retained earnings

$ 1,300,000

750,000

500,000 900,000 6,000 (192,000) 1,350,000

The average issue price per share of the preferred stock was: A) B) C) D)

$150. $165. $180. $195.

79) Shown below is information relating to the stockholders' equity of Brookdale Corporation at December 31, Year 1: 11% cumulative preferred stock, $130 par value; authorized, 100,000 shares; issued and outstanding, 10,000 shares Common stock, $1.25 par value; authorized, 1,000,000 shares; issued, 600,000 shares (of which 6,000 are held in treasury)

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$ 1,300,000

750,000

Additional paid-in capital: Preferred stock Common stock Treasury stock transactions Treasury stock (at cost: 6,000 common shares) Retained earnings

500,000 900,000 6,000 (192,000) 1,350,000

What was the average issue price per share of common stock? A) B) C) D)

$2.75 per share $1.25 per share $1.50 per share $3.75 per share

80) Shown below is information relating to the stockholders' equity of Brookdale Corporation at December 31, Year 1: 11% cumulative preferred stock, $130 par value; authorized, 100,000 shares; issued and outstanding, 10,000 shares Common stock, $1.25 par value; authorized, 1,000,000 shares; issued, 600,000 shares (of which 6,000 are held in treasury) Additional paid-in capital: Preferred stock Common stock Treasury stock transactions Treasury stock (at cost: 6,000 common shares) Retained earnings

$ 1,300,000

750,000

500,000 900,000 6,000 (192,000) 1,350,000

How many shares of common stock are outstanding? A) B) C) D)

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600,000 shares 606,000 shares 594,000 shares 1,000,000 shares

81) Shown below is information relating to the stockholders' equity of Brookdale Corporation at December 31, Year 1: 11% cumulative preferred stock, $130 par value; authorized, 100,000 shares; issued and outstanding, 10,000 shares Common stock, $1.25 par value; authorized, 1,000,000 shares; issued, 600,000 shares (of which 6,000 are held in treasury) Additional paid-in capital: Preferred stock Common stock Treasury stock transactions Treasury stock (at cost: 6,000 common shares) Retained earnings

$ 1,300,000

750,000

500,000 900,000 6,000 (192,000) 1,350,000

If Brookdale Corporation had reacquired 7,000 shares of treasury stock early in Year 1, and this was the company's only treasury stock transaction, then some treasury stock must have been sold during Year 1 for: A) B) C) D)

$32 per share. $38 per share. $27 per share. $6 per share.

82) Assuming there is no preferred stock, book value per share of common stock is derived by which of the following? A) B) C) D)

83)

Stockholders' equity divided by the number of shares authorized. Stockholders' equity divided by the number of shares outstanding. Net income divided by the number of shares outstanding. Net income divided by the number of shares authorized.

The net assets of a corporation are equal to:

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A) B) C) D)

Total assets − total liabilities. Total assets − retained earnings. Total assets + total liabilities. Total assets + retained earnings.

84) Coronet Corporation has total stockholders' equity of $6,100,000. The company's outstanding capital stock includes 100,000 shares of $8 par value common stock and 21,000 shares of 6%, $100 par value preferred stock. (No dividends are in arrears.) The book value per share of common stock is: A) B) C) D)

$34. $32. $40. $61.

85) Coronet Corporation has total stockholders' equity of $7,400,000. The company's outstanding capital stock includes 100,000 shares of $10 par value common stock and 20,000 shares of 6%, $100 par value preferred stock. (No dividends are in arrears.) The book value per share of common stock is: A) B) C) D)

$39. $49. $54. $74.

86) Marks Corporation has total stockholders' equity of $6,900,000. The company has outstanding 290,000 shares of $1 par value common stock and 40,000 shares of 9.0% preferred stock, $100 par value. (No dividends are in arrears.) The book value per share of common stock is:

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A) B) C) D)

$8.76. $11.24. $5.00. $10.00.

87) Marks Corporation has total stockholders' equity of $7,400,000. The company has outstanding 300,000 shares of $1 par value common stock and 20,000 shares of 8% preferred stock, $100 par value. (No dividends are in arrears.) The book value per share of common stock is: A) B) C) D)

$9.00. $24.06. $24.66. $18.00.

88) Seville Corporation has net assets of $3,698,000 and paid-in capital of $980,000. The only stock issue consists of 86,000 outstanding shares of common stock. From this information, it can be deduced that the company has: A) B) C) D)

A book value of $43 per share of common stock. A deficit of $3,698,000. Retained earnings of $3,698,000. A book value of $11.40 per share of common stock.

89) Seville Corporation has net assets of $2,072,000 and paid-in capital of $700,000. The only stock issue consists of 74,000 outstanding shares of common stock. From this information, it can be deduced that the company has: A) B) C) D)

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Retained earnings of $2,072,000. A deficit of $2,072,000. A book value of $9.46 per share of common stock. A book value of $28 per share of common stock.

90) Santa Fe Boat Yard has total stockholders' equity of $3,300,000, comprised of the following: $1,100,000 in $5 preferred stock consisting of 11,000 shares of $100 par value.$500,000 in common stock of $10 par value per share.$700,000 of additional paid-in capital.$1,000,000 in retained earnings.Assuming there are no dividends in arrears, the book value per share of common stock is: A) B) C) D)

$34.00. $44.00. $66.00. $10.00.

91) Santa Fe Boat Yard has total stockholders' equity of $4,100,000, comprised of the following:$2,000,000 in $5 preferred stock consisting of 20,000 shares of $100 par value.$420,000 in common stock of $6 par value per share.$700,000 of additional paid-in capital.$980,000 in retained earnings.Assuming there are no dividends in arrears, the book value per share of common stock is: A) B) C) D)

$30.00. $58.57. $45.71. $6.00.

92) Topper Corporation has 75,000 shares of $1 par value common stock and 48,000 shares of cumulative 6.4%, $100 par preferred stock outstanding. Topper has not paid a dividend for the prior year. If Topper declares a $1.40 per common share dividend this year, what will be the total amount they must pay their shareholders? A) B) C) D)

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$180,000. $105,000. $412,200. $719,400.

93) Topper Corporation has 60,000 shares of $1 par value common stock and 16,000 shares of cumulative 7%, $100 par preferred stock outstanding. Topper has not paid a dividend for the prior year. If Topper declares a $1.95 per common share dividend this year, what will be the total amount they must pay their shareholders? A) B) C) D)

94)

$117,000 $341,000 $327,000 $177,000

Most preferred stocks have one or more of the following characteristics, except: A) B) C) D)

To receive dividends on a preferred basis. Cumulative dividends. Voting rights. Callable at the option of the corporation.

95) Which of the following individuals has the most power to influence corporate policy on a long-term basis? A) B) C) D)

96)

A shareholder owning 60% of the outstanding common stock. A shareholder owning 80% of the outstanding preferred stock. The treasurer of the corporation. The controller of the corporation.

Which of the following is not a characteristic of most preferred stock? A) B) C) D)

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Dividends that vary as income changes. Preference as to dividends. Preference as to assets in the event of liquidation of the company. No voting power.

97) The financial statements of a corporation that failed during the current year to pay any dividends on its cumulative preferred stock should: A) B) C) D)

98)

Include the amount of the omitted dividends among its current liabilities. Include a footnote disclosing the amount of the dividends in arrears. Show the amount of the omitted dividends as a deduction from retained earnings. List the omitted dividends as a long-term liability.

If the preferred stock of a corporation is cumulative:

A) Dividends on preferred stock are guaranteed. B) Dividends cannot be declared in an amount less than that stated on the stock certificate. C) Preferred stockholders participate in dividends paid in excess of a stated amount on the common shares. D) Dividends in arrears must be paid on preferred stock before any dividend can be paid on common stock.

99) Mayfair Corporation has outstanding 80,000 shares of $1 par value common stock as well as 14,000 shares of 6.0%, $100 par value cumulative preferred stock. At the beginning of the year, the balance in retained earnings was $600,000, and one year's dividends were in arrears. Net income for the current year is $440,000. Compute the balance in retained earnings at the end of the year if Mayfair Corporation pays a dividend of $2.4 per share on its common stock this year. A) B) C) D)

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$848,000. $276,000. $680,000. $956,000.

100) Mayfair Corporation has outstanding 70,000 shares of $1 par value common stock as well as 20,000 shares of 7%, $100 par value cumulative preferred stock. At the beginning of the year, the balance in retained earnings was $800,000, and one year's dividends were in arrears. Net income for the current year is $580,000. Compute the balance in retained earnings at the end of the year if Mayfair Corporation pays a dividend of $3 per share on its common stock this year. A) B) C) D)

$1,080,000 $1,670,000 $890,000 $310,000

101) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 10.5% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 660,000 shares; issued and outstanding, 200,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 2,500,000 2,000,000 600,000 (100,000) 262,500

How many shares of preferred stock are issued and outstanding? A) B) C) D)

66,000 shares 250,000 shares 25,000 shares 20,000 shares

102) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 8% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 500,000 shares; issued and outstanding, 120,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit)

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$ 600,000 1,200,000 600,000 (60,000)

Dividends in arrears

48,000

How many shares of preferred stock are issued and outstanding? A) B) C) D)

75,000 shares 6,000 shares 60,000 shares 120,000 shares

103) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 3.5% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 400,000 shares; issued and outstanding, 148,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 1,200,000 1,480,000 444,000 (74,000) 42,000

What was the original issue price per share of common stock? A) B) C) D)

$3.70 per share $10.00 per share $13.00 per share $4.81 per share

104) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 8% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 500,000 shares; issued and outstanding, 120,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 600,000 1,200,000 600,000 (60,000) 48,000

What was the original issue price per share of common stock?

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A) B) C) D)

$10.00 per share $2.40 per share $15.00 per share $8.00 per share

105) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 5.5% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 360,000 shares; issued and outstanding, 140,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 1,000,000 1,400,000 140,000 (70,000) 55,000

What is total paid-in capital? A) B) C) D)

$2,540,000 $2,470,000 $2,610,000 $2,415,000

106) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 8% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 500,000 shares; issued and outstanding, 120,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 600,000 1,200,000 600,000 (60,000) 48,000

What is total paid-in capital?

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A) B) C) D)

$2,292,000 $1,800,000 $2,400,000 $2,340,000

107) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 8.0% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 500,000 shares; issued and outstanding, 120,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 600,000 1,200,000 600,000 (60,000) 48,000

Total stockholders' equity is: A) B) C) D)

$2,340,000. $2,292,000. $2,400,000. $2,460,000.

108) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 8% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 500,000 shares; issued and outstanding, 120,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 600,000 1,200,000 600,000 (60,000) 48,000

Total stockholders' equity is:

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A) B) C) D)

$2,400,000. $2,460,000. $2,340,000. $2,292,000.

109) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 4.0% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 480,000 shares; issued and outstanding, 164,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 1,600,000 1,640,000 1,148,000 (82,000) 64,000

The book value per share of common stock isclosest to: (Round to 2 decimal places.) A) B) C) D)

$17.00. $16.11. $10.00. $32.22.

110) Shown below is information relating to the stockholders' equity of Reeve Corporation as of December 31, Year 1: 8% cumulative preferred stock, $100 par value; authorized, ?? shares; issued and outstanding, ?? shares Common stock, $10 par value; authorized, 500,000 shares; issued and outstanding, 120,000 shares Additional paid-in capital: Common stock Retained earnings (Deficit) Dividends in arrears

$ 600,000 1,200,000 600,000 (60,000) 48,000

The book value per share of common stock is closest to: (Round to 2 decimal places.)

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A) B) C) D)

111)

$15.10. $14.10. $15.90. $19.10.

Which of the following best describes the book value of a share of stock?

A) Net assets divided by the number of shares outstanding. B) The amount at which the stock would sell on the market if sold by a willing and informed seller to a willing and informed buyer. C) Total assets of the company, as reported in the accounting records, divided by the number of shares of stock outstanding. D) Total stockholders' equity divided by the number of shares authorized.

112)

Vision Corporation has the following information on its financial statement:

Preferred Stock 6%, $100 par value, cumulative; authorized, issued, and outstanding, 4,500 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 240,000 shares Paid-in capital – Preferred Paid-in capital – Common Retained earnings

$ 450,000 720,000 750,000 3,000,000 1,192,500

If Vision paid a total of $55,800 in dividends, how much would each common stockholder receive for each share of stock owned? (Assume there are no dividends in arrears.) A) B) C) D)

113)

$0.12 per share $0.24 per share $0.06 per share $0.18 per share

Vision Corporation has the following information on its financial statement:

Preferred Stock 6%, $100 par value, cumulative;

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$ 450,000

authorized, issued, and outstanding, 4,500 shares Common stock, $3 par value; authorized, 500,000 shares; issued and outstanding, 240,000 shares Paid-in capital – Preferred Paid-in capital – Common Retained earnings

720,000 750,000 3,000,000 1,192,500

If Vision did not pay a dividend for the last two years, but declared a dividend this year, how much will they have to declare in order for the common stockholders to receive $0.45 per share? A) B) C) D)

114)

$189,000. $306,000. $108,000. $162,000.

Vision Corporation has the following information on its financial statement:

$ 450,000 720,000 750,000 3,000,000 1,192,500

If Vision decided to purchase 50,000 shares of its common stock to be used for future stock option plans at $9.50 per share, what journal entry would they make? A) Debit Treasury Stock

Credit

475,000

Common Stock

475,000

B) Debit

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Credit

Retained Earnings

475,000

Treasury Stock

475,000

C) Debit Treasury Stock

Credit

475,000

Cash

475,000

D) Debit Treasury Stock

150,000

Paid-in Capital

325,000

Cash

115)

Credit

475,000

Amelia Corporation has the following information in its financial statement:

6% Cumulative preferred stock, $100 par value; authorized, issued, and outstanding, 5,400 shares Common stock, $2 par value; authorized, 400,000 shares; issued and outstanding 320,000 shares Paid-in capital:

$ 540,000

Preferred Common Retained earnings

760,000 2,560,000 2,373,400

640,000

If Amelia paid a total of $75,000 in dividends, how much would each common stockholder receive for each share of stock owned? (Assume there are no dividends in arrears.) A) B) C) D)

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$0.23 per share $0.13 per share $0.18 per share $0.08 per share

116)

Amelia Corporation has the following information in its financial statement:

$ 540,000

Preferred Common Retained earnings

760,000 2,560,000 2,373,400

640,000

How many shares of preferred stock are outstanding? A) B) C) D)

117)

32,400 shares 5,400 shares 10,000 shares The number of shares cannot be determined without more information.

Amelia Corporation has the following information in its financial statement:

$ 540,000

Preferred Common Retained earnings

760,000 2,560,000 2,373,400

640,000

If Amelia did not pay a dividend for the last two years, but declared a $250,000 dividend this year, how much will the common stockholders receive? A) B) C) D)

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$152,800 $250,000 $97,200 $217,600

118)

Amelia Corporation has the following information in its financial statement:

$ 540,000

Preferred Common Retained earnings

760,000 2,560,000 2,373,400

640,000

If Amelia decided to purchase 20,000 shares of its common stock to be used for future stock option plans at $11.40 per share, what journal entry would the company make? A) Debit Treasury Stock

Credit

228,000

Common Stock

228,000

B) Debit Retained Earnings

Credit

228,000

Treasury Stock

228,000

C) Debit Treasury Stock

Credit

228,000

Cash

228,000

D) Debit

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Credit

Treasury Stock

40,000

Paid-in Capital

188,000

Cash

228,000

119) Shown below is information relating to the stockholders' equity of Clydesdale Corporation at December 31, Year 1: 4% cumulative preferred stock, $80 par value; authorized, 100,000 shares; issued and outstanding, 20,000 shares Common stock, $2.50 par value; authorized, 1,000,000 shares; issued 600,000 shares (of which 8,000 are held in treasury) Additional paid-in capital: Preferred Common Treasury stock (8,000 common shares) Retained earnings

$ 1,600,000 640,000

800,000 900,000 (192,000) 1,825,000

The average issue price per share of the preferred stock was: A) B) C) D)

$40. $80. $120. $160.

120) Shown below is information relating to the stockholders' equity of Clydesdale Corporation at December 31, Year 1: 4% cumulative preferred stock, $80 par value; authorized, 100,000 shares; issued and outstanding, 20,000 shares Common stock, $2.50 par value; authorized, 1,000,000 shares; issued 600,000 shares (of which 8,000 are held in treasury) Additional paid-in capital: Preferred Common Treasury stock (8,000 common shares)

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$ 1,600,000 640,000

800,000 900,000 (192,000)

Retained earnings

1,825,000

If Clydesdale Corporation had reacquired the 8,000 shares of treasury stock early in Year 1, what was the purchase price per share? A) B) C) D)

$2.50 per share $4.00 per share $24 per share More information is needed to determine the purchase price.

121) Which of the following statements regarding preferred stock and preferred stock dividends is not true? A) Companies are inclined to routinely distribute dividends on preferred stock. B) The preferred dividend rate is an important factor in determining the market price of a preferred stock. C) In the long run, a company must be profitable enough to pay dividends. D) Dividends on preferred stock are guaranteed.

122)

Which of the following statements regarding accounting by investors is true?

A) From the investor’s point of view, shares owned in a publicly owned company are an asset, usually called Marketable Securities. B) The book value of the securities indicates what the securities are worth today. C) Investors show investments in marketable securities at current book value in their balance sheets. D) To the investor, the par value of securities owned is more relevant than the original purchase price of the securities.

123)

The market price of a preferred stock will be affected by:

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A) The dividend rate. B) The chance that the company will not operate profitably. C) The level of interest rates. D) The dividend rate, the chance that the company will not operate profitably, and the level of interest rates.

124)

If preferred stock is convertible, it is so at the option of the: A) B) C) D)

Board of directors. CEO. CFO. Stockholders.

125) On January 1, Year 1, Aili Corporation issued 60,000 shares of its total 200,000 authorized shares of $4 par value common stock for $18 per share. On December 31, Year 1, Aili Corporation’s common stock is trading at $32 per share. Assume Aili Corporation decides to issue an additional 10,000 shares of its common stock on December 31, Year 1. How will the above increase in value affect Aili? A) Aili can issue the 10,000 shares at a higher price than the initial 60,000 shares. B) Aili can sell the 10,000 shares for $32 each, as well as collect an additional $14 per share for each of the 60,000 shares sold initially. C) Aili reports a gain of $14 per share on all stock sold during the year. D) Paid-in capital at the end of Year 1 will be $2,240,000 (i.e., 70,000 shares times $32 per share).

126)

The par value of the common stock of a large listed corporation: A) B) C) D)

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Tends to establish a ceiling for the market price of the stock. Tends to establish a floor for the market price of the stock. Represents legal capital and is not related to the market price of the stock. Is increased by net income and decreased by dividends.

127)

When shares of stock are sold from one investor to another, they will trade at: A) B) C) D)

128)

Par value. Book value. Market value. Stated Value.

A 2-for-1 stock split will:

A) Increase the total par value of the stock and increase the number of shares outstanding. B) Decrease the total par value of the stock and increase the number of shares outstanding. C) Not change the total par value of the stock and increase the number of shares outstanding. D) Increase total stockholders’ equity.

129)

Which statement is true about a stock split?

A) Total shareholders’ equity increases. B) Total shareholders’ equity decreases. C) Total shareholders’ equity remains the same. D) A change in total stockholders’ equity depends upon whether it is a 2-for-1 split or a 3-for-1 split.

130)

A 2-for-1 stock split:

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A) Is accounted for in the same way as a stock dividend. B) Increases the number of outstanding shares of common stock, but par value per share remains the same as before the split. C) Is recorded by transferring the par value of additional shares from retained earnings to the common stock account. D) Should logically cause the market price per share to drop by approximately 50%.

131)

A 2-for-1 stock split will have what effect upon the following items? Total Assets

A. B. C. D.

None None Increase Decrease

A) B) C) D)

Total Stockholders’ Equity None Increase Decrease Decrease

Shares issued

Shares Outstanding

Increase None Increase None

Increase Decrease Decrease Decrease

A B C D

132) On September 1, Year 1, Maryland Corporation’s common stock was selling at a market price of $250 per share. On that date, Maryland announced a 3 for 2 stock split. At what price would you expect the stock to trade immediately after the split goes into effect? A) B) C) D)

$250.00 per share $166.67 per share $125.00 per share $375.00 per share

133) On September 1, Year 1, Maryland Corporation’s common stock was selling at a market price of $200 per share. On that date, Maryland announced a 3 for 2 stock split. At what price would you expect the stock to trade immediately after the split goes into effect?

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A) B) C) D)

$100 per share $200 per share $133.33 per share $225 per share

134) On September 1, Year 1, Miami Corporation’s common stock was selling at a market price of $300 per share. On that date, Miami announced a 2-for-1 stock split. At what price would you expect the stock to trade immediately after the split goes into effect? A) B) C) D)

$100 $150 $200 $600

135) On September 1, Year 1, Miami Corporation’s common stock was selling at a market price of $25 per share. On that date, Miami announced a 1-for-4 stock split. At what price would you expect the stock to trade immediately after the split goes into effect? A) B) C) D)

136)

Treasury stock: A) B) C) D)

137)

$100 $25 $6.25 $50

Is an asset. Increases total stockholders' equity. Decreases total stockholders' equity. Does not change total stockholders' equity.

The purchase of treasury stock for cash will:

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A) B) C) D)

138)

Treasury stock should most often be recorded at: A) B) C) D)

139)

Shares of ownership in the United States Treasury Department. A current asset. Authorized shares that have never been issued. Previously outstanding shares that have been repurchased by the issuing company.

Stock that had been issued by a corporation, and later reacquired, is classified as: A) B) C) D)

141)

Cost. Par value. Fair market value at year-end. Face value.

Treasury stock represents: A) B) C) D)

140)

Increase stockholders' equity. Not increase nor decrease stockholders' equity. Decrease stockholders' equity. Not change total assets.

Treasury stock. Non-participating preferred stock. Restricted stock. Issued shares.

The purchase of treasury stock for cash will have which effect upon the following items? Total Assets

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Decrease

Total Stockholders’ Equity Decrease

Shares issued

Shares Outstanding

Decrease

Decrease 45

B. C. D.

None Increase Decrease

A) B) C) D)

142)

Increase Decrease Decrease

None Increase None

Decrease Decrease Decrease

A B C D

Which of the following does not appear in a corporate income statement?

A) Gains and losses from treasury stock transactions. B) Income tax expense. C) The income or loss from a segment of the business that has been discontinued during the current year. D) Gains and losses not expected to recur in the foreseeable future.

143)

When treasury stock is reissued at a price above cost:

A) B) C) statement. D)

The corporation recognizes a gain to be recorded on the income statement. Total paid-in capital is increased. The re-issuance is treated as an extraordinary item in the corporation's income Retained earnings is increased.

144) During the year ended December 31, Year 1, Riverside Corporation reacquired 700 shares of its own common stock at a price of $20 per share. During Year 2, the company reissued 500 shares of that treasury stock. The following items are shown in the stockholders’ equity section of the company’s balance sheet as of December 31, Year 2: Treasury stock (200 shares, at $20 cost) Additional paid-in capital: treasury stock

$ 4,000 $ 1,000

What was the reissuance price of the 700 shares that were reissued during Year 2?

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A) B) C) D)

$2 per share above its par value $2 per share $2 per share above its cost $22 per share above its cost

145) On April 1, Year 1, Jetter Corporation reacquired 2,000 shares of its own $10 par stock for $120,000 cash. On October 15, Year 1, 600 of the treasury shares were reissued at a price of $65 per share.The reacquisition of the 2,000 shares on April 1, Year 1, causes: A) B) C) D)

No change in total assets of Jetter Corporation. No change in the number of shares of Jetter Corporation stock outstanding. A reduction in total assets and in total stockholders' equity of Jetter Corporation. Jetter Corporation to show a new asset, "Treasury Stock", for $120,000.

146) On April 1, Year 1, Jetter Corporation reacquired 2,000 shares of its own $10 par stock for $120,000 cash. On October 15, Year 1, 600 of the treasury shares were reissued at a price of $65 per share.The journal entry to record the reissuance of the 600 shares of stock on October 15 includes a: A) B) C) D)

Credit to Common Stock of $6,000. Credit to Additional Paid-In Capital: Treasury Stock Transactions of $3,000. Credit to Gain on Treasury Stock Transactions of $3,000. Credit to Treasury Stock Reissued of $39,000.

147) On April 1, Year 1, Jetter Corporation reacquired 2,000 shares of its own $10 par stock for $120,000 cash. On October 15, Year 1, 600 of the treasury shares were reissued at a price of $65 per share.Assuming there are no further transactions involving treasury stock in Year 1, the financial statements of Jetter Corporation for Year 1 will show:

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A) Treasury Stock of $81,000 among the assets in the balance sheet. B) Gain on Sale of Treasury Stock of $3,000 in the income statement for Year 1. C) Treasury Stock of $120,000 as a deduction in the stockholders’ equity section of the December 31, Year 1, balance sheet. D) Additional Paid-In Capital: Treasury Stock Transactions of $3,000 in the December 31, Year 1 balance sheet.

148) On April 16, Year 1, Rodriguez Corporation reacquired 12,000 shares of its own $10 par stock for $660,000 cash. On November 4, Year 2, 1,000 of the treasury shares were reissued at a price of $65 per share. The journal entry to record the reissuance of the 1,000 shares of stock on November 4 includes a: A) B) C) D)

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Credit to Common Stock of $10,000. Credit to Additional Paid-In Capital: Treasury Stock Transactions of $10,000. Credit to Gain on Treasury Stock Transactions of $10,000. Credit to Treasury Stock Reissued of $65,000.

Answer Key Test name: Chapter 11 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) TRUE 8) TRUE 9) FALSE 10) FALSE 11) TRUE 12) FALSE 13) FALSE 14) TRUE 15) FALSE 16) TRUE 17) FALSE 18) FALSE 19) TRUE 20) FALSE 21) FALSE 22) FALSE 23) FALSE 24) FALSE 25) TRUE 26) FALSE Version 1

27) FALSE 28) FALSE 29) FALSE 30) TRUE 31) FALSE 32) TRUE 33) FALSE 34) FALSE 35) FALSE 36) FALSE 37) FALSE 38) D 39) C 40) C 41) B 42) A 43) A 44) D 45) D 46) D 47) B 48) C 49) A 50) D 51) C 52) D 53) A 54) A 55) A 56) C Version 1

57) D 58) B 59) C 60) B 61) A 62) C 63) C 64) A 65) D 66) C 67) A 68) B 69) D 70) D 71) C 72) C 73) C 74) B 75) B 76) A 77) D 78) C 79) A 80) C 81) B 82) B 83) A 84) C 85) C 86) D Version 1

87) D 88) A 89) D 90) B 91) A 92) D 93) B 94) C 95) A 96) A 97) B 98) D 99) C 100) C 101) C 102) B 103) C 104) C 105) A 106) C 107) A 108) C 109) B 110) B 111) A 112) A 113) A 114) C 115) B 116) B Version 1

117) A 118) C 119) C 120) C 121) D 122) A 123) D 124) D 125) A 126) C 127) C 128) C 129) C 130) D 131) A 132) B 133) C 134) B 135) A 136) C 137) C 138) A 139) D 140) A 141) D 142) A 143) B 144) C 145) C 146) B Version 1

147) D 148) B

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CHAPTER 12: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine technical accounting terms introduced in this chapter: Cash dividendStock dividendStock splitEarnings per shareNon-recurring itemPrice-earnings ratioIncome from continuing operationsStatement of retained earningsPrice-earnings ratioRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ___ (a) A financial statement showing the revenue, expenses, and net earnings of a corporation during the current accounting period. ___ (b) A distribution of cash to stockholders. ___ (c) A distribution to stockholders of additional shares of stock, accompanied by a proportionate reduction in the par value per share. ___ (d) The market price of a share of preferred stock, divided by the net income of the corporation. ___ (e) A correction in the amount of net income reported in an earlier accounting period. ___ (f) An event that is material in dollar amount, unusual in nature, and not expected to recur in the foreseeable future. ___ (g) A subtotal sometimes included in an income statement to assist investors in forecasting the income of future accounting periods.

The operations of Global Entertainment, Incorporated for Year 1 are summarized below:

Net sales Costs and expenses (including applicable income taxes) Gain on disposal of discontinued segment, net of income taxes

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From Continuing Operations $ 8,060,000 6,890,000

From Discontinued Segment $ 2,275,000 3,315,000 676,000

Global Entertainment had 400,000 shares of capital stock outstanding.Required: Prepare a condensed income statement for the year, including the appropriate earnings per share figures.

3) Shown below is information relating to operations of Broadway Industries for Year 2:Operating information: Net sales Cost and expenses Income tax expense*

$ 6,500,000 $ 5,600,000 $ 120,000

* Calculated based on income from operationsOther data: Current-year profit generated by segment of the business discontinued in May (net of income taxes) Gain on disposal of discontinued segment (net of income taxes) Prior-period adjustment (decrease in prior years' income net of tax benefit) Non-recurring loss Income tax benefit on non-recurring loss Cash dividends declared ($6 per share)

$ 542,100 $ 185,900 $ 347,100 $ 365,000 $ 40,000 $ 520,000

Broadway Industries had 100,000 shares of a single class of common stock outstanding throughout the year.Required: Prepare the income statement for Broadway Industries, including earnings per share figures.

Shown below is information relating to operations of Laconia, Incorporated for Year 2:

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Operating information: Net sales Cost and expenses Income tax expense (calculated based on income from operations) Other data: Current-year profit generated by segment of the business discontinued in April (net of income taxes) Gain on disposal of discontinued segment (net of income taxes) Prior-period adjustment (decrease in prior years' income net of tax benefit) Non-recurring loss Income tax benefit on non-recurring loss Cash dividends declared ($1.50 per share)

$ 7,620,000 $ 3,170,000 $ 580,000

$ 420,000 $ 108,000 $ 168,000 $ 107,000 $ 11,000 $ 150,000

Laconia has 100,000 shares of a single class of common stock outstanding throughout the year.Required: In the space provided, complete the income statement for Laconia, Incorporated including earnings-per-share figures.

5) What is the purpose of arranging an income statement to show a subtotal for Income from Continuing Operations?

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6) Greenwich Corporation had net income of $1,712,500 in Year 2. The company had 300,000 shares of $4 par value common stock and 25,000 shares of 8%, $100 par, preferred stock outstanding throughout the year. Each share of preferred stock is both cumulative and convertible. Each share of preferred stock is convertible into four shares of common stock. Compute the following for Year 2:(a) Basic earnings per share: $ ________ per share(b) The number of shares to be used in computing diluted earnings per share. ________

7) Stainless Corporation had net income of $7,800,000 in Year 2. The company had 500,000 shares of $4 par value common stock and 70,000 shares of 8%, $100 par, preferred stock outstanding throughout the year. Each share of preferred stock is both cumulative and convertible. Each share of preferred stock is convertible into two shares of common stock.Required: Compute the following for Year 2: (A) The number of shares to be used in computing basic earnings per share. (B) The number of shares to be used in computing diluted EPS. (C) Basic earnings per share.

8) Olympic Corporation has 75,000 shares of $1 par value stock outstanding. The largest single stockholder is Lou Cheng, who owns 6,000 shares. On December 31, the total assets of the company amount to $4,360,000 and total liabilities to $2,230,000. On that date, the board of directors declared a stock dividend of one new share for each five shares outstanding.Required: Compute the following:(a) Book value per share before the stock dividend $ ________ per share(b) Book value per share after stock dividend $ ________ per share(c) Total book value of Lou Cheng's stockholdings before the stock dividend $ ________(d) Total book value of Lou Cheng's stockholdings after the stock dividend $ ________

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9) Eagle Corporation has 250,000 shares of $6 par value capital stock outstanding. The company entered into the following transactions during the current year: March 15 Issued the shares for the stock dividend declared on February 10. June 30 Distributed additional shares of capital stock in a 2for-1 stock split. Market price per share was $40 immediately before the stock split. October 17 Declared a 10% stock dividend. Market price per share was $24.

Required: Prepare journal entries for each of the transactions listed above. Date March 15

General Journal

Debit

Credit

June 30

October 17

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10) A partial list of the ledger accounts of Soundview Corporation is shown below, followed by a list of transactions.Required: For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.) 1 10 20 21 24 25 30 31 45 50

(a) (b) (c) (d)

Cash Dividends Payable Common Stock, $1 par Additional Paid-In Capital Stock Dividend to Be Distributed Treasury Stock Retained Earnings Dividends All Revenue and Gains All Expenses and Losses Transactions

Account(s) Account(s) Debited Credited Example: Issued common stock for cash at a 1 20, 21 price above par. Declared a 10% stock dividend. Market price per share is higher than par. Declared a cash dividend on common stock. Issues shares pursuant to stock dividend declared in (a), above. The dividend declared in (b), above, is paid.

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(e) (f)

(g)

Reacquired shares of Soundview common stock on the open market. Reissued some of the shares reacquired in (e), above, at a price higher than cost. Declared and distributed a 2-for-1 stock split. Market price per share is higher than par value.

11) At the beginning of the current year, Falcon Corporation had 2 million shares of $2 par value common stock outstanding and retained earnings of $17 million. During the year, Falcon earned $12 million, declared a 5% stock dividend when the price of the stock was $19 per share, and paid a year-end cash dividend of $2.50 per share. (The cash dividend was declared after the stock dividend had been distributed.)Required: Determine the company's retained earnings at the end of the current year.

12) At the beginning of the current year, King Cole, Incorporated had 300,000 shares of capital stock outstanding and total stockholders' equity of $1,200,000. During the year, the company earned net income of $325,000, declared cash dividends of $150,000, distributed a 5% stock dividend of 15,000 shares when the market price of the stock was $16 per share, and purchased 3,000 shares of treasury stock at a cost of $13 per share.Required: Compute the following at the end of the current year: (A) Total stockholders' equity: (B) Number of shares of stock outstanding: (C) Book value per share:

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13)

What is the effect of a stock dividend?

14)

Explain how prior period adjustments are shown in the financial statements.

15) The stockholders' equity section of the balance sheet of Nautilus Corporation at December 31, Year 2, appears as follows: Stockholders' equity: 8% cumulative preferred stock, $100 par, 50,000 shares authorized, ?? shares issued Common stock, $10 par, 500,000 shares authorized, 100,000 shares issued, of which ?? are held in treasury Additional paid-in capital:

$ 1,400,000

Preferred stock Common stock Total paid-in capital

344,000 2,835,000 $ 5,579,000

Retained earnings Subtotal Less: Treasury stock (4,000 common shares at $40 per

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1,000,000

1,280,000 $ 6,859,000 (160,000)

share) Total stockholders' equity

$ 6,699,000

Required: Answer the following questions based on the stockholders' equity section given above. Each question is a separate situation, unless otherwise indicated. (A) What is the total dollar amount paid annually as dividends to preferred stockholders? (B) What was the average issue price per share of preferred stock? (C) What was the average issue price per share of common stock? (D) How many shares of common stock are outstanding? (E) What is the book value per share of the common stock? (F) If all the treasury stock is reissued at a price of $45 per share, what amount will be credited to the account Additional Paid-In Capital: Treasury Stock Transactions?

16) The stockholders' equity section of the balance sheet of Creative Corporation at December 31, Year 2, appears as follows: Stockholders' equity $5 preferred stock, $100 par, 100,000 shares authorized, 8,000 shares issued Common stock, $3 par, 100,000 shares authorized, 50,000 shares issued (of which 5,000 are held in treasury) Additional paid-in capital: From issuance of preferred stock From issuance of common stock From treasury stock transactions From common stock dividends Total paid-in capital Retained earnings Subtotal Less: Treasury stock (5,000 common shares at $8 per share) Total stockholders' equity

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$ 800,000 150,000

160,000 550,000 6,000 130,000 $ 1,796,000 750,000 $ 2,546,000 40,000 $ 2,506,000 9

The company had no treasury stock transactions before Year 2.Required: Answer the following questions based on the stockholders' equity section given above. (A) What is the average issue price per share of preferred stock? (B) How many shares of common stock are outstanding? (C) A small stock dividend of 5,000 shares was declared and distributed during Year 2. What was the market price per share on the date of declaration? (D) If Creative Corporation had reacquired 7,000 shares of treasury stock early in Year 2, compute the price per share for which the reissued treasury stock was sold. (E) Assume all remaining treasury stock is reissued at a price of $12 per share in January of Year 2. Give the journal entry to record this transaction.

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Answer Key Test name: Chapter 12 Test Bank (Problem Material) 1) (a) None (b) Cash dividend (c) Stock split (d) None (e) Prior period adjustment (f) Non-recurring item (g) Income from continuing operations(a) The statement describes an income statement. (d) A price-earnings ratio is the market price of common stock divided by earnings per share. 2) GLOBAL ENTERTAINMENT, INCORPORATED Income Statement For the Year Ended December 31, Year 1 Net sales

$ 8,060,000

Costs and expenses (including applicable income taxes) Income from continuing operations

(6,890,000) $ 1,170,000

Loss from discontinued operations: Operating loss, (net of income taxes) $ (1,040,000) Gain on disposal, (net of income taxes) Net income

676,000

(364,000) $ 806,000

Earnings per share: Earnings from continuing operations

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$ 2.93

Loss from discontinued operations

(0.91)

Net income

$ 2.02

Earnings per share: Earnings from continuing operations = $1,170,000 ÷ 400,000 shares = $2.93 Loss from discontinued operations = $(364,000) ÷ 400,000 shares = $(0.91) Net earnings = $806,000 ÷ 400,000 shares = $2.02 3) BROADWAY INDUSTRIES Condensed Income Statement For the Year Ended December 31, Year 2 Net sales

$ 6,500,000

Costs and expenses

(5,600,000)

Non-recurring loss

(365,000)

Income before income taxes

$ 535,000

Income tax expense

80,000

Income from continuing operations

$ 455,000

Discontinued operations: Operating profit, net of income taxes

$ 542,100

Gain on disposal, net of income taxes Net income

185,900

728,000 $ 1,183,000

Earnings per share: Earnings from continuing operations

$ 4.55

Gain from discontinued operations

7.28

Net income

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$ 11.83

Earnings per share: Earnings from continuing operations = $455,000 ÷ 100,000 shares = $4.55 Loss from discontinued operations = $728,000 ÷ 100,000 shares = $7.28 Net earnings = ($1,183,000 ÷ 100,000 shares = $11.83 4) LACONIA, INCORPORATED

5) The purpose of developing subtotals, such as Income from Continuing Operations, is to assist users of the income statement in making forecasts of future earnings. By excluding the operating results of discontinued operations and stating in a separate line within continuing operations the effects of nonrecurring transactions, users may determine the amount of income derived from the company's ongoing, normal operations. 6) (A) Basic earnings per share = ($1,712,500 − $200,000) ÷ 300,000 shares = $5.04 per share (B) Number of shares diluted = 300,000 common outstanding + 100,000 from assumed conversion of convertible preferred stock = 400,000 shares 7) (A) 500,000 (B) 500,000 + (2 × 70,000) = 640,000 (C) [$7,800,000 − (70,000 × $100 × 8%)] ÷ 500,000 = $14.48 8) (a) Net assets of Olympic Corporation ($4,360,000 − $2,230,000) Shares outstanding before stock dividend Book value (net assets) per share before stock dividend

$ 2,130,000 75,000 $ 28.40

(b) Net assets of Olympic Corporation (as above) Shares outstanding after stock dividend Book value (net assets) per share after stock dividend

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$ 2,130,000 90,000 $ 23.67

(c)Total book value of 6,000 shares owned by Lou Cheng before the stock dividend (6,000 x $28.40) = $ 170,400(d)Total book value of 7,200 shares owned by Lou Cheng after the stock dividend (7,200 x $23.67) = $ 170,400 (rounded) 9) Date March 15

General Journal Stock Dividend to be Distributed

Debit 375,000

Common Stock

June 30

October 17

Credit

375,000

To record distribution of a stock dividend of 62,500 shares. Memorandum: Issued an additional 312,500 shares of Common stock in a 2-for-1 split. Par value reduced From $6 per share to $3.00 per share. Retained Earnings 1,500,000 Stock Dividend to be Distributed

187,500

Additional Paid in Capital: Stock Dividends To record declaration of a 10% stock dividend consisting of 62,500 shares of $3.00 par value common stock. Amount of retained earnings transferred to permanent capital is based on market price of $24 per share.

1,312,500

10) Transactions

(a) (b) (c)

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Account(s) Account(s) Debited Credited Example: Issued common stock for cash at 1 20, 25 a price above par. Declared a 10% stock dividend. Market 30 24, 21 price per share is higher than par. Declared a cash dividend on common 31 or 30 10 stock. Issues shares pursuant to stock 24 20 dividend declared in (a), above.

(d) (e) (f)

(g)

The dividend declared in (b), above, is paid. Reacquired shares of Soundview common stock on the open market. Reissued some of the shares reacquired in (e), above, at a price higher than cost. Declared and distributed a 2-for-1 stock split. Market price per share is higher than par value.

25, 21

None

11) Retained earnings, beginning

$ 17,000,000

Add: Net income

12,000,000 $ 29,000,000

Less: Stock dividend (100,000 × $19) Cash dividend (2,100,000 × $2.50) Retained earnings, ending

$ 1,900,000 5,250,000

(7,150,000) $ 21,850,000

12) (A) Total stockholders' equity = $1,200,000 + $325,000 − $150,000 − $39,000 = $1,336,000 (B) Shares outstanding = 300,000 + 15,000 − 3,000 = 312,000 (C) Book value per share = $1,336,000 ÷ 312,000 shares = $4.28 per share 13) Stock dividends do not change total assets, liabilities, or stockholders’ equity. The number of shares outstanding increases, but total stockholders' equity does not change. They are popular with stockholders because the dividend is not subject to income taxation until the shares received are sold. 14) A prior period adjustment represents a correction of an error in the amount of income reported in a prior period. Prior period adjustments are shown in the statement of retained earnings as an adjustment to the balance of retained earnings at the beginning of the period in which the error was discovered. Version 1

15) (A) $100 par × 8% × 14,000 shares = $112,000 (B) ($1,400,000 + $344,000) ÷ 14,000 shares = $124.57 per share (C) ($1,000,000 + $2,835,000) ÷ 100,000 shares issued = $38.35 per share (D) 100,000 shares issued − 4,000 shares held in treasury = 96,000 shares (E) ($6,699,000 − $112,000 − $1,400,000) =$5,187,000 ÷ 96,000 shares outstanding = $54.03 per share (F) ($45 × 4,000 shares) − $160,000 = $20,000 16) (A) ($800,000 + $160,000) ÷ 8,000 shares = $120 per share. (B) 50,000 shares issued − 5,000 held in treasury = 45,000 shares (C) Market price per share on stock dividend declaration date = $130,000 ÷ 5,000 shares = $26 market value in excess of par. Market price = $26 + $3 = $29. (D) Treasury stock was reissued at $11 share. 2,000 shares treasury stock reissued (7,000 − 5,000 remaining) $6,000 ÷ 2,000 shares = $3.00 per share in excess of cost, received when the shares were reissued. $8 + $3 = $11

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CHAPTER 12 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) When revenue is included in a company’s income statement, it is said to have been “recognized.” ⊚ ⊚

true false

2) The general principle underlying revenue recognition is that revenue is recognized when it has been collected. ⊚ ⊚

true false

3) If the customer has a right to return the product, revenue is not considered to have been earned, and the revenue cannot be recognized until the customer has decided not to exercise that right. ⊚ ⊚

true false

4) A contract is a written agreement between two or more parties that creates enforceable rights and obligation for both parties. ⊚ ⊚

true false

5) The timing of revenue recognition is directly tied to the completion of performance obligations in a contract with a customer. ⊚ ⊚

true false

The term “cutoff” refers to recognizing revenue in the correct accounting period.

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⊚ ⊚

true false

7) An unusual and infrequent item (a non-recurring item) appears on the income statement before the section on discontinued operations. ⊚ ⊚

true false

8) In order for a loss on the disposal of a discontinued operation to be classified on the income statement as a discontinued operation, it must be unusual in nature. ⊚ ⊚

true false

"Discontinued operations" is an example of an unusual and/or infrequent item. ⊚ ⊚

true false

10) Discontinued operations should be shown on the statement of retained earnings net of taxes. ⊚ ⊚

true false

11) The expropriation (seizure of) of a multinational company's assets by a government is an example of a discontinued operation item. ⊚ ⊚

true false

12) Discontinued operations are shown in the income statement net of any related income tax effects.

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⊚ ⊚

true false

13) The FASB has not compiled a comprehensive list of what is considered to be unusual and/or infrequent items; thus, the determination is a matter of judgment. ⊚ ⊚

true false

14) Earnings per share is equal to net income applicable to common stock, divided by the weighted number of common shares outstanding. ⊚ ⊚

true false

15) When a company has dividends in arrears on its cumulative preferred stock, only the current year's preferred dividend is deducted in the earnings per share computation. ⊚ ⊚

true false

16) While the price-earnings ratio is computed using historical earnings, it reflects investors' expectations of future earnings. ⊚ ⊚

true false

17) The amount of cash dividends paid to common stockholders is part of the computation of earnings per share. ⊚ ⊚

true false

18) Diluted earnings per share are shown to alert investors that earnings per share could increase by the effects of conversions of securities into common stock.

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⊚ ⊚

true false

19) Diluted earnings per share represents a hypothetical case, showing what earnings per share would be if certain securities were converted into additional shares of common stock. ⊚ ⊚

true false

20) When a corporation presents both "basic" and "diluted" earnings per share, basic earnings per share will be the smaller of the two figures. ⊚ ⊚

true false

21) In order to receive a dividend, a stockholder must have owned the stock as of the declaration date. ⊚ ⊚

true false

22) A stock dividend provides a stockholder with more shares of stock, but his or her percentage of ownership in the company is no larger than before. ⊚ ⊚

true false

23) When a small (under 10%) stock dividend is declared, the market value of the stock is transferred from Retained Earnings into other stockholder equity accounts. ⊚ ⊚

24)

true false

A stock split changes the par value of a stock, whereas a stock dividend does not.

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⊚ ⊚

25)

true false

Stock splits are always in a 2-for-1 ratio. ⊚ ⊚

true false

26) Stock dividends and stock splits do not cause a change in the total amount of stockholders' equity. ⊚ ⊚

true false

27) The amount transferred out of retained earnings when a 4% stock dividend is declared is equal to the prevailing market value per share times the number of dividend shares to be distributed. ⊚ ⊚

28)

true false

Large stock dividends tend to keep stock prices down. ⊚ ⊚

true false

29) The date on a statement of retained earnings is at a point in time, such as, at December 31, Year 1. ⊚ ⊚

true false

30) A prior period adjustment to retained earnings is made when a discovery of a material error was made to prior years' income.

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⊚ ⊚

true false

31) Prior period adjustments are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of retained earnings. ⊚ ⊚

true false

32) Prior period adjustments appear in the statement of retained earnings and in the income statement for the current year. ⊚ ⊚

true false

33) Comprehensive income differs from net income in that it includes events that are recognized but not realized. ⊚ ⊚

34)

true false

Comprehensive income is a component of net income. ⊚ ⊚

true false

35) Comprehensive income may be presented in a statement with net income, in a separate statement, or as part of the notes to the financial statements. ⊚ ⊚

36)

true false

The Statement of Retained Earnings shows all equity accounts and their changes. ⊚ ⊚

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true false

37) A statement of stockholders' equity is not a required financial statement and need not be prepared along with a statement of retained earnings. ⊚ ⊚

true false

38) The statement of stockholders' equity discloses the amount of cash dividends as well as stock dividends declared during the current year. ⊚ ⊚

39)

true false

In an attempt to appeal to investors, a company may be tempted to overstate net income. ⊚ ⊚

true false

40) According to the Sarbanes-Oxley Act, lying to an external auditor can create a criminal penalty as well as a civil penalty. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 41) When revenue is included in a company’s income statement: A) It has been collected. B) It is said to have been “recognized.” C) It means that company has promised to do everything required in its agreement with a customer. D) It means the earnings process is almost complete.

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42) When a customer enters a retail establishment, selects a product, pays cash for that product, and leaves the store with that product but has the right to return the product: A) B) C) that right. D)

43)

The seller is not in a position to recognize revenue for the price of the product.

Which of the following statements regarding a contract is not true? A) B) C) D)

44)

Revenue is considered to have been earned, and the revenue can be recognized. The earnings process is not yet complete. Revenue is not recognized until the customer has decided whether or not to exercise

It is an agreement between two or more parties. It may be written or implied. It creates unenforceable rights and obligation for both parties. It dictates the earning and subsequent recognition of revenue for both parties.

Which of the following statements regarding a performance obligation is not true?

A) It is a promise a company makes to transfer goods and/or services to a customer. B) The timing of revenue recognition is directly tied to the completion of performance obligations in a contract with a customer. C) As performance obligations are completed, the seller recognizes revenue. D) It is the promise the customer makes not to return the product.

45)

When a transaction involves multiple performance obligations in a single transaction:

A) Revenue cannot be recognized until all of the performance obligations have been completed. B) The revenue must be deferred until the last performance obligation has been completed. C) The performance obligations involve products but not services. D) The seller must separate the revenue into two or more elements.

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46) On January 2, Year 1, a motorcycle dealer sells a motorcycle with an extended warranty for two years beyond the manufacturer’s two-year warranty and an agreement to service the vehicle for the first three years. The total transaction amount is $8,300. The extended warranty is estimated at 5 percent of the total price, less the amount of the service agreement, which is estimated to be $100 per year.How many performance obligations are included in this contract? A) B) C) D)

One Two Three Four

47) On January 2, Year 1, a motorcycle dealer sells a motorcycle with an extended warranty for two years beyond the manufacturer’s two-year warranty and an agreement to service the vehicle for the first three years. The total transaction amount is $8,300. The extended warranty is estimated at 5 percent of the total price, less the amount of the service agreement, which is estimated to be $100 per year.How much revenue is recognized during the year ending December 31, Year 1? A) B) C) D)

$8,300 $7,600 $7,700 $7,900

48) On January 2, Year 1, a motorcycle dealer sells a motorcycle with an extended warranty for two years beyond the manufacturer’s two-year warranty and an agreement to service the vehicle for the first three years. The total transaction amount is $8,300. The extended warranty is estimated at 5 percent of the total price, less the amount of the service agreement, which is estimated to be $100 per year.How much revenue is recognized during the year ending December 31, Year 2?

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A) B) C) D)

49)

$300 $500 $100 $400

Unusual and infrequent non-recurring items are found on the income statement: A) B) C) D)

Before discontinued operations. After discontinued operations. After income from continuing operations. After prior period adjustments.

50) Doogle Corporation sold a segment of its operations in Year 2 and suffered a loss in Year 3 that was both unusual and infrequent. Which of the following would be the most useful in attempting to predict Doogle's performance for Year 4? A) B) C) D)

Doogle's income from continuing operations in Year 2 and Year 3. Doogle's net income in Year 2 and Year 3. Doogle's total assets at the end of Year 3. Doogle's retained earnings at the end of Year 3.

51) Execucomp Corporation's financial statements in the current year show a loss from discontinued operations, a prior period adjustment, and an unusual and infrequent gain. If Execucomp's income statement is prepared according to generally accepted accounting principles (as illustrated in your text), which of the following four items would appear second in sequence in the income statement? A) B) C) D)

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Prior period adjustment Income from continuing operations Loss from discontinued operations Unusual and infrequent gain

52)

Of the items listed, which would appear closest to the bottom of the income statement? A) B) C) D)

Unusual and infrequent non-recurring items Prior period adjustment Income from continuing operations Discontinued operations

53) The purpose of developing the subtotal "Income from Continuing Operations" in an income statement is to: A) B) C) D)

54)

Assist investors in forecasting future operating results. Increase the amount of reported net income. Decrease the amount of income subject to income taxes. Provide investors with the information necessary to compute earnings per share.

To qualify as an unusual and infrequent item, a gain or loss must:

A) Affect the income of a prior period. B) Be larger in amount than any other item in the income statement. C) Be material in amount, unusual in nature, and not expected to recur. D) Be associated with a segment of the business that has been discontinued during the current period.

55)

Which of the following would not be classified as an unusual and/or infrequent item?

A) B) C) D) business

A loss from write down of inventory A loss from settlement of a lawsuit A loss from a natural disaster that affects the company at infrequent intervals A loss from restructuring charges associated with a discontinued segment of the

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56)

An example of an unusual and infrequent gain or loss is:

A) customer. B) C) D)

A large loss arising from inability to collect an account receivable from a bankrupt A large gain from disposal of a segment of the business. A gain or loss from sale of an expensive machine no longer needed in the business. A loss due to restructuring charges.

57) Which of the following items would be included in the discontinued operations section of the income statement? A) Income or loss from operating the segment prior to its disposal. B) The gain or loss on disposal of the segment. C) Both the income or loss from operating the segment prior to its disposal, and the gain or loss on disposal of the segment. D) Only losses and not gains on the disposal of a segment.

58) Family Fashions Corporation discontinued Kid-Choice, its entire line of children's clothing, in November of the current year. Prior to the disposal, Kid-Choice generated a loss of $600,000 (net of tax) for the period from January through the sale date. Because of the value of the real estate and machinery, there was a gain of $850,000 (net of tax) on the actual sale. How should this situation be reported in the financial statements of Family Fashions for the current year? A) A $250,000 gain should be included in the income statement as a non-recurring item. B) A $600,000 loss should be included in income from operations and a $850,000 gain should be reported in the "discontinued operations" section of the income statement. C) A $250,000 adjustment to beginning retained earnings should be in the statement of retained earnings. D) A $250,000 gain should be in the "discontinued operations" section of the income statement.

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59) Sovereign Foods suffered a $1,500,000 loss when the FDA prohibited the sale of food products containing red dye no. 3. On its other products, Sovereign Foods had sales of $6,580,000 and costs and other expenses of $6,505,000. Which of the following statements is true? (Ignore taxes) A) Sovereign Foods reports a net loss of $1,425,000 for the current year. B) Sovereign Foods reports income from continuing operations of $75,000. C) Sovereign Foods combines the $1,500,000 loss with its other costs and expenses of $6,505,000, since this item does not qualify for any special disclosure. D) Sovereign Foods shows the $1,500,000 loss in a separate line of the income statement after income from continuing operations.

60)

Corona Corporation's financial statements for the current year include the following:

Income from continuing operations Income tax expense Prior period adjustment (increase in prior year net income, net of taxes) Cash dividends paid to preferred stockholders Gain from discontinued operations (net of taxes) Non-recurring loss

$ 632,300 $ 137,000 $ 133,400 $ 270,960 $ 413,794 $ 127,800

On the basis of this information, net income for the current year is: A) B) C) D)

61)

$1,036,894 $495,300 $780,894 $909,094

Corona Corporation's financial statements for the current year include the following:

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$ 818,400 $ 125,000 $ 250,800 $ 266,640 $ 541,200 $ 125,400

On the basis of this information, net income for the current year is: A) B) C) D)

$1,234,600 $693,400 $1,360,000 $1,108,800

62) During the current year, Tosco Corporation suffered an $780,000 loss when its factory was destroyed in a flood. Floods are not common in this area. Assuming the corporate income tax rate is 34%, what amount will Tosco report as a non-recurring loss on its income statement for the current year? A) B) C) D)

$780,000 $514,800 $265,200 Nothing, since the loss from this flood does not qualify as a non-recurring item.

63) During the current year, Tosco Corporation suffered an $800,000 loss when its factory was destroyed in a flood. Floods are not common in this area. Assuming the corporate income tax rate is 36%, what amount will Tosco report as a non-recurring loss on its income statement for the current year? A) B) C) D)

64)

$800,000 $512,000 $288,000 Nothing, since the loss from this flood does not qualify as a non-recurring item.

Colfax Corporation's financial statements for the current year include the following:

Income from continuing operations Income tax expense Prior period adjustment (decrease in prior year net income, net of taxes) Cash dividends paid to preferred stockholders

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$ 756,400 $ 90,000 $ 131,800 $ 193,320

Gain from discontinued operations (net of taxes) Non-recurring loss

$ 803,200 $ 248,400

On the basis of this information, net income for the current year is: A) B) C) D)

65)

$1,221,200 $534,600 $666,400 $1,469,600

Colfax Corporation's financial statements for the current year include the following:

Income from continuing operations Income tax expense Prior period adjustment (decrease in prior year net income, net of taxes) Cash dividends paid to preferred stockholders Gain from discontinued operations (net of taxes) Non-recurring loss

$ 780,400 $ 84,000 $ 125,800 $ 133,320 $ 743,200 $ 188,400

On the basis of this information, net income for the current year is: A) B) C) D)

$1,251,200 $696,400 $570,600 $1,439,600

66) During the current year, Torino Corporation suffered a $1,150,000 loss when its factory was severely damaged in an earthquake. Earthquakes are not common in this area. Assuming the corporate income tax rate is 30%, what amount will Torino report as a non-recurring loss on its income statement for the current year? A) B) C) D)

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$1,150,000 $805,000 $345,000 Nothing, since this does not qualify as a non-recurring item.

67) During the current year, Torino Corporation suffered a $1,200,000 loss when its factory was severely damaged in an earthquake. Earthquakes are not common in this area. Assuming the corporate income tax rate is 30%, what amount will Torino report as a non-recurring loss on its income statement for the current year? A) B) C) D)

$1,200,000 $840,000 $360,000 Nothing, since this does not qualify as a non-recurring item.

68) A company had 135,000 shares of common stock outstanding on January 1 and then sold 30,000 additional shares on March 30. Net income for the year was $510,000. What are earnings per share? A) B) C) D)

$3.78. $3.09. $3.24. $17.00.

69) A company had 125,000 shares of common stock outstanding on January 1 and then sold 35,000 additional shares on March 30. Net income for the year was $594,750. What are earnings per share? A) B) C) D)

70)

$4.73 $4.58 $3.93 $6.61

The price-earnings ratio is the:

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A) B) C) D)

71)

In computing earnings per share, the number of shares used is: A) B) C) D)

72)

Book value of a share of common stock divided by EPS. Market price of a share of common stock divided by EPS. Par value of a share of common stock divided by EPS. Market price divided by book value of a share of stock.

The year-end number of shares outstanding. The beginning of the year number of shares outstanding. The average of the beginning and the year-end number of shares outstanding. The weighted average of shares outstanding for the year.

The amount of earnings per share is usually computed:

A) For both preferred and common stock. B) For common stock by deducting the dividends on preferred stock from net income and dividing the remaining amount by the weighted average number of common shares outstanding. C) By dividing net income by the combined number of preferred and common shares. D) On the basis of the number of shares outstanding at year-end, regardless of changes in the number of shares during the year.

73) Which of the following statistics is generally computed for both common and preferred stock? A) B) C) D)

74)

Earnings per share Price-earnings ratio (P/E ratio) Annual dividend per share Retained earnings per share

Earnings per share figures are shown in the income statement:

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A) For income from continuing operations, discontinued operations, and net income. B) For common stock as well as for preferred stock. C) For all publicly owned, as well as for all privately held, corporations. D) As an optional disclosure for all corporations, and may be omitted completely or disclosed in a footnote at the option of the issuing corporation.

75)

The numerator in calculating earnings per share is reduced for: A) B) C) D)

Noncumulative preferred dividends declared. Common dividends. Common stock dividends. Any form of dividend.

76) All things being equal, if investors expect earnings to increase substantially from current levels, the price to earnings ratio will: A) B) C) D)

Be quite low. Be quite high. Not change. Not be affected by income expectations.

77) The common stock of Securetech Corporation consistently sells at a market price of 20 times earnings (i.e., at a price-earnings ratio of 20). What would be the most likely effect of a 10cent increase in Securetech's basic EPS? A) B) C) D)

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An increase in market price of approximately 10 cents per share. An increase in market price of approximately $2 per share. A reduction in the price-earnings ratio due to the larger EPS. Nothing, since market price reflects expectations of future earnings.

78) Which of the following has no effect on the computation of earnings per share for the current period? A) B) C) D)

The amount of cash dividends declared or paid to preferred stockholders. The amount of cash dividends declared or paid to common stockholders. Net income. The number of shares of common stock issued.

79) General Corporation was organized on January 1 and issued 475,000 shares of common stock on that date. On July 1, an additional 200,000 shares were issued for cash. Net income for the year was $4,535,000. Net earnings per share amounted to: A) B) C) D)

$6.72. $9.55. $22.68. $7.89.

80) General Corporation was organized on January 1 and issued 500,000 shares of common stock on that date. On July 1, an additional 200,000 shares were issued for cash. Net income for the year was $5,184,000. Net earnings per share amounted to: A) B) C) D)

$7.41. $7.98. $8.41. $8.64.

81) Platinum Company reports net income of $590,000 and declared a cash dividend of $1.4 per share on each of its 130,000 shares of common stock outstanding. What are earnings per share?

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A) B) C) D)

$4.54 per share $1.40 per share $3.14 per share $5.94 per share

82) Platinum Company reports net income of $520,000 and declared a cash dividend of $1 per share on each of its 100,000 shares of common stock outstanding. What are earnings per share? A) B) C) D)

$5.20 per share $1.00 per share $1.20 per share $4.80 per share

83) Designs, Incorporated had 4,000 shares of $5.00, $100 par preferred stock, and 40,000 shares of common stock outstanding throughout the year. During the year, Designs declared a dividend of $5.00 per share on its common stock and its income statement showed net income of $510,000. What is the earnings per share? A) B) C) D)

$5.00 per share $11.59 per share $12.25 per share $12.75 per share

84) Designs, Incorporated had 4,000 shares of $7, $100 par preferred stock, and 50,000 shares of common stock outstanding throughout the year. During the year, Designs declared a dividend of $7 per share on its common stock and its income statement showed net income of $630,000. What is the earnings per share?

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A) B) C) D)

$7.00 per share $6.00 per share $12.04 per share $12.60 per share

85) Unique Corporation had 60,000 shares of $3 preferred stock, $100 par, and 100,000 shares of $1 par common stock outstanding throughout the year. Net income for the year was $620,000, and Unique declared and distributed a cash dividend of $1.7 per share on its common stock. Earnings per share amounted to: A) B) C) D)

$6.2. $1.7. $4.4. $3.1.

86) Unique Corporation had 50,000 shares of $5 preferred stock, $100 par, and 100,000 shares of $1 par common stock outstanding throughout the year. Net income for the year was $780,000, and Unique declared and distributed a cash dividend of $1 per share on its common stock. Earnings per share amounted to: A) B) C) D)

$7.80. $1.00. $5.30. $2.30.

87) A company had 240,000 shares of common stock outstanding on January 1 and then sold 60,000 additional shares on April 30. Net income for the year was $426,750. What are earnings per share?

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A) B) C) D)

$1.42 $1.52 $1.78 $7.11

88) National Corporation was organized on January 1 and issued 540,000 shares of common stock on that date. On July 1, an additional 140,000 shares were issued for cash. Net income for the year was $3,615,000. Net earnings per share amounted to: A) B) C) D)

$5.93. $6.69. $5.32. $10.63.

89) National Corporation was organized on January 1 and issued 600,000 shares of common stock on that date. On July 1, an additional 200,000 shares were issued for cash. Net income for the year was $3,675,000. Net earnings per share amounted to: A) B) C) D)

$5.25. $6.13. $4.59. $9.19.

90) On January 1, Year 2, Carleton Corporation had 48,000 shares of $6 par value common stock outstanding. On March 31, Year 2, Carleton issued an additional 14,000 shares in exchange for a building. What number of shares will be used in the computation of earnings per share for Year 2? A) B) C) D)

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48,000 62,000 58,500 124,000

91) On January 1, Year 2, Carleton Corporation had 55,000 shares of $6 par value common stock outstanding. On March 31, Year 2, Carleton issued an additional 10,000 shares in exchange for a building. What number of shares will be used in the computation of earnings per share for Year 2? A) B) C) D)

55,000 65,000 62,500 62,000

92) On January 1, Year 2, Ole Corporation had 82,000 shares of $7 par value common stock outstanding. On July 31, Year 2, Ole issued an additional 14,000 shares in exchange for a building. What number of shares will be used in the computation of earnings per share for Year 2? A) B) C) D)

82,000 98,000 87,833 96,000

93) On January 1, Year 2, Ole Corporation had 75,000 shares of $8 par value common stock outstanding. On July 31, Year 2, Ole issued an additional 10,000 shares in exchange for a building. What number of shares will be used in the computation of earnings per share for Year 2? A) B) C) D)

94)

75,000 80,000 79,167 85,000

It would be reasonable to assume that:

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A) B) C) D)

Basic earnings per share should exceed diluted earnings per share. Diluted earnings per share should exceed basic earnings per share. Basic earnings per share should be equal to diluted earnings per share. Basic earnings per share would not be presented with diluted earnings per share.

95) Diluted earnings per share is a hypothetical computation to warn stockholders what could happen if: A) B) C) D)

Loss contingencies turn out adversely. Convertible securities are converted into shares of common stock. Non-recurring losses were to recur. Consideration was given to the loss from operations discontinued during the current

period.

96)

When a company reports both diluted earnings per share and basic earnings per share: A) B) C) D)

97)

Basic EPS would be greater than fully diluted EPS. Basic EPS would be less than fully diluted EPS. Basic EPS may be either greater or less than fully diluted EPS. Both should never be shown; only one or the other would be reported.

Which of the following would not be used in computing diluted earnings per share? A) B) C) D)

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Preferred stock Convertible bonds Stock options Weighted-average number of shares of common stock outstanding during the year

98) On January 1, Year 2, Edward Corporation had 13,000 shares of $5 par value common stock and 13,000 shares of 6%, $100 par value convertible preferred stock outstanding. The preferred shares carried a 3-for-1 conversion privilege. On October 1, Year 2, all of the preferred shares were converted to common. What number of shares must Edward use in computing basic earnings per share at December 31, Year 2? A) B) C) D)

22,750 52,000 9,750 13,000

99) On January 1, Year 2, Edward Corporation had 10,000 shares of $6 par value common stock and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding. The preferred shares carried a 3-for-1 conversion privilege. On October 1, Year 2, all of the preferred shares were converted to common. What number of shares must Edward use in computing basic earnings per share at December 31, Year 2? A) B) C) D)

17,500 40,000 7,500 10,000

100) For the current year, Evoque Company reported basic earnings per share of $8 and diluted earnings per share of $3. The difference between these figures is attributable to outstanding shares of convertible preferred stock. If all this preferred stock had actually been converted into common stock at the beginning of the current year, Evoque Company would have reported only one earnings per share amount, which would have been: A) B) C) D)

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$8. $5. $3. Cannot be determined.

101) On January 1, Year 2, Alice Corporation had 22,000 shares of $6 par value common stock and 11,000 shares of 8%, $100 par value convertible preferred stock outstanding. The preferred shares carried a 4-for-1 conversion privilege. As of December 31, Year 2, none of the preferred shares had been converted. What number of shares must Alice use in computing diluted earnings per share at December 31, Year 2? A) B) C) D)

11,000 22,000 33,000 66,000

102) On January 1, Year 2, Alice Corporation had 20,000 shares of $6 par value common stock and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding. The preferred shares carried a 3-for-1 conversion privilege. As of December 31, Year 2, none of the preferred shares had been converted. What number of shares must Alice use in computing diluted earnings per share at December 31, Year 2? A) B) C) D)

103)

A small stock dividend is recorded at: A) B) C) D)

104)

10,000 20,000 30,000 50,000

Market value. Book value. Par value. No amount, just a memorandum entry is required.

Stock splits:

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A) Allow management to conserve cash. B) Give stockholders more shares. C) Cause no change in total assets, liabilities, or stockholders' equity. D) Allow management to conserve cash, give stockholders more shares, and cause no change in total assets, liabilities, or stockholders' equity.

105)

Which of the following would have no effect on Retained Earnings? A) B) C) D)

Declaration of a cash dividend Declaration of a stock dividend Declaration of a stock split A prior period adjustment

106) On January 31, Year 2, Village Bank had 580,000 shares of $2 par value common stock outstanding. On that date, the company declared a 14% stock dividend when the market price of the stock was $47 per share. The immediate effect of this dividend upon Village Bank was: A) B) C) D)

A reduction in cash of $3,816,400. A reduction in retained earnings of $3,816,400. A reduction in retained earnings of $162,400. A liability to the stockholders of $162,400.

107) On January 31, Year 2, Village Bank had 500,000 shares of $2 par value common stock outstanding. On that date, the company declared a 14% stock dividend when the market price of the stock was $37 per share. The immediate effect of this dividend upon Village Bank was: A) B) C) D)

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A reduction in cash of $2,590,000. A reduction in retained earnings of $2,590,000. A reduction in retained earnings of $140,000. A liability to the stockholders of $140,000.

108)

Large stock dividends tend to: A) B) C) D)

109)

To receive the next cash dividend, an investor must purchase the stock before the: A) B) C) D)

110)

Dividend declaration date. Ex-dividend date. Date of record. Payment date announced by the board of directors.

Dividends become a liability of a corporation: A) B) C) D)

111)

Increase stock prices. Have no effect upon stock prices. Keep stock prices down. Decrease total assets.

On the date the board of directors declares the dividend. On the date of record. On the date payment is to be made. When cumulative preferred stock dividends are in arrears.

A liquidating dividend:

A) Occurs when a corporation distributes shares of its own stock as a dividend, rather than cash. B) Occurs whenever a corporation distributes non-cash assets as a dividend to its stockholders. C) Represents a distribution of a corporation's profits to the stockholders. D) Occurs when a corporation pays a dividend that exceeds the balance in its Retained Earnings account.

112)

Dividends are first recorded and retained earnings are reduced on:

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A) B) C) D)

113)

The ex-dividend date. The date of record. The date of declaration. The date of payment.

As a result of a 5% stock dividend:

A) Total stockholders' equity decreases by 5%. B) The par value per share decreases by 5%. C) The number of shares owned by each stockholder increases by 5%, but total stockholders' equity does not change. D) Both the number of shares outstanding and the total stockholders' equity increase by 5%.

114)

A large stock dividend and a stock split are similar in that they both cause a: A) B) C) D)

Reduction in total stockholders' equity. Reduction in retained earnings. Reduction in the par value per share. Reduction in the market price per share.

115) Superior Corporation declared a 3-for-2 common stock split, but this transaction was erroneously recorded as a 50% common stock dividend. As a result: A) Retained earnings is understated. B) The total dollar amount of stockholders' equity is overstated. C) The corporate records do not show the correct number of shares of common stock outstanding. D) The common stock account is understated.

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116) Declaration and distribution of a stock dividend cause each of the following effects except: A) B) C) D)

117)

An increase in the number of shares of stock outstanding. A decrease in retained earnings. A decrease in total assets of the issuing corporation. An increase in legal capital of the issuing corporation.

A 2-for-1 stock split:

A) Is accounted for in the same way as a 100% stock dividend. B) Increases the number of outstanding shares of common stock, but par value per share remains the same as before the split. C) Is recorded by transferring the par value of additional shares from retained earnings to the common stock account. D) Should logically cause the market price per share to drop by approximately 50%.

118)

When a stock dividend is declared, total stockholders' equity will: A) B) C) D)

119)

Decrease. Increase. Not change. Increase or decrease, depending upon whether it's a small or large stock dividend.

A liquidating dividend:

A) Occurs only when a company is going out of business. B) Occurs when a corporation pays a dividend that exceeds the balance in the retained earnings account. C) Is an expense to the corporation. D) Occurs only when the corporation has a loss for the year.

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120) At the beginning of the current year, Elite Corporation had 210,000 shares of $1 par common stock outstanding and had retained earnings of $4,900,000. During the year, the company earned $1,685,000, declared a 10% stock dividend when the price of stock was $29 per share, and paid a year-end cash dividend of $2 per share. (The cash dividend was paid after the stock dividend had been distributed.) What was Elite Corporation's retained earnings at the end of the year? A) B) C) D)

$5,976,000 $5,514,000 $5,574,900 $3,829,000

121) At the beginning of the current year, Elite Corporation had 200,000 shares of $1 par common stock outstanding and had retained earnings of $4,800,000. During the year, the company earned $1,675,000, declared a 10% stock dividend when the price of stock was $28 per share, and paid a year-end cash dividend of $3 per share. (The cash dividend was paid after the stock dividend had been distributed.) What was Elite Corporation's retained earnings at the end of the year? A) B) C) D)

$5,915,000 $5,255,000 $5,311,000 $3,580,000

122) At the beginning of the current year, Wilson Corporation had 210,000 shares of $1 par common stock outstanding and had retained earnings of $4,900,000. During the year, the company earned $1,685,000 and paid a year-end cash dividend of $2 per share. What was Wilson Corporation's retained earnings at the end of the year? A) B) C) D)

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$6,375,000 $6,165,000 $6,585,000 $4,900,000

123) At the beginning of the current year, Wilson Corporation had 200,000 shares of $1 par common stock outstanding and had retained earnings of $4,800,000. During the year, the company earned $1,675,000 and paid a year-end cash dividend of $3 per share. What was Wilson Corporation's retained earnings at the end of the year? A) B) C) D)

$6,275,000 $5,875,000 $6,475,000 $4,800,000

124) On January 31, Village Bank had 490,000 shares of $3 par value common stock outstanding. On that date, the company declared a 10% stock dividend when the market price of the stock was $61 per share. The immediate effect of this dividend upon Village Bank was: A) B) C) D)

A reduction in cash of $3,683,500. A reduction in retained earnings of $2,989,000. A reduction in retained earnings of $1,470,000. A liability to the stockholders of $1,470,000.

125) On January 31, Village Bank had 500,000 shares of $3 par value common stock outstanding. On that date, the company declared a 10% stock dividend when the market price of the stock was $62 per share. The immediate effect of this dividend upon Village Bank was: A) B) C) D)

126)

A reduction in cash of $3,794,500. A reduction in retained earnings of $3,100,000. A reduction in retained earnings of $150,000. A liability to the stockholders of $150,000.

Which of the following items would not reduce retained earnings?

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A) B) C) D)

A common stock dividend A preferred stock dividend A cash dividend A cash payment of a previously declared dividend

127) The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, Year 2 appears as follows. The company engaged in no treasury stock transactions prior to Year 2. Stockholders' Equity $2 preferred stock, $100 par, 10,000 shares authorized, 8,000 shares issued $800,000 Common stock, $2 par, 100,000 shares authorized, 75,000 shares issued, 5,000 are held in the treasury 150,000 Additional Paid-in Capital:

$ 800,000

From issuance of preferred stock From issuance of common stock From treasury stock transactions From common stock dividends Total paid-in capital Retained earnings ($40,000 equal to cost of treasury stock is not available for dividends)

80,000 225,000 8,000 26,000 $ 1,289,000 500,000

150,000

$ 1,789,000 Less treasury stock (at cost: 5,000 common shares) Total Stockholders' equity

(40,000) $ 1,749,000

What was the original cost of the treasury stock to Caesar Corporation? A) B) C) D)

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$5 per share $7 per share $8 per share Cannot be determined

128) The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, Year 2 appears as follows. The company engaged in no treasury stock transactions prior to Year 2. Stockholders' Equity $2 preferred stock, $100 par, 10,000 shares authorized, 8,000 shares issued $800,000 Common stock, $2 par, 100,000 shares authorized, 75,000 shares issued, 5,000 are held in the treasury 150,000 Additional Paid-in Capital:

$ 800,000

80,000 225,000 8,000 26,000 $ 1,289,000 500,000

150,000

$ 1,789,000 Less treasury stock (at cost: 5,000 common shares) Total Stockholders' equity

(40,000) $ 1,749,000

What was the average issue price per share of preferred stock? A) B) C) D)

$100 $110 $115 $5

129) The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, Year 2 appears as follows. The company engaged in no treasury stock transactions prior to Year 2. Stockholders' Equity $2 preferred stock, $100 par, 10,000 shares authorized, 8,000 shares issued $800,000 Common stock, $2 par, 100,000 shares authorized, 75,000 shares issued, 5,000 are held in the treasury

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$ 800,000 150,000

150,000 Additional Paid-in Capital: From issuance of preferred stock From issuance of common stock From treasury stock transactions From common stock dividends Total paid-in capital Retained earnings ($40,000 equal to cost of treasury stock is not available for dividends)

80,000 225,000 8,000 26,000 $ 1,289,000 500,000 $ 1,789,000

Less treasury stock (at cost: 5,000 common shares) Total Stockholders' equity

(40,000) $ 1,749,000

How many shares of common stock are outstanding? A) B) C) D)

100,000 95,000 75,000 70,000

130) The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, Year 2 appears as follows. The company engaged in no treasury stock transactions prior to Year 2. Stockholders' Equity $2 preferred stock, $100 par, 10,000 shares authorized, 8,000 shares issued $800,000 Common stock, $2 par, 100,000 shares authorized, 75,000 shares issued, 5,000 are held in the treasury 150,000 Additional Paid-in Capital:

$ 800,000

From issuance of preferred stock From issuance of common stock From treasury stock transactions From common stock dividends Total paid-in capital Retained earnings ($40,000 equal to cost of treasury

80,000 225,000 8,000 26,000 $ 1,289,000 500,000

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150,000

stock is not available for dividends) $ 1,789,000 Less treasury stock (at cost: 5,000 common shares) Total Stockholders' equity

(40,000) $ 1,749,000

A small stock dividend of 1,000 common shares was declared and distributed during the current year. What was the market price per share on the date of declaration? A) B) C) D)

$8.00 per share $2 per share $16 per share $28.00 per share

131) The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, Year 2 appears as follows. The company engaged in no treasury stock transactions prior to Year 2. Stockholders' Equity $2 preferred stock, $100 par, 10,000 shares authorized, 8,000 shares issued $800,000 Common stock, $2 par, 100,000 shares authorized, 75,000 shares issued, 5,000 are held in the treasury 150,000 Additional Paid-in Capital:

$ 800,000

80,000 225,000 8,000 26,000 $ 1,289,000 500,000

150,000

$ 1,789,000 Less treasury stock (at cost: 5,000 common shares) Total Stockholders' equity

(40,000) $ 1,749,000

If Caesar Corporation had reacquired 7,000 shares of treasury stock early in Year 2, then some treasury stock must have been sold during Year 2 for:

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A) B) C) D)

$8 per share $12.00 per share $1.50 per share $5 per share

132) The stockholders' equity section of the balance sheet of Caesar Corporation at December 31, Year 2 appears as follows. The company engaged in no treasury stock transactions prior to Year 2. Stockholders' Equity $2 preferred stock, $100 par, 10,000 shares authorized, 8,000 shares issued $800,000 Common stock, $2 par, 100,000 shares authorized, 75,000 shares issued, 5,000 are held in the treasury 150,000 Additional Paid-in Capital:

$ 800,000

80,000 225,000 8,000 26,000 $ 1,289,000 500,000

150,000

$ 1,789,000 Less treasury stock (at cost: 5,000 common shares) Total Stockholders' equity

(40,000) $ 1,749,000

Assume that all remaining treasury stock is reissued at a price of $14 per share in January of Year 3. What amount should be credited to the account Additional Paid-In Capital: Treasury Stock Transactions in the journal entry to record this transaction? A) B) C) D)

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$14,000 $30,000 $40,000 $70,000

133) The stockholders' equity section of the balance sheet of Carmon Corporation at December 31, appears as follows: Stockholders' Equity $3 Cumulative preferred stock, $100 par; authorized, 10,000 shares; issued and outstanding, 7,600 shares Common stock, $2 par; authorized, 100,000 shares; issued and outstanding; ? shares Additional Paid-in Capital: From issuance of preferred stock From issuance of common stock Total paid-in capital Retained earnings Total Stockholders' equity

$ 760,000 162,000

210,000 755,000 $ 1,887,000 880,000 $ 2,767,000

What was the average issue price per share of preferred stock? A) B) C) D)

$100.00 $127.63 $188.70 $300.00

134) The stockholders' equity section of the balance sheet of Carmon Corporation at December 31, appears as follows: Stockholders' Equity $3 Cumulative preferred stock, $100 par; authorized, 10,000 shares; issued and outstanding, 7,000 shares Common stock, $2 par; authorized, 100,000 shares; issued and outstanding; ? shares Additional Paid-in Capital: From issuance of preferred stock From issuance of common stock Total paid-in capital Retained earnings Total Stockholders' equity

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$ 700,000 150,000

180,000 725,000 $ 1,755,000 850,000 $ 2,605,000

What was the average issue price per share of preferred stock? A) B) C) D)

$100.00 $125.71 $175.50 $300.00

135) The stockholders' equity section of the balance sheet of Carmon Corporation at December 31, appears as follows: Stockholders' Equity $3 Cumulative preferred stock, $100 par; authorized, 10,000 shares; issued and outstanding, 7,600 shares Common stock, $2 par; authorized, 100,000 shares; issued and outstanding; ? shares Additional Paid-in Capital: From issuance of preferred stock From issuance of common stock Total paid-in capital Retained earnings Total Stockholders' equity

$ 760,000 162,000

210,000 755,000 $ 1,887,000 880,000 $ 2,767,000

How many shares of common stock are outstanding? A) B) C) D)

100,000 86,000 81,000 110,000

136) The stockholders' equity section of the balance sheet of Carmon Corporation at December 31, appears as follows: Stockholders' Equity $3 Cumulative preferred stock, $100 par; authorized, 10,000 shares; issued and outstanding, 7,000 shares Common stock, $2 par; authorized, 100,000 shares;

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$ 700,000 150,000 39

issued and outstanding; ? shares Additional Paid-in Capital: From issuance of preferred stock From issuance of common stock Total paid-in capital Retained earnings Total Stockholders' equity

180,000 725,000 $ 1,755,000 850,000 $ 2,605,000

How many shares of common stock are outstanding? A) B) C) D)

137)

100,000 80,000 75,000 110,000

A restriction of retained earnings:

A) B) earnings. C) D)

Reduces the dollar amount of retained earnings shown in the balance sheet. Appears in the statement of retained earnings as a reduction of ending retained Appears in the liability section of the balance sheet. Limits the dollar amount of dividends a corporation may declare.

138) A company failed to make an adjusting entry in the prior year to accrue earned revenue. To correct this, the company should: A) Correct last year's statement by increasing net income. B) Correct this year's statements with a prior period adjustment increasing beginning retained earnings. C) Correct this year's statements with a prior period adjustment decreasing beginning retained earnings. D) Correct this year's statements with a prior period adjustment increasing ending retained earnings.

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139)

A prior period adjustment is a correction made to: A) B) C) D)

140)

Retained earnings of the beginning of the period. Retained earnings at the end of the period. Net income of the current year. Only to last years' financial statements.

If a material accounting error was made in a prior year, that error:

A) Should be reflected on the current year's income statement. B) Should be reflected, net of taxes, on the retained earnings statement. C) Should be reflected as a change in accounting principle. D) Should be considered as a non-recurring item, and shown, net of taxes, on the income statement.

141) Which of the following would be treated as a prior period adjustment by Gold Corporation in Year 10? A) In Year 10, it was discovered that Gold Corporation recorded the purchase of a warehouse in Year 7 as a debit to Repairs Expense. B) In Year 10, Gold Corporation switched from the straight-line method of depreciation to another method of computing depreciation. C) In Year 10, Gold Corporation's management decided that the estimated useful life of its computer equipment should be changed from five years to nine years. D) In Year 10, Gold Corporation sold a segment of the business that it has operated since Year 1.

142)

A prior period adjustment appears in:

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A) The income statement following the subtotal "Income before Prior Period Adjustments." B) The statement of retained earnings, as an adjustment to the ending balance of retained earnings. C) Footnotes to the financial statements. D) The statement of retained earnings, as an adjustment to the beginning balance of retained earnings.

143) After preparing the financial statements for Year 4, the accountant for the Dawson Corporation discovered that a prior period adjustment had been omitted from the Year 1 financial statements. Which of the following is most likely to require correction as a result of this oversight? A) B) C) D)

144)

Earnings per share as originally computed. Net income for Year 4 as originally reported. Ending retained earnings at December 31, Year 4. Non-recurring items as originally reported.

A prior period adjustment appears in the financial statements of the current year when:

A) An error was made in computing the net income of the current period. B) An error was made in measuring the net income of a previous year or years. C) A non-recurring loss in a prior year was not separately stated (but still included in total results of operations for the year). D) Earnings per share figures from prior years are restated to reflect the increased number of shares outstanding due to a stock split or a stock dividend.

145) Comprehensive income can be displayed to users of financial statements in which of the following way(s):

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A) Only as a second income statement. B) As a single income statement that includes both the components of net income and the components of other comprehensive income. C) As a footnote disclosure to the financial statements. D) Either as a second income statement or as a single income statement that includes both the components of net income and the components of other comprehensive income.

146) Which of the following items would be included in comprehensive income but not reported as a component of net income? A) B) C) D)

147)

Treasury stock appears as: A) B) C) D)

148)

A lower-of-cost-or-market write-down of inventory. A material loss due to natural disaster. An unrealized gain on the portfolio of available-for-sale marketable securities. A gain on the sale of a segment of the business.

An asset account. A liability account. An expense account. An equity account.

The statement of stockholders' equity:

A) Is a required financial statement. B) May be issued as a substitute for the statement of retained earnings. C) Shows the changes during the year in all stockholders' equity accounts except retained earnings. D) Is a statement sent to each stockholder showing that person's overall return on equity.

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149)

A statement of stockholders' equity discloses each of the following except: A) B) C) D)

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The market value of the stockholders' equity at the end of the year. The cost of treasury stock owned at the end of the year. Net income for the current year. The amount of cash dividends declared during the current year.

Answer Key Test name: Chapter 12 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) FALSE 4) FALSE 5) TRUE 6) TRUE 7) TRUE 8) FALSE 9) FALSE 10) FALSE 11) FALSE 12) TRUE 13) TRUE 14) TRUE 15) TRUE 16) TRUE 17) FALSE 18) FALSE 19) TRUE 20) FALSE 21) FALSE 22) TRUE 23) TRUE 24) TRUE 25) FALSE 26) TRUE Version 1

27) TRUE 28) TRUE 29) FALSE 30) TRUE 31) TRUE 32) FALSE 33) TRUE 34) FALSE 35) FALSE 36) FALSE 37) TRUE 38) TRUE 39) TRUE 40) TRUE 41) B 42) A 43) C 44) D 45) D 46) C 47) C 48) C 49) A 50) A 51) B 52) D 53) A 54) C 55) A 56) D Version 1

57) C 58) D 59) A 60) D 61) A 62) A 63) A 64) D 65) D 66) A 67) A 68) C 69) C 70) B 71) D 72) B 73) C 74) A 75) A 76) B 77) B 78) B 79) D 80) D 81) A 82) A 83) C 84) C 85) C 86) C Version 1

87) B 88) A 89) A 90) C 91) C 92) C 93) C 94) A 95) B 96) A 97) A 98) A 99) A 100) C 101) D 102) D 103) A 104) D 105) C 106) B 107) B 108) C 109) B 110) A 111) D 112) C 113) C 114) D 115) A 116) C Version 1

117) D 118) C 119) B 120) B 121) B 122) B 123) B 124) B 125) B 126) D 127) C 128) B 129) D 130) D 131) B 132) B 133) B 134) B 135) C 136) C 137) D 138) B 139) A 140) B 141) A 142) D 143) C 144) B 145) D 146) C Version 1

147) D 148) B 149) A

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CHAPTER 13: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms introduced in this chapter: Cash received from customersFinancing activitiesCash equivalentsNon-cash investing and financing activitiesOperating activitiesInvesting activitiesStatement of cash flowsIncome statement Required: Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (a) Cash sales and collections of accounts receivable ____ (b) The classification of cash flows which includes issuing capital stock and paying dividends ____ (c) The financial statement that best illustrates the profitability of a business ____ (d) The section of a statement of cash flows summarizing the cash effects of most transactions entering into the determination of net income ____ (e) An expense that reduces net cash flow but does not reduce net income ____ (f) The classification of cash flows that includes purchases and sales of plant assets ____ (g) Transactions shown in a supplementary schedule accompanying a statement of cash flows

2) In a business with an accrual-based accounting system, is a statement of cash flows based upon account balances shown in the adjusted trial balance? Explain.

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3) A business entered into the events listed below during the current year. Required: Indicate how each of the following events should be classified in a statement of cash flows for the current calendar year. Use the following code: O = operating activities, I = investing activities, and F = financing activities. Assume use of the direct method. If the event does not involve a cash flow that should be included in the statement of cash flows, use an X. __

__ __

(a) Paid an account payable for inventory purchased in a prior accounting period. (b) On December 28, made a large credit sale; terms, 2/10, n/30. (c) Received a dividend from an investment in IBM common stock. (d) Paid a dividend to stockholders. (e) Paid the interest on a note payable to First Bank. (f) Paid the principal amount due on the note payable to First Bank. (g) Transferred cash from a checking account into a money market fund. (h) Made an adjusting entry to record accrued wages payable at the end of the period. (i) Recorded depreciation expense for the current year. (j) Purchased plant assets for cash.

Consider the following information for Olympia, Incorporated

__ __ __ __ __ __ __

Purchases of marketable securities Proceeds from sales of marketable securities Interest and dividends received Interest paid Taxes paid Dividends paid Proceeds from short-term borrowing Payments to settle short-term debts (principal repaid) Cash received from customers Cash paid to suppliers and employees Proceeds from issuing capital stock

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$ 48,000 $ 75,000 $ 19,500 $ 18,000 $ 43,500 $ 27,000 $ 31,500 $ 36,000 $ 681,000 $ 531,000 $ 118,500 2

Purchases of plant assets Proceeds from sales of plant assets Cash and cash equivalents, beginning of year

$ 201,000 $ 58,500 $ 73,500

Required: Use the information provided to complete the statement of cash flows for Olympia, Incorporated Place parentheses around those dollar amounts representing cash outlays. OLYMPIA, INCORPORATED Statement of Cash Flows For the Year Ended December 31, 20__ Cash flows from operating activities (direct method): Cash provided by operating activities $ Cash disbursed for operating activities

Net cash flow from operating activities

Cash flows from investing activities Net cash used by investing activities

Cash flows from financing activities: Net cash provided by financing activities

Net increase (decrease) in cash

Cash and cash equivalents, end of year

5) Consider the following information to complete the statement of cash flows for Jericho Corporation.

Collections on loans made to borrowers

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$ 104,000

Loans made to borrowers Interest and dividends received Interest paid Income taxes paid Dividends paid Payments to retire bonds payable Payments to settle short-term debt Cash received from customers Cash paid to suppliers and employees Proceeds from issuing capital stock Purchases of plant assets Proceeds from sales of plant assets Cash and cash equivalents, beginning of year

$ 229,000 $ 24,000 $ 21,500 $ 91,500 $ 44,000 $ 179,000 $ 74,000 $ 1,709,000 $ 1,054,000 $ 254,000 $ 684,000 $ 329,000 $ 81,500

Required: Use the information provided to complete the statement of cash flows for Jericho Corporation. Place parentheses around those dollar amounts representing cash outlays. JERICHO CORPORATION Statement of Cash Flows For the Year Ended December 31, 20__ Cash flows from operating activities (direct method): Cash provided by operating activities

Cash disbursed for operating activities Net cash flow from operating activities

Cash flow from investing activities Net cash used by investing activities

Cash flows from financing activities: Net cash provided by financing activities

Net increase (decrease) in cash

Cash and cash equivalents, end of year

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6) The following information was obtained from the Champion Company for the year ending December 31. Cash paid to suppliers Capital stock issued Equipment purchased Interest paid Cash received from customers Taxes paid Proceeds from long-term borrowing Collections of loans made Interest received Proceeds from sale of equipment Dividends paid Loans made to borrowers Cash on hand January Cash on hand December

$ 289,000 $ 81,000 $ 58,000 $ 10,500 $ 936,000 $ 28,000 $ 116,000 $ 17,000 $ 16,000 $ 24,000 $ 4,600 $ 29,000 $ 1,781,000 $ 2,551,900

Required:Use the information provided to complete the statement of cash flows for Champion Company. Place parentheses around those dollar amounts representing cash outlays.

7) Place an “X” in the column signifying whether the activity is an operating, investing, or a financing activity, and if it is a source or a use of funds, or if it is a non-cash activity.

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Operating

Investing

Financing

Source

Use

Non Cash

Use

Cash dividends paid by the company Sale of equipment for cash Issuance of bonds payable Purchase of inventory from suppliers Repurchase of outstanding stock Interest paid to lenders Dividends received on investments Sale of marketable securities Cash purchase of machinery Payment of salaries to employees Depreciation of fixed assets Payment of operating expenses Loss on sale of equipment

8) Indicate how each of the following events should be classified in a statement of cash flows for the current calendar year. Use the following code: O = operating activities, I = investing activities, and F = financing activities. Assume this company uses the direct method. If the event does not involve a cash flow that should be included in the statement of cash flows, use an X. __ __ __

(a) Declared a dividend to be paid early next year. (b) Recorded depreciation expense for the current year. (c) At year-end, paid rent in advance for the next six months.

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__ __ __ __ __ __ __

(d) Issued capital stock for cash; management plans to use this cash to invest in marketable securities. (e) Sold a parcel of unused land for cash at a loss. (f) Collected principal amount due on a note receivable. (g) Used the cash received in d, above, to purchase marketable securities. (h) Collected interest due on note receivable described in f, above. (i) Made an adjusting entry to accrue interest payable at yearend. (j) Collected account receivable from a customer who made a large credit purchase in a prior period.

9) Computation of operating cash flows The financial statements of Packard Corporation provide the following information for the current year:

End of Year

Beginning of Year

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued liabilities Net sales

$ 106,000 $ 105,000 $ 31,000 $ 74,000

$ 98,000 $ 120,000 $ 29,000 $ 70,000

$ 30,000 $ 848,000

$ 28,000

Cost of goods sold

$ 318,000

Expenses (including depreciation of $43,000)

$ 258,000

Required: Using this information, compute for the current year:

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(a) Cash received from customers (b) Cash payments for purchases of merchandise (c) Cash payments for operating expenses (d) Net cash flow from operating activities

$ ______ $ ______ $ ______ $ ______

10) The financial statements of Custom Corporation provide the following information for the current year: End of Year Accounts receivable Inventory Short-term prepayments Accounts payable (for merchandise) Accrued operating expenses payable Accrued income taxes payable Net sales

$ 201,000 $ 249,000 $ 12,000 $ 177,000 $ 25,500 $ 12,600 $ 801,000

Cost of goods sold

$ 465,000

Operating expenses (including depreciation of $40,000) Income taxes expense

$ 300,000

Beginning of Year $ 221,000 $ 233,000 $ 9,500 $ 170,000 $ 33,200 $ 15,500

$ 39,000

Using this information, compute for the current year: (a) Cash received from customers (b) Cash payments for purchases of merchandise (c) Cash payments for operating expenses (d) Income taxes paid

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$ ______ $ ______ $ ______ $ ______

11) An analysis of changes in selected balance sheet accounts of Taurus Corporation shows the following for the current year: Marketable securities account: Debit entries Credit entries Plant and equipment accounts:

$ 1,600,000 $ 1,000,000

Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sales of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 3,600,000 $ 2,800,000 $ 1,300,000 $ 500,000

The income statement for the current year included the following items relating to the transactions summarized above:

Loss on sales of marketable securities Gain on sales of plant assets

$ 350,000 $ 650,000

All payments and proceeds relating to these transactions were in cash. Required: Using this information, compute the following cash flows for the current year: (a) Purchases of marketable securities (b) Proceeds from sales of marketable securities (c) Purchases of plant assets (d) Proceeds from sales of plant assets

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$ ______ $ ______ $ ______ $ ______

12) An analysis of changes in selected balance sheet accounts of Gable Corporation shows the following for the current year: Marketable securities account: Debit entries Credit entries Plant and equipment accounts:

$ 250,000 $ 400,000

$ 700,000 $ 900,000 $ 300,000 $ 125,000

The income statement for the current year included the following items relating to the transactions summarized above: Gain on sales of marketable securities Loss on sales of plant assets

$ 85,000 150,000

$ ______ $ ______ $ ______ $ ______

13) Underhill Corporation's statement of cash flows for Year 2 shows the following information regarding investing activities: Purchases of marketable securities Proceeds from sale of marketable securities

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$ (1,518,000) 811,000 10

Proceeds from sale of land Net cash used by investing activities

425,000 $ (282,000)

Underhill Corporation's income statement for Year 2 includes the following items: Loss on sale of marketable securities Gain on sales of land

$ 157,000 $ 179,000

All payments and proceeds relating to these transactions were in cash. Underhill Corporation's balance sheet at the end of Year 1 showed Land of $3,057,000 and Investment in Marketable Securities of $2,218,000. Required: Using this information, compute the following:(A) Cost of the land sold during Year 2(B) Cost (book value) of marketable securities sold during Year 2(C) Amount to be reported for Land on Underhill Corporation's balance sheet at December 31, Year 2(D) Amount to be reported for Investment in Marketable Securities on Underhill Corporation's balance sheet at December 31, Year 2

14) The Year 2 statement of cash flows of Citation Corporation shows the amount of cash received from customers as $800,000. Comparative balance sheets report accounts receivable to be $70,000 at January 1 and $100,000 at December 31, Year 2. The supplementary schedule for noncash investing and financing activities accompanying Citation Corporation's Year 2 statement of cash flows disclosed the following: Sale of land Less: portion consisting of long-term note receivable Proceeds from sale of land

$ 1,400,000 $ (850,000) $ 550,000

Citation Corporation's Year 2 income statement reports a $61,000 loss on the disposal of land. Required:(A) Compute the amount of net sales reported in Citation Corporation's income statement for Year 2.(B) Prepare the journal entry made by Citation in Year 2 to record this sale of land.

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15) Identify three factors that may cause net income to differ from the net cash flow from operating activities.

16) In the long run, is it more important for a business to have a positive cash flow from its operating activities, investing activities, or financing activities? Why?

17) In the computation of net cash flows from operating activities for Year 2 by the indirect method, determine whether each of the following items would be added to net income, deducted from net income, or omitted from the computation. Indicate your answer by using the following symbols: + (added to net income), − (deducted from net income), or 0 (omitted from computation). __ __ __ __ __ __

(a) A decrease in accounts payable to suppliers of merchandise during Year 2. (b) A loss recognized on the sale of office equipment during Year 2. (c) Depreciation expense for Year 2. (d) Dividends, declared at the end of last year, paid to shareholders during the current year. (e) An increase in inventory levels during Year 2. (f) A decrease in accounts receivable from customers during Year

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18) An analysis of the financial statements of Portside Provisions reveals the following:Accounts payable to suppliers of merchandise decreased by $65,000 during Year 2.Dividends of $135,000 were declared in November Year 2, to be paid in January Year 3.Dividends of $120,000, declared in November Year 1, were paid in January Year 2.Inventory levels increased by $91,000 during Year 2.Depreciation expense for Year 2 amounted to $53,000.Land, which had a cost of $350,000, was sold in Year 2 for $400,000 cash, resulting in a gain of $50,000.Net income for Year 2 was $745,000.Using only the above information, follow the indirect method to compute Portside Provisions' net cash flows from operating activities for Year 2.

19)

The data below are taken from the financial statements of the Rutherford Corporation:

Income Statement: Net income Depreciation expense Amortization of patent Gain on sale of equipment Balance Sheet: Accounts receivable Inventory Prepaid expenses Accounts payable Accrued expenses payable

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Year 2 $ 840,000 170,000 30,000 110,000 December 31, Year 2 $ 710,000 840,000 30,000 660,000 430,000

December 31, Year 1 $ 680,000 800,000 35,000 630,000 440,000

Required: Complete the partial statement of cash flows for the year ended December 31, Year 2, showing the computation of net cash flows from operating activities by the indirect method: RUTHORFORD CORPORATION Partial Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities (indirect method): Net income Add:

Subtotal Less:

Net cash flows from operating activities

20) Cash flows from operating activities-indirect methodThe data below are taken from the financial statements of the Spectrum Corporation: Income Statement: Net income Depreciation expense Amortization of trademark Loss on sale of machinery Balance Sheet: Accounts receivable Inventory Prepaid expenses

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2018 $ 299,000 101,000 20,000 38,000 December 31, Year 2 $ 195,000 353,000 50,000

December 31, Year 1 $ 204,000 321,000 38,000 14

Accounts payable Accrued expenses payable

314,000 158,000

290,000 159,000

Required: Complete the partial statement of cash flows for the year ended December 31, Year 2, showing the computation of net cash flows from operating activities by the indirect method: SPRECTRUM CORPORATION Partial Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities (indirect method): Net income Add:

Subtotal Less:

Net cash flows from operating activities

21) Saxony, Industries is a relatively new business. In its first three years of operations, the company has recorded positive and increasing net cash flows from its operating activities. In each of these three years, the company has also reported a net loss on its income statement. Suggest at least one plausible explanation for these financial results. Given the net losses in the first three years of operations, should investors be concerned about the solvency and future profitability of Saxony? Explain.

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22) Based on the information provided below, complete the following worksheet to be used to prepare the statement of cash flows for the Gulp-it-Down Coffee Company Gulp-it-Down Coffee Company Worksheet for a Statement of Cash Flows For the Year Ended December 31, 20__ Balance sheet effects: Beginning Debit Credit Assets Balance Changes Changes Cash and cash equivalents 160,000 (x)

Ending Balance 140,000

Accounts receivable

380,000

(4)

400,000

Inventory

420,000

(5)

480,000

Plant and equipment (net of accumulated depreciation) Totals

820,000

(8)

(3)

1,780,000

860,000

1,880,000

Liabilities and Owner's Equity Accounts payable

260,000

Accrued expenses payable

100,000

(7)

120,000

Notes payable

720,000

(9)

780,000

Capital stock

420,000

Retained earnings

280,000

(2)

(1)

320,000

1,780,000

260,000

1,880,000

Totals

(6)

240,000

420,000

Cash effects: Operating activities: Net income

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(1)

Depreciation expense Increase in accounts receivable Increase in inventory Decrease in accounts payable Increase in accrued expenses payable Investing activities:

(3) (4) (5) (6) (7)

Cash paid to acquire plant assets Financing activities:

(8)

Dividends paid Proceeds from issuance of notes payable Subtotals Net decrease in cash and cash equivalents Totals

(2) (9)____

_____

240,000 (X)

260,000

Additional Information: (1.) Net income for the year amounted to $60,000, and cash dividends were declared and paid in the amount of $20,000. (2.) Gulp-it-Down Coffee Company's only noncash expense was depreciation that totaled $100,000. (3.) The company purchased plant assets for $140,000. (4.) Notes payable in the amount of $60,000 were issued during the year.

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Answer Key Test name: Chapter 13 Test Bank (Problem Material) 1) (a) Cash received from customers(b) Financing activities(c) Income statement(d) Operating activities(e) None(f) Investing activities(g) Noncash investing and financing activities(e) Any "expense" reduces net income. Depreciation expense reduces net income; however, it does not reduce net cash flow. 2) No. In an accrual-based accounting system, the balances in the revenue and expense accounts are based upon revenue earned and expenses incurred, not upon cash flows. Therefore, the balances of the ledger accounts must be adjusted to the cash basis in order to determine the items and amounts appearing in a statement of cash flows.It should be noted that in discussing this question in class, it should be pointed out that these adjustments to the accrual balances are made solely for the purpose of preparing the cash flow statement. They are not recorded in the accounting records as are end-of-period "adjusting entries." Many of the general ledger software packages include a routine that quickly prepares a statement of cash flows by adjusting the accrual-based data in the manner discussed in the text. 3) Operating activities X Operating activities Financing activities Operating activities Financing

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activities X X X Investing activities

payable to First Bank. (g) Transferred cash from a checking account into a money market fund. (h) Made an adjusting entry to record accrued wages payable at the end of the period. (i) Recorded depreciation expense for the current year. (j) Purchased plant assets for cash.

4) OLYMPIA, INCORPORATED Statement of Cash Flows For the Year Ended December 31, 20__ Cash flows from operating activities: Cash received from customers Interest and dividends received

$ 681,000 19,500

Cash provided by operating activities Cash paid to suppliers and employees

$ 700,500 $ (531,000)

Interest paid

(18,000)

Taxes paid

(43,500)

Cash disbursed for operating activities

(592,500)

Net cash flows from operating activities

$ 108,000

Cash flows from investing activities: Purchases of marketable securities

$ (48,000)

Proceeds from sales of marketable securities Purchases of plant assets

75,000 (201,000)

Proceeds from sale of plant assets

58,500

Net cash used by investing activities

(115,500)

Cash flows from financing activities:

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Proceeds from short-term borrowing

$ 31,500

Payments to settle short-term debts

(36,000)

Proceeds from issuing capital stock

118,500

Dividends paid

(27,000)

Net cash provided by financing activities

87,000

Net increase (decrease) in cash

$ 79,500

Cash and cash equivalents, beginning of year

73,500

Cash and cash equivalents, end of year

$ 153,000

5) JERICHO CORPORATION Statement of Cash Flows For the Year Ended December 31, 20__ Cash flows from operating activities: Cash provided by operating activities Cash received from customers Interest and dividends received

$ 1,709,000 24,000

Total cash provided Cash disbursed from operating activities: Cash paid to suppliers and employers

1,733,000

$ (1,054,000)

Interest paid

(21,500)

Income taxes paid

(91,500)

Total cash disbursed

(1,167,000)

Net cash flows from operating activities Cash flows from investing activities: Loans made to borrowers

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$ 566,000

$ (229,000)

Purchases of plant assets

(684,000)

Collections of loans

104,000

Proceeds from sale of plant assets

329,000

Net cash used by investing activities Cash flows from financing activities: Payments to retire bonds

(480,000)

$ (179,000)

Payments to settle short-term debts

(74,000)

Proceeds from issuing capital stock

254,000

Dividends paid

(44,000)

Net cash used by financing activities Net increase (decrease) in cash

(43,000) $ 43,000

Cash and cash equivalents, beginning of year

81,500

Cash and cash equivalents, end of year

$ 124,500

6) Champion Company Statement of Cash Flows For the year ended 12/31 Cash flows from operating activities: Sources of cash: Cash received from customers Interest received

$ 936,000 16,000

Uses of cash: Cash paid to suppliers

(289,000)

Interest paid

(10,500)

Taxes paid

(28,000)

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Net cash flow provided by operating activities Cash flows from investing activities:

$ 624,500

Collections of loans

17,000

Sale of equipment

24,000

Equipment purchased

(58,000)

Loans to borrowers

(29,000)

Net cash flows used in investing activities Cash flows from financing activities:

(46,000)

Capital stock issued

81,000

Proceeds from long-term borrowing

116,000

Dividends paid

(4,600)

Net cash flows provided by financing activities Net increase (decrease) in cash

192,400 770,900

Cash on hand, January 1

1,781,000

Cash on hand, December 31

$ 2,551,900

Cash dividends paid by the company Sale of equipment for cash Issuance of bonds payable Purchase of inventory from suppliers Repurchase of

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Operating

Investing

Financing

Source

Use

Non Cash

Use X

X X X

outstanding stock Interest paid to lenders Dividends received on investments Sale of marketable securities Cash purchase of machinery Payment of salaries to employees Depreciation of fixed assets Payment of operating expenses Loss on sale of equipment

X X X X X X X X

8) X X Operating activities Financing activities Investing activities Investing activities Investing activities Operating activities X Operating activities

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(a) Declared a dividend to be paid early next year. (b) Recorded depreciation expense for the current year. (c) At year-end, paid rent in advance for the next six months. (d) Issued capital stock for cash; management plans to use this cash to invest in marketable securities. (e) Sold a parcel of unused land for cash at a loss. (f) Collected principal amount due on a note receivable. (g) Used the cash received in d, above, to purchase marketable securities. (h) Collected interest due on note receivable described in f, above. (i) Made an adjusting entry to accrue interest payable at year-end. (j) Collected account receivable from a customer who made a large credit purchase in a prior period.

9) (a) Cash received from customers = $848,000 (net sales) − $8,000 (increase in accounts receivable) = $840,000.(b) Cash payments for purchases of merchandise = $318,000 (cost of goods sold) − $15,000 (decrease in inventory) − $4,000 (increase in accounts payable) = $299,000.(c) Cash payments for operating expenses = $258,000 (operating expenses) − $43,000 (non-cash expenses) + $2,000 (increase in prepaid expenses) − $2,000 (increase in accrued liabilities) = $215,000.(d) Net cash flow from operating activities = $840,000 (from part a) − $299,000 (from part b) − $215,000 (from part c) = $326,000. 10) (a) Cash received from customers: $801,000 (net sales) + $20,000 (decrease in accounts receivable) = $821,000(b) Cash payments for purchases of merchandise: $465,000 (costs of goods sold) + $16,000 (increase in inventory) − $7,000 (increase in accounts payable) = $474,000(c) Cash payments for operating expenses: $300,000 (operating expenses) − $40,000 (non-cash expenses) + $2,500 (increase in prepayments) + $7,700 (decrease in accrued liabilities) = $270,200(d) Income taxes paid: $39,000 (income tax expense) + $2,900 (decrease in accrued income taxes payable) = $41,900 11) (a) $1,600,000 (debit entries to Marketable account)(b) $650,000 ($1,000,000 credit entries − $350,000 loss on sale)(c) $3,600,000 (debit entries to plant asset accounts)(d) Cost of plant assets sold (credit entries to asset accounts) Less: Accumulated depreciation on assets sold (debit entries to accumulated depreciation accounts) Book value of plant assets sold Gain on sales of plant assets

$ 2,800,000

Proceeds from sale (all cash)

$ 2,150,000

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(1,300,000) $ 1,500,000 650,000

12) (a) Debit entries to Marketable Securities account of $250,000 represent purchases of marketable securities(b) $400,000 credit entries + $85,000 gain on sale = $485,000 proceeds from sales of marketable securities(c) Debit entries to plant asset accounts of $700,000 represent purchases of plant assets(d) Cost of plant assets sold (credit entries to asset accounts) Less: Accumulated depreciation on assets sold (debit entries to accumulated depreciation accounts) Book value of plant assets sold Loss on sales of plant assets

$ 900,000

Proceeds from sale (all cash)

$ 450,000

(300,000) $ 600,000 (150,000)

13) (A) Cost of land = $425,000 (cash proceeds) − $179,000 (gain on sale) = $246,000(B) Book value of marketable securities = $811,000 (cash proceeds) + $157,000 (loss on sale) = $968,000(C) Amount reported for land = $3,057,000 − $246,000 (cost of land sold) = $2,811,000(D) Amount reported for investment in marketable securities = $2,218,000 + $1,518,000 (marketable securities purchased) − $968,000 (marketable securities sold) = $2,768,000 14) (A) Net sales − Increase in accounts receivable = Cash received from customers Net sales − $30,000 = $800,000 Net sales = $800,000 + $30,000 = $830,000 (B) Cash

$ 550,000

Notes Receivable

850,000

Loss on Disposal of Land

61,000

Land

$ 1,461,000

To record sale of land for $1,400,000; received $550,000 cash plus note receivable for balance of $850,000. (explanation not required) Version 1

15) Net income may differ from the net cash flow from operating activities as a result of such factors as:(1) Depreciation and other "noncash" expenses that enter into the determination of net income.(2) Shortterm timing differences between the cash basis and accrual basis of accounting. These include changes in the amounts of accounts receivable, inventories, prepaid expenses, accounts payable, and accrued liabilities.(3) Non-operating gains and losses which, although included in the measurement of net income, are attributable to investing or financing activities rather than to operating activities. 16) In the long run, it is most important for a business to have positive cash flows from operating activities. To a large extent, the ability of a business to generate positive cash flows from financing activities is dependent upon its ability to generate cash from operations. Investors are reluctant to invest money in a business that does not have an operating cash flow sufficient to assure interest and dividend payments. Also, a business cannot sustain a positive cash flow from investing activities over the long run. A company can only sell productive assets for a limited period of time. In fact, a successful and growing business will normally show a negative cash flow from investing activities, as the company normally is increasing its investment in plant assets. 17) − + + 0 − +

18) Net income

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$ 745,000

Add: Depreciation Less: Decrease in accounts payable Increase in inventory Non-operating gain

53,000 (65,000) (91,000) (50,000)

Net cash flow from operating activities

$ 592,000

19) RUTHORFORD CORPORATION Partial Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities: Net income Add: Depreciation expense

$ 840,000 $ 170,000

Amortization

30,000

Decrease in prepaid expenses

5,000

Increase in accounts payable Subtotal

30,000

Less: Increase in accounts receivable

30,000

Increase in inventory

40,000

Decrease in accrued expenses payable

10,000

Non-operating gain

110,000

Net cash flows from operating activities

235,000 $ 1,075,000

(190,000) $ 885,000

20) SPRECTRUM CORPORATION Partial Statement of Cash Flows For the Year Ended December 31, Year 2 Cash flows from operating activities: Net income

$ 299,000

Add: Decrease in accounts receivable

$ 9,000

Depreciation expense

101,000

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Amortization expense

20,000

Non-operating loss

38,000

Increase in accounts payable Subtotal

24,000

Less: Increase in inventory

32,000

Decrease in accrued expenses payable

1,000

Increase in prepaid expenses

12,000

Net cash flows from operating activities

192,000 $ 491,000

(45,000) $ 446,000

21) In its first years of operations, Saxony would have acquired significant amounts of new equipment. Depreciation expense could have been large enough to generate operating losses. However, since this is a non-cash expense it would have had no impact on cash flows from operating activities. The company might also be experiencing nonoperating losses due to its financing activities in early years of operations. Because Saxony has shown an ability to generate positive cash flows from operations, the business has demonstrated the ability to remain solvent. The prospects for future profitability are less clear. Again, however, the increasing cash flows from operations are consistent with strong customer demand and effective management of operating assets. Both of these factors would suggest positive earnings in the future. 22) Gulp-it-Down Coffee Company Worksheet for a Statement of Cash Flows For the Year Ended December 31, 20__ Balance sheet effects: Beginning Debit Credit Assets Balance Changes Changes Cash and cash 160,000 (x) equivalents 20,000 Accounts receivable 380,000 (4) 20,000

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Ending Balance 140,000 400,000

Inventory

420,000

Plant and equipment (net of accumulated depreciation) Totals Liabilities and Owner's Equity Accounts payable

820,000

Accrued expenses payable

100,000

Notes payable

720,000

Capital stock

420,000

Retained earnings

280,000

(2) 20,000

(1) 60,000

320,000

1,780,000

260,000

1,880,000

Totals

(5) 60,000 (8) 140,000

480,000 (3) 100,000

860,000

1,780,000

220,000

120,000

1,880,000

260,000

(6) 20,000

240,000 (7) 20,000 (9) 60,000

120,000 780,000 420,000

Cash effects: Operating activities: Net income

(1) 60,000

Depreciation expense

(3) 100,000

Increase in accounts receivable

(4) 20,000

Increase in inventory

(5) 60,000

Decrease in accounts payable

(6) 20,000

Increase in accrued expenses payable

(7) 20,000

Investing activities: Cash paid to acquire plant assets

(8) 140,000

Financing activities: Dividends paid

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(2) 20,000

Proceeds from issuance of notes payable

(9) 60,000

Subtotals Net decrease in cash and cash equivalents

240,000 (X) 20,000

260,000

Totals

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CHAPTER 13 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The principal purpose of a statement of cash flows is to measure the profitability of a business that maintains its accounting records on the cash basis. ⊚ ⊚

true false

2) The statement of cash flows helps investors and creditors assess both the cash and noncash aspects of a company's investing and financing activities. ⊚ ⊚

Interest paid belongs in the operating activities section of the statement of cash flows. ⊚ ⊚

true false

Collections of interest revenue are classified as operating activities. ⊚ ⊚

true false

In a statement of cash flows, the term "cash" includes both cash and cash equivalents. ⊚ ⊚

true false

6) Both FASB and IASB require the cash flow statement to be organized in three categories, operating activities, investing activities, and financing activities. ⊚ ⊚

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true false

7) When preparing a statement of cash flows, money held in cash equivalents is considered the same as cash. ⊚ ⊚

true false

8) Companies that show profits on the income statement will always show positive cash flows from operating activities. ⊚ ⊚

true false

9) The purchase of equipment for the manufacturing of inventory belongs in the operating activities section of the statement of cash flows. ⊚ ⊚

true false

10) When credit sales exceed collections of cash from accounts receivable, the increase in accounts receivable is added to net sales to determine the amount of cash collected from customers during the period. ⊚ ⊚

11)

true false

Dividends paid belong in the operating activities section of the statement of cash flows. ⊚ ⊚

true false

12) If cash increased during the year and there was also a net loss for the year, there must be positive cash flows from financing and investing activities. ⊚ ⊚

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true false

13) Any "non-cash" investing and financing transactions should be disclosed in a supplementary schedule accompanying a statement of cash flows. ⊚ ⊚

true false

14) The purchase or sale of marketable securities is reported in the statement of cash flows as a financing activity. ⊚ ⊚

true false

15) For a company to survive in the long-run it must have positive cash flows from investing activities. ⊚ ⊚

true false

16) Whether one uses the direct or the indirect method of presentation of the statement of cash flows, the totals from each of the three sections (activities) will be the same regardless of the method used. ⊚ ⊚

true false

17) The SEC requires public companies to use the indirect method for the statement of cash flows. ⊚ ⊚

18)

true false

Depreciation is a non-cash expense. ⊚ ⊚

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true false

19) Depreciation expense reduces net income but does not reduce the net cash flow from operating activities. ⊚ ⊚

true false

20) The operating activities section of the cash flow statement includes the cash effects of those transactions reported on the income statement. ⊚ ⊚

true false

21) When applying the direct method in a statement of cash flows, the amount of depreciation is added to net income. ⊚ ⊚

true false

22) In the long run, it is more important for a business to generate positive cash flows from investing activities than from operating activities. ⊚ ⊚

true false

23) Large cash flows from operations are more important to financial statement analysts over the long term than cash flows from financing or investing. ⊚ ⊚

true false

24) If accounts receivable decrease during the period, cash received from customers probably exceeds net sales. ⊚ ⊚

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true false

25) The FASB permits a company to use the direct method or the indirect method for the statement of cash flows. ⊚ ⊚

true false

26) Net cash flows from operating activities will have the same total no matter which method is used, direct or indirect. ⊚ ⊚

true false

27) Both the direct method and the indirect method of computing net cash flow from operating activities convert accrual-based income statement amounts into cash flows. ⊚ ⊚

true false

28) Under the indirect method, when machinery is sold at a gain, the gain is added in the operating section of the statement of cash flows and the cost is added in the investing section. ⊚ ⊚

true false

29) A net decrease in accounts payable to suppliers indicates that cash payments to suppliers were less than purchases made during the period. ⊚ ⊚

true false

30) Under the indirect method, depreciation, increase in inventories, and "non-operating" losses are added to net income to arrive at net cash flow from operating activities. ⊚ ⊚

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true false

31) If accounts receivable increased during the year, deducting the increase from net sales determines the amount of cash received. ⊚ ⊚

true false

32) If a company uses the indirect method to prepare its statement of cash flows, it must provide a supplementary schedule showing the computation of net cash flow from operating activities using the direct method. ⊚ ⊚

true false

33) Free cash flow is often calculated by adding to net cash flow from operating activities the cash used to acquire plant assets and subtracting cash paid for dividends. ⊚ ⊚

34)

The indirect method of computing cash flows from operations begins with net income. ⊚ ⊚

35)

true false

Free cash flow refers to the excess of cash inflows over cash outflows. ⊚ ⊚

true false

36) Deferring income taxes by using legal accounting methods is one strategy to permanently improve cash flow. ⊚ ⊚

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true false

37) When a company uses peak pricing, it is charging the highest or "peak" prices the public will be willing to pay during periods of low demand. ⊚ ⊚

true false

38) The "worksheet approach" to preparing a statement of cash flows involves analyzing changes in non-cash balance sheet accounts. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 39) A statement of cash flows is not intended to assist investors in evaluating: A) Reasons for differences between the amount of net income and net cash flow from operations. B) The company's ability to meet its obligations and to pay dividends. C) Non-cash aspects of investing and financing activities. D) The profitability of business operations.

40)

The "bottom line" in a statement of cash flows shows: A) B) C) D)

41)

The cash (including cash equivalents) on the balance sheet at the end of the period. Net increase or decrease in cash during the period. Net income, computed by the cash basis of accounting. Net cash flow from operating activities.

All of the following are considered cash equivalents except:

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A) B) C) D)

Marketable securities. Money market funds. Commercial paper. Treasury bills.

42) In a statement of cash flows, cash transactions are classified into three major categories. Which of the following is not one of these three categories? A) B) C) D)

43)

Managing activities. Operating activities. Financing activities. Investing activities.

In a statement of cash flows, the term "cash" includes:

A) Only money on deposit in bank accounts. B) Only bank accounts and cash on hand. C) Bank accounts, cash on hand, and cash equivalents. D) Bank accounts, cash on hand, cash equivalents, and marketable securities classified as current assets.

44) The FASB classifies interest received on investments and interest paid on debt financing as part of operating cash flows, while the IASB: A) Allows interest received to be classified as either operating or investing and interest paid as either operating or financing. B) Allows interest received to be classified as either operating or financing and interest paid as either operating or investing. C) Allows interest received to be classified only as investing and interest paid only as financing. D) Allows interest received to be classified only as financing and interest paid only as investing.

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45)

Which of the following indicates a cash receipt? A) B) C) D)

46)

A decrease in accrued expenses, such as wages payable. A decrease in accounts receivable. An increase in inventory. A decrease in accounts payable.

Cash flows from operating activities include all of the following except: A) B) C) D)

Collections from customers for sales of goods. Interest and dividends received. Payments of interest. Payments of dividends.

47) Net income differs from net cash flows from operations because of all the following except: A) B) C) activities. D)

48)

Cash received in exchange for goods sold in the normal course of operations.

In the statement of cash flows, the purchase of supplies is classified as: A) B) C) D)

49)

Non-cash expenses such as depreciation. Timing differences between recognizing revenue and expenses and their cash flows. Gains and losses included in net income but classified as investing or financings

Operating activities. Financing activities. Investing activities. Managing activities.

In a statement of cash flows, collections of accounts receivable are classified as:

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A) B) C) D)

50)

Which of the following would indicate a cash disbursement? A) B) C) D)

51)

Operating activities. Financing activities. Investing activities. Revenues and Gains.

Selling equipment at a loss. A decrease in accounts receivable. An increase in prepaid expenses. A decrease in inventory.

Which of the following does not decrease the cash flow from operating activities?

A) The prepayment of an expense. B) The purchase of operating equipment. C) The payment of interest. D) The prepayment of an expense, the purchase of operating equipment, and the payment of interest all decrease cash from operating activities.

52) Which of the following is not classified among the operating activities in a statement of cash flows? A) B) C) D)

Payment of interest on a bank loan. Payment of the principal amount owed on a bank loan. Payment of an account payable to a merchandise supplier. Payment of income taxes.

53) Which of the following sets of data is sufficient to compute the amount of cash paid for merchandise?

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A) Cost of goods sold, increase or decrease in inventory, increase or decrease in accounts payable. B) Increase or decrease in cash, increase or decrease in inventory, increase or decrease in accounts payable. C) Cost of goods sold, increase or decrease in accounts payable. D) Cost of goods sold.

54) The financial statements of New World, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 283,000 $ 275,000 $ 71,200 $ 252,300 $ 66,150 $ 3,147,500

$ 341,500 $ 262,000 $ 68,000 $ 241,550 $ 77,450

Cost of goods sold

$ 1,657,500

Operating expenses (including depreciation of $59,000)

$ 377,500

What is the amount of cash received from customers during the current year? A) B) C) D)

$3,147,500 $3,236,700 $3,206,000 $3,158,250

55) The financial statements of New World, Incorporated, provide the following information for the current year:

Accounts receivable Inventory Prepaid expenses

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December 31

January 1

$ 273,000 $ 262,500 $ 67,200

$ 241,500 $ 252,000 $ 63,000 11

Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 237,300 $ 66,150 $ 3,097,500

Cost of goods sold

$ 1,627,500

Operating expenses (including depreciation of $94,500)

$ 221,550 $ 72,450

$ 367,500

What is the amount of cash received from customers during the current year? A) B) C) D)

$3,097,500 $3,129,000 $3,066,000 $3,612,000

56) The financial statements of New World, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 278,000 $ 268,750 $ 69,200 $ 244,800 $ 66,150 $ 3,122,500

$ 291,500 $ 257,000 $ 65,500 $ 231,550 $ 74,950

Cost of goods sold

$ 1,642,500

Operating expenses (including depreciation of $54,000)

$ 372,500

What is the amount of New World's cash payments for purchases of merchandise during the current year? A) B) C) D)

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$3,121,000 $1,644,000 $1,615,750 $1,641,000

57) The financial statements of New World, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 273,000 $ 262,500 $ 67,200 $ 237,300 $ 66,150 $ 3,097,500

$ 241,500 $ 252,000 $ 63,000 $ 221,550 $ 72,450

Cost of goods sold

$ 1,627,500

Operating expenses (including depreciation of $94,500)

$ 367,500

What is the amount of New World's cash payments for purchases of merchandise during the current year? A) B) C) D)

$1,627,500 $1,622,250 $1,638,000 $2,157,750

58) The financial statements of New World, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 288,000 $ 281,250 $ 73,200 $ 259,800 $ 66,150 $ 3,172,500

$ 391,500 $ 267,000 $ 70,500 $ 251,550 $ 79,950

Cost of goods sold

$ 1,672,500

Operating expenses (including depreciation of $64,000)

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$ 382,500

What is the amount of New World's cash payments for operating expenses during the current year? A) B) C) D)

$321,200 $399,000 $335,000 $332,300

59) The financial statements of New World, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 273,000 $ 262,500 $ 67,200 $ 237,300 $ 66,150 $ 3,097,500

$ 241,500 $ 252,000 $ 63,000 $ 221,550 $ 72,450

Cost of goods sold

$ 1,627,500

Operating expenses (including depreciation of $94,500)

$ 367,500

What is the amount of New World's cash payments for operating expenses during the current year? A) B) C) D)

$277,200 $283,500 $378,000 $349,650

60) The financial statements of New World, Incorporated, provide the following information for the current year:

Accounts receivable

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December 31

January 1

$ 276,000

$ 271,500

Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 266,250 $ 68,400 $ 241,800 $ 66,150 $ 3,112,500

Cost of goods sold

$ 1,636,500

Operating expenses (including depreciation of $52,000)

$ 255,000 $ 64,500 $ 227,550 $ 73,950

$ 370,500

What is New World's net cash flow from operating activities for the current year? A) B) C) D)

$1,470,600 $1,474,500 $1,144,300 $1,196,300

61) The financial statements of New World, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 273,000 $ 262,500 $ 67,200 $ 237,300 $ 66,150 $ 3,097,500

$ 241,500 $ 252,000 $ 63,000 $ 221,550 $ 72,450

Cost of goods sold

$ 1,627,500

Operating expenses (including depreciation of $94,500)

$ 367,500

What is New World's net cash flow from operating activities for the current year? A) B) C) D)

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$1,191,750 $1,192,800 $1,113,000 $1,160,250

62) The financial statements of Seldin, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 42,000 $ 62,000 $ 12,700 $ 40,000 $ 15,700 $ 295,000

$ 47,000 $ 58,000 $ 14,700 $ 39,000 $ 20,700

Cost of goods sold

$ 147,500

Operating expenses (including depreciation of $18,700)

$ 87,000

What is the amount of cash received from customers during the current year? A) B) C) D)

$295,000 $290,000 $47,000 $300,000

63) The financial statements of Seldin, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 35,000 $ 55,000 $ 12,000 $ 33,000 $ 15,000 $ 260,000

$ 40,000 $ 51,000 $ 14,000 $ 32,000 $ 20,000

Cost of goods sold

$ 130,000

Operating expenses (including depreciation of $18,000)

$ 80,000

What is the amount of cash received from customers during the current year? Version 1

A) B) C) D)

$265,000 $255,000 $260,000 $40,000

64) The financial statements of Seldin, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 43,000 $ 63,000 $ 12,800 $ 41,000 $ 15,800 $ 300,000

$ 48,000 $ 59,000 $ 14,800 $ 40,000 $ 20,800

Cost of goods sold

$ 150,000

Operating expenses (including depreciation of $18,800)

$ 88,000

What is the amount of Seldin's cash payments for purchases of merchandise during the current year? A) B) C) D)

$147,000 $145,000 $150,000 $153,000

65) The financial statements of Seldin, Incorporated, provide the following information for the current year:

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise)

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December 31

January 1

$ 35,000 $ 55,000 $ 12,000 $ 33,000

$ 40,000 $ 51,000 $ 14,000 $ 32,000 17

Accrued expenses payable Net sales

$ 15,000 $ 260,000

Cost of goods sold

$ 130,000

Operating expenses (including depreciation of $18,000)

$ 80,000

$ 20,000

What is the amount of Seldin's cash payments for purchases of merchandise during the current year? A) B) C) D)

$130,000 $125,000 $133,000 $127,000

66) The financial statements of Seldin, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 45,000 $ 65,000 $ 13,000 $ 43,000 $ 16,000 $ 310,000

$ 50,000 $ 61,000 $ 15,000 $ 42,000 $ 21,000

Cost of goods sold

$ 155,000

Operating expenses (including depreciation of $19,000)

$ 90,000

What is the amount of Seldin's cash payments for operating expenses during the current year? A) B) C) D)

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$68,000 $74,000 $90,000 $83,000

67) The financial statements of Seldin, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 35,000 $ 55,000 $ 12,000 $ 33,000 $ 15,000 $ 260,000

$ 40,000 $ 51,000 $ 14,000 $ 32,000 $ 20,000

Cost of goods sold

$ 130,000

Operating expenses (including depreciation of $18,000)

$ 80,000

What is the amount of Seldin's cash payments for operating expenses during the current year? A) B) C) D)

$73,000 $59,000 $81,000 $65,000

68) The financial statements of Seldin, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 35,000 $ 55,000 $ 12,000 $ 33,000 $ 15,000 $ 260,000

$ 40,000 $ 51,000 $ 14,000 $ 32,000 $ 20,000

Cost of goods sold

$ 130,000

Operating expenses (including depreciation of $18,000)

$ 80,000

What is the amount of Seldin's net cash flow from operating activities for the current year?

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A) B) C) D)

$57,000. $59,000. $61,000. $67,000.

69) Early in Year 1, Larsen Corporation purchased marketable securities at a cost of $86,000. In September, dividends of $6,200 were received; Larsen sold the securities in December at a gain of $5,200. How would these transactions be reported on Larsen's statement of cash flows for Year 1? A) $11,400 net cash provided by investing activities. B) $80,800 net cash used in investing activities; $91,200 cash provided by investing activities. C) $91,200 cash provided by investing activities; $86,000 cash used in financing activities. D) $5,200 net cash provided by investing activities; $6,200 included in cash provided by operating activities.

70) Early in Year 1, Larsen Corporation purchased marketable securities at a cost of $90,000. In September, dividends of $6,600 were received; Larsen sold the securities in December at a gain of $5,600. How would these transactions be reported on Larsen's statement of cash flows for Year 1? A) $5,600 net cash provided by investing activities; $6,600 included in cash provided by operating activities. B) $12,200 net cash provided by investing activities. C) $95,600 cash provided by investing activities; $90,000 cash used in financing activities. D) $84,400 net cash used in investing activities; $95,600 cash provided by investing activities.

71) The financial statements of Garver, Incorporated, provide the following information for the current year:

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December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 70,000 $ 110,000 $ 24,000 $ 66,000 $ 30,000 $ 520,000

$ 80,000 $ 102,000 $ 28,000 $ 64,000 $ 40,000

Cost of goods sold

$ 260,000

Operating expenses (including depreciation of $36,000)

$ 160,000

What is the amount of the cash received from customers during the current year? A) B) C) D)

$530,000 $510,000 $520,000 $80,000

72) The financial statements of Garver, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 70,000 $ 110,000 $ 24,000 $ 66,000 $ 30,000 $ 520,000

$ 80,000 $ 102,000 $ 28,000 $ 64,000 $ 40,000

Cost of goods sold

$ 260,000

Operating expenses (including depreciation of $36,000)

$ 160,000

What is the amount of the cash payments for purchases of merchandise during the current year?

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A) B) C) D)

$260,000 $250,000 $266,000 $254,000

73) The financial statements of Garver, Incorporated, provide the following information for the current year: December 31

January 1

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 70,000 $ 110,000 $ 24,000 $ 66,000 $ 30,000 $ 520,000

$ 80,000 $ 102,000 $ 28,000 $ 64,000 $ 40,000

Cost of goods sold

$ 260,000

Operating expenses (including depreciation of $36,000)

$ 160,000

What is the amount of the cash payments for operating expenses during the current year? A) B) C) D)

$146,000 $118,000 $162,000 $130,000

74) The financial statements of Garver, Incorporated, provide the following information for the current year:

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable

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December 31

January 1

$ 70,000 $ 110,000 $ 24,000 $ 66,000 $ 30,000

$ 80,000 $ 102,000 $ 28,000 $ 64,000 $ 40,000 22

Net sales

$ 520,000

Cost of goods sold

$ 260,000

Operating expenses (including depreciation of $36,000)

$ 160,000

What is the amount of net cash flow from operating activities for the current year? A) B) C) D)

75)

Cash flows from investing activities include all of the following except: A) B) C) D)

76)

Cash proceeds from selling investments. Cash proceeds from collections on loans. Cash advanced to borrowers. Cash proceeds from borrowing.

All of the following are financing activities except: A) B) C) D)

77)

$114,000. $118,000. $122,000. $134,000.

Borrowing money. Lending money. Selling capital stock. Paying dividends.

A cash dividend paid to shareholders is reported on the: A) B) C) D)

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Financing activities section of the statement of cash flows. Balance sheet. Income statement. Operating activities section of the statement of cash flows.

78)

In a statement of cash flows, payments of dividends are classified as: A) B) C) D)

Operating activities. Financing activities. Investing activities. Costs and Expenses.

79) Which of the following is not classified among the investing activities in a statement of cash flows? A) B) C) D)

Purchase of marketable securities for cash. Collection of the principal amount of cash loans made to others. Investment of cash made in the business by the owners. Purchase of plant assets for cash.

80) Which of the following is not classified among the financing activities in a statement of cash flows? A) B) C) D)

81)

Which of the following is an investing activity? A) B) C) D)

82)

Long-term borrowing. Payment of dividends to stockholders. Payment of interest to creditors. Short-term borrowing.

Purchase of equipment. Payment of interest. Issuing common stock. Issuing long-term debt.

Which of the following is a financing activity?

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A) B) C) D)

83)

Which of the following indicates cash receipts? A) B) C) D)

84)

Payment of interest. Payment of dividends. Making sales on account. Paying off accounts payable.

Debit entries in the Notes Receivable account. Credit entries in the Marketable Securities account. Debit entries in the Notes Payable account. Credit entries in the Accumulated Depreciation account.

Which method will yield the higher cash flows from financing activities?

A) The indirect method yields higher cash flows from financing activities. B) The direct method yields higher cash flows from financing activities. C) The net cash flow from financing activities is not impacted by the choice between the direct and indirect methods. D) It depends upon the situation.

85) An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is: A) B) C) D)

86)

Recording depreciation expense for the current year. Declaring, but not paying, dividends on common stock. Selling land in exchange for a note receivable. Transferring cash from a checking account into a money market fund.

When equipment is sold at a loss:

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A) The net proceeds are shown in the investing section. B) The book value of the asset is shown in the investing section. C) The book value of the asset is shown in the investing section, and the loss is shown in the operating section. D) The net proceeds are shown in the financing section.

87)

When equipment is purchased entirely through a loan:

A) The equipment is shown as an increase in the investing activities section. B) The equipment is shown as a decrease in the investing activities section. C) The loan is shown as an increase in the financing section. D) Neither the loan nor the purchase of equipment is shown in the investing or the financing sections.

88) In Year 2, Anderson Company purchased equipment for $370,000 and also sold some special purpose machinery with a book value of $157,800 for $185,500. In its statement of cash flows for Year 2, Anderson should report the following with respect to the above transactions: A) $370,000 cash used by investing activities; $185,500 cash provided by financing activities. B) $184,500 net cash used by investing activities. C) $184,500 net cash used by investing activities; $27,700 net cash provided by operating activities. D) $370,000 net cash used by investing activities.

89) In Year 2, Anderson Company purchased equipment for $363,000 and also sold some special purpose machinery with a book value of $155,000 for $182,000. In its statement of cash flows for Year 2, Anderson should report the following with respect to the above transactions:

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A) $363,000 net cash used by investing activities. B) $181,000 net cash used by investing activities; $27,000 net cash provided by operating activities. C) $181,000 net cash used by investing activities. D) $363,000 cash used by investing activities; $182,000 cash provided by financing activities.

90) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 153,000 226,000

Karman's Year 2 income statement included a $36,500 gain on sale of marketable securities and $23,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.The amount of cash paid by Karman Corporation in Year 2 for the purchase of marketable securities was: A) B) C) D)

$189,500. $153,000. $226,000. $176,000.

91) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 160,000 240,000

Karman’s Year 2 income statement included a $40,000 gain on sale of marketable securities and $30,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.The amount of cash paid by Karman Corporation in Year 2 for the purchase of marketable securities was:

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A) B) C) D)

$240,000. $160,000. $200,000. $190,000.

92) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 165,000 250,000

Karman's Year 2 income statement included a $42,500 gain on sale of marketable securities and $35,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.The cash proceeds received by Karman Corporation in Year 2 for the sale of marketable securities was: A) B) C) D)

$292,500. $250,000. $165,000. $242,500.

93) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 160,000 240,000

Karman’s Year 2 income statement included a $40,000 gain on sale of marketable securities and $30,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.The cash proceeds received by Karman Corporation in Year 2 for the sale of marketable securities was:

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A) B) C) D)

$160,000. $230,000. $240,000. $280,000.

94) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 160,000 240,000

Karman’s Year 2 income statement included a $40,000 gain on sale of marketable securities and $30,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.How should the transactions involving marketable securities be classified in Karman’s statement of cash flows for Year 2? A) The purchase of marketable securities, sales of marketable securities, and receipt of dividends are all classified as investing activities. B) The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as an operating activity. C) The purchase of marketable securities is classified as an investing activity; the sale of marketable securities is classified as a financing activity; the receipt of dividends is classified as an operating activity. D) The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as a financing activity.

95) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 168,000 256,000

Karman's Year 2 income statement included a $44,000 gain on sale of marketable securities and $38,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.Based solely on the above information, Karman's net cash flow from investing activities for Year 2 is:

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A) B) C) D)

$88,000 net cash used by investing activities. $88,000 net cash provided by investing activities. $132,000 net cash provided by investing activities. $300,000 net cash provided by investing activities.

96) An analysis of Karman Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 160,000 240,000

Karman’s Year 2 income statement included a $40,000 gain on sale of marketable securities and $30,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.Based solely on the above information, Karman’s net cash flow from investing activities for Year 2 is: A) B) C) D)

$80,000 net cash used by investing activities. $80,000 net cash provided by investing activities. $120,000 net cash provided by investing activities. $240,000 net cash provided by investing activities.

97) The financial statements of York, Incorported, provide the following information for the current year:

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales Cost of goods sold

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December 31

January 1

$ 136,500 $ 131,250 $ 33,600 $ 118,650 $ 33,075 $ 1,548,750

$ 120,750 $ 126,000 $ 31,500 $ 110,775 $ 36,225

$ 813,750

Operating expenses (including depreciation of $47,250)

$ 183,750

What is the amount of cash received from customers during the current year? A) B) C) D)

$1,548,750 $1,564,500 $1,533,000 $1,806,000

98) The financial statements of York, Incorporated, provide the following information for the current year:

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

December 31

January 1

$ 136,500 $ 131,250 $ 33,600 $ 118,650 $ 33,075 $ 1,548,750

$ 120,750 $ 126,000 $ 31,500 $ 110,775 $ 36,225

Cost of goods sold

$ 813,750

Operating expenses (including depreciation of $47,250)

$ 183,750

What is the amount of cash payments for purchases of merchandise during the current year? A) B) C) D)

$813,750 $811,125 $819,000 $1,078,875

99) The financial statements of York, Incorporated, provide the following information for the current year:

Accounts receivable

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December 31

January 1

$ 136,500

$ 120,750

Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

$ 131,250 $ 33,600 $ 118,650 $ 33,075 $ 1,548,750

Cost of goods sold

$ 813,750

Operating expenses (including depreciation of $47,250)

$ 183,750

$ 126,000 $ 31,500 $ 110,775 $ 36,225

What is the amount of cash payments for operating expenses during the current year? A) B) C) D)

$138,600 $141,750 $189,000 $174,825

100) The financial statements of York, Incorporated, provide the following information for the current year:

Accounts receivable Inventory Prepaid expenses Accounts payable (for merchandise) Accrued expenses payable Net sales

December 31

January 1

$ 136,500 $ 131,250 $ 33,600 $ 118,650 $ 33,075 $ 1,548,750

$ 120,750 $ 126,000 $ 31,500 $ 110,775 $ 36,225

Cost of goods sold

$ 813,750

Operating expenses (including depreciation of $47,250)

$ 183,750

What is the net cash flow from operating activities for the current year? A) B) C) D)

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$595,875. $596,400. $556,500. $580,125.

101) An analysis of Kenny Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 445,000 $ 270,000

Kenny's Year 2 income statement included a $90,000 loss on sale of marketable securities and $65,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.The amount of cash paid by Kenny Corporation in Year 2 for the purchase of marketable securities was: A) B) C) D)

$445,000. $535,000. $355,000. $420,000.

102) An analysis of Kenny Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 445,000 $ 270,000

Kenny's Year 2 income statement included a $90,000 loss on sale of marketable securities and $65,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.The cash proceeds received by Kenny Corporation in Year 2 for the sale of marketable securities was: A) B) C) D)

$230,000. $280,000. $195,000. $180,000.

103) An analysis of Kenny Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

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$ 445,000 $ 270,000

Kenny's Year 2 income statement included a $90,000 loss on sale of marketable securities and $65,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.How should the transactions involving marketable securities be classified in Kenny's statement of cash flows for Year 2? A) The purchase of marketable securities, sales of marketable securities, and receipt of dividends are all classified as investing activities. B) The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as an operating activity. C) The purchase of marketable securities is classified as an investing activity; the sale of marketable securities is classified as a financing activity; the receipt of dividends is classified as an operating activity. D) The purchase and the sale of marketable securities are classified as investing activities; the receipt of dividends is classified as a financing activity.

104) An analysis of Kenny Corporation's Investment in Marketable Securities account during Year 2 disclosed the following: Debit entries Credit entries

$ 445,000 $ 270,000

Kenny's Year 2 income statement included a $90,000 loss on sale of marketable securities and $65,000 dividend income from marketable securities. All payments and proceeds relating to marketable securities transactions were in cash.Based solely on the above information, Kenny's net cash flow from investing activities for Year 2 is: A) B) C) D)

$215,000 net cash used by investing activities. $165,000 net cash provided by investing activities. $265,000 net cash used by investing activities. $290,000 net cash provided by investing activities.

105) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts

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$ 170,000 $ 123,000

Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 96,000 $ 112,000

Johnson's income statement for the current year includes a $19,000 loss on disposal of plant assets. All payments and proceeds relating to purchase or sale of plant assets were in cash.The amount of cash paid by Johnson to acquire plant assets during the current year was: A) B) C) D)

$170,000. $282,000. $47,000. $58,000.

106) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 160,000 $ 118,000 $ 91,000 $ 107,000

$53,000. $267,000. $42,000. $160,000.

107) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts:

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Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 166,000 $ 121,000 $ 94,000 $ 110,000

Johnson's income statement for the current year includes a $17,000 loss on disposal of plant assets. All payments and proceeds relating to purchase or sale of plant assets were in cash.Total cash proceeds received by Johnson from sales of plant assets during the current year amounted to: A) B) C) D)

$231,000. $214,000. $104,000. $10,000.

108) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 160,000 $ 118,000 $ 91,000 $ 107,000

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$13,000. $104,000. $195,000. $41,000.

109) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 160,000 $ 118,000 $ 91,000 $ 107,000

Johnson's income statement for the current year includes a $14,000 loss on disposal of plant assets. All payments and proceeds relating to purchase or sale of plant assets were in cash.How should purchases, sales, and depreciation of plant assets be classified in Johnson's statement of cash flows for the current year? (Assume the direct method is used by Johnson.) A) Purchases of plant assets are classified as investing activities; sales of plant assets are classified as financing activities; depreciation is classified as an operating activity. B) Purchases of plant assets and depreciation are classified as investing activities; sales of plant assets are classified as financing activities. C) Purchases and sales of plant assets are classified as investing activities; depreciation does not appear as an operating, financing, or investing activity. D) Since plant assets are used to generate income from operations, purchases, sales, and depreciation of plant assets are all classified as operating activities.

110) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 158,000 $ 117,000 $ 90,000 $ 106,000

Johnson's income statement for the current year includes a $13,000 loss on disposal of plant assets. All payments and proceeds relating to purchase or sale of plant assets were in cash.Based solely on the data provided above, Johnson's net cash flow from investing activities for the current year is: Version 1

A) B) C) D)

$14,000 net cash provided by investing activities. $90,000 net cash used by investing activities. $158,000 net cash used by investing activities. $144,000 net cash used by investing activities.

111) An analysis of changes in selected balance sheet accounts of Johnson Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 160,000 $ 118,000 $ 91,000 $ 107,000

$160,000 net cash used by investing activities. $147,000 net cash used by investing activities. $13,000 net cash provided by investing activities. $91,000 net cash used by investing activities.

112) An analysis of changes in selected balance sheet accounts of Hierarchy Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

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$ 504,000 $ 768,000 $ 72,000 $ 192,000

$252,000. $504,000. $724,000. $768,000.

113) An analysis of changes in selected balance sheet accounts of Hierarchy Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 504,000 $ 768,000 $ 72,000 $ 192,000

$696,000. $705,600. $633,600. $768,000.

114) An analysis of changes in selected balance sheet accounts of Hierarchy Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts

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$ 504,000 $ 768,000

Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 72,000 $ 192,000

Hierarchy's income statement for the current year includes a $9,600 gain on disposal of plant assets. All payments and proceeds relating to purchase or sale of plant assets were in cash.How should purchases, sales, and depreciation of plant assets be classified in Hierarchy's statement of cash flows for the current year? (Assume the direct method is used by Hierarchy.) A) Purchases of plant assets are classified as operating activities; sales of plant assets are classified as financing activities; depreciation is classified as an operating activity. B) Purchases of plant assets and depreciation are classified as investing activities; sales of plant assets are classified as operating activities. C) Purchases and sales of plant assets are classified as investing activities; depreciation does not appear as an operating, financing, or investing activity. D) Since plant assets are used to generate income from operations, purchases, sales, and depreciation of plant assets are all classified as operating activities.

115) An analysis of changes in selected balance sheet accounts of Hierarchy Corporation shows the following for the current year: Plant and Equipment accounts: Debit entries to asset accounts Credit entries to asset accounts Debit entries to accumulated depreciation accounts (resulting from sale of plant assets) Credit entries to accumulated depreciation accounts (representing depreciation for the current year)

$ 504,000 $ 768,000 $ 72,000 $ 192,000

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$264,000 net cash provided by investing activities. $264,000 net cash used by investing activities. $201,600 net cash provided by investing activities. $1,200,000 net cash provided by investing activities.

116) Haven Corporation issued $700,000 of 10-year bonds payable at par in Year 1. During Year 5, Haven paid $50,000 interest and an additional $233,333 to retire one-third of the bonds at par. These activities would be reported in Haven's statement of cash flows for Year 5 as: A) $283,333 net cash provided by financing activities. B) $283,333 net cash used in financing activities. C) $233,333 net cash used in financing activities, and $50,000 cash disbursed for operating activities. D) $466,667 net cash provided by financing activities, and $50,000 cash disbursed for operating activities.

117) Hines Cannery issued capital stock in Year 2 for $700,000. During Year 2 the company paid dividends of $250,000. What is the effect of these events in Hines' statement of cash flows for Year 2? A) $700,000 cash provided by investing activities, and $250,000 cash disbursed for financing activities. B) $700,000 cash provided by financing activities, and $250,000 cash disbursed for investing activities. C) $700,000 cash provided by financing activities, and $250,000 cash disbursed for operating activities. D) $450,000 net cash provided by financing activities.

118) The accountant for Foster Institute, Incorporated, determined the cash flow for several transactions to be as follows: Payment to pay off notes payable Proceeds from issuance of bonds payable Payment to purchase equipment Payment of wages Payment of dividends

$ 195,000 $ 635,000 $ 275,000 $ 115,000 $ 155,000

On the basis of the above transactions alone, determine the net cash flow from financing activities.

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A) B) C) D)

$275,000 net cash used for financing activities. $440,000 net cash provided by financing activities. Zero: cash inflows equal cash outflows from financing activities. $285,000 net cash provided by financing activities.

119) The Year 2 statement of cash flows of Dickens Corporation shows $500,000 cash paid for dividends. If dividends in Dickens' statement of retained earnings are reported at $550,000 then: A) B) C) D)

Dickens' dividends payable account must amount to $50,000 at the end of Year 2. Dickens' Cash account must have increased by $50,000 in Year 2. Dickens' dividends payable account must have increased by $50,000 in Year 2. Dickens' dividends payable account must have decreased by $50,000 in Year 2.

120) During Year 2, the cash flows related to Global Data, Incorporated's lending and borrowing activities are summarized as follows: Cash lent to borrowers Payment to retire bonds payable Proceeds from borrowing at bank (note payable) Interest received from borrowers Interest payments made on bonds payable

$ 128,600 $ 359,500 $ 216,500 $ 27,500 $ 38,000

On the basis of the above information alone, what is Global Data's net cash flow from financing activities? A) B) C) D)

$143,000 net cash used for financing activities $488,100 net cash used for financing activities $141,500 net cash used for financing activities $202,100 net cash used for financing activities

121) During Year 2, the cash flows related to Global Data, Incorporated's lending and borrowing activities are summarized as follows: Cash lent to borrowers

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$ 132,600

Payment to retire bonds payable Proceeds from borrowing at bank (note payable) Interest received from borrowers Interest payments made on bonds payable

$ 367,500 $ 220,500 $ 31,500 $ 42,000

On the basis of the above information alone, what is Global Data's net cash flow from financing activities? A) B) C) D)

$147,000 net cash used for financing activities $145,500 net cash used for financing activities $206,100 net cash used for financing activities $500,100 net cash used for financing activities

122) During Year 2, the cash flows related to Global Data, Incorporated's lending and borrowing activities are summarized as follows: Cash lent to borrowers Payment to retire bonds payable Proceeds from borrowing at bank (note payable) Interest received from borrowers Interest payments made on bonds payable

$ 132,600 $ 367,500 $ 220,500 $ 31,500 $ 42,000

If Global Data's income statement for Year 2 reports interest expense of $25,200, then: A) Interest payable decreased by $16,800 in Year 2. B) Interest payable increased by $16,800 in Year 2. C) Interest payable at the end of Year 2 amounts to $16,800. D) Either the amount reported in the income statement or the interest payment shown above must be incorrect.

123) During Year 2, the cash flows related to Global Data, Incorporated's lending and borrowing activities are summarized as follows: Cash lent to borrowers Payment to retire bonds payable Proceeds from borrowing at bank (note payable) Interest received from borrowers Interest payments made on bonds payable

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$ 127,600 $ 357,500 $ 215,500 $ 26,500 $ 37,000

If interest receivable was $10,300 at December 31, Year 1, and is $12,500 at the end of Year 2, interest revenue reported in Global Data's income statement for Year 2 must have been: A) B) C) D)

$28,700. $2,200. $22,800. $14,000.

124) During Year 2, the cash flows related to Global Data, Incorporated's lending and borrowing activities are summarized as follows: Cash lent to borrowers Payment to retire bonds payable Proceeds from borrowing at bank (note payable) Interest received from borrowers Interest payments made on bonds payable

$ 132,600 $ 367,500 $ 220,500 $ 31,500 $ 42,000

If interest receivable was $6,300 at December 31, Year 1, and is $10,500 at the end of Year 2, interest revenue reported in Global Data's income statement for Year 2 must have been: A) B) C) D)

$16,800. $21,000. $35,700. $4,200.

125) During Year 2, Gillespie Corporation made a loan of $155,000 to a major customer. By the end of Year 2 the customer had paid back $60,000 of the loan plus interest of $12,000. In the statement of cash flows for Year 2, Gillespie Corporation would report: A) A net decrease in cash and cash equivalents of $72,000 for Year 2. B) $72,000 net cash used for investing activities. C) $95,000 net cash used for investing activities, and $12,000 cash provided from operating activities. D) $155,000 net cash used for investing activities, $60,000 net cash provided by financing activities, and $12,000 cash provided by operating activities.

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126)

Which method will yield higher cash flows from operating activities? A) B) C) D)

The indirect method. The direct method. Both direct and indirect methods will yield the same amount. Depends upon the situation.

127) Which of the following statements regarding the direct and indirect methods of reporting cash flow from operating activities is false? A) Although both methods result in the same net increase or decrease in cash for the year, net cash flow from operating activities will be different under the two methods. B) The direct method shows the specific cash inflows and outflows constituting the operating activities of the business. C) Under the indirect method, the computation of net cash flow from operating activities begins with net income as shown in the income statement. D) The FASB permits both the direct and the indirect methods, but has expressed a preference for the direct method.

128) Which of the following would not be presented in the cash flows from operating activities section of the statement of cash flows when the direct method is used? A) B) C) D)

Dividends paid. Dividends received. Neither dividends paid nor dividends received would be shown. Both dividends paid and dividends received would be shown.

129) Which statement is true as to the FASB's position on the presentation of the statement of cash flows?

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A) The FASB recommends the use of the indirect method, but most companies use the direct method. B) The FASB recommends the use of the direct method, but most companies use the indirect method. C) The FASB recommends the use of the direct method, and most companies use the direct method. D) The FASB recommends the use of the indirect method, and most companies use the indirect method.

130) Which of the following does not create a difference between net income and the net cash flow from operations? A) B) C) D)

Non-operating gains and losses Depreciation expense Timing differences between credit sales and collections from customers Payment of a cash dividend

131) Cigna Corporation's Year 2 net income is smaller than net cash flow from operating activities. Which of the following would not be an explanation of why net income is smaller than net cash flow from operating activities? A) B) C) D)

132)

Cigna paid dividends to shareholders during Year 2. Cigna's accounts payable increased during Year 2. Cigna recognized depreciation expense in Year 2. Cigna sold equipment at a loss in Year 2.

When using the indirect method, depreciation expense: A) B) C) D)

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Increases net cash flow from operations. Decreases net cash flow from operations. Does not affect net income. Does not affect net cash flow from operations.

133) Which of the following is not true regarding the direct and indirect methods of computing net cash flow from operating activities? A) Both methods result in the same dollar amount of cash flow from operating activities. B) Both methods involve adjusting entries to the company's books so that the accounting records reflect the figures shown in the statement of cash flows. C) Both methods are acceptable to the FASB for reporting purposes. D) Both methods convert accrual-based income statement amounts to cash flow results.

134) Craig Corporation's reported net income for Year 2 is less than its net cash flow from operating activities. One reason for this could be: A) The sale of machinery at a loss in Year 2. B) An increase in inventory levels during Year 2. C) The sale of investments at a gain in Year 2. D) An error in the preparation of the statement of cash flows; net income should be greater than or equal to net cash flow from operating activities.

135) The Nelson Corporation reported net income in excess of its net cash flow from operating activities for the current year. An explanation for this may be: A) B) C) D)

136)

A loss on the sale of equipment in the current year. An increase in accounts payable during the year. Depreciation expense recognized for the year. A gain on the sale of investments during the year.

All of the following are advantages of an increasing cash flow from operations except:

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A) B) C) D)

A company is likely to pay its current bills with cash from operations not earnings. A company with cash is in a better position to fund growth. Large cash flows eliminate the need for borrowing. Earnings are viewed better if cash flows from operations closely match net income.

137) When net cash flow from operating activities is presented by the direct method, the statement of cash flows is accompanied by a supplementary schedule reconciling: A) Net cash flow from operating activities with net sales. B) Net income with the net increase or decrease in cash and cash equivalents. C) Net income with net cash flow from operating activities. D) Net cash flow from operating activities shown in the statement with that which would result from use of the indirect method.

138) Which of the following would be presented in the cash from operating activities section of the statement of cash flows when the indirect method is used? A) B) C) D)

Gain on the sale of investments. Depreciation expense. Neither a gain on the sale of investments nor depreciation expense would be shown. Both a gain on the sale of investments and depreciation expense would be shown.

139) At the beginning of Year 2, Baldwin Corporation bought an automobile for $36,000 by issuing a note payable. The automobile has a six-year life and is depreciated using the straightline method. To determine net cash flow from operating activities for Year 2 using the indirect method, net income should be: A) Increased by $6,000. B) Decreased by $6,000. C) Increased by $42,000. D) Neither increased nor decreased. No adjustments are necessary since no cash was received or paid.

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140) Gannon Corporation uses the indirect method to prepare its statement of cash flows. Following this approach, a gain on sale of equipment was deducted from net income in computing net cash flow from operating activities. The most likely reason for this adjustment is that: A) The sale of equipment did not result in the receipt of any cash by Gannon Corporation. B) The sale resulted in a cash receipt in an accounting period different from the period in which the gain was recognized. C) The amount of the gain recognized was not equal to the cash received. D) This type of transaction is not classified as an operating activity.

141) The statement of cash flows of Bosley Corporation shows the amount of cash received from customers as $720,000. If net sales in Bosley Corporation's income statement are reported at $670,000 then: A) B) C) D)

Bosley's accounts receivable increased $50,000. Bosley's cash account decreased $50,000. Bosley's accounts receivable decreased $50,000. Bosley's accounts receivable are $50,000 at the end of the year.

142) Hamilton Company reported an increase of $490,000 in its accounts receivable during the year. The company's statement of cash flows reported $2.2 million of cash received from customers. What was the amount of net sales for the year? A) B) C) D)

$2,200,000 $1,710,000 $2,690,000 $490,000

143) Hamilton Company reported an increase of $370,000 in its accounts receivable during the year. The company's statement of cash flows reported $1 million of cash received from customers. What was the amount of net sales for the year? Version 1

A) B) C) D)

$630,000 $1,370,000 $1,000,000 $370,000

144) Rent expense in Marin Company's Year 2 income statement is $425,000. If Prepaid Rent was $46,000 at December 31, Year 1, and is $99,000 at December 31, Year 2, the cash paid for rent during Year 2 is: A) B) C) D)

$425,000. $478,000. $471,000. $372,000.

145) Rent expense in Marin Company's Year 2 income statement is $420,000. If Prepaid Rent was $70,000 at December 31, Year 1, and is $95,000 at December 31, Year 2, the cash paid for rent during Year 2 is: A) B) C) D)

$420,000. $445,000. $395,000. $480,000.

146) Bert's Bungy Jumping, Incorporated paid $650,000 cash for casualty insurance during the year. If the income statement for the year reports insurance expense of $620,000, then: A) B) C) D)

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Bert's prepaid insurance decreased $30,000. Bert's cash account balance decreased $30,000. Bert's prepaid insurance increased $30,000. Bert's prepaid insurance was $30,000 at year-end.

147) The comparative balance sheets of Friends, Incorporated show a net increase in accounts receivable of $650 and a net decrease in inventory of $500. To determine net cash flow from operating activities under the indirect method, net income should be: A) B) C) D)

Reduced by $650. Increased by $650. Reduced by $150. Increased by $150.

148) The comparative balance sheets of Greenvale Games, Incorporated show a net decrease in unexpired insurance of $400 and a net decrease in interest payable of $250. In order to reconcile net income with net cash flow from operating activities, net income should be: A) B) C) D)

Increased by $650. Reduced by $650. Increased by $150. Reduced by $150.

149) The comparative balance sheets of Apollo Rocket, Incorporated show a net increase in inventory of $89,000 and a net decrease in accounts payable of $47,000 during Year 2. In computing net cash flow from operating activities under the indirect method, net income for Year 2 should be: A) B) C) D)

Increased by $42,000. Reduced by $42,000. Increased by $136,000. Reduced by $136,000.

150) The comparative balance sheets of Apollo Rocket, Incorporated show a net increase in inventory of $79,000 and a net decrease in accounts payable of $42,000 during Year 2. In computing net cash flow from operating activities under the indirect method, net income for Year 2 should be:

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A) B) C) D)

Increased by $37,000. Reduced by $37,000. Increased by $121,000. Reduced by $121,000.

151) During the current year, Atkins, Incorporated sold a parcel of land for $840,000 cash. The land had been purchased by Atkins several years ago for $410,000. Atkins, Incorporated uses the indirect method to prepare its statement of cash flows. In order to reconcile net income to net cash flow from operating activities, net income must be: A) B) C) D)

Decreased by $410,000. Decreased by $430,000. Increased by $430,000. Not adjusted because the sale of land is classified as an investing activity.

152) At the end of the first year of operations, the balance sheet of Midwood Medical Supply showed the following account balances: Accounts Receivable, $5,800; Accounts Payable, $6,800; Inventory, $3,800; and Unexpired Insurance, $2,800. The corporation reported net income of $87,000 for the year, including depreciation expense of $5,800, and uses the indirect method of computing net cash flow from operating activities. Solely on the basis of this information, net cash flow from operating activities is: A) B) C) D)

$84,200. $90,000. $87,200. $86,000.

153) At the end of the first year of operations, the balance sheet of Midwood Medical Supply showed the following account balances: Accounts Receivable, $5,000; Accounts Payable, $6,000; Inventory, $3,000; and Unexpired Insurance, $2,000. The corporation reported net income of $79,000 for the year, including depreciation expense of $5,000, and uses the indirect method of computing net cash flow from operating activities. Solely on the basis of this information, net cash flow from operating activities is:

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A) B) C) D)

$78,000. $82,000. $77,000. $80,000.

154) At the end of the first year of operations, Meacham's balance sheet showed the following account balances: Accounts Receivable, $13,400; Inventory, $9,400; and Accounts Payable, $14,650. The company's income statement reports net income of $37,400, including depreciation expense of $10,400. Using only the given information, compute Meacham's net cash flow from operating activities using the indirect method. A) B) C) D)

$65,250 $39,650 $24,350 $26,650

155) Chapin Company reported net income of $410,000 for Year 1. Balances of selected current asset and current liability accounts are as shown on the indicated dates:

Accounts receivable Inventory Accounts payable

January 1, Year December 31, Year 1 1 $ 60,000 $ 69,400 $ 130,000 $ 141,000 $ 54,000 $ 48,000

Depreciation expense for Year 1 amounted to $65,000. Using only the above information, compute Chapin's net cash flow from operating activities (indirect method) for Year 1. A) B) C) D)

$470,600 $467,400 $460,600 $448,600

156) Monarch Company uses the indirect method to prepare its statement of cash flows. The following information has been gathered for the current period: Version 1

Gain on sale of land Net income Depreciation expense Cash received from sale of land Decrease in inventory Increase in accounts receivable Increase in accounts payable

$ 54,000 $ 171,000 $ 83,000 $ 169,000 $ 19,000 $ 14,000 $ 20,000

On the basis of the above information only, Monarch Company's statement of cash flows shows net cash flow from operating activities to be: A) B) C) D)

$187,000. $333,000. $225,000. $361,000.

157) Empire Company uses the indirect method to prepare its statement of cash flows. The following information has been gathered for the current period: Loss on sale of land Net income Depreciation expense Cash received from sale of land Decrease in accounts receivable Increase in inventory Decrease in accounts payable Dividends paid

$ 15,000 $ 309,000 $ 68,000 $ 70,000 $ 17,000 $ 22,000 $ 29,000 $ 88,000

Solely on the basis of the above information, Empire's net cash flow from operating activities is: A) B) C) D)

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$338,000. $428,000. $343,000. $358,000.

158) Royal Corporation uses the indirect method of computing net cash flow from operating activities and reported the following for Year 2: Accounts receivable decreased by $10,300, merchandise inventory increased by $15,300, accounts payable decreased by $4,000, and income taxes payable increased by $18,800. If Royal Corporation reported net income for Year 2 of $157,800 (including $34,800 of depreciation expense), net cash flow from operating activities for Year 2 is: A) B) C) D)

$202,400. $132,800. $164,800. $221,700.

159) At the end of Year 2, Schenck Corporation sold its only piece of equipment for $9,000 cash, a price that resulted in a loss of $3,000. During Year 2, depreciation expense recognized by Schenck was $1,000. Schenck uses the indirect method to compute net cash flow from operating activities. In reconciling net income to net cash flow from operating activities under the indirect method, the required adjustments based upon the given data: A) B) C) D)

Increase net income by $4,000. Increase net income by $1,000. Decrease net income by $4,000. Increase net income by $3,000.

160) Alexander Company reported an increase of $185,000 in its accounts receivable during the year. The company's statement of cash flows reported $500,000 of cash received from customers. What amount of net sales must Alexander have recorded? A) B) C) D)

$315,000 $685,000 $500,000 $185,000

161) Rent expense in Burr Company's income statement is $480,000. If Prepaid Rent was $120,000 on January 1 and is $95,000 on December 31, the cash paid for rent during the year is: Version 1

A) B) C) D)

162)

Free cash flow arises out of: A) B) C) D)

163)

$480,000. $455,000. $360,000. $575,000.

Operating activities. Investing activities. Financing activities. Management activities.

Peak pricing charges: A) B) C) D)

A higher price when demand is high and a lower price when demand is low. A lower price when demand is high and a higher price when demand is low. A low price when demand is high and a lower price when demand is low. A high price when demand is high and a higher price when demand is low.

164) From the viewpoint of stockholders or potential investors, which of the following cash flow measurements would be of least importance? A) B) C) D)

The dollar amount of net cash flow from operating activities for the current year. The trend in net cash flow from operating activities from year to year. The corporation's free cash flow for the current year. The dollar amount of overall increase or decrease in cash for the current year.

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Answer Key Test name: Chapter 13 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) TRUE 4) TRUE 5) TRUE 6) TRUE 7) TRUE 8) FALSE 9) FALSE 10) FALSE 11) FALSE 12) FALSE 13) TRUE 14) FALSE 15) FALSE 16) TRUE 17) FALSE 18) TRUE 19) TRUE 20) TRUE 21) FALSE 22) FALSE 23) TRUE 24) TRUE 25) TRUE 26) TRUE Version 1

27) TRUE 28) FALSE 29) FALSE 30) FALSE 31) TRUE 32) FALSE 33) FALSE 34) TRUE 35) FALSE 36) TRUE 37) FALSE 38) TRUE 39) D 40) A 41) A 42) A 43) C 44) A 45) B 46) D 47) D 48) A 49) A 50) C 51) B 52) B 53) A 54) C 55) C 56) D Version 1

57) B 58) C 59) B 60) C 61) D 62) D 63) A 64) D 65) C 66) B 67) D 68) D 69) D 70) A 71) A 72) C 73) D 74) D 75) D 76) B 77) A 78) B 79) C 80) C 81) A 82) B 83) B 84) C 85) C 86) A Version 1

87) D 88) B 89) C 90) B 91) B 92) A 93) D 94) B 95) C 96) C 97) C 98) B 99) B 100) D 101) A 102) D 103) B 104) C 105) A 106) D 107) D 108) A 109) C 110) D 111) B 112) B 113) B 114) C 115) C 116) C Version 1

117) D 118) D 119) C 120) A 121) A 122) A 123) A 124) C 125) C 126) C 127) A 128) A 129) B 130) D 131) A 132) A 133) B 134) A 135) D 136) C 137) C 138) D 139) A 140) D 141) C 142) C 143) B 144) B 145) B 146) C Version 1

147) C 148) C 149) D 150) D 151) B 152) C 153) D 154) B 155) D 156) C 157) D 158) A 159) A 160) B 161) B 162) A 163) A 164) D

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CHAPTER 14: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms introduced in this chapter:Current ratioQuick ratioDebt ratioReturn on assetsMarket shareWorking capitalPrice-earnings (p/e) ratioEarnings per shareRequired: Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (a) The percentage of total assets financed by creditors. ____ (b) A measure of the effectiveness with which management utilizes a company's resources, regardless of how those resources are financed. ____ (c) A company's percentage share of total dollar sales within its industry. ____ (d) Current assets less current liabilities. ____ (e) A measure reflecting investors' expectations of future profitability. ____ (f) A measure of short-term solvency often used when a company has large inventories that cannot be quickly converted into cash. ____ (g) A ratio that helps individual stockholders relate the net income of a large corporation to their equity investment.

2) Selected information from the financial statements of Perfectly Baked Cake Company appears below:

Net sales Total expenses Net income

Year 2

Year 1

$ 1,692,000 1,470,000 $ 222,000

$ 1,600,000 1,520,000 $ 80,000

Required: (A) Compute the percentage change in each of the above items from Year 1 to Year 2. Use a + or − to indicate increase or decrease. Net sales

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________% 1

Total expenses Net income

________% ________%

(B) Compute net income as a percentage of net sales in each year. (Round to the nearest onetenth of 1%)

3) The statement of financial position (balance sheet) of Red Missile Company contained the following items, among others: Cash Accounts Receivable Inventory Store Equipment (net) Other Assets Mortgage Payable (due in 3 years) Note Payable (due in 10 days) Accounts Payable Capital Stock Retained Earnings

$ 180,000 $ 84,000 $ 124,000 $ 236,000 $ 67,500 $ 169,000 $ 163,000 $ 96,000 $ 67,500 $ 197,000

Required: (A) From the above information compute:(1) Current assets(2) Current liabilities(3) The current ratio(4) Working capital(B) Assume that Red Missile Company pays the note payable of $163,000, thus reducing cash to $17,000. Compute the following after the completion of this transaction:(1) The current ratio(2) Working capital

4) Shown below are selected items appearing in a recent statement of financial position (balance sheet) of Grant Products. (Dollar amounts are in thousands.)

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Cash and cash equivalents Investments in marketable securities Receivables Inventories Prepaid expense and other current assets Plant and equipment Accounts payable Bank loans payable within one year Income taxes payable Retained earnings

$ 620 $ 300 $ 1,400 $ 1,100 $ 450 $ 3,300 $ 1,600 $ 300 $ 300 $ 1,700

Required: (A) Compute the following: (Round ratios to two decimal points.)(1) Total quick assets(2) Total current assets(3) Total current liabilities(4) Quick ratio(5) Current ratio(B) Research indicates an industry average quick ratio is 1.3 to 1, and a current ratio of 2.3 to 1. Based upon this information, does Grant Products appear more or less solvent than the average company in its industry? Explain briefly.

5) Carter Corporation financed construction of a new addition to its facilities with a large long-term note payable. As a condition of obtaining the loan, Carter agreed to maintain a current ratio at year-end of at least 1.7 to 1. If Carter fails to maintain this ratio, the lender may demand immediate repayment of the principal amount of the note and all unpaid accrued interest. As the end of the year approaches, Carter is concerned about the magnitude of its current ratio.Required: Suggest some actions that the company might take to increase the magnitude of the current ratio.

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Shown below is a recent income statement for Phaeton, Incorporated: PHAETON, Incorporated Income Statement For the Year Ended December 31 Year 2 Net sales

$ 6,000,000

Cost and expenses: Cost of goods sold

$ 4,200,000

Operating expenses

900,000

Interest expense Earnings before income taxes

150,000

$ 5,250,000 $ 750,000

Income taxes

360,000

Net earnings

$ 390,000

Required: Prepare an income statement for the year in a multiple-step format.

7) Assume that Delta Corporation earns net income of $1,000,000 in the current year.Required: Identify two important factors that investors should consider in evaluating the reasonableness of this dollar amount. Explain what investors may learn from each of these considerations.

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8) Simon Hardware and Garfunkel Foods are sole proprietorships with similar amounts of total assets. Also, both businesses earn similar amounts of revenue, incur similar amounts of operating expenses, and report similar net incomes. However, Simon has a higher cost of goods sold, while Garfunkel Foods has higher interest expense.Required: Indicate which of these companies has the higher (A) gross profit rate, and (B) return on assets. In each case, explain the reasons for each answer.

9) Shown below is selected information from a recent annual report of Quality Service. (Dollar amounts are in millions.)

Total assets Total stockholders' equity Operating income Net income

Beginning of the Year $ 6,000 $ 3,200

End of the Year $ 6,600 $ 3,700 $ 2,000 $ 1,900

Required: Compute for the year (round each to two decimal points):(A) Return on average total assets(B) Return on average total equity

10) Shown below is selected information from a recent annual report of Tall Oaks Company (Dollar amounts are in thousands.)

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Total assets Total stockholders' equity Net sales

Beginning of the Year $ 7,400 $ 3,900

End of the Year $ 8,100 $ 4,600 $ 14,000

Gross profit

$ 5,000

Operating income

$ 1,400

Net income

$ 1,000

Required: Compute for the year the company's (round each to one decimal point):

(a) Gross profit rate (b) Return on average total assets (c) Return on average total stockholders' equity

11)

________% ________% ________%

Profitability measuresShown below is a recent income statement for B-D Electric. B-D ELECTRIC Income Statement For the Year Ended January 31, Year 2

Net sales Less: Cost of goods sold Gross profit Less: Operating expenses Operating income

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$ 7,500,000 4,100,000 $ 3,400,000 1,975,000 $ 1,425,000

Less: Non-operating expenses: Interest expense

$ 175,000

Income taxes expense Net Income

280,000

455,000 $ 970,00

Assume that comparative statements of financial position (balance sheets) for B-D Electric indicate average total assets for the year of $2,500,000, and average total equity of $2,050,000.Required: Compute the following: (Round each to one decimal point.) (a) Gross profit rate. (b) Net income as a percentage of net sales. (c) Return on assets. (d) Return on equity.

12)

________% ________% ________% ________%

Consider the common measure referred to as return on investment (ROI).Required:

(A) In general terms, what does return on investment (ROI) measure? Why is this measure useful to investors? (B) How is ROI calculated? (C) How does the stability of an investment impact the calculation of ROI?

13)

The following information is available for the Grant Company for Year 2:

Net sales Net income

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$ 1,200,000 $ 600,000

Market price per share of common stock Dividend per share of common stock Common shares authorized par value $10 Average common shares outstanding 7% $100 par preferred stock authorized Preferred stock outstanding Average total stockholders' equity Market price per share of preferred stock

$ 32 $ 1.80 $ 100,000 50,000 $ 70,000 $ 30,000 $ 160,000 $ 118

Required: (Round your answers to two decimal places.)(A) What are earnings per share for the current year?(B) What is the price-earnings ratio?(C) What is the book value per share of common stock?(D) What is the dividend yield on common stock?(E) What is the net profit ratio?(F) What is the return on equity?

14) Shown below are some key figures from the statements of financial position (balance sheets) of Minuteman Gas Company for two successive years:

Total assets (of which 30% are current) Current liabilities Bonds payable (long term) Capital stock, $6 par value Retained Earnings

December 31, Year 2 $ 2,820,000

December 31, Year 1 $ 2,220,000

$ 336,000 $ 1,080,000 $ 660,000 $ 828,000

$ 372,000 $ 840,000 $ 660,000 $ 480,000

Dividends of $96,000 were declared and paid in Year 2.Required: Compute the following:(A) Current ratio at end of Year 1.(B) Current ratio at end of Year 2.(C) Working capital at end of Year 1.(D) Working capital at end of Year 2.(E) Debt ratio at end of Year 1.(F) Debt ratio at end of Year 2.(G) Earnings per share for Year 2.

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15) Given below are comparative statements of financial position (balance sheets) and an income statement for the Excellent Corporation: Excellent Corporation Balance Sheets Year 2 December 31 Cash Accounts receivable Inventory Equipment (net) Total Accounts payable Dividends payable Long-term note payable Capital stock, $10 par Retained earnings Total

January 1

$ 34,000 94,000 68,000 114,000 $ 310,000 54,000 20,000 32,000 140,000 64,000 $ 310,000

$ 34,000 78,000 74,000 132,000 $ 318,000 60,000 12,000 32,000 140,000 74,000 $ 318,000

Excellent Corporation Income Statement for the year ended December 31, Year 2 Sales $ 524,000 Cost of goods sold (328,000) Gross profit on sales $ 196,000 Operating expenses (118,700) Operating income $ 77,300 Interest expense and income taxes (28,750) Net income $ 48,550

All sales were made on account. Cash dividends declared during the year totaled $58,550.Required: Compute the following (Round ratios to one decimal point):

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(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Average accounts receivable turnover Average inventory turnover Earnings per share of capital stock Book value per share of capital stock at yearend Current ratio at year-end Quick ratio at beginning of year Debt ratio at year-end Operating expense ratio Return on assets Return on common stockholders' equity

________times ________times $________ $________ ________to 1 ________to 1 ________% ________% ________% ________%

16) Determine the immediate effect of each of the transactions described below on the ratio listed beside each transaction. In the blank space to the left of each statement, you are to indicate the effect by writing the appropriate code letter. The code letters are as follows: I = increase the ratio, D = decrease the ratio, and NE = no effect on this ratio. ____ Return on common stockholders' equity (13%): Issued 10% bonds and invested the proceeds to earn 12%.____ Return on total assets (13%): Issued 10% bonds and invested the proceeds to earn 12%.____ Accounts receivable turnover ratio (4 times): Shortened credit period from 60 days to 30 days and raised standards for accepting credit customers.____ Earnings per share of common stock ($6.25): Sold common stock held in the treasury at a price above cost.____ Inventory turnover (4 times): Made large purchases increasing the average size of inventory.____ Current ratio (2.1 to 1): Collected a large account receivable____ Quick ratio: Wrote off an uncollectible account receivable against the allowance account.____ Debt ratio: Declared a cash dividend, to be paid in three months.

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17)

Below are eight ratios.Required:

Match each equation to the correct ratio. If there is no match, use "None" as your response.Current ratioA/R turnover rateEarnings per shareReturn on equityWorking capitalDebt ratioReturn on assetsPrice-earnings ratio ________(a.) Net income minus preferred dividends divided by average number of common shares outstanding ________(b.) Net sales divided by average accounts receivable ________(c.) Operating income divided by average total assets ________(d.) Current assets divided by current liabilities ________(e.) Annual dividend divided by current stock price ________(f.) Current assets minus current liabilities ________(g.) Total liabilities divided by total assets ________(h.) Net income divided by average total equity ________(i.) Common stockholder's equity divided by shares of common stock outstanding ________(j.) Current stock price divided by earnings per share

18) Shown below are Gamma, Incorporated's earnings per share for a four-year period, along with the per-share market price of the company's stock at each year-end. The earnings in Year 4 were the highest in the company's history.

Earnings per share Percentage change Year-end stock price Price-earnings ratio

Year 4

Year 3

Year 2

Year 1

$ 9 ________% $ 77 ________

$ 7 ________% $ 140 ________

$ 6 ________% $ 84 ________

$ 7 ________% $ 70 ________

Required: (A) Compute the percentage change in earnings per share in Years 2, 3, and 4. (Note: Add a minus or plus sign before each percentage to indicate whether it decreased or increased during each of the three years.)(B) Compute the p/e ratio of stock at the end of each of the four years.(C) What does the p/e ratio at the end of Year 4 indicate about investors' expectations of earnings per share for the coming year? Explain your reasoning.

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19) Indicate the probable effects of each of the following strategies or events upon the financial measurements of Lindsay Corporation listed below. Use the code letters I = Increase, D = Decrease, and NE = No Effect. (A)

A supplier raised by 3% the purchase price of several products sold by Lindsay. Lindsay did not change its sales prices for these products. Gross profit rate______ Current liabilities ________

(B)

Lindsay began purchasing larger than normal quantities from a particular supplier in order to receive a “volume discount.” Gross profit rate________ Quick ratio________

(C)

Lindsay has consistently earned a return on assets of 15%. Recently the company borrowed money at an interest rate of 10% to expand its operations. Lindsay expects its investment of these borrowed funds to earn a return (operating income) of 20%. Return on assets________ Debt ratio________

(D)

Lindsay extended the credit terms allowed to customers buying merchandise on account from 30 days to 90 days. Net sales________ Cash collected from customers: Dollar amount of gross profit (over the next 90 days)________ Dollar amount of gross profit (after the next 90 days)________

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20) Shown below are various financial measurements for two companies that are similar in size and sell similar products.Required: Complete the table below by entering code letters as follows:1) In the “Most Interested Group" column, indicate which of the following three groups probably would be most interested in the specified financial measurement. Identify one group for each financial measure using the following code letters: “STC” for short-term creditors, “LTC” for long-term creditors, and “S” for stockholders.2) In the “Most Favorable Result” column, enter an “X” or a “Y” to indicate whether your "most interested group" would prefer the measurement results reported by Company X or Company Y. Consider each financial measurement independently of the others. Financial Measurement

Company X

Company Most Most Y Interested Favorable Group Result 8

(a) Accounts receivable 5 turnover (b) Return on equity ratio 40% 60% (assume the return on assets is 10% and the rate of interest paid to creditors is 11% for both companies) (c) Operating cycle 54 days 218 days (d) Percentage change in net income (e) Interest coverage ratio

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+6%

−12%

________

Answer Key Test name: Chapter 14 Test Bank (Problem Material) 1) (a) Debt ratio(b) Return on assets(c) Market share(d) Working capital(e) Price-earnings (p/e) ratio(f) Quick ratio(g) Earnings per share 2) (A)

Percentage changes in: Net sales:

+5.8%

($1,692,000 − $1,600,000) ÷ $1,600,000 Total expenses:

−3.3%

($1,470,000 − $1,520,000) ÷ $1,520,000 Net income:

+177.5%

($222,000 − $80,000) ÷ $80,000 (B)

Net income as a percentage of sales: Year 1:

5.0%

($80,000 ÷ $1,600,000) Year 2:

13.1%

($222,000 ÷ $1,692,000)

3) (A) (1) Current assets ($180,000 + $84,000 + $124,000) (2) Current liabilities:

$ 388,000

$ 259,000

($163,000 + $96,000) (3) Current ratio:

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1.5 to 1

($388,000 ÷ $259,000) (4) Working capital:

$ 129,000

($388,000 − $259,000) (B) (1) Current ratio: ($388,000 − $163,000) ÷ ($259,000 − $163,000) (2) Working capital:

2.3 to 1

$ 129,000

($388,000 − $163,000) − ($259,000 − $163,000)

4) (A) (1) Quick assets: ($620 + $300 + $1,400) (2) Current assets:

$ 2,320

$ 3,870

($620 + $300 + $1,400 + $1,100 + $450) (3) Current liabilities:

$ 2,200

($1,600 + $300 + $300) (4) Quick ratio:

1.05

($2,320 ÷ $2,200) (5) Current ratio: ($3,870 ÷ $2,200)

1.76 to 1

(B) Grant Products' current ratio and quick ratio both are below the industry averages. This means that Grant Products has less liquid assets in relation to its current liabilities, and therefore appears less solvent, than the average company in the industry.

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5) Paying any current liabilities will increase the current ratio. The company could also consider postponing until after year-end any routine transactions that would reduce current assets, such as the acquisition of equipment or scheduled maintenance and repair expenditures. The sale of existing inventory (or any other current asset) for a price above cost would also cause the current ratio to increase. 6) PHAETON, INCORPORATED Income Statement For the Year Ended December 31, Year 2 Net sales Cost of goods sold Gross profit Operating expenses Operating income Non-operating expenses: Interest expense Income before taxes Income tax expense Net income

$ 6,000,000 4,200,000 1,800,000 900,000 $ 900,000

150,000 $ 750,000 360,000 $ 390,000

7) Students should identify two of the following factors:The resources invested in the effort to generate the company's earnings (i.e., size of the company). This consideration indicates the efficiency with which economic resources are employed.The earnings of the company in prior periods. The trend in earnings indicates whether performance is improving or deteriorating.The earnings of comparable companies (in size, as well as in the nature of operations). This comparison provides an indication of the company's ability to compete.

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8) (A) Both companies earn similar amounts of revenue, but Simon Hardware has the higher cost of goods sold. Therefore, Garfunkel Foods must have the higher total gross profit and also the higher gross profit rate.(B) Garfunkel Foods has the higher return on assets. Return on assets usually is computed by expressing operating income as a percentage of average total assets. As both companies have similar amounts of total assets, the company with the higher operating income will have the higher return on assets. Garfunkel Foods probably has the higher operating income. As both companies earn similar amounts of revenue and net income, their total costs and expenses also must be similar. Simon however, has a higher cost of goods sold, which is deducted in arriving at operating income. Garfunkel Foods has higher interest expense, but interest is deducted after the determination of operating income. Therefore, Garfunkel Foods probably has the higher operating income of the two businesses. Income taxes is another "non-operating item" which may cause two businesses with similar net incomes to have different levels of operating income. However, both Simon Hardware and Garfunkel Foods are organized as sole proprietorships, and, therefore, do not include income taxes expense in their income statements. 9) (A) Return on average total assets $2,000 ÷ [($6,000 + $6,600) ÷ 2]

31.75%

(B) Return on average total equity $1,900 ÷ [($3,200 + $3,700) ÷ 2]

55.07%

10) (a)

Gross profit rate:

35.7%

($5,000 ÷ $14,000) (b)

Return on average total assets

18.1%

$1,400 ÷ [($7,400 + $8,100) ÷ 2]

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(c)

Return on average total equity

23.5%

$1,000 ÷ [($3,900 + $4,600) ÷ 2]

11) (a)

Gross profit rate:

45.3%

($3,400,000 ÷ $7,500,000) (b)

Net income as a percentage of net sales:

12.9%

($970,000 ÷ $7,500,000) (c)

Return on assets

57.0%

($1,425,000 ÷ $2,500,000) (d)

Return on equity

47.3%

($970,000 ÷ $2,050,000)

12) (A) In deciding where to invest their money, equity investors want to know how efficiently a company utilizes its resources. A common method of evaluating the efficiency with which financial resources are employed is to compute the rate of return earned on these resources. This rate of return is called the return on investment (ROI), and is sometimes referred to as return on assets.(B) ROI is calculated by dividing the annual return (or profit) generated by the investment by the average amount invested.(C) The average amount invested usually is computed by adding the amounts invested as of the beginning and end of the year, and dividing this total by two. If the investment is relatively stable over time, the year-end balance may be used instead of an average. ROI is stated as a percentage of the average amount invested throughout the year. And if the investment in assets were highly variable during the year, a monthly average is preferable. 13) (A) Earnings per share $600,000 − $2,100 ÷ 50,000 = $11.96(B) Price-earnings ratio $32 ÷ $11.96 = 2.68(C) Book value ($160,000 − $30,000) ÷ 50,000 = $2.60(D) Dividend yield $1.80 ÷ $32 = 5.63%(E) Net profit rate $600,000 ÷ $1,200,000 = 50%(F) Return on equity $600,000 ÷ $160,000 = 3.75% Version 1

14) (A) Current ratio at end of Year 1 ($666,000 ÷ $372,000) (B) Current ratio at end of Year 2 ($846,000 ÷ $336,000) (C) Working capital at end of Year 1 ($666,000 − $372,000) (D) Working capital at end of Year 2 ($846,000 − $336,000) (E) Debt ratio at end of Year 1 ($1,212,000 ÷ $2,220,000) (F) Debt ratio at end of Year 2 ($1,416,000 ÷ $2,820,000) (G) Earnings per share for Year 2 [($348,000 + $96,000) ÷ 110,000 shares)

1.79 to 1 2.52 to 1 $ 294,000 $ 510,000 54.6% 50.2% $ 4.04

15) (a)

Average accounts receivable turnover [$524,000 ÷ (($94,000 + $78,000) ÷ 2)]

6.1 times

(b)

Average inventory turnover [$328,000 ÷ (($68,000 + $74,000) ÷ 2)]

4.6 times

(c)

Earnings per share of capital stock

$ 3.47

($48,550 ÷ 14,000 shares) (d)

Book value per share of capital stock at year-end ($204,000 ÷ 14,000 shares)

(e)

Current ratio at year-end

$ 14.57

2.65

($196,000 ÷ $74,000) (f)

Quick ratio at beginning of year

1.56

($112,000 ÷ $72,000) (g)

Debt ratio at year-end

34.2%

($106,000 ÷ $310,000) (h)

Operating expense ratio

22.7%

($118,700 ÷ $524,000) (i)

Return on assets

24.6%

[$77,300 ÷ (($310,000 + $318,000) ÷ 2)]

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(j)

Return on common stockholders' equity

23.2%

[$48,550 ÷ (($204,000 + $214,000) ÷ 2)]

16) I D I

D D NE NE I

Return on common stockholders' equity (13%): Issued 10% bonds and invested the proceeds to earn 12%. Return on total assets (13%): Issued 10% bonds and invested the proceeds to earn 12%. Accounts receivable turnover ratio (4 times): Shortened credit period from 60 days to 30 days and raised standards for accepting credit customers. Earnings per share of common stock ($6.25): Sold common stock held in the treasury at a price above cost. Inventory turnover (4 times): Made large purchases increasing the average size of inventory. Current ratio (2.1 to 1): Collected a large account receivable. Quick ratio: Wrote off an uncollectible account receivable against the allowance account. Debt ratio: Declared a cash dividend, to be paid in three months.

17) (a.) Earnings per share(b.) A/R turnover rate(c.) Return on assets(d.) Current ratio(e.) None(f.) Working capital(g.) Debt ratio(h.) Return on equity(i) None(j.) Price-earnings ratio(e.) This calculates the dividend yield.(i.) This calculates the book value per share. 18) Year 4

Year 3

Year 2

Year 1

Earnings per share

$ 9

$ 7

$ 6

$ 7

(A) Percentage change

+28.6%

+16.7%

−14.3%

Year-end stock price

$ 77

$ 140

$ 84

$ 70

(B) Price-earnings ratio

8.6

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(C) The p/e ratio of 8.6 is low by historical standards, indicating that investors do not expect the rapid earnings growth of recent years to continue. The sharp declines in stock price and price-earnings ratio occurring during Gamma's "record year" suggest that investors may be expecting earnings to decline from current levels. The current priceearnings ratio of 8.6 is even less than that at the end of Year 2 which was preceded by a decline in earnings per share. 19) (A)

Gross profit rate Current liabilities

D I

(B)

Gross profit rate Quick ratio

I D

(C)

Return on assets Debt ratio

I I

(D)

Dollar amount of gross profit (over the next 90 days) Dollar amount of gross profit (after the next 90 days)

D I

20) (a) (b) (c) (d) (e)

Most Interested Most Favorable Group Result STC Y S Y STC X S X LTC X

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CHAPTER 14 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Vertical analysis compares the results of financial information with a business in the same industry for a number of consecutive periods of time. ⊚ ⊚

true false

2) Comparative financial statements show side-by-side financial information for two or more companies. ⊚ ⊚

true false

3) The quality of earnings tends to be higher for a company that uses accounting principles and methods that lead to a conservative measurement of earnings. ⊚ ⊚

true false

Working capital is the excess of current assets over current liabilities. ⊚ ⊚

true false

5) In a classified statement of financial position (balance sheet), assets are subdivided into current assets, plant and equipment and other assets, while all liabilities are classified as current. ⊚ ⊚

true false

6) The quick ratio is especially useful in evaluating the liquidity of a company with fast moving inventories. ⊚ ⊚

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true false

7) If total current assets are $140,000 at the end of Year 1, increase by $50,000 by the end of Year 2, and increase by $50,000 in Year 3, the percentage increase over the preceding year is less in Year 3 than in Year 2. ⊚ ⊚

A company's liquidity refers to its ability to remain profitable. ⊚ ⊚

true false

Inventory is an example of a quick asset. ⊚ ⊚

true false

10) Current assets are those assets that are expected to be converted into cash within a relatively short period of time. ⊚ ⊚

11)

The debt ratio is computed by dividing total liabilities by current assets. ⊚ ⊚

12)

true false

The lower the current ratio, the more liquid the company appears. ⊚ ⊚

13)

true false

The owners of a corporation are not personally responsible for the debts of the business.

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⊚ ⊚

14)

From a creditor's point of view, the lower the debt ratio; the safer the creditor's position. ⊚ ⊚

15)

true false

The current ratio may be less than, equal to, or greater than the quick ratio. ⊚ ⊚

true false

16) A company should carry the amount of working capital necessary to conduct operations, not necessarily maximize its working capital. ⊚ ⊚

true false

17) Deducting the cost of goods sold from net income gives us operating income (sometimes called income from operations). ⊚ ⊚

18)

true false

The gross profit rate is gross profit expressed as a percentage of net sales. ⊚ ⊚

true false

19) The gross profit rate usually is lowest on fast moving merchandise and highest on specialty and novelty products. ⊚ ⊚

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true false

20) When an income statement does not show gross profit or operating income, it is referred to as a consolidated income statement. ⊚ ⊚

true false

21) A single-step and a multiple-step income statement are different in form and in the amount of net income reported. ⊚ ⊚

true false

22) A company whose sales are growing at less than the rate of inflation may actually be selling less merchandise every year. ⊚ ⊚

23)

true false

A company cannot be increasing its market share if its net sales are declining. ⊚ ⊚

true false

24) Net income stated as a percentage of sales is one means of evaluating a company's ability to control its expenses. ⊚ ⊚

true false

25) If the return on total assets ratio is substantially below the cost of borrowing, common stockholders will benefit from a high debt ratio. ⊚ ⊚

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true false

26) A company whose future earnings are expected to rise substantially is likely to have a higher price-earnings ratio than a company whose future earnings are expected to decline. ⊚ ⊚

true false

27) The price-earnings ratio is calculated by dividing earnings per share by the current market price of a share of the company's stock. ⊚ ⊚

28)

true false

The return on equity ratio may be either higher or lower than the return on assets ratio. ⊚ ⊚

true false

29) In a single-step income statement, all revenue items are listed, then all expense items are combined and deducted from total revenue. ⊚ ⊚

true false

30) The more pessimistic investors' expectations regarding a company's future performance, the lower the price-earnings ratio is likely to be. ⊚ ⊚

true false

31) Return on equity (ROE) is measured by dividing net income by average number of shares outstanding. ⊚ ⊚

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true false

32)

The trend in ratios is usually more useful than looking at a single year's ratio. ⊚ ⊚

true false

33) The acid test ratio includes marketable securities but does not include accounts receivable. ⊚ ⊚

34)

true false

The inventory turnover rate indicates how quickly inventory sells. ⊚ ⊚

true false

35) The dividend yield rate on stock is measured by dividing dividends per share by market price per share. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 36) A comparative financial statement: A) Places the statement of financial position (balance sheet), the income statement, and the statement of cash flows side-by-side in order to compare the results. B) Places two or more years of a financial statement side-by-side in order to compare results. C) Places the financial statements of two or more companies side-by-side in order to compare results. D) Places the dollar amounts next to the percentage amounts of a given year for the income statement.

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37) The changes in financial statement items from a base year to following years are sometimes expressed as: A) B) C) D)

38)

The measurement of the relative size of each item included in a total is called: A) B) C) D)

39)

Money changes. Trend percentages. Component percentages. Ratios.

One number expressed as a percentage of another is called: A) B) C) D)

40)

Money changes. Trend percentages. Component percentages. Ratios.

Comparative financial statements compare the company's current statements with: A) B) C) D)

Those of prior periods. Those of other companies in the same industry. Those of the company's principal competitor. The budgeted level of performance for the period.

41) On common size income statements, each component in the income statement is represented as a percentage of: Version 1

A) B) C) D)

Net income. Net sales. Total assets. Profit.

42) During the Years 1 through 3, Powers, Incorporated, reported the following amounts of net income (dollars in thousands): Year 3 $170

Year 2 $150

Year 1 $120

Relative to the prior year, the percentage change in net income: A) B) C) D)

43)

Was the same in Years 2 and 3. Was larger in Year 3 than in 2. Was smaller in Year 3 than in 2. Cannot be determined without knowing how many shares of stock were outstanding.

A high quality of earnings is indicated by: A) B) C) D)

Earnings derived largely from newly introduced products. Declaration of both cash and stock dividends. Use of the FIFO method of inventory during sustained inflation. A history of increasing earnings and conservative accounting methods.

44) In evaluating the quality of a company's earnings, which of the following factors is least important? A) B) C) D)

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The accounting methods used by management. The trend of the company's earnings over a period of years. The dollar amount of earnings per share. The stability and sources of the company's earnings.

45)

The term, classified financial statements, refers to:

A) The financial statements of all companies working on government projects. B) The financial statements of defense contractors working on secret projects. C) Financial statements prepared for use by management, but not for distribution outside of the organization. D) Financial statements in which items with certain characteristics are placed together in a group in an effort to develop useful subtotals.

46)

The operating cycle of a company: A) Must be less than one year. B) Is usually greater than one year. C) Is the time it takes to purchase inventory, sell inventory, and collect cash from the

sale. D) Is the time it takes to acquire a loan, pay the interest, and retire the loan by paying the creditor in full.

47)

The excess of current assets over current liabilities is called: A) B) C) D)

48)

Current ratio. Working capital. Debt ratio. Quick ratio.

Quick assets include which of the following? A) B) C) D)

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Cash, marketable securities, and receivables. Cash, marketable securities, and inventories. Cash, prepaid rent, and receivables. Market securities, receivables, and inventories.

49)

The ratio that measures total liabilities as a percentage of total assets is called the: A) B) C) D)

50)

Current ratio. Working capital. Debt ratio. Quick ratio.

The principle factor(s) affecting the quality of working capital is (are):

A) The nature of the current assets. B) The length of time to convert current assets into cash. C) Both the nature of the current assets and the length of time to convert current assets into cash. D) Neither the nature of the current assets nor the length of time to convert current assets into cash.

51)

All of the following are measures of liquidity except: A) B) C) D)

52)

Which of the following is a measure of short-term liquidity? A) B) C) D)

53)

Quick ratio. Debt ratio. Current ratio. Working capital.

Quick ratio Return on assets Dividend yield Debt ratio

The current ratio will be _______________ the quick ratio.

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A) B) C) D)

less than greater than or equal to the same as always different than

54) The measures most often used in evaluating solvency—the current ratio, quick ratio, and amount of working capital—are developed from amounts appearing in the: A) B) C) D)

55)

Balance sheet. Income statement. Statement of retained earnings. Statement of cash flows.

Segment reporting refers to the presentation of:

A) Classifications on various financial statements. B) Classifications on a multiple-step income statement. C) Consolidated financial statements. D) Supplemental information about parts of a business, usually along industry or product lines and geographic areas

56)

The current ratio: A) B) C) D)

Is computed by dividing current assets by current liabilities. Is computed by subtracting current liabilities from current assets. Remains unchanged throughout the operating cycle. Is a measure of short-term profitability.

57) How would a company's working capital be affected if a substantial amount of accounts payable were paid in cash?

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A) It would be unaffected. B) It would fall. C) It would increase. D) The change would depend on the relationship between the payables liquidated and current liabilities.

58)

Current assets are those assets that can be converted into cash within: A) B) C) D)

59)

Working capital is calculated by: A) B) C) D)

60)

One year and never longer. One year or the operating cycle, whichever is longer. One year or the operating cycle, whichever is shorter. Management's discretion.

Dividing current assets by total assets. Dividing current assets by total liabilities. Subtracting current liabilities from total assets. Subtracting current liabilities from current assets.

The quick ratio: A) B) C) D)

Is computed by dividing current assets by current liabilities. Is always higher than the current ratio. Cannot be higher than the current ratio. May be higher or lower than the current ratio.

61) Short-term creditors are most likely to use the quick ratio instead of the current ratio in evaluating the solvency of a company with large, slow-moving:

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A) B) C) D)

62)

Plant and equipment. Receivables. Inventories. Employees.

Which of the following is considered a quick asset? A) B) C) D)

Accounts receivable. Inventory. Automobiles. Prepaid expenses.

63) Which of the following transactions would cause a change in the amount of a company's working capital? A) B) C) D)

64)

The debt ratio indicates the percentage of: A) B) C) D)

65)

Collection of an account receivable. Payment of an account payable. Borrowing cash over a 60-day period. Selling merchandise at a price above its cost.

Total assets financed by long-term mortgages. Revenue consumed by interest expense. Total assets financed by creditors. Total liabilities classified as current.

The debt ratio is used primarily as a measure of:

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A) B) C) D)

66)

Short-term liquidity. Creditors' long-term risk. Profitability. Return on Investment.

Generally speaking, which appears to be a desirable current ratio? A) B) C) D)

20 to 1. 1 to 20. 2 to 1. 1 to 2.

67) If a company has a current ratio of 2 to 1, and purchases inventory on credit, what will this do to its current ratio? A) B) C) D)

68)

Increase the current ratio. Decrease the current ratio. Does not change the current ratio. Cannot be determined.

When comparing the current ratio to the quick ratio: A) B) C) D)

The current ratio will be greater or equal. The quick ratio will always be greater. The quick ratio is sometimes greater and sometimes less than the current ratio. They always will be the same.

69) If a retail store has a current ratio of 2.1 and current assets of $155,400, the amount of working capital is:

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A) B) C) D)

$74,000 $326,340 $229,400 $81,400

70) If a retail store has a current ratio of 2.5 and current assets of $195,000, the amount of working capital is: A) B) C) D)

$78,000 $380,000 $330,000 $117,000

71) The Plaza Company has working capital of $520,000 and a current ratio of 3 to 1. The amount of current assets is: A) B) C) D)

$390,000. $520,000. $780,000. $260,000.

72) The Plaza Company has working capital of $540,000 and a current ratio of 3 to 1. The amount of current assets is: A) B) C) D)

$405,000. $540,000. $810,000. $270,000.

73) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands): Version 1

Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 76 $ 136 $ 245 $ 905 $ 310 $ 380

What is the quick ratio? A) B) C) D)

1.47 to 1 0.68 to 1 0.44 to 1 0.79 to 1

74) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands):

Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 75 $ 135 $ 240 $ 900 $ 300 $ 375

What is the quick ratio? A) B) C) D)

1.5 to 1 0.7 to 1 0.45 to 1 0.8 to 1

75) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets

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$ 84 $ 144 $ 285 $ 945 16

Current liabilities Noncurrent liabilities

$ 390 $ 420

What is the current ratio? A) B) C) D)

0.37 to 1 1.32 to 1 0.58 to 1 0.73 to 1

76) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands):

Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 75 $ 135 $ 240 $ 900 $ 300 $ 375

What is the current ratio? A) B) C) D)

5.0 to 1 1.5 to 1 0.7 to 1 0.8 to 1

77) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 85 $ 145 $ 290 $ 950 $ 400 $ 425

What is the amount of working capital?

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A) B) C) D)

$205 $400 $120 $520

78) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands):

Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 75 $ 135 $ 240 $ 900 $ 300 $ 375

What is the amount of working capital? A) B) C) D)

$225 $300 $150 $450

79) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 66 $ 126 $ 195 $ 855 $ 210 $ 330

What is the debt ratio?

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A) B) C) D)

63.16%. 36.84%. 75.44%. 24.56%.

80) Shown below is selected information from the statement of financial position (balance sheet) of Comoros, a small electronics store (dollar amounts are in thousands):

Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 75 $ 135 $ 240 $ 900 $ 300 $ 375

What is the debt ratio? A) B) C) D)

75% 25% 60% 33%

81) Shown below is selected information from the statement of financial position (balance sheet) of Bill's Auto Parts, a retail store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 130 $ 370 $ 400 $ 1,260 $ 340 $ 280

What is the quick ratio? (Round your answer to one decimal place.)

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A) B) C) D)

5.0% 1.5 to 1 20.0% 1.1 to 1

82) Shown below is selected information from the statement of financial position (balance sheet) of Bill's Auto Parts, a retail store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 130 $ 370 $ 400 $ 1,260 $ 340 $ 280

What is the current ratio? (Round your answer to one decimal place.) A) B) C) D)

1.2 to 1 Less than 2 to 1, but not 1.2 to 1 2.6 to 1 More than 2 to 1, but not 2.6 to 1

83) Shown below is selected information from the statement of financial position (balance sheet) of Bill's Auto Parts, a retail store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 130 $ 370 $ 400 $ 1,260 $ 340 $ 280

Working capital equals:

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A) B) C) D)

$560,000. $530,000. $270,000. $900,000.

84) Shown below is selected information from the statement of financial position (balance sheet) of Bill's Auto Parts, a retail store (dollar amounts are in thousands): Cash Accounts receivable Inventory Total assets Current liabilities Noncurrent liabilities

$ 130 $ 370 $ 400 $ 1,260 $ 340 $ 280

The debt ratio is: (Round your answer to one decimal place.) A) B) C) D)

22%. 27%. 57%. 49%.

85) If a retail store has a current ratio of 2.8 and working capital of $145,800. What are the total of the current assets? A) B) C) D)

$52,100. $145,800. $226,800. $408,240.

86) If a retail store has a current ratio of 2.5 and working capital of $117,000. What are the total of the current assets?

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A) B) C) D)

$46,800 $117,000 $195,000 $292,500

87) The Piazza Company has working capital of $538,000 and current assets of $800,000. The current ratio is: A) B) C) D)

0.67 1.49 2.05 3.05

88) The Piazza Company has working capital of $540,000 and current assets of $810,000. The current ratio is: A) B) C) D)

0.67 1.50 2.00 3.00

89) All of the following captions or subtotals are typical of a multiple-step income statement, except: A) B) C) D)

90)

Net sales. Gross profit. Total costs and expenses. Operating income.

The gross profit rate represents:

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A) Total sales revenue. B) The percentage change in net sales from the prior period. C) The percentage of sales revenue remaining after providing for the cost of the merchandise sold. D) Net income stated as a percentage of total sales revenue.

91)

An increasing gross profit rate most strongly suggests: A) B) C) D)

92)

Operating income excludes each of the following, except: A) B) C) D)

93)

An increase in physical sales volume. Strong consumer demand for the company's products. Intense competition. Increased short-term solvency.

Interest expense. Income taxes. Depreciation. Purchase discounts lost.

In calculating earnings per share, the denominator of the equation includes: A) B) C) D)

Only common stock outstanding. Common stock plus preferred stock. Common stock less preferred stock. The total shares of authorized common stock.

94) In a multiple-step income statement, interest expense usually is not classified as an operating expense because interest charges:

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A) Do not contribute to the production of revenue. B) Stem from the manner in which assets are financed, not the manner in which they are used in business operations. C) Relate directly to the cost of goods sold. D) The statement is incorrect. Interest usually is classified as an operating expense.

95) In a multiple-step income statement, income taxes are not classified as operating expenses because: A) Income taxes do not contribute to the production of revenue. B) Income taxes stem from the manner in which assets are financed, not the manner in which they are used in business operations. C) Not all forms of business organization are subject to income taxes. D) The statement is incorrect; income taxes are classified as operating expenses.

96)

All of the following are true of operating expenses except:

A) Operating expenses are incurred for the purpose of producing revenue. B) Operating expenses are subdivided on the income statement into the classifications of component and trend. C) The administrative expenses portion of operating expenses tends to remain constant from period to period. D) Subdividing operating expenses into different classifications helps managers and investors evaluate different aspects of the company's operations.

97)

The measurement that best reflects investors' expectations about future earnings is: A) B) C) D)

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Earnings per share. Return on assets. The price-earnings ratio. Return on equity.

98) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,150 $ 500 $ 420 $ 350

$ 2,000 $ 3,600

Supreme reported earnings per share for the year of $3 and paid cash dividends of $3 per share. At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $84 per share.Supreme's gross profit rate was: A) B) C) D)

43.48%. 56.52%. 20.00%. 30.43%.

99) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,230 $ 520 $ 440 $ 390

$ 2,400 $ 4,000

Supreme reported earnings per share for the year of $4 and paid cash dividends of $1 per share. At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $88 per share.Supreme's gross profit rate was:

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A) B) C) D)

42.9%. 57.7%. 20.0%. 31.7%.

100) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,190 $ 510 $ 430 $ 370

$ 2,200 $ 3,800

Supreme reported earnings per share for the year of $4 and paid cash dividends of $1 per share. At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $86 per share.What was Supreme's operating income (in millions)? A) B) C) D)

$680 $370 $250 $510

101) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income

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$ 1,230 $ 520 $ 440 $ 390

Balance sheet information: Average total equity Average total assets

$ 2,400 $ 4,000

$710 $390 $270 $520

102) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,130 $ 495 $ 415 $ 340

$ 1,900 $ 3,500

Supreme reported earnings per share for the year of $4 and paid cash dividends of $1 per share. At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $83 per share.Supreme's return on assets was: A) B) C) D)

9.71%. 6.29%. 18.14%. 32.29%.

103) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data).

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Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,230 $ 520 $ 440 $ 390

$ 2,400 $ 4,000

9.75%. 6.75%. 17.75%. 30.75%.

104) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,270 $ 530 $ 450 $ 410

$ 2,600 $ 4,200

Supreme reported earnings per share for the year of $3 and paid cash dividends of $3 per share. At year-end, the Wall Street Journal listed Supreme's capital stock as trading at $90 per share.Supreme's return on equity was:

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A) B) C) D)

11.15%. 28.46%. 7.40%. 15.77%.

105) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,230 $ 520 $ 440 $ 390

$ 2,400 $ 4,000

11%. 25%. 7.5%. 16.3%.

106) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income

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$ 1,150 $ 500 $ 420 $ 350

Balance sheet information: Average total equity Average total assets

$ 2,000 $ 3,600

33.33. 28.00. 100.00. 3.00.

107) Shown below is selected information from the financial statements of Supreme Company Dollar amounts are in millions (except for the per share data). Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 1,230 $ 520 $ 440 $ 390

$ 2,400 $ 4,000

25. 22. 100. 4.

108) Shown below is selected information from the financial statements of Noble Computers. (Dollar amounts are in millions, except for the per share data.)

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Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 3,500 $ 1,890 $ 675 $ 115

$ 540 $ 4,400

Noble reported earnings per share for the year of $6 and paid cash dividends of $2.00 per share. At year-end, the Wall Street Journal listed Noble's capital stock as trading at $81 per share.Noble's price-earnings ratio at year end was: A) B) C) D)

0.07 13.5 17 1.42

109) Shown below is selected information from the financial statements of Noble Computers. (Dollar amounts are in millions, except for the per share data.) Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 3,500 $ 1,890 $ 675 $ 115

$ 540 $ 4,400

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A) B) C) D)

18%. 46%. 50%. 54%.

110) Shown below is selected information from the financial statements of Noble Computers. (Dollar amounts are in millions, except for the per share data.) Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 3,500 $ 1,890 $ 675 $ 115

$ 540 $ 4,400

$1,610. $675. $935. $115.

111) Shown below is selected information from the financial statements of Noble Computers. (Dollar amounts are in millions, except for the per share data.) Income statement information: Net sales Cost of goods sold Operating expenses Net income

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$ 3,500 $ 1,890 $ 675 $ 115

Balance sheet information: Average total equity Average total assets

$ 540 $ 4,400

2.6% 21%. 26%. 37%.

112) Shown below is selected information from the financial statements of Noble Computers. (Dollar amounts are in millions, except for the per share data.) Income statement information: Net sales Cost of goods sold Operating expenses Net income Balance sheet information: Average total equity Average total assets

$ 3,500 $ 1,890 $ 675 $ 115

$ 540 $ 4,400

10%. 13%. 21%. 1.73%

113) Assume that net sales are increasing faster than the rate of inflation, and that the company's gross profit rate is rising. Of the following, the most logical conclusion is that:

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A) B) C) D)

The company's cost of purchasing merchandise is rising rapidly. Operating expenses are falling. Demand for the company's products is very strong. The company has achieved an increase in sales volume by reducing its sales prices.

114) Component percentages indicate the relative size of each item included in a total. Which of the following statements is true? A) Income statement items are expressed as a percentage of net income, while statement of financial position (balance sheet) items are expressed as a percentage of total assets. B) Income statement items are expressed as a percentage of net sales, while statement of financial position (balance sheet) items are expressed as a percentage of total assets. C) Income statement items are expressed as a percentage of net income, while statement of financial position (balance sheet) items are expressed as a percentage of net assets. D) Both income statement and statement of financial position (balance sheet) items are expressed as a percentage of net assets.

115) Given below are comparative statements of financial position (balance sheets) and an income statement for Namekagon Corporation. Namekagon Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net) Total

$ 16,100 47,200 33,000 57,700 $ 154,000

$ 16,100 38,700 36,900 66,800 $ 158,500

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

26,500 8,300 14,800 73,300 31,100 $ 154,000

29,100 4,400 14,800 73,300 36,900 $ 158,500

Namekagon Corporation

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Income Statement For the year ended Year 2 Sales $229,300 Cost of goods sold 137,590 Gross profit on sales $ 91,710 Operating expenses 75,918 Operating income $ 15,792 Interest expense 9,600 Net income $ 6,192

Namekagon Corporation's interest coverage ratio for Year 2 is: A) B) C) D)

1.55. 1.65. 2.55. 4.81.

116) Given below are comparative statements of financial position (balance sheets) and an income statement for Namekagon Corporation. Namekagon Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total Namekagon Corporation Income Statement For the year ended Year 2

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Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense Net income

$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100 $ 6,292

Namekagon Corporation's return on common stockholders' equity for Year 2 is: A) B) C) D)

9.9%. 8.7%. 5.9%. 16.9%.

117) Given below are comparative statements of financial position (balance sheets) and an income statement for Namekagon Corporation. Namekagon Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total Namekagon Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales

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$ 228,800 137,540 $ 91,260

Operating expenses Operating income Interest expense Net income

75,868 $ 15,392 9,100 $ 6,292

Namekagon Corporation's interest coverage ratio for Year 2 is: A) B) C) D)

1.45. 1.69. 2.45. 4.92.

118) Given below are comparative statements of financial position (balance sheets) and an income statement for Namekagon Corporation. Namekagon Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

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$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100

Net income

$ 6,292

Namekagon Corporation's book value per share for Year 2 is: A) B) C) D)

119)

The price-earnings ratio is measured by dividing: A) B) C) D)

120)

$7.32. $10.58. $21.16. $3.14.

Book value by earnings per share. Par value by earnings per share. Market value by earnings per share. Market value by total net income.

Return on equity computations are used in evaluating: A) B) C) D)

Liquidity. Profitability. Gross profit. Whether a ratio is improving or deteriorating over time.

121) The financial ratio intended to measure the effectiveness with which management has utilized the resources of the business, regardless of how these resources are financed, is: A) B) C) D)

122)

Gross profit rate. Current ratio. Return on assets. Return on equity.

The return on assets ratio usually is computed as:

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A) B) C) D)

123)

Net sales divided by average total assets. Gross profit divided by average total assets. Operating income divided by average total assets. Net income divided by average total assets.

The return on equity ratio usually is computed as: A) B) C) D)

Net income divided by average total assets. Net income divided by average total stockholders' equity. Gross profit divided by average total stockholders' equity. Net income less preferred dividends, divided by average common stockholders'

equity.

124) Amalgamated Corporation's net income was $3,280,000 in Year 1 and $820,000 in Year 2. What percentage increase in net income must Amalgamated achieve in Year 3 to offset the decline in profits in Year 2? A) B) C) D)

100% 400% 25% 820%

125) Amalgamated Corporation's net income was $2,400,000 in Year 1 and $800,000 in Year 2. What percentage increase in net income must Amalgamated achieve in Year 3 to offset the decline in profits in Year 2? A) B) C) D)

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75% 300% 33.33% 800%

126) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Claret Corporation Balance Sheets Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net) Total

$ 15,100 46,150 32,000 56,700 $ 149,950

$ 15,100 36,700 35,900 65,800 $ 153,500

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

25,500 7,300 13,800 72,300 31,050 $ 149,950

28,100 3,400 13,800 72,300 35,900 $ 153,500

Claret Corporation Income Statement For the year ended Year 2 Sales $ 228,300 Cost of goods sold 137,490 Gross profit on sales $ 90,810 Operating expenses 75,818 Operating income $ 14,992 Interest expense and income taxes 8,850 Net income $ 6,142

All sales were made on account. Cash dividends declared during the year totaled $10,992.Claret Corporation's return on assets for Year 2 rounded to the nearest tenth of a percent is: A) B) C) D)

9.88%. 4.05%. 5.81%. 16.81%.

127) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Version 1

Claret Corporation Balance Sheets Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total Claret Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100 $ 6,292

All sales were made on account. Cash dividends declared during the year totaled $11,492.Claret Corporation's return on assets for Year 2 rounded to the nearest tenth of a percent is: A) B) C) D)

10.0%. 4.1%. 5.9%. 16.9%.

128) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Claret Corporation

Version 1

Balance Sheets Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net) Total

$ 15,900 47,190 32,800 57,500 $ 153,390

$ 15,900 38,300 36,700 66,600 $ 157,500

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

26,300 8,100 14,600 73,100 31,290 $ 153,390

28,900 4,200 14,600 73,100 36,700 $ 157,500

Claret Corporation Income Statement For the year ended Year 2 Sales $ 229,100 Cost of goods sold 137,570 Gross profit on sales $ 91,530 Operating expenses 75,898 Operating income $ 15,632 Interest expense and income taxes 9,250 Net income $ 6,382

All sales were made on account. Cash dividends declared during the year totaled $11,792.Claret Corporation's earnings per share for Year 2, rounded to the nearest cent, is: A) B) C) D)

0.44. 0.59. 0.15. 0.10.

129) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Claret Corporation Balance Sheets Year 2

Version 1

December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100 $ 6,292

All sales were made on account. Cash dividends declared during the year totaled $11,492.Claret Corporation's earnings per share for Year 2, rounded to the nearest cent, is: A) B) C) D)

$0.43. $0.15. $0.11. $0.57.

130) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Claret Corporation Balance Sheets Year 2

Version 1

December 31

January 1

Cash Accounts receivable Inventory Equipment (net) Total

$ 15,900 47,190 32,800 57,500 $ 153,390

$ 15,900 38,300 36,700 66,600 $ 157,500

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

26,300 8,100 14,600 73,100 31,290 $ 153,390

28,900 4,200 14,600 73,100 36,700 $ 157,500

All sales were made on account. Cash dividends declared during the year totaled $11,792.Claret Corporation's accounts receivable turnover for Year 2 is: A) B) C) D)

5.98 times. 4.85 times. 5.36 times. 68 days.

131) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Claret Corporation Balance Sheets Year 2 December 31

Version 1

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100 $ 6,292

All sales were made on account. Cash dividends declared during the year totaled $11,492.Claret Corporation's accounts receivable turnover for Year 2 is: A) B) C) D)

4.6 times. 2.9 times. 5.4 times. 68 days.

132) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation.

Cash

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Claret Corporation Balance Sheets Year 2 December 31

January 1

$ 16,300

Accounts receivable Inventory Equipment (net) Total

47,710 33,200 57,900 $ 155,110

39,100 37,100 67,000 $ 159,500

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

26,700 8,500 15,000 73,500 31,410 $ 155,110

29,300 4,600 15,000 73,500 37,100 $ 159,500

Claret Corporation Income Statement For the year ended Year 2 Sales $ 229,500 Cost of goods sold 137,610 Gross profit on sales $ 91,890 Operating expenses 75,938 Operating income $ 15,952 Interest expense and income taxes 9,450 Net income $ 6,502

All sales were made on account. Cash dividends declared during the year totaled $12,192.Claret Corporation's inventory turnover for Year 2 is: A) B) C) D)

3.71 times. 3.91 times. 4.14 times. 93.40 days.

133) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation.

Cash Accounts receivable Inventory

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Claret Corporation Balance Sheets Year 2 December 31

January 1

$ 15,600 46,800 32,500

$ 15,600 37,700 36,400 46

Equipment (net) Total Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

57,200

66,300

$ 152,100

$ 156,000

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

Claret Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100 $ 6,292

All sales were made on account. Cash dividends declared during the year totaled $11,492.Claret Corporation's inventory turnover for Year 2 is: A) B) C) D)

6.64 times. 3.99 times. 4.23 times. 94 days.

134) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation.

Cash Accounts receivable Inventory Equipment (net)

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Claret Corporation Balance Sheets Year 2 December 31

January 1

$ 16,300 47,710 33,200 57,900

$ 16,300 39,100 37,100 67,000

Total

$ 155,110

$ 159,500

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

26,700 8,500 15,000 73,500 31,410 $ 155,110

29,300 4,600 15,000 73,500 37,100 $ 159,500

All sales were made on account. Cash dividends declared during the year totaled $12,192.Claret Corporation's gross profit rate for Year 2 is: A) B) C) D)

59.96%. 40.04%. 33.09%. 66.78%.

135) Given below are comparative statements of financial position (balance sheets) and an income statement for Claret Corporation. Claret Corporation Balance Sheets Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 15,600 46,800 32,500 57,200

$ 15,600 37,700 36,400 66,300

Total

$ 152,100

$ 156,000

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Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

26,000 7,800 14,300 72,800 31,200

28,600 3,900 14,300 72,800 36,400

$ 152,100

$ 156,000

Claret Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 228,800 137,540 $ 91,260 75,868 $ 15,392 9,100 $ 6,292

All sales were made on account. Cash dividends declared during the year totaled $11,492.Claret Corporation's gross profit rate for Year 2 is: A) B) C) D)

60.1%. 39.9%. 33%. 68%.

136) Given below are comparative statements of financial position (balance sheets) and an income statement for Eleva Corporation. Eleva Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 31,200 93,600 65,000 114,400

$ 31,200 75,400 72,800 132,600

Total

$ 304,200

$ 312,000

52,000 15,600

57,200 7,800

Accounts payable Dividends payable

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Long-term note payable Capital stock, $5 par Retained earnings Total

28,600 145,600 62,400

28,600 145,600 72,800

$ 304,200

$ 312,000

Eleva Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 457,600 275,080 $ 182,520 151,736 $ 30,784 18,200 $ 12,584

All sales were made on account. Cash dividends declared during the year totaled $22,984.Eleva Corporation's accounts receivable turnover for Year 2 is closest to: A) B) C) D)

4.63 times. 2.91 times. 5.42 times. 68 days.

137) Given below are comparative statements of financial position (balance sheets) and an income statement for Eleva Corporation. Eleva Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 31,200 93,600 65,000 114,400

$ 31,200 75,400 72,800 132,600

Total

$ 304,200

$ 312,000

52,000 15,600 28,600 145,600

57,200 7,800 28,600 145,600

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par

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Retained earnings Total

62,400

72,800

$ 304,200

$ 312,000

Eleva Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 457,600 275,080 $ 182,520 151,736 $ 30,784 18,200 $ 12,584

All sales were made on account. Cash dividends declared during the year totaled $22,984.Eleva Corporation's inventory turnover for Year 2 is closest to: A) B) C) D)

6.67 times. 3.99 times. 4.15 times. 94 days.

138) Given below are comparative statements of financial position (balance sheets) and an income statement for Eleva Corporation. Eleva Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 31,200 93,600 65,000 114,400

$ 31,200 75,400 72,800 132,600

Total

$ 304,200

$ 312,000

52,000 15,600 28,600 145,600 62,400

57,200 7,800 28,600 145,600 72,800

$ 304,200

$ 312,000

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total

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Eleva Corporation Income Statement For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 457,600 275,080 $ 182,520 151,736 $ 30,784 18,200 $ 12,584

All sales were made on account. Cash dividends declared during the year totaled $22,984.Eleva Corporation's days to collect accounts receivable for Year 2 is: A) B) C) D)

54.7 days. 67.3 days. 88.0 days. 94.0 days.

139) Given below are comparative statements of financial position (balance sheets) and an income statement for Eleva Corporation. Eleva Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 31,200 93,600 65,000 114,400

$ 31,200 75,400 72,800 132,600

Total

$ 304,200

$ 312,000

52,000 15,600 28,600 145,600 62,400

57,200 7,800 28,600 145,600 72,800

$ 304,200

$ 312,000

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total Eleva Corporation Income Statement

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For the year ended Year 2 Sales Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

$ 457,600 275,080 $ 182,520 151,736 $ 30,784 18,200 $ 12,584

All sales were made on account. Cash dividends declared during the year totaled $22,984.Eleva Corporation's days to sell the average inventory for Year 2 is: A) B) C) D)

91.5 days. 67.3 days. 94.0 days. 125.4 days.

140) Given below are comparative statements of financial position (balance sheets) and an income statement for Eleva Corporation. Eleva Corporation Balance Sheets – Year 2 December 31

January 1

Cash Accounts receivable Inventory Equipment (net)

$ 31,200 93,600 65,000 114,400

$ 31,200 75,400 72,800 132,600

Total

$ 304,200

$ 312,000

52,000 15,600 28,600 145,600 62,400

57,200 7,800 28,600 145,600 72,800

$ 304,200

$ 312,000

Accounts payable Dividends payable Long-term note payable Capital stock, $5 par Retained earnings Total Eleva Corporation Income Statement For the year ended Year 2 Sales

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$ 457,600

Cost of goods sold Gross profit on sales Operating expenses Operating income Interest expense and income taxes Net income

275,080 $ 182,520 151,736 $ 30,784 18,200 $ 12,584

All sales were made on account. Cash dividends declared during the year totaled $22,984.Eleva Corporation's operating cycle (in days) for Year 2 is: A) B) C) D)

141)

158.8 days. 122.0 days. 213.4 days. 188.0 days.

An organization that provides ratings of corporate governance services is: A) B) C) D)

SEC. ISS. IRS. IBM.

142) In order for investors and creditors to decide whether to invest in a company or loan a company funds they should do all of the following except: A) B) C) D)

143)

Analyze financial statements for the company. Focus on corporate governance of the company. Rely on assurances of reliability by the company's leaders. Compute profitability, liquidity, and leverage ratios for the company.

Which of the following is not a measure of long-term credit risk?

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A) B) C) D)

144)

All of the following ratios are considered measures of profitability except: A) B) C) D)

145)

Earnings per share. Gross profit rate. Price-earnings ratio. Return on assets.

Which of the following is a measure of profitability? A) B) C) D)

146)

Quick ratio. Debt ratio. Interest coverage ratio. Yield rate on bonds.

Inventory turnover rate. Quick ratio. Interest coverage ratio. Return on assets.

The interest coverage ratio is computed by dividing: A) B) C) D)

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Operating income by annual interest expense. Net income by annual interest expense. Carrying value of bonds by cash interest payments. Earnings per share by the prime interest rate.

Answer Key Test name: Chapter 14 Test Bank - Algorithmic and Static 1) FALSE 2) FALSE 3) TRUE 4) TRUE 5) FALSE 6) FALSE 7) TRUE 8) FALSE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) TRUE 14) TRUE 15) FALSE 16) TRUE 17) FALSE 18) TRUE 19) TRUE 20) FALSE 21) FALSE 22) TRUE 23) FALSE 24) TRUE 25) FALSE 26) TRUE Version 1

27) FALSE 28) TRUE 29) TRUE 30) TRUE 31) FALSE 32) TRUE 33) FALSE 34) TRUE 35) TRUE 36) B 37) B 38) C 39) D 40) A 41) B 42) C 43) D 44) C 45) D 46) C 47) B 48) A 49) C 50) C 51) B 52) A 53) B 54) A 55) D 56) A Version 1

57) A 58) B 59) D 60) C 61) C 62) A 63) D 64) C 65) B 66) C 67) B 68) A 69) D 70) D 71) C 72) C 73) B 74) B 75) B 76) B 77) C 78) C 79) A 80) A 81) B 82) C 83) A 84) D 85) C 86) C Version 1

87) D 88) D 89) C 90) C 91) B 92) C 93) A 94) B 95) A 96) B 97) C 98) B 99) B 100) C 101) C 102) B 103) B 104) D 105) D 106) B 107) B 108) B 109) B 110) C 111) B 112) C 113) C 114) B 115) B 116) C Version 1

117) B 118) A 119) C 120) B 121) C 122) C 123) B 124) B 125) B 126) A 127) A 128) A 129) A 130) C 131) C 132) B 133) B 134) B 135) B 136) C 137) B 138) B 139) A 140) A 141) B 142) C 143) A 144) C 145) D 146) A Version 1

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CHAPTER 15: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are nine technical accounting terms introduced in this chapter:Gain on fluctuations in foreign exchange ratesLoss on fluctuations in foreign exchange ratesExchange rateFuture contractsHedgingTranslating a currencyInternational Accounting Standards BoardFinancial Accounting Standards BoardFacilitating paymentRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. _____ (a) The strategy of creating offsetting positions so that losses from currency fluctuations will be offset by gains resulting from the same fluctuations. _____ (b) The price of foreign currency, stated in terms of the domestic currency. _____ (c) An item likely to appear in the income statements of American-based importers when foreign exchange rates are rising. _____ (d) The organization responsible for developing uniform worldwide accounting standards. _____ (e) Payments made to foreign officials to expedite paperwork. _____ (f) The process of restating an amount of foreign currency in terms of the equivalent number of U.S. dollars. _____ (g) An item likely to appear in the income statements of American-based exporters when foreign exchange rates are falling.

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2) Listed below are several terms and statements with missing expressions. Fill in the blanks with the appropriate term.MultiplyDivideMarket economyPlanned economyWeak (relative to currency)Strong (relative to currency)Foreign trade zonesForeign Corrupt Practices ActInternational Accounting Standards BoardHedgingTranslatingInternational licensing(1) To convert a foreign currency to an equivalent dollar amount, ________ the foreign currency by the foreign exchange rate. (2) To convert a dollar amount into an equivalent amount of foreign currency, ________ the dollar amount by the exchange rate. (3) The ________ prohibits companies engaged in global activities from bribing officials of foreign countries. (4) Goods imported into ________ are duty free. (5) ________ minimizes or eliminates the risk of loss associated with foreign currency fluctuations. (6) In a ________, ownership of land and the means of production are privately held. (7) In a ________, the government allocates resources and determines output among various segments of the economy. (8) The process of restating an amount of foreign currency in terms of the equivalent number of dollars is called ________ the foreign currency. (9) A currency is described as ________ when its exchange rate is rising relative to other currencies. (10) A currency is described as ________when its exchange rate is falling in relation to other currencies.

3) Striking Furs imports furs from Canada. The company entered into the following transactions: December 11, Year Purchased furs from Capable Trappers, Limited, a 1: Canadian corporation, at a price of 25,000 Canadian dollars, due in 60 days. The current exchange rate is $0.85 U.S. dollars per Canadian dollar. (Striking uses the perpetual inventory method; debit the Inventory account.) December 31, Year Striking made a year-end adjusting entry relating to 1: the account payable to Capable Trappers. The exchange rate at year-end is $0.89 U.S. dollars per

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Canadian dollar. February 9, Year Issued a check for $21,750 (U.S. dollars) to 2: National Bank in full settlement of the liability to Capable Trappers, Limited. The exchange rate at this date is $0.87 U.S. dollars per Canadian dollar.

Required: In the space provided below, prepare journal entries to record the following events. Date Year 1

General Journal

Debit

Credit

December 11

December 31

Year 2 February 9

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4) Jung Farms exports wheat to Germany. The company entered into the following transactions: November 15, Year Sold wheat to a German restaurant chain at a price 1: of 2 million euros, due in 90 days. The current exchange rate is $0.80 U.S. dollars per euro. (Jung uses the periodic inventory method. December 31, Year Jung made a year-end adjusting entry relating to the 1: account receivable from the German restaurant chain. The exchange rate at year-end is $0.85 U.S. dollars per euro. February 15, Year Received a check for $1,640,000 from the 1: InterContinental Bank in full settlement of the receivable from the German restaurant chain. The exchange rate at this date is $0.82 U.S. dollars per euro.

Required: In the space provided below, prepare journal entries to record the following events. Date Year 1

General Journal

Debit

Credit

November 15

December 31

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Year 2 February 15

5) The following table summarizes the facts of five independent cases (labeled a through e) of American companies engaging in credit transactions with foreign corporations while the foreign exchange rate is fluctuating:

Case (a.)

Type of Credit Transaction 1 Sales

Column Currency Used in Contract 2 Foreign currency

Exchange Rate Direction 3 Falling

(b.)

Purchases

U.S. dollars

Rising

Foreign currency

Rising

Loss

Falling

No effect

(c.) (d.)

Sales

(e.)

Purchases

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Foreign currency

Effect on Income 4

Gain

Required: After evaluating the information about each case, fill the blank space that has been left in one of the four columns. The content of each column and the word or words that you should enter in the blank spaces are described below:Column 1 indicates the type of credit transaction in which the American company engaged with the foreign corporations. The answer entered in this column should be either "Sales" or "Purchases."Column 2 indicates the currency in which the invoice price is stated. The answer may be either "United States dollars" or "Foreign currency."Column 3 indicates the direction in which the foreign currency exchange rate has moved between the date of the credit transaction and the date of settlement. The answer in this column may be either "Rising" or "Falling."Column 4 indicates the effect of the exchange rate fluctuation upon the income of the American company. The answers entered in this column are to be selected from the following: "Gain," "Loss," or "No effect."

6) On October 1, Year 1, Glenn Company accepted a shipment of beer from Germany. The purchase contract specifies payment of 3,000,000 euros is to be made on December 1, Year 1. The exchange rate on October 1, Year 1, was: $1 = 1.4 euros.Required: (A) If the exchange rate on December 1, Year 1 is: $1 = 1.18 euros, what amount of gain or loss due to the exchange rate fluctuation will be recognized on the purchase? (B) On October 1, Year 1, Glenn's analysts were forecasting the exchange rate to be: $1 = 1.20 euros on December 1, Year 1. Glenn can enter into a hedging contract on October 1, Year 1 whereby the bank would accept $2,480,000 in exchange for 3,000,000 euros on December 1. The bank will charge a $2,000 fee to enter into the agreement. Should Glenn enter into the hedge agreement? (C) If Glenn enters into the hedging contract, what will be the exchange gain/loss recorded on December 1, Year 1? (Do not round your intermediate computations, but rather round the final answers to nearest whole dollar.)

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7) Inter-Global Company entered into the following transactions during the current year:Prepare journal entries for the following transactions for Inter-Global Co. October 10 Purchased merchandise on account from Le Monde, a French company, for 80,000 euros. The exchange rate was $0.82. November 2 Paid Le Monde for the merchandise purchased on October 1. The exchange rate at this date was $0.83. November 15 Sold merchandise to Nippon, a Japanese company for 300,000 yen on account. The rate of exchange was $0.0091. November 20 The Japanese company paid the full amount. The exchange rate was $0.0090. December 5 Sold merchandise to Ponti, an Italian company for $24,000. The exchange rate is $0.81. The Italian company agrees to pay in U.S. dollars. December 15 Collected the full amount from the Italian company when the exchange rate is $0.82.

Required: In the space provided below, prepare journal entries to record the following events. (Explanations are not required.) Date 10/10

General Journal

Debit

Credit

11/2

11/15

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11/20

12/5

12/18

8) Explain the major provisions of the Foreign Corrupt Practices Act and the 1988 amendment.

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9) Differentiate between adoption and convergence as related to International Financial Reporting Standards.

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Answer Key Test name: Chapter 15 Test Bank (Problem Material) 1) (a) Hedging(b) Exchange rate(c) Loss on fluctuations in foreign exchange rates(d) International Accounting Standards Board(e) Facilitating payments(f) Translating a currency(g) Loss on fluctuations in foreign exchange rates 2) (1) Multiply(2) Divide(3) Foreign Corrupt Practices Act(4) Foreign trade zones(5) Hedging(6) Market economy(7) Planned economy(8) Translating(9) Strong(10) Weak 3) Date Year 1

General Journal

December 11 Inventory Accounts Payable Capable Trappers, Limited To record purchase of furs from Capable Trappers Limited. For 25,000 Canadian dollars when the exchange rate is $0.85 U.S. dollars per Canadian dollar (C$25,000 × $0.85 = $21,250) December 31 Loss on fluctuations in foreign exchange rates Accounts Payable Capable Trappers, Limited. To adjust balance of 25,000 Canadian dollars Account Payable to amount indicated by year-end exchange rate: Original account balance $21,250 Adjusted balance of $22,250 (or C$25,000 × $0.89) Required adjustment (loss) $(1,000) Year 2

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Debit

Credit

21,250 21,250

1,000 1,000

February 9

Accounts Payable, Capable Trappers, Limited. Cash

22,250 21,750

Gain on fluctuations in foreign exchange rate To record payment of 25,000 Canadian dollars account to Capable Trappers, Limited and to recognize gain from fall in exchange rate since Dec. 31, Year 1 (C$25,000 × $0.87): Accounts Payable, adjusted balance $22,250 Amount paid, Feb. 9 $21,750 Gain from decline in exchange rate $500

500

4) Date Year 1

General Journal

November 15 Accounts receivable

Debit

1,600,000

Sales To record the sale of wheat to German Restaurants for 2 million euros when the exchange rate is $0.80 U.S. dollars per euro. December 31 Accounts Receivable Gain on fluctuations in foreign exchange rate To adjust balance on 1,600,000dollar account receivable to amount indicated by year-end exchange rate. Original account balance $1,600,000 Adjusted balance (2 million euros × $0.85) $1,700,000 Required adjustment (gain) $100,000

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Credit

1,600,000

100,000 100,000

Year 2 February 15 Cash

1,640,000

Loss on fluctuations in foreign exchange rate Accounts receivable

60,000 1,700,000

To record receipt $1,640,000 in settlement of Account receivable, and to recognize loss from fall in exchange rate since Dec. 31, Year 1 (2 million euros × $0.82) A/R adjusted balance $1,700,000 Amount paid $1,640,000 Loss from decline in exchange rate $(60,000)

Case (a.) (b.) (c.) (d.) (e.)

Type of Credit Transaction 1 Sales Purchases Purchases Sales Purchases

Column Currency Used in Contract 2 Foreign currency U.S. dollars Foreign currency U.S. dollars Foreign currency

Exchange Rate Direction 3 Falling Rising Rising Falling Falling

Effect on Income 4 Loss No effect Loss No effect Gain

6) (A) The recorded dollar cost of the shipment based on October 1 exchange rates (€3,000,000 ÷ 1.4 euros/dollar) Dollars needed to settle contract on December 1 (€3,000,000 ÷ 1.18 euros/dollar) Loss on exchange

$ 2,142,857

(B) Forecasted dollars needed to settle contract on December 1 (€3,000,000/1.20 Euros/dollar) Total cost of settling contract with hedge: ($2,480,000 + $2,000 fee)

$ 2,500,000

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2,542,373 $ (399,516)

$ 2,482,000

Glenn should enter into the hedging contract since the expected cost of settling the payable is less with the hedge. (C)

Recorded dollar cost of shipment on Oct 1 Total dollars required to settle debt on Dec. 1

$ 2,142,857 2,482,000

Loss

$ (339,143)

7) Date 10/10

General Journal Inventory

Debit 65,600

Accounts Payable

11/2

Accounts Payable Loss on fluctuations in foreign exchange rate Cash

11/15

Accounts Receivable

65,600

65,600 800 66,400

2,730

Sales

11/20

Cash Loss on fluctuations in foreign exchange rate Accounts Receivable

12/5

Accounts Receivable

2,730

2,700 30 2,730

24,000

Sales

12/18

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Cash

Credit

24,000

Accounts Receivable

24,000

8) The Foreign Corrupt Practices Act (the Act) requires that all foreign payments, including improper or illegal payments, be recorded and disclosed. The Act further requires that an adequate system of internal controls be in place to maintain the integrity of the company's assets, allowing only authorized personnel to have access to them.The Act was amended in 1988 to distinguish between influence peddling and facilitating payments. Influence peddling is a type of payment made to motivate the awarding of business that would not otherwise have been awarded. Facilitating payments is a type of payment made to public officials for the purpose of motivating them to undertake an action or series of actions in an expedited manner than they might otherwise. Generally speaking, facilitating payments are not illegal under the Act. 9) Adoption means abandoning the country's current financial reporting standards and replacing them with International Financial Reporting Standards. That is, the original country has chosen to fully adopt the standards exactly as written and promulgated by the International Accounting Standards Board.Convergence means changing the country's existing standards so that they will produce financial reports equivalent to International Financial Reporting Standards requirements. That is, the original country has chosen to adapt its current standards to comply with International Financial Reporting Standards requirements.

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CHAPTER 15 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) An international joint venture involves the creation of a new company that is owned by two or more firms from different countries. ⊚ ⊚

true false

2) A wholly owned international subsidiary exists when a company owns 100% equity control of a foreign subsidiary. ⊚ ⊚

true false

3) Licensing maintains control over product creation, while exporting involves giving up some control for a monetary return. ⊚ ⊚

true false

4) In a planned economy, ownership of land and the means of production are private, and markets dictate the allocation of resources and the output among segments of the economy. ⊚ ⊚

true false

5) Differences in accounting practices among countries reflect the different sources of capital in those countries. ⊚ ⊚

true false

6) Although cultural differences are significant in business dealings, they pose no difficulties to the design and implementation of an accounting system.

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⊚ ⊚

true false

7) In a planned economy, the government uses central planning to allocate resources and determine output among various segments of the economy. ⊚ ⊚

true false

8) Cultural traits in the United States include high uncertainty avoidance and a long-term orientation. ⊚ ⊚

true false

9) The accounting profession has been slow to develop in Asian countries because of strict governmental control of accounting regulations. ⊚ ⊚

true false

10) All multinational companies must follow the standards issued by the International Accounting Standards Board. ⊚ ⊚

true false

11) Generally accepted accounting principles (GAAP) in the United States have been fully converged with International Financial Reporting Standards (IFRS). ⊚ ⊚

true false

12) "Convergence" means abandoning a country's financial reporting standards and replacing them with the International Financial Reporting Standards.

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⊚ ⊚

true false

13) The adoption approach was agreed to by the European Union in 2005 when all companies trading on European Union securities markets were required to adopt International Financial Reporting Standards (IFRS) for their annual reports. ⊚ ⊚

true false

14) "Harmonization of accounting standards" means the development of similar accounting methods and principles for use throughout the world. ⊚ ⊚

15)

true false

An exchange rate represents the price of one currency stated in terms of another. ⊚ ⊚

true false

16) To convert a foreign currency into dollars, divide the foreign currency by the foreign exchange rate. ⊚ ⊚

true false

17) To convert a dollar amount into a foreign currency divide the dollar amount by the exchange rate. ⊚ ⊚

true false

18) A dollar that is stronger than the British pound would make travel to the United States more attractive to British citizens.

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⊚ ⊚

true false

19) The statement that "the yen has fallen against the dollar" means that the yen has become less valuable relative to the dollar. ⊚ ⊚

true false

20) Having a liability that is fixed in terms of a foreign currency results in a loss for the debtor if the exchange rate falls between the transaction date and the payment date. ⊚ ⊚

true false

21) Whenever an American corporation sells merchandise to a foreign company, the transaction must be stipulated in United States dollars. ⊚ ⊚

true false

22) An American corporation making purchases from foreign companies will experience gains and losses from exchange rate fluctuations if (A) the purchase prices are stated in terms of the foreign currency and (B) the purchases are made on account. ⊚ ⊚

true false

23) An increase in the exchange rate between a transaction date and the date of payment will cause the debtor to incur a loss. ⊚ ⊚

true false

24) As foreign exchange rates fall, importers based in the United States will lose and exporters will gain. Version 1

⊚ ⊚

true false

25) Hedging refers to the strategy of taking offsetting positions so that gains in one currency offset losses in another currency. ⊚ ⊚

true false

26) A company has a "hedged position" when it has similar amounts of accounts receivable and accounts payable in the same foreign currency. ⊚ ⊚

27)

Companies may use future contracts to hedge against losses in foreign currencies. ⊚ ⊚

28)

true false

Making accurate estimates of costs is a challenge for global companies. ⊚ ⊚

true false

29) The consolidated financial statements of a United States based corporation are expressed in United States dollars and conform to International Financial Reporting Standards. ⊚ ⊚

true false

30) Companies choose a standard exchange rate to compute the cost buildup in their domestic currency. ⊚ ⊚

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true false

31) Payments made by American companies to motivate foreign officials to undertake actions more rapidly than they might otherwise are prohibited by the Foreign Corrupt Practices Act. ⊚ ⊚

true false

32) One of the most important requirements of the Foreign Corrupt Practices Act is the maintenance of an adequate system of internal control procedures. ⊚ ⊚

true false

33) The Foreign Corrupt Practices Act distinguishes between influence peddling and facilitating payments. Facilitating payments are prohibited, while influence peddling is allowed. ⊚ ⊚

true false

34) The Foreign Corrupt Practices Act allows Americans doing business in countries where bribes are legal to also negotiate bribes. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 35) Accounting practices are affected by all of the following except: A) B) C) D)

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Political systems. Economic systems. Technology and infrastructure. Management knowledge of accounting practices.

36)

An international joint venture is: A) B) C) D)

A company owned by two or more companies from different countries. A contractual agreement between a company and a foreign party. A company that owns 100 percent of a foreign company. A company that owns more than 75 percent of a foreign company.

37) A United States public corporation's decision to globalize impacts all of following except: A) B) C) D)

Internal procedures. Who owns stock in the company. Production processes. Accounting outputs.

38) In Japan, financial reporting requirements are based primarily on the need to provide information to: A) B) C) D)

39)

Investors. Government agencies. Banks. United States subsidiaries of Japanese companies.

Low individualism and high long-term orientation is indicative of which culture? A) B) C) D)

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United States Great Britain Japan Germany

40) When the government uses central planning to allocate resources and to determine output among various segments of the economy, this is known as: A) B) C) D)

41)

A dictatorship. A democracy. A planned economy. A market economy.

Which of the following is true about foreign trade zones?

A) They are illegal in the United States. B) Goods imported into these designated United States areas are duty-free until they leave the zone. C) They have a special excise tax. D) They are areas outside the United States that offer special tax treatments.

42)

Establishing international accounting standards is the responsibility of: A) B) C) D)

43)

Securities and Exchange Commission. International Accounting Standards Board. Financial Accounting Standards Board. Accounting Association of America.

Which of the following statements is correct?

A) Germany requires companies to provide extensive segment disclosure. B) Brazil has the highest number of auditors per capita. C) The United States is the only country that permits companies to use LIFO to account for inventory. D) The United States permits fixed asset revaluation.

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44) "Adoption" means abandoning a country's financial reporting standards and replacing them with: A) B) C) D)

45)

International Accounting Standards. International Financial Reporting Standards. Generally Accepted Accounting Principles. Securities and Exchange Commission Principles.

The price of one currency stated in terms of another currency is the: A) B) C) D)

Current ratio. Exchange rate. Facilitating payment. International clearing price.

46) If the exchange rate for a foreign currency (stated in dollars) has risen, a dollar will purchase: A) B) C) D)

An increased amount of that foreign currency. An unchanged amount of that foreign currency. A smaller amount of that foreign currency. An undetermined amount of that foreign currency.

47) Consider the following statement: "A strong dollar rose sharply against the British pound, but fell slightly against the Japanese yen." This statement indicates that: A) B) C) D)

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The British pound is a stronger currency than the Japanese yen. The exchange rate for the yen, stated in dollars, is rising. The exchange rate for the pound, stated in dollars, is rising. The exchange rate for the yen, stated in pounds, is falling.

48) In a recent financial journal, the exchange rate between the dollar and the British pound was quoted in two ways: Exchange rate (in dollars) Exchange rate (in pounds)

$ 1.60 £ 0.625

The number of pounds equal to $57,000 on this date is: A) B) C) D)

£35,625. £91,200. £37,050. Depends upon whether the item is a receivable or a payable.

49) In a recent financial journal, the exchange rate between the dollar and the British pound was quoted in two ways: Exchange rate (in dollars) Exchange rate (in pounds)

$ 1.60 £ 0.625

The number of pounds equal to $50,000 on this date is: A) B) C) D)

£31,250. £80,000. £32,500. Depends upon whether the item is a receivable or a payable.

50) In a recent financial journal, the exchange rate between the dollar and the British pound was quoted in two ways: Exchange rate (in dollars) Exchange rate (in pounds)

$ 1.60 £ 0.625

The number of dollars equivalent to £55,000 on this date is: A) B) C) D)

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$34,375. $88,000. $35,750. Depends upon whether the item is a receivable or a payable.

51) In a recent financial journal, the exchange rate between the dollar and the British pound was quoted in two ways: Exchange rate (in dollars) Exchange rate (in pounds)

$ 1.60 £ 0.625

The number of dollars equivalent to £50,000 on this date is: A) B) C) D)

$31,250. $80,000. $32,500. Depends upon whether the item is a receivable or a payable.

52) In a recent financial journal, the exchange rate between the dollar and the Japanese yen (¥) was quoted two ways: Exchange rate (in dollars) Exchange rate (in yen)

$ 0.00764 ¥ 130.89005

The number of Japanese yen equivalent to $36,000 on this date is (rounded to whole ¥): A) B) C) D)

¥2,750,400. ¥4,712,042. ¥4,722,185. Depends upon whether the item is a receivable or a payable.

53) In a recent financial journal, the exchange rate between the dollar and the Japanese yen (¥) was quoted two ways: Exchange rate (in dollars) Exchange rate (in yen)

$ 0.00764 ¥ 130.89005

The number of Japanese yen equivalent to $40,000 on this date is (rounded to whole ¥):

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A) B) C) D)

¥3,056,000. ¥5,235,602. ¥5,245,745. Depends upon whether the item is a receivable or a payable.

54) In a recent financial journal, the exchange rate between the dollar and the Japanese yen (¥) was quoted two ways: Exchange rate (in dollars) Exchange rate (in yen)

$ 0.00764 ¥ 130.89005

The number of dollars equivalent to ¥5,251,000 on this date is: A) B) C) D)

$40,118. $687,304. $687,435. Depends upon whether the item is a receivable or a payable.

55) In a recent financial journal, the exchange rate between the dollar and the Japanese yen (¥) was quoted two ways: Exchange rate (in dollars) Exchange rate (in yen)

$ 0.00764 ¥ 130.89005

The number of dollars equivalent to ¥5,250,000 on this date is: A) B) C) D)

$40,110.00. $687,172.50. $87,225.50. Depends upon whether the item is a receivable or a payable.

56) Walblue imports a desk from a French manufacturer for sale in its chain of United States stores. The cost of a desk to Walblue is 3,900 euros (€). What is the dollar cost of one of these desks if the exchange rate is currently 1.119 euros per United States dollar? (round to nearest cent.)

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A) B) C) D)

$1,119.00. $4,364.10. $3,485.25. $3,900.00.

57) Walblue imports a desk from a French manufacturer for sale in its chain of United States stores. The cost of a desk to Walblue is 3,700 euros (€). What is the dollar cost of one of these desks if the exchange rate is currently 1.117 euros per United States dollar? (round to nearest cent.) A) B) C) D)

$1,117.00 $4,132.90 $3,312.44 $3,700.00

58) At the current exchange rate of $1.40 per British pound, a one-day pass to Worldwide Theme Park of Florida sells for 35 pounds at travel agencies throughout Great Britain. If the exchange rate increases to $1.70 per pound, what will happen to the price of a one-day pass sold in Great Britain? (Round to nearest whole pound.) A) B) C) D)

The price will be unchanged. The price will fall to 29.00 pounds. The price will increase to 41.00 pounds. The price will fall by 10.50 pounds.

59) At the current exchange rate of $1.40 per British pound, a one-day pass to Worldwide Theme Park of Florida sells for 45 pounds at travel agencies throughout Great Britain. If the exchange rate increases to $1.70 per pound, what will happen to the price of a one-day pass sold in Great Britain?

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A) B) C) D)

The price will be unchanged. The price will fall to 37 pounds. The price will increase to 54 pounds. The price will fall by 12 pounds.

60) Rochester, Incorporated purchased cameras from a Japanese company at a price of 4.5 million yen. On the purchase date, the exchange rate was $0.0100 per Japanese yen, but when Rochester, Incorporated, paid the liability, the exchange rate was $0.0103 per yen. When this foreign account payable was paid, Rochester, Incorporated, recorded a: A) B) C) D)

Debit to Inventory of $1,350. Loss of $1,350. Credit to Accounts Payable of $46,350. Gain of $1,350.

61) Rochester, Incorporated purchased cameras from a Japanese company at a price of 4 million yen. On the purchase date, the exchange rate was $0.0100 per Japanese yen, but when Rochester, Incorporated, paid the liability, the exchange rate was $0.0103 per yen. When this foreign account payable was paid, Rochester, Incorporated, recorded a: A) B) C) D)

Debit to Inventory of $1,200. Loss of $1,200. Credit to Accounts Payable of $41,200. Gain of $1,200.

62) Hayden, Incorporated purchased knobs from a Greek company for 191,000 euros. On the purchase date the exchange rate was $0.80 per euro, but when Hayden paid the liability, the exchange rate was $0.70 per euro. When this foreign account payable was paid, Hayden, Incorporated, recorded a:

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A) B) C) D)

Debit to Inventory of $19,100. Loss of $19,100. Credit to Accounts Payable of $152,800. Gain of $19,100.

63) Hayden, Incorporated purchased knobs from a Greek company for 185,000 euros. On the purchase date the exchange rate was $0.80 per euro, but when Hayden paid the liability, the exchange rate was $0.70 per euro. When this foreign account payable was paid, Hayden, Incorporated, recorded a: A) B) C) D)

Debit to Inventory of $18,500. Loss of $18,500. Credit to Accounts Payable of $148,000. Gain of $18,500.

64) Tuliptime, Incorporated sold American fashions to a Japanese company at a price of 4.4 million yen. On the sale date, the exchange rate was $0.01 per Japanese yen, but when Tuliptime received payment from its customer, the exchange rate was $0.0103 per yen. When the foreign receivable was collected, Tuliptime: A) B) C) D)

Credited Sales for $1,320. Debited Cash for $44,000. Credited Gain on Fluctuation of Foreign Currency for $1,320. Debited Loss on Fluctuation of Foreign Currency for $1,320.

65) Tuliptime, Incorporated sold American fashions to a Japanese company at a price of 4 million yen. On the sale date, the exchange rate was $0.0100 per Japanese yen, but when Tuliptime received payment from its customer, the exchange rate was $0.0103 per yen. When the foreign receivable was collected, Tuliptime:

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A) B) C) D)

Credited Sales for $1,200. Debited Cash for $40,000. Credited Gain on Fluctuation of Foreign Currency for $1,200. Debited Loss on Fluctuation of Foreign Currency for $1,200.

66) Barter Corporation sold American telecommunications equipment to a British company for 550,000 pounds. On the sale date, the exchange rate was $1.65 per British pound, but when Barter received payment from its customer, the exchange rate was $1.60 per pound. When the foreign receivable was collected, Barter Enterprises: A) B) C) D)

Credited Sales for $27,500. Debited Cash for $27,500. Credited Gain on Fluctuation of Foreign Currency for $27,500. Debited Loss on Fluctuation of Foreign Currency for $27,500.

67) Barter Corporation sold American telecommunications equipment to a British company for 650,000 pounds. On the sale date, the exchange rate was $1.65 per British pound, but when Barter received payment from its customer, the exchange rate was $1.60 per pound. When the foreign receivable was collected, Barter Enterprises: A) B) C) D)

Credited Sales for $32,500. Debited Cash for $32,500. Credited Gain on Fluctuation of Foreign Currency for $32,500. Debited Loss on Fluctuation of Foreign Currency for $32,500.

68) Flynn Corporation purchased bicycles from a British manufacturer at a price of 47,000 British pounds on November 15, Year 1, with payment due in 60 days. Using the following exchange rates, what gain or loss from currency fluctuations should be recognized in Year 1 and Year 2, respectively? Nov. 15, Year 1 Dec. 31, Year 1 Jan. 15, Year 2

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$1.70 per British pound $1.75 per British pound $1.73 per British pound

A) B) C) D)

A $2,350 loss in Year 1 and a $940 gain in Year 2. No gain or loss in Year 1 and a $1,410 loss in Year 2. A $2,350 gain in Year 1 and a $940 loss in Year 2. No gain or loss in Year 1 and a $1,410 gain in Year 2.

69) Flynn Corporation purchased bicycles from a British manufacturer at a price of 45,000 British pounds on November 15, Year 1, with payment due in 60 days. Using the following exchange rates, what gain or loss from currency fluctuations should be recognized in Year 1 and Year 2, respectively?

Nov. 15, Year 1 Dec. 31, Year 1 Jan. 15, Year 2

A) B) C) D)

$ 1.70 per British pound $ 1.75 per British pound $ 1.73 per British pound

A $2,250 loss in Year 1 and a $900 gain in Year 2. No gain or loss in Year 1 and a $1,350 loss in Year 2. A $2,250 gain in Year 1 and a $900 loss in Year 2. No gain or loss in Year 1 and a $1,350 gain in Year 2.

70) Exact Instruments sold equipment to a British research group at a price of 77,000 British pounds on December 1, Year 1 with payment due in 90 days. Using the following exchange rates, what gain or loss from currency fluctuations should be recognized in Year 1 and Year 2, respectively? Dec. 1, Year 1 Dec. 31, Year 1 Mar. 1, Year 2

A) B) C) D)

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$1.78 per British pound $1.82 per British pound $1.77 per British pound

A $3,080 loss in Year 1 and a$3,850 gain in Year 2. No gain or loss in Year 1 and a $770 loss in Year 2. A $3,080 gain in Year 1 and a $3,850 loss in Year 2. No gain or loss in Year 1 and a $770 gain in Year 2.

71) Exact Instruments sold equipment to a British research group at a price of 70,000 British pounds on December 1, Year 1 with payment due in 90 days. Using the following exchange rates, what gain or loss from currency fluctuations should be recognized in Year 1 and Year 2, respectively? Dec. 1, Year 1 Dec. 31, Year 1 Mar. 1, Year 2

A) B) C) D)

72)

$ 1.78 per British pound $ 1.82 per British pound $ 1.77 per British pound

A $2,800 loss in Year 1 and a $3,500 gain in Year 2. No gain or loss in Year 1 and a $700 loss in Year 2. A $2,800 gain in Year 1 and a $3,500 loss in Year 2. No gain or loss in Year 1 and a $700 gain in Year 2.

Gains and losses from fluctuations in exchange rates should be shown on the: A) B) C) D)

Balance sheet. Income statement. Statement of changes to owners' equity. Statement of cash flows.

73) On November 1, a French company purchased machinery from an American company for 800,000 euros when the exchange rate was $0.83. When preparing financial statements on December 31, assuming the rate for euros was $0.88, what amount of gain or loss should the American company report? A) B) C) D)

$40,000 gain $40,000 loss $19,000 gain No gain or loss would be reported.

74) Assume the exchange rate for the Canadian dollar is rising relative to the United States dollar. An American company will incur losses from this rising exchange rate if it is making:

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A) B) C) D)

Credit sales to Canadian companies at prices stated in Canadian dollars. Credit purchases from Canadian companies at prices stated in United States dollars. Credit sales to Canadian companies at prices stated in United States dollars. Credit purchases from Canadian companies at prices stated in Canadian dollars.

75) Assume the exchange rate for the Mexican peso is falling relative to the United States dollar. An American company will incur losses from this falling exchange rate if the company is making: A) B) C) D)

Credit sales to Mexican companies at prices stated in United States dollars. Credit purchases from Mexican companies at prices stated in United States dollars. Credit sales to Mexican companies at prices stated in Mexican pesos. Credit purchases from Mexican companies at prices stated in Mexican pesos.

76) Blue Waters is an American company that does business with several Japanese corporations. In recent months, Blue Waters has been reporting losses from increases in the exchange rate of the Japanese yen. The majority of Blue Waters transactions with the Japanese companies probably consist of: A) B) C) D)

Credit sales at prices stated in United States dollars. Credit sales at prices stated in Japanese yen. Credit purchases at prices stated in United States dollars. Credit purchases at prices stated in Japanese yen.

77) A corporation that uses a strategy of hedging all contracts specifying a foreign currency (i.e. foreign accounts receivable and foreign accounts payable): A) B) C) D)

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Will always be better off than if the contracts were not hedged. Recognizes a net loss if the foreign exchange rate increases. Avoids or offsets net losses from fluctuations in foreign exchange rates. Recognizes a net gain if the foreign exchange rate increases.

78) Trente Switch and Signal sold equipment to a Canadian transportation company at a price of 300,000 Canadian dollars with payment due in 60 days. On the date of sale, the exchange rate was 1.50 Canadian dollars per United States dollar. Trente decided to hedge the risk of currency fluctuations by purchasing 300,000 Canadian dollars with payment due in 60 days. If the exchange rate in 60 days is 1.25 Canadian dollars per United States dollar, Trente Switch and Signal will: A) Recognize a net gain of $40,000 on the two transactions. B) Recognize a $40,000 gain when it collects the receivable and incur a $40,000 loss when it pays the liability. C) Incur a $40,000 loss when it collects the receivable and recognize a $40,000 gain when it pays the liability. D) Incur a net loss of $40,000 on the two transactions.

79) Samson Corporation buys a foreign currency future contract as a hedging strategy to protect against possible losses from fluctuations in a particular foreign exchange. This strategy suggests that Samson Corporation has: A) B) C) D)

Foreign accounts payable and expects the exchange rate to fall. Foreign accounts receivable and expects the exchange rate to rise. Foreign accounts payable and expects the exchange rate to rise. Foreign accounts receivable and expects the exchange rate to fall.

80) A contract giving the right to receive a specified quantity of foreign currency at a future date is known as a: A) B) C) D)

Hedging contract. Specified contract. Foreign contract. Future contract.

81) Of the following globalization strategies, which would be least demanding in terms of the quantity and variety of accounting information required? Version 1

A) B) C) D)

Exporting International licensing Joint ventures Establishing a wholly owned foreign subsidiary

82) Which of the following does not affect the cost associated with producing and selling goods and services in global markets? A) B) C) D)

83)

Tariffs Duties Special trade zones Sales or use tax rates in the United States

Under the Foreign Corrupt Practices Act, American business firms are required to:

A) Refuse to transact business in countries that sanction official corruption. B) Report all bribery attempts to the International Monetary Fund and World Bank. C) Maintain an adequate system of internal control limiting access to company assets to authorized personnel. D) Maintain a list of all personnel employed by the company during the last 10 years.

84) The Foreign Corrupt Practices Act (FCPA) imposes _____ for managers who engage in bribes. A) B) C) D)

85)

Fines Deportation Quotas Taxes

The Foreign Corrupt Practices Act (FCPA) affects all of the following except:

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A) United States companies. B) Foreign companies operating in the United States. C) Foreign companies operating solely in their home country. D) Affiliates and agents of a United States company or a foreign company operating in the United States.

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Answer Key Test name: Chapter 15 Test Bank - Algorithmic and Static 1) TRUE 2) TRUE 3) FALSE 4) FALSE 5) TRUE 6) FALSE 7) TRUE 8) FALSE 9) TRUE 10) FALSE 11) FALSE 12) FALSE 13) TRUE 14) TRUE 15) TRUE 16) FALSE 17) TRUE 18) FALSE 19) TRUE 20) FALSE 21) FALSE 22) TRUE 23) TRUE 24) FALSE 25) FALSE 26) TRUE Version 1

27) TRUE 28) TRUE 29) FALSE 30) TRUE 31) FALSE 32) TRUE 33) FALSE 34) FALSE 35) D 36) A 37) B 38) C 39) C 40) C 41) B 42) B 43) C 44) B 45) B 46) C 47) B 48) A 49) A 50) B 51) B 52) B 53) B 54) A 55) A 56) C Version 1

57) C 58) B 59) B 60) B 61) B 62) D 63) D 64) C 65) C 66) D 67) D 68) A 69) A 70) C 71) C 72) B 73) A 74) D 75) C 76) D 77) C 78) B 79) C 80) D 81) A 82) D 83) C 84) A 85) C

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CHAPTER 16: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) The accounting department of Burke Manufacturing prepares numerous reports at the request of, and for exclusive use by, the management of the company. Is it necessary that these managerial accounting reports be developed in accordance with generally accepted accounting principles (GAAP)?

2) Listed below are nine technical accounting terms introduced or emphasized in this chapter:Product costsPeriod costsDirect laborCost driverIndirect materialsDirect materialsManufacturing overheadWork-in-Process InventoryFinished Goods InventoryRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (a) The account that is debited when the Work in Process Inventory account is credited. ____ (b) A manufacturing cost that can be traced conveniently and directly to the quantity of goods manufactured. ____ (c) Costs that are charged directly to expense accounts at the time that the costs are incurred. ____ (d) The category of manufacturing cost that would include the cost of tires used in the manufacture of automobiles. ____ (e) An account that has a balance that is increased by manufacturing costs incurred during the period and decreased by the cost of finished goods manufactured. ____ (f) The category of manufacturing cost that includes the salaries of plant guards, supervisors, and maintenance personnel. ____ (g) A term describing all three categories of manufacturing costs.

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3) A pen manufacturing company incurred various costs during the year. Required:Using the following code letters, indicate in the space provided how each of the costs listed should be classified:Code Letters:DM = Direct materialsDL = Direct laborMO = Manufacturing overheadWP = Work in processFG = Finished goodsPC = Period cost ____ (a) Property tax on the factory building ____ (b) The chief financial officer's salary ____ (c) Plastic used to manufacture pens ____ (d) Janitors at the factory ____ (e) Manufactured pens waiting to be sold to customers ____ (f) Advertising logos ____ (g) Partially completed pens

The companies described below incurred various costs during the year.Required:

Using the following code letters, indicate in the space provided how each of the costs listed should be classified:Code Letters:DM = Direct materialsDL = Direct laborMO = Manufacturing overheadWP = Work in processFG = Finished goodsPC = Period cost ____ (a) Research and development costs incurred by Martin, manufacturer of derailleurs, brakes, and other component parts for bicycles in its efforts to develop new products. ____ (b) Salaries paid by Martin to the plant managers supervising production operations. ____ (c) An inventory of Martin Group 105 components purchased by Earl Bicycle Corporation for use in the manufacture of Earl's Model 1200 aluminum bicycle. ____ (d) An inventory of Model 1200 bicycle frames manufactured by Earl. Prior to sale, these frames will be painted and equipped with derailleurs, brakes, and other component parts. ____ (e) Salaries paid by Earl to its sales personnel. ____ (f) Salaries paid by Earl to employees who install derailleurs, brakes, and other component parts on the bicycle frames. ____ (g) An inventory of Martin Group 105 derailleurs awaiting sale to customers.

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The following information is available for the LBB Company for the current year: December 31 Raw materials inventory Work in process inventory Finished goods inventory Direct materials used Net sales Direct labor Manufacturing overhead

January 1 0

$ 70 $ 75 $ 375

$ 80 $ 60

$ 2,585 $ 500 $ 1,000

General & administrative expenses

$ 300

Selling expenses

$ 300

Income tax paid

$ 100

Required:

(1). What are total manufacturing costs charged to work in process? (2). What are costs of finished goods manufactured? (3). What is the cost of goods sold? (4). What is gross profit? (5). What is operating income?

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The following information is for the Harding Company for the current year:

Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Direct materials used

December 31

January 1

$ 330 $ 340 $ 350

$ 340 $ 190 $ 370 $ 1,130

Total manufacturing costs charged to production (of which $855 was manufacturing overhead) Selling and administrative expenses

$ 3,340

Sales revenue

$ 6,390

$ 2,460

Required: (1). What is the cost of materials purchased? (2). What is the cost of goods sold? (3). What is gross profit? (4). What is net profit?

The following information is for the Choplin Company for the current year:

Raw Materials Inventory Work in Process Inventory Finished Goods Inventory Direct materials used Total manufacturing costs charged to production, of which $900 was manufacturing overhead Selling and administrative expenses

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December 31

January 1

$ 530 $ 540 $ 450

$ 540 $ 290 $ 270 $ 1,250 $ 4,540

$ 3,200

Sales revenue

$ 8,900

Required: (1). What is the cost of materials purchased? (2). What is the cost of goods sold? (3). What is gross profit? (4). What is net profit?

8) Briefly define the terms product cost and period cost. Explain why the distinction between these two types of costs is important.

9) Indicate whether each of the following is a product cost or a period cost: __________a. Electricity for lighting a factory building. __________b. Costs of delivering finished bicycles to dealers. __________c. Cost of a store detective in a retail establishment. __________d. Cost of eggs in a bakery. __________e. Cost of chocolate to a candy manufacturer. __________f. Salary of injection molding machine operator in a plastics factory. __________g. Salary of a sewing machine operator in a clothing factory. __________h. Depreciation of a freezer in an ice cream plant.

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10) The following data are taken from the accounting records of Gregory Manufacturing Company: This Year

Last Year

$ 100,000 $ 64,000 $ 140,000

$ 80,000 $ 56,000 $ 170,000

Ending inventories: Materials Work in Process Finished Goods Manufacturing costs: Direct materials used

$ 657,000

Direct labor costs charged to production

$ 270,000

Manufacturing overhead

$ 378,000

Compute the following for the current year: (a). Direct materials purchased (b). Total manufacturing costs charged to production (the Work in Process Inventory account) (c). The cost of finished goods manufactured (d). The cost of goods sold

11) The following data are taken from the accounting records of Victoria Manufacturing Company: End of Year

Beginning of Year

Inventories: Materials Work in Process Finished Goods

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$ 25,000 $ 28,000 $ 33,000

$ 22,000 $ 23,000 $ 32,000

Manufacturing costs: Direct materials used

$ 22,000

Direct labor costs charged to production Manufacturing Overhead

$ 12,000 $ 42,000

Compute the following amounts: (a). Direct materials purchased during the period (b). Total manufacturing costs charged to production (the Work in Process Inventory account) during the year (c). The cost of finished goods manufactured during the year (d). The cost of goods sold during the year

12) The "flow" of manufacturing costs through the ledger of MF Enterprise. Company during the month of August is summarized in the following T accounts. Certain amounts have been omitted and are represented by question marks. Materials Inventory Debit Beginning Balance

31,000 44,000

Ending Balance

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Credit

10,000 102,000

Ending Balance

________?

38,000 Work in Process Inventory Debit

Beginning Balance

Credit

________?

7,000

Direct Labor Debit

Credit

Beginning Balance 22,000

Beginning Balance

29,000 Ending Balance

________?

Finished Goods Inventory Debit

Credit

71,000 ________?

Ending Balance

________?

78,000 Manufacturing Overhead Debit 36,000

Cost of Goods Sold Debit

Credit 36,000

Credit

________?

Required:From the data supplied above, determine each of the following amounts. Some of the required amounts already appear in the T accounts; others require a short computation. (A) The amount of direct materials purchased during the month (B) The amount of direct labor cost assigned to production (C) The amount of accrued wages payable to direct labor workers at August 31 (D) The cost of finished goods manufactured during the month (E) The cost of goods sold during the month

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13) The "flow" of manufacturing costs through the ledger of Wolpe Manufacturing Company during the month of October is summarized in the following T accounts. Certain amounts have been omitted and are represented by question marks. Materials Inventory Debit Beginning Balance

42,000

Credit 44,000

49,000 Ending Balance

47,000 Work in Process Inventory Debit

Beginning Balance

10,000 ________?

Ending Balance

Credit

________?

14,000 Direct Labor Debit

Credit

Beginning Balance 29,000

Beginning Balance

32,000 Ending Balance

________?

Finished Goods Inventory Debit

Credit

92,000 ________?

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131,000

Ending Balance

77,000 Manufacturing Overhead Debit 44,000

Credit 44,000

Cost of Goods Sold Debit

Credit

131,000

Required: From the data supplied above, determine each of the following amounts. Some of the required amounts already appear in the T accounts; others require a short computation. (A) The amount of direct materials used during the month (B) The amount paid to direct labor workers during the month (C) The amount of accrued wages payable to direct labor workers at October 31 (D) Total manufacturing costs charged (debited) to the Work in Process Inventory account during the month (E) The cost of finished goods manufactured during the month

14) The accounting records of Village Cleaning Company include the following information about the company's manufacturing costs and inventories in Year 2: Beginning of Year End of Year Manufacturing costs: Direct materials used

$ 274,000

Direct labor costs charged to production

$ 112,000

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Manufacturing overhead

$ 464,000

Inventories: Materials Work in Process Finished Goods

$ 31,000 $ 21,000 $ 165,000

$ 44,000 $ 30,000 $ 120,000

Required: Prepare a Schedule of Cost of Finished Goods Manufactured for the year ended December 31, Year 2.

15) The accounting records of Hogan Handle Company include the following information about the company's manufacturing costs and inventories in March of Year 1: Beginning of Month

End of Month

Manufacturing costs: Direct materials used

$ 227,000

Direct labor charged to production

$ 158,000

Manufacturing overhead

$ 79,000

Inventories: Materials Work in Process Finished Goods

$ 143,000 $ 134,000 $ 196,000

$ 148,000 $ 126,000 $ 186,000

Required: Prepare a Schedule of Cost of Finished Goods Manufactured for the year ended March 31, Year 1.

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16) The following information pertains to the Galaxy Company: The beginning Work in Process balance was $54,500The ending Work in Process balance was $56,275During the year, the company used $575,500 in raw materials, incurred $420,500 in direct labor costs, and $500,000 in manufacturing overhead costs were applied to work in process. Required: Determine the costs of goods manufactured for the Galaxy Company.

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Answer Key Test name: Chapter 16 Test Bank (Problem Material) 1) Since managerial accounting information is developed exclusively for use by a company's management, it need not conform to generally accepted accounting principles or any other set of prescribed standards. However, managerial accounting information should be developed in a manner that is relevant to the decision at hand and will not mislead the decision maker. 2) (a) Finished Goods Inventory(b) None(c) Period costs(d) Direct materials(e) Work in Process Inventory(f) Manufacturing overhead(g) Product costs(b) The statement describes direct manufacturing costs. 3) (a) MO(b) PC(c) DM(d) MO(e) FG(f) PC(g) WP 4) (a) PC(b) MO(c) DM(d) WP(e) PC(f) DL(g) FG 5) (1) $375 + $500 + $1,000 = $1,875(2) $80 + $1,875 − $70 = $1,885(3) $60 + $1,885 − $75 = $1,870(4) $2,585 − $1,870 = $715(5) $715 − $300 − $300 = $115 6) (1) $330 + $1,130 − $340 = $1,120(2) $370 + ($190 + $3,340 − $340) − $350 = $3,210(3) $6,390 − $3,210 = $3,180(4) $3,180 − $2,460 = $720 7) (1) $530 + $1,250 − $540 = $1,240(2) $270 + ($290 + $4,540 − $540) − $450 = $4,110(3) $8,900 − $4,110 = $4,790(4) $4,790 − $3,200 = $1,590

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8) Product costs are the costs of purchasing or manufacturing an inventory of merchandise. Period costs are those costs charged to expense in the period in which they are incurred without regard to the volume of production in that period. The distinction is important because whether a cost is considered a product or a period cost will affect the amount of periodic income. Product costs become a part of the cost of inventory at the end of any period and are carried forward and charged against revenue in the period in which the product with which they are associated is sold. Period costs become an immediate charge against revenue and reduce net income in the period in which they are incurred. 9) a. Productb. Periodc. Periodd. Producte. Productf. Productg. Producth. Product 10) (a) $100,000 Ending inventory + $657,000 Materials used − $80,000 Beginning inventory = $677,000(b) $657,000 DM + $270,000 DL + $378,000 MO = $1,305,000(c) $56,000 Beginning WP inventory + $1,305,000 from part b − $64,000 Ending WP inventory = $1,297,000(d) $170,000 Beginning FG inventory + $1,297,000 from part c − $140,000 Ending FG inventory = $1,327,000 11) (a.) $25,000 Ending inventory + $22,000 Materials used − $22,000 Beginning inventory = $25,000(b.) $22,000 DM + $12,000 DL + $42,000 MO = $76,000(c.) $23,000 Beginning WP inventory + $76,000 from part b − $28,000 Ending WP inventory = $71,000(d.) $32,000 Beginning FG inventory + $71,000 from part c − $33,000 Ending FG inventory = $70,000 12) (A) $44,000 (shown)(B) $29,000 (shown)(C) $29,000 DL cost incurred − $22,000 paid = $7,000(D) $10,000 Beginning WP inventory + $102,000 DM, DL, and OH costs added to WIP − $7,000 Ending WP inventory = $105,000(E) $71,000 Beginning FG inventory + $105,000 from part d − $78,000 Ending FG inventory = $98,000 Version 1

13) (A) $44,000 (shown)(B) $29,000 (shown)(C) $32,000 DL cost incurred − $29,000 paid = $3,000(D) $44,000 materials + $32,000 direct labor + $44,000 overhead = $120,000(E) $10,000 Beginning WP inventory + $120,000 manufacturing costs − $14,000 Ending WP inventory = $116,000 14) VILLAGE CLEANING COMPANY Schedule of Cost of Finished Goods Manufactured For the Year Ended December 31, Year 2 Work in process inventory, January 1, Year 2 Manufacturing costs assigned to production: Direct materials used $ 274,000 Direct labor charged to production

112,000

Manufacturing overhead applied

464,000

Total manufacturing costs

$ 21,000

850,000

Total cost of all work in process during the year Less: Work in process inventory, December 31, Year 2

$ 871,000

Cost of finished goods manufactured

$ 841,000

(30,000)

15) Hogan Handle Company Schedule of Cost of Finished Goods Manufactured For the Month Ended March 31, Year 1 Work in process inventory, March 1 $ 134,000 Manufacturing costs assigned to production: Direct materials used

$ 227,000

Direct labor charged to production

158,000

Manufacturing overhead applied

79,000

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Total manufacturing costs

464,000

Total cost of all work in process during the month Less: Work in process inventory, March 31

$ 598,000

Cost of finished goods manufactured

$ 472,000

(126,000)

16) Work in process, beginning balance

$ 54,500

Add: raw materials used in production

575,500

Add: direct labor costs

420,500

Add: manufacturing overhead

500,000

Cost of all work in process

$ 1,550,500

Less: Work in process, ending balance Cost of Goods Manufactured

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56,275 $ 1,494,225

CHAPTER 16 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Managerial accounting refers to the preparation and use of accounting information designed to meet the needs of decision makers inside and outside the business organization. ⊚ ⊚

true false

2) Management accounting encompasses the design and use of accounting information systems inside the company to achieve the company's objectives. ⊚ ⊚

true false

3) Management accounting reports may provide sufficient means of monitoring, evaluating and rewarding performance. ⊚ ⊚

true false

4) A value chain is a linked set of activities and resources necessary to create and deliver a product or service to a customer. ⊚ ⊚

true false

5) The three basic types of manufacturing costs are direct materials, direct labor, and manufacturing overhead. ⊚ ⊚

true false

6) Manufacturing overhead is a term used to describe all manufacturing costs other than direct materials and direct labor.

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⊚ ⊚

true false

7) Finished goods is comprised of direct materials purchased, direct labor, and manufacturing overhead. ⊚ ⊚

true false

8) Manufacturing overhead is considered an indirect cost, since overhead costs generally cannot be traced conveniently and directly to specific units of product. ⊚ ⊚

true false

9) Supervisor salaries, equipment repairs, depreciation of machinery, and indirect materials are all examples of manufacturing overhead. ⊚ ⊚

true false

10) Prime costs include direct materials and direct labor used in the production of goods and services. ⊚ ⊚

true false

11) Direct labor and overhead costs that are required to convert raw materials into finished goods are considered to be conversion costs. ⊚ ⊚

true false

12) The James Company has incurred the following costs of production: Direct Materials $350,000;Direct Labor $475,000;Manufacturing Overhead $722,000; andSelling and Administrative Costs $256,000. The James Company conversion costs are $1,197,000. Version 1

⊚ ⊚

true false

13) The James Company has incurred the following costs of production: Direct Materials $350,000;Direct Labor $475,000;Manufacturing Overhead $722,000; andSelling and Administrative Costs $256,000.The James Company prime costs are $606,000. ⊚ ⊚

true false

14) Product costs are offset against revenue in the period in which the related products are manufactured, rather than the period in which the products are sold. ⊚ ⊚

15)

Period costs are deducted from sales to arrive at gross profit. ⊚ ⊚

16)

true false

Product costs are charged directly to expense accounts. ⊚ ⊚

true false

17) Product costs become part of inventory and are placed on the balance sheet until the products are sold. ⊚ ⊚

true false

18) Depreciation on a manufacturing facility is considered a period cost whereas depreciation on a warehouse used to store finished goods is considered a product cost.

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⊚ ⊚

true false

19) As units are completed, their cost is transferred from the Work in Process Inventory account to the Finished Goods Inventory account. ⊚ ⊚

true false

20) All three inventory accounts (raw materials, work in process, and finished goods) are considered current assets. ⊚ ⊚

true false

21) When direct materials are applied to the production process, materials inventory is debited and work in process is credited. ⊚ ⊚

22)

A debit balance in the Direct Labor account represents a liability for wages payable. ⊚ ⊚

23)

true false

Costs to repair equipment are considered a direct cost. ⊚ ⊚

true false

24) The costs of storing and delivering finished goods are allocated to the finished goods account. ⊚ ⊚ Version 1

true false 4

25) A schedule of the cost of finished goods manufactured summarizes the flow of manufacturing costs into and out of the finished goods inventory account. ⊚ ⊚

true false

26) The "cost of finished goods manufactured," which appears on the bottom of the Schedule of the Cost of Finished Goods Manufactured, flows to the balance sheet and is reported as the ending inventory balance. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 27) The principal difference between managerial accounting and financial accounting is that managerial accounting information is: A) Prepared by managers. B) Intended primarily for use by decision makers inside the business organization. C) Prepared in accordance with a set of accounting principles developed by the Institute of Certified Managerial Accountants. D) Oriented toward measuring solvency rather than profitability.

28) Management accounting systems are designed to assist organizations in the performance of all of the following functions except: A) B) C) D)

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The assignment of decision-making authority over company assets. Planning and decision-making. Monitoring, evaluating, and rewarding performance. The preparation of income tax returns.

29) The set of linked activities and resources needed to create and deliver a product or service to the customer is referred to as: A) B) C) D)

30)

The budget. The value chain. The operating cycle. The production process.

Which of the following is not a characteristic of managerial accounting? A) Reports are used primarily by insiders rather than by persons outside of the business

31) In comparison with a financial statement prepared in conformity with generally accepted accounting principles, a managerial accounting report is more likely to: A) B) C) D)

Be used by decision makers outside of the business organization. Focus upon the operating results of the most recently completed accounting period. View the entire organization as the reporting entity. Be tailored to the specific needs of an individual decision maker.

32) In comparison with a financial statement prepared in conformity with generally accepted accounting principles, a managerial accounting report is less likely to: A) B) C) D)

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Focus upon the entire organization as the accounting entity. Focus upon future accounting periods. Make use of estimated amounts. Be tailored to the specific needs of an individual decision maker.

33) All of the following statements regarding management accounting's role in assigning decision-making authority are true except: A) Since management accounting information is used for decision-making purposes, historical information is unnecessary. B) Information from the management accounting system supports decision-making. C) The syllabus for a college course is a type of report that outlines students' decisionmaking responsibilities. D) All members of an organization have some decision-making ability.

34)

All of the following are true regarding benchmark studies except:

A) The studies are shared with customers and suppliers. B) The studies are shared with competitors. C) The studies are prepared by collecting information from companies in the same industry. D) The studies show an organization how its costs and processes compare with other companies.

35) The cost of the employee who installs the leather on the seats of a new automobile would be considered: A) B) C) D)

36)

Manufacturing overhead. Indirect labor. Direct material. Direct labor.

Manufacturing costs do not include:

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A) B) C) D)

37)

Which of the following should not be classified as a manufacturing cost? A) B) C) D)

38)

Indirect factory labor costs, such as salaries of plant security guards. Direct materials used in the production process. Utility bills related to factory operations. Commissions paid to salespeople.

In an aircraft factory, the inventory of direct materials would not include: A) B) C) D)

39)

Direct labor applicable to production within the period. Selling expenses related to goods manufactured during the period. Direct materials used during the period. Manufacturing overhead charged to work in process during the period.

Electronic instruments to be installed in aircraft. Completed aircraft, available for sale. Sheet aluminum to be used for the exterior "skin" of the aircraft. Ejection seats to be installed only in military aircraft.

Manufacturing overhead is best described as:

A) B) C) D) expenses.

All manufacturing costs other than direct materials and direct labor. All period costs associated with manufacturing operations. Indirect materials and indirect labor. All operating expenses other than selling expenses and general and administrative

40) Which of the following costs would not be considered part of the manufacturing overhead of a furniture manufacturer?

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A) B) C) D)

The cost of compliance with federal factory safety regulations. Depreciation expense on factory equipment. The cost of grease used to lubricate factory equipment. The cost of wood used in furniture construction.

41) Which of the following costs would not be considered part of the manufacturing overhead of a chemical plant? A) B) C) process. D)

42)

Direct labor. Indirect labor. Manufacturing overhead. Administrative costs.

Direct labor costs in a paint factory would include wages of employees who: A) B) C) D)

44)

The cost of complying with federal safety regulations concerning plant operations.

The cost of the employee who computes total manufacturing costs would be considered: A) B) C) D)

43)

The costs of disposing of toxic waste materials. Salaries of factory medical personnel. Salaries of employees who operate distilling equipment used in the production

Supervise heavy equipment operators. Operate paint-mixing machines. Develop highly secret formulas for new products. Paint the interior of the factory every two years.

Which of the following is not a product cost?

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A) B) C) D)

45)

The costs of purchasing or manufacturing inventory are called: A) B) C) D)

46)

Period costs. Product costs. Overhead costs. Job costs.

Which of the following is not a period cost? A) B) C) D)

47)

Depreciation on a warehouse where raw materials are stored. An employee working directly on assembling a car. The leather seats of a motorcycle. The real estate tax of the showroom.

Depreciation on factory equipment. Depreciation on the retail store building. Salesperson salaries. Office supplies used.

Which of the following is not a product cost? A) B) C) D)

Property tax on the factory building. Advertising. Factory workers' salaries. Indirect materials used in production.

48) Which of the following is not one of the three types of inventories of a manufacturing company?

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A) B) C) D)

49)

A product cost is deducted from revenue in the period in which: A) B) C) D)

50)

Assets. Liabilities. Operating expenses. Manufacturing overhead.

Which of the following is a period cost? A) B) C) D)

52)

The related finished goods are sold. The expenditure is made. The production of the product begins. The production process is completed.

Until the related goods are sold, product costs are viewed as: A) B) C) D)

51)

Raw materials inventory. Work in process inventory. Product inventory. Finished goods inventory.

Direct materials used. Direct labor costs applicable to production. Manufacturing overhead. Advertising expense.

Which of the following is a period cost?

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A) B) C) D)

Depreciation on a factory building. The cost of direct materials used. Depreciation on a sales showroom. The cost of disposing of hazardous waste materials from factory operations.

53) The following information is available about the August transactions of the Helpful Tool Company: Invoices for product costs paid during the month Product costs charged to work in process Cost of finished goods manufactured Cost of goods sold

$ 493,000 $ 737,000 $ 718,000 $ 739,000

The product costs to be deducted from revenue in August amount to: A) B) C) D)

54)

$493,000. $737,000. $718,000. $739,000.

Manufacturing companies normally have three types of inventory: A) B) C) D)

Direct materials, direct labor, and manufacturing overhead. Raw materials, work in process, and finished goods. Work in process, finished goods, and returned merchandise. Economy, standard, and deluxe.

55) Herb Company manufactured more product than it was able to sell during the current year. If the salaries of the sales staff of Herb Company are improperly recorded as a product cost, what will be the likely effect on net income of the period in which the error occurs?

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A) B) C) D)

Net income will be overstated. Net income will be understated. Net income will be unaffected. Net income will be understated only if inventory levels rise.

56) When a manufacturing company purchases raw materials or component parts to be used in manufacturing finished goods, these costs are initially debited to: A) B) C) D)

57) as a:

The wages paid to employees working directly on a company's products would be shown

A) B) C) D)

58)

Credit to Direct Labor. Debit to Direct Labor. Credit to Work in Process. Debit to Manufacturing Overhead.

When goods are completed and transferred from the assembly line: A) B) C) D)

59)

Expense accounts. Raw Materials Inventory. Finished Goods Inventory. Manufacturing Overhead.

Cost of Goods Sold is debited and Finished Goods Inventory is credited. Work in Process Inventory is debited and Finished Goods Inventory is credited. Finished Goods Inventory is debited and Cost of Goods Sold is credited. Work in Process Inventory is credited and Finished Goods Inventory is debited.

Goods that are still in the production process would be in which account?

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A) B) C) D)

60)

Raw Materials Inventory. Work in Process Inventory. Finished Goods Inventory. Cost of Goods Sold.

Determine the amount of manufacturing overhead given the following information:

Depreciation on a factory building Telephone expense in factory office Telephone expense in sales showroom Factory foreman's salary Maintenance costs for the factory Maintenance costs for the sales showroom

A) B) C) D)

61)

$8,070 $10,270 $11,980 $9,830

Determine the amount of manufacturing overhead given the following information:

A) B) C) D)

62)

$ 3,650 $ 920 $ 1,050 $ 4,600 $ 1,100 $ 660

$ 2,600 $ 950 $ 1,050 $ 5,200 $ 1,000 $ 880

$7,750 $10,430 $9,750 $11,080

When products are completed:

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A) B) C) D)

63)

Finished Goods Inventory is credited. Work in Process Inventory is credited. Cost of Goods Sold is debited. Work in Process Inventory is debited.

When products held in inventory are sold: A) B) C) D)

Cost of Goods Sold is credited. Work in Process Inventory is credited. Finished Goods Inventory is credited. Finished Goods Inventory is debited.

64) The ending inventory of a merchandising company corresponds most closely to which of the following amounts of a manufacturer? A) B) C) D)

65)

Ending inventory of finished goods. Cost of finished goods manufactured. Ending inventory of work in process. Total manufacturing costs incurred during the period.

Amounts debited to the Work in Process Inventory account may best be described as:

A) Direct materials purchased, direct labor costs paid, and payments for items classified as manufacturing overhead. B) The cost of finished goods manufactured during the period. C) Total manufacturing costs charged to production. D) The cost of goods sold.

66)

Amounts credited to the Work in Process inventory account may best be described as:

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A) The cost of finished goods manufactured. B) Total manufacturing costs charged to production. C) The cost of goods sold. D) Direct materials purchased, direct labor costs paid, and payments for items classified as manufacturing overhead.

67) The placing of direct materials into the production process is recorded by an entry debiting: A) B) C) D)

Materials Expense. Raw Materials Inventory. Work in Process Inventory. Finished Goods Inventory.

68) The placing of direct materials into the production process is recorded by an entry crediting: A) B) C) D)

Materials Expense. Raw Materials Inventory. Work in Process Inventory. Finished Goods Inventory.

69) The accountant for Eric's Plumbing Equipment Company recently made a journal entry consisting of a debit to Work in Process and a credit to Raw Materials Inventory. This entry recorded: A) B) C) D)

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The use of raw materials in the production process. Payment for raw materials. The return of unused materials to inventory. The receipt of raw materials from the company's supplier.

70)

When direct materials are used: A) B) C) D)

Manufacturing Overhead is debited. Raw Materials Inventory is debited. Cost of Goods Sold is debited. Work in Process Inventory is debited.

71) The payment of raw materials previously purchased on account is recorded by an entry that includes a debit to: A) B) C) D)

Raw Materials Inventory. Accounts Payable. Work in Process Inventory. Cash.

72) The payment of wages to factory employees who work directly on the goods being manufactured is recorded by an entry that includes a credit to: A) B) C) D)

Wages Expense. Direct Labor. Work in Process Inventory. Cash.

73) When direct labor employees contribute to the production process, the cost of their labor is recorded by an entry that includes a debit to: A) B) C) D)

74)

Wages Expense. Direct Labor. Work in Process Inventory. Manufacturing Overhead.

If the end of the fiscal year is not a payroll date, the Direct Labor account normally has:

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A) A debit balance, representing prepaid labor costs. B) A credit balance, representing accrued wages payable. C) Either a debit or a credit balance, depending upon whether the end of the fiscal year falls before or after the end of the pay period. D) A zero balance, because the Direct Labor account is closed along with the other expense accounts.

75)

In the year-end financial statements, the Manufacturing Overhead account should have:

A) A debit balance, representing overhead on hand and available for use. B) A credit balance, representing accumulated depreciation and amounts owed to suppliers of overhead items. C) Either a debit or a credit balance, depending upon whether the overhead application rate used throughout the year was higher or lower than 100%. D) A zero balance, since all overhead costs incurred during the period should have been assigned to the production of the period.

76) Since manufacturing costs (direct materials, direct labor, and overhead) are incurred in the process of manufacturing units of product, these costs are recorded in entries that include debits to: A) accounts. B) C) D)

The Direct Materials Inventory, Direct Labor, and Manufacturing Overhead Expense accounts. The Work in Process Inventory account. The Cost of Goods Sold account.

77) Since manufacturing costs (direct materials, direct labor, and overhead) are incurred in the process of manufacturing units of product, these costs are recorded in entries that include credits to:

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A) The Direct Materials Inventory, Direct Labor, and Manufacturing Overhead accounts respectively. B) Liability accounts. C) The Work in Process Inventory account. D) The Cost of Goods Sold account.

78) The completion of a computer by First Wireless, Incorporated would require a debit to which of the following accounts? A) B) C) D)

Cost of Goods Sold. Work in Process Inventory. Finished Goods Inventory. Materials Inventory.

79) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 74,000 $ 59,500 $ 26,000 $ 35,000 August 31 $ ? $ 58,000 $ 63,000

August 1 $ 32,000 $ 54,000 $ 47,200

The total amount of inventory to be included in Elite's August 31st balance sheet amounts to: A) B) C) D)

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$135,500. $227,000. $167,500. Some other amount.

80) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 60,000 $ 50,000 $ 25,000 $ 35,000 August 31 $ ? $ 65,000 $ 60,000

August 1 $ 25,000 $ 47,000 $ 43,000

The total amount of inventory to be included in Elite's August 31st balance sheet amounts to: A) B) C) D)

$135,000. $210,000. $160,000. Some other amount.

81) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 72,000 $ 56,500 $ 29,000 $ 35,000 August 31 $ ? $ 56,000 $ 61,000

August 1 $ 42,000 $ 53,000 $ 46,600

Total manufacturing costs charged (debited) to Work in Process during August amount to: A) B) C) D)

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$64,000. $162,500. $120,500. Some other amount.

82) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 60,000 $ 50,000 $ 25,000 $ 35,000 August 31 $ ? $ 65,000 $ 60,000

August 1 $ 25,000 $ 47,000 $ 43,000

Total manufacturing costs charged (debited) to Work in Process during August amount to: A) B) C) D)

$60,000. $125,000. $110,000. Some other amount.

83) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 71,000 $ 55,000 $ 25,000 $ 35,000 August 31 $ ? $ 55,000 $ 60,000

August 1 $ 40,000 $ 52,500 $ 46,300

The cost of finished goods manufactured in August is: A) B) C) D)

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$172,500. $112,500. $47,500. Some other amount.

84) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 60,000 $ 50,000 $ 25,000 $ 35,000 August 31 $ ? $ 65,000 $ 60,000

August 1 $ 25,000 $ 47,000 $ 43,000

The cost of finished goods manufactured in August is: A) B) C) D)

$147,000. $92,000. $57,000. Some other amount.

85) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 66,000 $ 47,500 $ 27,000 $ 35,000 August 31 $ ? $ 50,000 $ 55,000

August 1 $ 30,000 $ 50,000 $ 44,800

The cost of goods sold in August is: A) B) C) D)

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$99,300. $10,200. $154,300. Some other amount.

86) The following information has been taken from the perpetual inventory system of Elite Manufacturing Company for the month ended August 31: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred (and applied) Balances in inventory Materials Work in Process Finished Goods

$ 60,000 $ 50,000 $ 25,000 $ 35,000 August 31 $ ? $ 65,000 $ 60,000

August 1 $ 25,000 $ 47,000 $ 43,000

The cost of goods sold in August is: A) B) C) D)

$75,000. $17,000. $135,000. Some other amount.

87) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 80,000 $ 58,400 $ 38,000 $ 43,000 September 30 $ ? $ 52,000 $ 47,000

September 1 $ 59,000 $ 49,000 $ 68,000

The total amount of inventory to be included in Imperial 's September 30th balance sheet amounts to: A) B) C) D)

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$238,000. $99,000. $179,600. Some other amount.

88) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 72,000 $ 70,000 $ 40,000 $ 60,000 September 30 $ ? $ 35,000 $ 88,000

September 1 $ 60,000 $ 45,000 $ 76,000

The total amount of inventory to be included in Imperial 's September 30th balance sheet amounts to: A) B) C) D)

$255,000. $123,000. $185,000. Some other amount.

89) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 84,000 $ 63,200 $ 44,000 $ 46,000 September 30 $ ? $ 34,000 $ 61,000

September 1 $ 67,000 $ 51,000 $ 66,000

Total manufacturing costs charged (debited) to Work in Process during September amount to: A) B) C) D)

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$170,200. $153,200. $174,000. Some other amount.

90) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 72,000 $ 70,000 $ 40,000 $ 60,000 September 30 $ ? $ 35,000 $ 88,000

September 1 $ 60,000 $ 45,000 $ 76,000

Total manufacturing costs charged (debited) to Work in Process during September amount to: A) B) C) D)

$180,000. $170,000. $172,000. Some other amount.

91) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 90,000 $ 70,400 $ 46,000 $ 49,000 September 30 $ ? $ 40,000 $ 67,000

September 1 $ 65,000 $ 54,000 $ 72,000

The cost of finished goods manufactured in September is: A) B) C) D)

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$184,400. $179,400. $219,400. Some other amount.

92) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 72,000 $ 70,000 $ 40,000 $ 60,000 September 30 $ ? $ 35,000 $ 88,000

September 1 $ 60,000 $ 45,000 $ 76,000

The cost of finished goods manufactured in September is: A) B) C) D)

$190,000. $180,000. $213,000. Some other amount.

93) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 90,000 $ 70,400 $ 46,000 $ 49,000 September 30 $ ? $ 40,000 $ 67,000

September 1 $ 65,000 $ 54,000 $ 72,000

The cost of goods sold in September is: A) B) C) D)

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$168,400. $170,400. $184,400. Some other amount.

94) The following information has been taken from the perpetual inventory system of Imperial Manufacturing Company for the month ended September 30: Purchases of direct materials Direct materials used Direct labor costs assigned to production Manufacturing overhead costs incurred Balances in inventory Materials Work in Process Finished Goods

$ 72,000 $ 70,000 $ 40,000 $ 60,000 September 30 $ ? $ 35,000 $ 88,000

September 1 $ 60,000 $ 45,000 $ 76,000

The cost of goods sold in September is: A) B) C) D)

$190,000. $158,000. $168,000. Some other amount.

95) Alton Company produces metal belts. During the current month, the company incurred the following product costs:Raw materials $94,000;Direct labor $57,000;Electricity used in the Factory $21,500;Factory foreperson salary $4,600; andMaintenance of factory machinery $2,050.Alton Company's indirect product costs totaled: A) B) C) D)

$151,000. $57,000. $26,100. $28,150.

96) Alton Company produces metal belts. During the current month, the company incurred the following product costs:Raw materials $100,000; Direct labor $75,000; Electricity used in the Factory $25,000; Factory foreperson salary $3,750; and Maintenance of factory machinery $2,000.Alton Company's indirect product costs totaled:

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A) B) C) D)

$175,000. $30,750. $75,000. $28,750.

97) Alton Company produces metal belts. During the current month, the company incurred the following product costs:Raw materials $82,000;Direct labor $51,000;Electricity used in the Factory $21,000;Factory foreperson salary $2,800; andMaintenance of factory machinery $1,900.Alton Company's direct product costs totaled: A) B) C) D)

$23,800. $133,000. $25,700. $51,000.

98) Alton Company produces metal belts. During the current month, the company incurred the following product costs:Raw materials $100,000; Direct labor $75,000; Electricity used in the Factory $25,000; Factory foreperson salary $3,750; and Maintenance of factory machinery $2,000.Alton Company's direct product costs totaled: A) B) C) D)

$175,000. $30,750. $75,000. $28,750.

99) Alton Company produces metal belts. During the current month, the company incurred the following product costs:Raw materials $84,000;Direct labor $52,000;Electricity used in the Factory $22,000;Factory foreperson salary $3,100; andMaintenance of factory machinery $2,000.Alton Company's total product costs:

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A) B) C) D)

$163,100. $25,100. $136,000. $27,100.

100) Alton Company produces metal belts. During the current month, the company incurred the following product costs:Raw materials $100,000; Direct labor $75,000; Electricity used in the Factory $25,000; Factory foreperson salary $3,750; and Maintenance of factory machinery $2,000.Alton Company's total product costs: A) B) C) D)

101)

$175,000. $30,750. $205,750. $28,750.

In a manufacturing company, the cost of goods sold is equal to:

A) The beginning inventory of work in process, plus total manufacturing costs, less the ending inventory of finished goods. B) Total manufacturing costs for the period, less selling expenses. C) The beginning inventory of work in process, plus total manufacturing costs, less the ending inventory of work in process. D) The cost of goods available for sale, less the ending inventory of finished goods.

102)

In a manufacturing company, the cost of finished goods manufactured is equal to:

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A) The beginning inventory of finished goods, plus net purchases, less the ending inventory of finished goods. B) The sum of the manufacturing costs charged (debited) to the Work in Process Inventory account during the period. C) The costs of direct materials, direct labor, and manufacturing overhead incurred in manufacturing the goods sold during the period. D) The beginning inventory of Work in Process, plus total manufacturing costs for the period, less the ending inventory of Work in Process.

103)

In a manufacturing company, the cost of goods sold is equal to:

104) In a schedule of cost of finished goods manufactured, the figure for total manufacturing costs: A) B) C) D)

105)

May be less than the cost of direct materials used. May be less than the direct labor costs assigned to production. May be less than the manufacturing overhead applied to production. May be less than the cost of finished goods manufactured.

The cost of finished goods manufactured will exceed the cost of goods sold whenever:

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A) B) C) D)

The inventory of finished goods increases over the period. The inventory of work in process increases over the period. The inventory of finished goods decreases over the period. The inventory of work in process decreases over the period.

106) Grand Company's ending inventory of work in process is twice as large as at the beginning of the period. Therefore: A) The ending inventory of finished goods must be larger than the beginning inventory of finished goods. B) Total manufacturing costs for the period must exceed the cost of finished goods manufactured. C) Total manufacturing costs for the period must exceed the cost of goods sold. D) The cost of finished goods manufactured must be smaller than the cost of goods sold.

107) During its first year of operations, Brown Company incurred the following product costs:Direct materials used in production $151,500;Direct labor $76,200; andManufacturing overhead $89,200.The Brown Company's ending Work in Process Inventory amounted to $21,000 at the end of the year. What is the company's cost of finished goods manufactured for the year? A) B) C) D)

$316,900 $295,900 $227,700 $151,500

108) During its first year of operations, Brown Company incurred the following product costs:Direct materials used in production $200,000;Direct labor $175,000; andManufacturing overhead $145,500. The Brown Company's ending Work in Process Inventory amounted to $35,000 at the end of the year. What is the company's cost of finished goods manufactured for the year?

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A) B) C) D)

$200,000 $375,000 $485,500 $520,500

109) During the current year, Jules Company incurred the following product costs:Direct materials used in production $270,000;Direct labor $134,250; andManufacturing overhead $203,500.Jules Company's beginning Work in Process Inventory was $29,000 and its ending Work in Process Inventory amounted to $34,500. What is the company's cost of finished goods manufactured for the year? A) B) C) D)

$636,750 $613,250 $602,250 $337,750

110) During the current year, Jules Company incurred the following product costs:Direct materials used in production $250,000; Direct labor $185,000; and Manufacturing overhead $245,500.Jules Company's beginning Work in Process Inventory was $20,000 and its ending Work in Process Inventory amounted to $30,000. What is the company's cost of finished goods manufactured for the year? A) B) C) D)

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$700,500 $690,500 $670,500 $430,500

Answer Key Test name: Chapter 16 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) TRUE 4) TRUE 5) TRUE 6) TRUE 7) FALSE 8) TRUE 9) TRUE 10) TRUE 11) TRUE 12) TRUE 13) FALSE 14) FALSE 15) FALSE 16) FALSE 17) TRUE 18) FALSE 19) TRUE 20) TRUE 21) FALSE 22) FALSE 23) FALSE 24) FALSE 25) FALSE 26) FALSE Version 1

27) B 28) D 29) B 30) C 31) D 32) A 33) A 34) B 35) D 36) B 37) D 38) B 39) A 40) D 41) C 42) D 43) B 44) D 45) B 46) A 47) B 48) C 49) A 50) A 51) D 52) C 53) D 54) B 55) A 56) B Version 1

57) B 58) D 59) B 60) B 61) C 62) B 63) C 64) A 65) C 66) A 67) C 68) B 69) A 70) D 71) B 72) D 73) C 74) B 75) D 76) C 77) A 78) C 79) C 80) C 81) C 82) C 83) B 84) B 85) A 86) A Version 1

87) C 88) C 89) B 90) B 91) B 92) B 93) C 94) C 95) D 96) B 97) B 98) A 99) A 100) C 101) D 102) D 103) C 104) D 105) A 106) B 107) B 108) C 109) C 110) C

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CHAPTER 17: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) What are the major objectives of a cost accounting system in both manufacturing and service companies?

2) Listed below are nine technical accounting terms introduced or emphasized in this chapter:Finished Goods InventoryWork-in-Process InventoryJob cost sheetOverapplied overheadUnderapplied overheadMaterials InventoryActivity-based cost systemJob order cost systemProcess cost system Required: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. _____ (a) The balance remaining in the Manufacturing Overhead account when the overhead application rate used during the period is too low. _____ (b) The account credited as component parts are transferred into production. _____ (c) A schedule used to accumulate manufacturing costs and to determine the unit costs associated with a specific customer's order. _____ (d) The inventory account credited when the cost of goods sold is recorded. _____ (e) The type of cost accounting system most likely used by an oil refinery engaged in the continuous production of petroleum products. _____ (f) The inventory account debited when manufacturing cost accounts (such as Direct Labor or Materials Inventory) are credited. _____ (g) The type of cost accounting system likely to be used by a machine shop that manufactures items to the specifications provided by its customers.

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3) Pyramid Corporation manufactures a single product. As a basis for determining an overhead application rate, the production manager made the following estimates for the coming year: Total manufacturing overhead Total direct labor cost Total number of machine hours to be utilized

$ 1,638,000 $ 819,000 9,000 hours

In the following month, 19,500 units were produced, involving direct labor costs of $78,000 and requiring 1,073 machine-hours.Required: Determine the amount of manufacturing overhead to be applied to production during this month, assuming that the overhead application rate is based upon:(A) Estimated total direct labor cost for the year.(B) Estimated total machine-hours for the year.

4) Holden Corporation manufactures a single product. Overhead is applied to production during the year using a predetermined rate based on direct labor cost. During the month of April, 50,000 units of output were produced at a total direct labor cost of $425,000. The amount of overhead applied to these units was $2,125,000. Total direct labor cost for the year had been estimated to be $4,125,000.Required: What is estimated total manufacturing overhead cost for the year?

5) For a single product manufacturing company, all overhead must be assigned to the one product. Since this is the case, why would such a firm not simply assign actual overhead cost to production as it is incurred throughout the year?

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6) Explain the role of a cost driver in the computation of an overhead application rate and define the term, cost driver.

7) Langdon Company manufactures custom designed toy sailboats. The company uses a job order costing system. Overhead is applied based on direct labor hours. Estimated overhead for the current year is $11,840 and the company estimates it will use 7,400 direct labor hours. The following events occurred in March:a. The company purchased materials for $800 on account. b. The production supervisor requisitioned 15 sheets of fiberglass for constructing the boats. The fiberglass was in stock and originally cost $3 a sheet. c. Direct labor on the boats cost $500. d. More materials were purchased for $350 on account. e. Indirect labor costs were $210. f. A utility bill for the boat factory was $230 and was paid in cash. g. A repair bill for the salesman's car was $75 and will be paid next month. h. Additional materials were placed into production that cost $215. i. Manufacturing overhead was applied (direct labor during March totaled 500 hours) j. One sailboat was completed which cost $325. k. The completed sailboat was sold for $750 on account. Record the sale and the cost of sale.Required: (A) Determine the overhead application rate. (B) Prepare journal entries for the above transactions. (C) What is the cost of the remaining Work in Process?

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8) Paxton Products, which uses a job order cost system, completed the following transactions during the current month:(A) Materials costing $75,000 were used on various jobs. (B) Time cards of workers directly involved in the production process indicate direct labor costs of $125,000 for the month. (C) Overhead is applied to jobs at a rate of 75% of direct labor cost. (D) Jobs with total accumulated costs of $165,000 were finished during the month. (E) Units costing $210,000 were sold during the month at sales prices totaling $390,000. All sales were on account.Required: Using the format provided, prepare a general journal entry for the month summarizing each of the above categories of transactions. Explanations are not required. Transaction (A)

Account Title

Debit

Credit

(B)

(C)

(D)

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(E)

9) Selected ledger accounts used by Miles Manufacturing Company are listed along with identifying numbers.Required: For each of the transactions listed below, indicate the accounts that would be debited and credited by placing the appropriate number (or numbers) in the space provided. (An example transaction has been completed below.)(1) Cash(2) Materials Inventory(3) Work-in-Process Inventory(4) Finished Goods Inventory(5) Sales(6) Cost of Goods Sold(7) Direct Labor(8) Manufacturing Overhead (controlling account) Transaction Account(s) Account(s) Debited Credited (a)

Purchased raw materials for cash.

(b)

Recorded direct labor costs applicable to job number 328 Recorded direct materials used on job number 328. Applied overhead to job number 328 using a predetermined overhead application rate. Paid the direct labor payroll.

(e) (f)

Paid the indirect factory labor payroll.

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(g) (h)

Recorded the completion of job number 328. Sold for cash all of the units manufactured in job number 328.

10) Century Pools designs and builds custom pools and spas to the customer's order and uses a job order system. The predetermined overhead rate for the current year is 60% of direct labor cost.At the end of the current year, Century Pools' direct labor cost totaled $170,000 and actual overhead amounted to $105,000.A pool built for F. Becker required $32,000 of direct materials and $6,500 of direct labor. It was completed in May of the current year.(A) Compute the total cost of the Becker pool as shown on the job cost sheet at date of completion. (B) Compute the amount of under- or over-applied manufacturing overhead for Century's operations for the current year. (C) What disposition is made of over- or under-applied overhead at the end of the year? (Assume that the amount is not material.)

11) What is meant by under-applied overhead? By over-applied overhead? Briefly explain each term.

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12) Continental Company uses a job order cost accounting system. During March, three jobs were completed and the costs were computed as follows: job number 1, $89,000; job number 2, $58,800; job number 3, $54,000. As of March 31, the following amounts had been charged to the Work in Process Inventory controlling account in the general ledger: Work in Process Inventory Debit Balance, March 1

33,800

Direct labor

48,000

Manufacturing overhead

83,200

Direct materials

72,000

Credit

Required: (A) Prepare the general journal entry to reflect the jobs completed during March: Account Title

Debit

Credit

(B) Compute the cost of the unfinished jobs at March 31.

13) Alice Blue is a wholesale dress manufacturer. In manufacturing dresses, the following costs were incurred in March: Direct materials Direct labor

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$ 40,600 $ 78,000

Projected overhead for the year was $560,000 to be allocated based on project direct labor cost of $395,000.Required: What are the total manufacturing costs for March? (Round your interim calculations to one decimal place.)

14) Listed below are six activity cost pools used by the Keaton Corporation:Heating costsMachinery set-up costsMaterials storage costsMachinery power costsEquipment maintenance costsPurchasing department costsRequired: Listed below are six activity bases used by Keaton to allocate manufacturing overhead costs to products. In the space provided next to each activity base, indicate for which of the above cost pools it is a cost driver._____ (a) Number of equipment work orders related to each product line. _____ (b) Number of direct material purchase orders related to each product line. _____ (c) Number of production runs related to each product line. _____ (d) Square feet of direct materials warehouse space occupied by each product line. _____ (e) Number of machine hours required to produce each product line. _____ (f) Square feet of production space occupied by each product line.

15) Burgundy Corporation makes plastic and wooden picture frames. The company has assigned $107,000 in monthly manufacturing overhead costs to two cost pools as follows: $67,000 to power costs, and $40,000 to production set-up costs. Additional monthly data are provided below: Plastic Frames Wooden Frames Sales revenue Direct materials

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$ 254,000 $ 101,000

$ 179,000 $ 38,360

Direct labor Machine hours Production runs Units produced and sold

$ 53,360 107,420 65 59,000

$ 92,720 7,580 35 29,000

Power costs are allocated to products using machine hours as an activity base. Production set-up costs are allocated to products based on the number of production runs each product line requires.Required: (A) Allocate manufacturing overhead from the activity cost pools to each product line. Record your answers in the following table: (Round percentages to whole numbers.) Plastic

Wooden

Power cost pool allocation Set-up cost pool allocation Total overhead allocation

(B) Compute the total per-unit cost of manufacturing plastic frames and wooden frames. Record your answers in the following table: (Round per-unit cost to two decimal places.) Plastic

Wooden

Total manufacturing costs Units produced and sold Costs per unit

(C) On a per-unit basis, what is the profitability per unit for each of the two product lines? Record your answers in the following table. Which product line appears to be most profitable? (Round interim and final answers to two decimal places.)

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16) Laughton Corporation makes two styles of cases for compact disks, the standard case and the deluxe case. The company has assigned $210,000 in monthly manufacturing overhead to three cost pools as follows: $90,000 to machining costs, $60,000 to production set-up costs, and $60,000 to inspection costs. Additional monthly data are provided below:

Sales revenue Direct materials Direct labor Machine hours Production runs Units produced and sold

Standard Case

Deluxe Case

$ 480,000 $ 135,000 $ 105,000 24,000 7 33,000

$ 189,000 $ 45,000 $ 30,000 6,000 12 3,000

The first and last unit in each production run is inspected for quality control purposes. Inspection costs are allocated to the products based on the number of inspections required. Machining costs are allocated to products using machine hours as an activity base. Set-up costs are allocated to products based on the number of production runs each product line requires.Required: (A) Allocate manufacturing overhead from the activity cost pools to each product line. Record your answers in the following table: (Round percentages to two-decimal places.) Standard

Deluxe

Machining cost pool allocation Set-up cost pool allocation Inspection cost pool allocation Total overhead allocation

(B) Compare the total per-unit cost of manufacturing standard cases and deluxe cases. Record your answers in the following table: (Round per-unit cost to two decimal places.) Standard

Deluxe

Total manufacturing costs Units produced and sold Costs per unit

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Answer Key Test name: Chapter 17 Test Bank (Problem Material) 1) In both manufacturing and service companies, cost accounting systems help management attain two important objectives: (1) to determine the unit cost of manufacturing a product or providing a service, and (2) to provide managers with useful information for planning and cost control functions. 2) (a) Under-applied overhead(b) Materials Inventory(c) Job cost sheet(d) Finished Goods Inventory(e) Process cost system(f) Work in Process Inventory(g) Job order cost system 3) (A) $1,638,000 OH ÷ $819,000 DL = 200% $78,000 direct labor costs × 200% = $156,000(B) $1,638,000 OH ÷ 9,000 hours = $182 per direct labor-hour 1,073 machine-hours × $182/hour = $195,286 4) $2,125,000 = Predetermined overhead rate × $425,000 Predetermined overhead rate = $2,125,000 ÷ $425,000 = 500% Predetermined overhead rate = Estimated manufacturing overhead ÷ Estimated direct labor cost 500% = Estimated manufacturing overhead ÷ $4,125,000 Estimated manufacturing overhead = 500% × $4,125,000 = $20,625,000

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5) There are two reasons that a single product firm may choose not to assign actual overhead as it is incurred. First, the need for timely information regarding product costs may preclude waiting until actual overhead cost information is available. Second, if there is a strong seasonal component to either the rate of production or the overhead costs, product costs will display variations completely unrelated to the underlying economics of the production process. 6) For overhead application rates to provide reliable results, any activity base chosen to compute an application rate must be a significant driver of overhead costs. A cost driver is an activity base that can be traced directly to units produced and that serves as a casual factor in the incurrence of overhead costs. In other words, an increase in the number of activity base units (for example, direct labor hours worked) must cause a proportional increase in actual overhead costs incurred. 7) (A) $11,840 ÷ $7,400=$1.60(B) Transaction a.

Account Title Raw Materials Inventory

Debit 800

Accounts Payable b.

Work-in-Process Inventory

Credit

800 45

Raw Materials Inventory c.

Work-in-Process Inventory

45 500

Direct Labor d.

Raw Materials Inventory

500 350

Accounts Payable e.

Manufacturing Overhead

350 210

Salary Payable f.

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Manufacturing Overhead

210 230

Cash g.

Auto Expense

230 75

Accounts Payable h.

Work-in-Process Inventory

75 215

Raw Materials Inventory i.

Work-in-Process Inventory

215 800

Manufacturing Overhead Applied j.

Finished Goods Inventory

800 325

Work-in-Process Inventory k.

Accounts Receivable

325 750

Sales Cost of Goods Sold

750 325

Finished Goods Inventory

325

(C) Direct materials $45 + $215 + Direct labor $500 + Overhead applied $800 − Completed goods $325 = $1,235 8) Transaction (A)

Account Title Work in Process Inventory

Debit 75,000

Materials Inventory (B)

Work in Process Inventory

75,000 125,000

Direct Labor (C)

Work in Process Inventory

125,000 93,750

Manufacturing Overhead (D)

Finished Goods Inventory Work in Process Inventory

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Credit

93,750 165,000 165,000

(E)

Accounts Receivable

390,000

Sales Cost of Goods Sold

390,000 210,000

Finished Goods Inventory

210,000

(a) (b) (c) (d)

(e) (f) (g) (h)

Purchased raw materials for cash. Recorded direct labor costs applicable to job number 328 Recorded direct materials used on job number 328. Applied overhead to job number 328 using a predetermined overhead application rate. Paid the direct labor payroll. Paid the indirect factory labor payroll. Recorded the completion of job number 328. Sold for cash all of the units manufactured in job number 328.

Transaction Account(s) Account(s) Debited Credited 2 1 3 7 3

7 8 4

1 1 3

1,6

5,4

10) (A) $32,000 materials + $6,500 labor + $3,900 ($6,500 × 0.6) = $42,400 (B) $105,000 actual overhead − $102,000 ($170,000 × 0.6) applied = $3,000 under-applied overhead (C) Balance of overhead account at year-end is closed into the Cost of Goods Sold account if amount is not material. Under-applied overhead would increase Cost of Goods Sold. Over-applied overhead would decrease Cost of Goods Sold.

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11) Under-applied overhead refers to the debit balance that results in the Manufacturing Overhead account when the amount of overhead applied to production of the period is less than the total amount of expenditures actually incurred for overhead. In short, the overhead costs incurred have not been fully applied to the production of the period.Over-applied overhead is the credit balance that results in the Manufacturing Overhead account when the amount of overhead applied to production of the period exceeds the actual overhead expenditures for the period. In short, a credit balance in the overhead account indicates that too much overhead has been applied to production. 12) (A) Account Title Finished Goods Inventory Work in Process Inventory

Debit 201,800

Credit

201,800

To transfer the cost of completed jobs to Finished Goods Inventory

(B) Cost of unfinished jobs at March 31: Balance, March 1 Direct labor Manufacturing overhead Direct materials Total costs Less cost of jobs finished in March

$ 33,800 48,000 83,200 72,000 $ 237,000 (201,800)

Balance of work in process, March 31

$ 35,200

13) $40,600 + $78,000 + $109,200 = $227,800 ($560,000 ÷ $395,000 = 1.4 × $78,000 = $109,200) 14) (a) Equipment maintenance costs(b) Purchasing department costs(c) Machinery set-up costs(d) Materials storage costs(e) Machinery power costs(f) Heating costs 15)

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(A)

Power cost pool allocation Machine hours, plastic frames

107,420

93%

Machine hours, wooden frames

7,580

115,000

100%

Total machine hours Power costs, plastic frames ($67,000 × 93%)

$ 62,310

Power costs, wooden frames ($67,000 × 7%)

$ 4,690

Set-up cost pool allocation Production runs, plastic frames

65%

Production runs, wooden frames

35%

Total machine hours

100

100%

Set-up costs, plastic frames ($40,000 × 65%)

$ 26,000

Set-up costs, wooden frames ($40,000 × 35%)

$ 14,000

(B)

Plastic

Wooden

$ 101,000 53,360

$ 38,360 92,720

88,310

18,690

$ 242,670

$ 149,770

Units produced and sold

59,000

29,000

Manufacturing cost per unit

$ 4.11

$ 5.16

Direct materials Direct labor Manufacturing overhead Total manufacturing costs

(C)

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Total revenue Units produced and sold

Plastic

Wooden

$ 254,000 59,000

$ 179,000 29,000

Selling price per unit

$ 4.31

$ 6.17

Manufacturing cost per unit

$ 4.11

5.16

Profitability per unit

$ 0.20

$ 1.01

16) (A)

Standard

Deluxe

Machine hours, standard

24,000

80%

Machine hours, deluxe

6,000

20%

Total machine hours

30,000

100%

Machining cost pool allocation

Machining costs, standard ($90,000 × 80%)

$ 72,000

Machining costs, deluxe ($90,000 × 20%)

$ 18,000

Set-up cost pool allocation Production runs, standard

36.84%

Production runs, deluxe

63.16%

Total number of runs

100.00%

Set-up costs, standard ($60,000 × 36.84%)

$ 22,104

Set-up costs, deluxe ($60,000 × 63.16%)

$ 37,896

Inspection cost pool allocation

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Inspections, standard

36.84%

Inspections, deluxe

63.16%

Total number of runs

100.00%

Inspection costs, standard ($60,000 × 36.84%)

$ 22,104

Inspection costs, deluxe ($60,000 × 63.16%)

$ 37,896

(B)

Direct materials Direct labor

$ 135,000 105,000

$ 45,000 30,000

116,208

93,792

$ 356,208

$ 168,792

Units produced and sold

33,000

3,000

Manufacturing cost per unit

$ 10.79

$ 56.26

Total revenue Units produced and sold

$ 480,000 33,000

$ 189,000 3,000

Selling price per unit

$ 14.55

$ 63.00

Manufacturing cost per unit

$ 10.79

56.26

Profitability per unit

$ 3.76

$ 6.74

Manufacturing overhead Total manufacturing costs

(C)

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CHAPTER 17 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A principal objective of cost accounting systems is to ensure that cost reports to management are prepared in accordance with generally accepted accounting principles. ⊚ ⊚

true false

2) Management uses a cost accounting system to evaluate and reward employee performance. ⊚ ⊚

true false

3) Since cost accounting systems provide managers with information necessary to manage operations, the information from cost accounting systems is not useful for external reporting purposes. ⊚ ⊚

true false

4) Management can compute the per-unit cost of finished goods accurately only when a job order cost system is in use. ⊚ ⊚

true false

5) In a job order cost system, the costs of direct materials, direct labor, and manufacturing overhead are separately accumulated for each department for a given period of time. ⊚ ⊚

true false

6) Job order costing is appropriate for businesses that mass-produce large quantities of identical units that require uniform types and amounts of direct materials, direct labor, and manufacturing overhead. Version 1

⊚ ⊚

Pepsi Cola would most likely use a job order costing system. ⊚ ⊚

true false

Job order costing cannot be used for a service company. ⊚ ⊚

true false

9) Overhead application rates allow overhead to be assigned as units are being produced throughout the accounting period. ⊚ ⊚

true false

10) Overhead is applied at year-end by dividing actual overhead costs incurred by the actual number of units completed during the year. ⊚ ⊚

true false

11) A cost driver is an activity base that can be traced directly to units produced and that serves as a casual factor in the incurrence of overhead costs. ⊚ ⊚

true false

12) The estimated overhead application rate expresses an expected relationship between overhead costs and some activity base related to the production process and overhead is then assigned to products in proportion to this activity.

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⊚ ⊚

true false

13) An activity-based costing system does not help managers make better product pricing decisions. ⊚ ⊚

true false

14) A collection of job cost sheets would be similar to a subsidiary ledger, and the Work in Process Inventory account would be similar to the controlling account. ⊚ ⊚

true false

15) Metalworks Incorporated purchased $54,500 worth of direct materials to be used in Job #222. During the accounting period, Job #222 used $45,600 of direct materials. The amount of direct materials that would be shown in Job #222 Job Cost Sheet at the end of the accounting period should be $54,500, since this is the amount of direct materials the company had purchased for this particular job. ⊚ ⊚

true false

16) Metalworks applies manufacturing overhead on the basis of direct materials used in production. During the current period, direct materials used for Job #123 amounted to $22,545. If Metalworks' overhead rate is 0.65 of direct materials used, the overhead applied to Job #123 for the period is $15,000. ⊚ ⊚

true false

17) Metalworks employs three assembly workers that, on average, each work 40 hours per week and earn $9 per hour. During the current accounting period, Job #543 consumed 77 hours of direct labor totaling $693.

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⊚ ⊚

true false

18) A credit balance in the manufacturing overhead account at month end indicates that the actual overhead costs were less than the amount of overhead costs applied to jobs. ⊚ ⊚

true false

19) A debit balance in the manufacturing overhead account at month end indicates overhead applied to jobs was greater than the actual overhead costs. ⊚ ⊚

true false

20) When goods are sold, a journal entry is made transferring the goods from cost of goods sold to finished goods. ⊚ ⊚

true false

21) A debit balance in the Manufacturing Overhead account at the end of the period indicates that overhead has been under-applied to jobs. ⊚ ⊚

true false

22) If the manufacturing overhead account at month end has a credit balance before adjustment, this indicates that overhead is under-applied. ⊚ ⊚

true false

23) If actual overhead costs are less than the amount of overhead applied to production, this indicates that manufacturing overhead is over-applied.

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⊚ ⊚

true false

24) Activity-based costing (ABC) typically requires two implementation stages—creating separate activity cost pools, and allocating each cost pool to products using appropriate cost drivers. ⊚ ⊚

true false

25) Activity-based costing is an overhead allocation method that uses multiple overhead rates to track indirect costs by the activities that drive those costs. ⊚ ⊚

26)

true false

In activity-based costing, only one cost driver should be used in applying overhead. ⊚ ⊚

true false

27) An increase in an activity base must cause an increase in actual overhead costs incurred for that base to be considered a cost driver. ⊚ ⊚

true false

28) Activity-based costing uses multiple activity bases to assign overhead costs to units of production. ⊚ ⊚

true false

29) Activity-based costing systems always result in more accurate measurements of unit costs.

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⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 30) Which of the following is not a commonly used cost accounting system? A) B) C) D)

Manufacturing yield costing Job order costing Process costing Activity-based costing

31) Select the best answer to complete the sentence: Processes that consume resources must be matched with the associated _____ so that managers can decide how best to provide products or services to customers. A) B) C) D)

Sales Shareholders Costs Activities

32) The method used by managers when comparing unit costs with budgeted costs or other measures is broadly known as: A) B) C) D)

33)

Sales management. Cost control. Employee evaluation. Account reconciliation.

The basic types of cost accounting systems are:

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A) B) C) D)

34)

A job order cost system would be appropriate in the manufacturing of: A) B) C) D)

35)

Each department in the production cycle. Each batch of production, known as a job or lot. Each individual unit produced. Each job supervisor.

The type of cost accounting system best suited to a particular company depends on: A) B) C) D)

37)

Paints. Custom-made furniture. Breakfast cereal. Standard-grade plywood.

Under a job order cost system, costs are separately accumulated for: A) B) C) D)

36)

Job order cost systems, activity-based cost systems, and process cost systems. Direct cost systems and indirect cost systems. Completed job cost systems and work in process cost systems. Fixed cost systems and variable cost systems.

The nature of the company's manufacturing operations. The requirements set forth by the FASB. Government regulations. The type of cost drivers available.

A job order cost system would be suitable for which of the following:

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A) B) C) D)

A manufacturer of laundry detergent. A manufacturer of candy bars. A sugar refinery. A sailboat builder.

38) Which of the following is a characteristic of manufacturing overhead in a job order cost system? A) B) C) D)

It is directly traceable to specific jobs or units. It includes the cost of all labor relating to manufacturing operations. It is assigned to units produced by means of an overhead application rate. It includes the cost of direct materials used and of indirect labor.

39) Which of the following is an advantage of developing a predetermined estimated application rate? A) Long-run fluctuations in volume of output are eliminated. B) In a job order system, unit costs can be determined only at the end of the period. C) Using predetermined estimated application rates enables management to set more realistic sales prices to charge customers throughout the year as jobs are completed. D) Actual overhead will always be less than applied overhead.

40)

The advantage of using a predetermined overhead application rate is that:

A) Units produced are charged with a "normal" amount of manufacturing overhead regardless of whether they are produced in a high-volume month or a low-volume month. B) Overhead costs will be limited to the predetermined amount. C) Entries need not be made to record actual overhead costs incurred. D) The unit cost of production will be lower than it would be if actual overhead costs were assigned to units produced.

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41)

A predetermined overhead application rate:

A) Expresses an expected relationship between overhead costs and an activity base. B) Can be determined by dividing budgeted direct labor cost by the budgeted factory overhead costs. C) Is computed at the end of the period once actual overhead costs are known. D) Applies the same amount of overhead to each product or service.

42)

Manufacturing overhead is: A) B) C) D)

A direct cost that can be traced to a specific job. An indirect cost that can be traced to a specific job. A direct cost that cannot be traced to a specific job. An indirect cost that cannot be traced to a specific job.

43) Overhead costs are assigned to production using an overhead application rate, whereas no such "application rate" is used to assign the costs of direct materials and direct labor to production. The reason for this difference in procedures is that: A) Overhead is an indirect cost which cannot be traced easily and directly to specific units of product. B) Overhead is always larger in dollar amount than either direct materials or direct labor. C) The amounts of direct material and direct labor applicable to each unit of production cannot be determined as easily as the amount of overhead. D) Overhead is always equal to a constant percentage of direct labor costs.

44)

Manufacturing overhead is not:

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A) B) C) D)

A product cost. An indirect cost. A manufacturing cost. A period cost.

45) The cost of salaries paid to employees who work in a factory maintaining the heating system is considered: A) B) C) D)

Direct labor. Indirect materials. Factory overhead. General and administrative costs.

46) Moran Company uses a job order cost system and has established a predetermined overhead application rate for the current year of 150% of direct labor cost, based on budgeted overhead of $900,000 and budgeted direct labor cost of $600,000. Job No. 1 was charged with direct materials of $36,000 and with overhead of $27,000. What is the total cost of Job No. 1? A) B) C) D)

$64,000 $81,000 $91,000 Cannot be determined without additional information.

47) Doyle Co. uses a job order cost accounting system. At year-end the Work-in-Process Inventory controlling account showed a debit balance of $43,125. For the two jobs in process at year-end, one showed $6,000 in direct materials and $4,500 in direct labor. The job cost sheet for the second job showed $9,000 in direct materials and $6,750 in direct labor. If the company is using a predetermined overhead application rate based on direct labor cost, the rate is:

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A) B) C) D)

50%. 100%. 150%. 200%.

48) Edwards Auto Body uses a job order cost system. Overhead is applied to jobs on the basis of direct labor hours. During the current period, Job No. 337 was charged $425 in direct materials, $475 in direct labor, and $190 in overhead. If direct labor costs an average of $16 per hour, the company's overhead application rate is: A) B) C) D)

$7.27 per direct labor hour. $6.40 per direct labor hour. $17.50 per direct labor hour. $40 per direct labor hour.

49) Marty's Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of 160% of direct labor costs. Job No. 2617 required $780 in direct labor costs. The job was initially budgeted to require $765 in direct labor costs. Overhead applied to Job No. 2617 during the period amounted to: A) B) C) D)

$765. $1,248. $1,385. $865.

50) Marty's Metal Shop uses a job order cost system. It applies overhead to jobs at a rate of 175% of direct labor costs. Job No. 2617 required $800 in direct labor costs. The job was initially budgeted to require $850 in direct labor costs. Overhead applied to Job No. 2617 during the period amounted to:

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A) B) C) D)

$850. $1,400. $1,275. $1,487.50.

51) Riverview Company's budget for the coming year includes $7,800,000 for manufacturing overhead, 40,000 hours of direct labor, and 300,000 hours of machine time.If Riverview applies overhead using a predetermined rate based on machine-hours, what amount of overhead will be assigned to a unit of output which requires 0.8 machine hours and 0.30 labor hours to complete? A) B) C) D)

$20.80 $59.00 $26.00 $195.00

52) Riverview Company's budget for the coming year includes $6,000,000 for manufacturing overhead, 50,000 hours of direct labor, and 250,000 hours of machine time.If Riverview applies overhead using a predetermined rate based on machine-hours, what amount of overhead will be assigned to a unit of output which requires 0.5 machine hours and 0.25 labor hours to complete? A) B) C) D)

$12.00 $16.00 $20.00 $ 6.00

53) Riverview Company's budget for the coming year includes $8,800,000 for manufacturing overhead, 40,000 hours of direct labor, and 200,000 hours of machine time.If Riverview applies overhead using a predetermined rate based on labor-hours, what amount of overhead will be assigned to a unit of output which requires 0.9 machine hours and 0.90 labor hours to complete?

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A) B) C) D)

$5.00 $198.00 $44.00 $103.00

54) Riverview Company's budget for the coming year includes $6,000,000 for manufacturing overhead, 50,000 hours of direct labor, and 250,000 hours of machine time.If Riverview applies overhead using a predetermined rate based on labor-hours, what amount of overhead will be assigned to a unit of output which requires 0.5 machine hours and 0.25 labor hours to complete? A) B) C) D)

55)

A job cost sheet usually contains a record of each of the following except: A) B) C) D)

56)

The cost of direct materials charged to a particular job. The overhead costs actually incurred on a particular job. The cost of direct labor charged to a particular job. The overhead cost applied to a particular job.

Which of the following costing systems would always use job cost sheets? A) B) C) D)

57)

$16.00 $30.00 $20.00 $60.00

Job order costing Process costing Activity-based costing Specific-identification costing

A job cost sheet should:

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A) B) C) D)

58)

The document that provides information for the cost of goods manufactured is: A) B) C) D)

59)

The job cost sheet. Time cards. Material requisition. Payroll check.

A job cost sheet will include: A) B) C) D)

60)

Contain information that summarizes all jobs finished. Contain information on each individual job in process. Contain only the direct costs of a particular job. Only be used for jobs that have been completed.

All raw materials purchased. Actual overhead. Direct labor applied to production. Selling costs.

A job order cost system traces direct materials cost to a particular job by means of: A) B) C) D)

Materials requisitions. A production budget. The Materials Inventory controlling account. A debit to the job cost sheet for the job.

61) At the end of the accounting period, applied overhead was larger than actual overhead by a material amount. The over-applied overhead should be:

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A) Treated as an extraordinary gain. B) Treated as an extraordinary loss. C) Apportioned among Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold. D) Ignored; actual overhead is determined only for internal control purposes.

62) In a job cost system, the Work-in-Process Inventory controlling account may be reconciled to the total of the: A) B) C) D)

63)

Employee time cards. Materials requisitions. Work-in-Process Inventory records for each department or process. Job cost sheets.

The year-end balance in the Materials Inventory controlling account is equal to:

A) The total of the various materials subsidiary ledger accounts (the materials on hand at the end of the period). B) The total amount of materials requisitioned during the period. C) The total amount of materials purchased during the period. D) The amount of materials debited to the Work-in-Process Inventory account during the period.

64) The employee time card for John Winter indicates that he spent last week performing routine maintenance on factory machinery. Payments made to Winter for last week's work should be: A) B) C) D)

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Debited to Work in Process Inventory. Credited to the Direct Labor account. Debited to the Direct Labor account. Debited to the Manufacturing Overhead account.

65)

When a job is completed: A) B) C) D)

66)

Debits to the Manufacturing Overhead account record: A) B) C) D)

67)

The actual amounts of overhead costs incurred during a period. The amount of overhead applied to production during a period. The amount of overhead incurred on a specific job. All conversion costs of a period.

Under-applied overhead at the end of a month:

A) process. B) C) D) account.

68)

Cost of goods sold is debited. Work-in-process inventory is debited. Materials inventory is credited. Finished goods inventory is debited.

Results when actual overhead costs are less than amounts applied to work in Indicates a poorly designed cost accounting system. Is represented by a debit balance remaining in the Manufacturing Overhead account. Is represented by a credit balance remaining in the Work in Process Inventory

If manufacturing overhead is materially over-applied, it is best to:

A) Close it to Work in Process Inventory. B) Close it to Finished Goods Inventory. C) Close it to Cost of Goods Sold. D) Apportion it among Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

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69)

The account Work-in-Process Inventory: A) B) C) D)

70)

The account Finished Goods: A) B) C) D)

71)

Consists of completed goods that have not yet been sold. Consists of goods being manufactured that are incomplete. Consists of materials to be used in the production process. Consists of the cost of new materials used and labor, but not overhead.

The Work in Process account in a job order cost accounting system will be debited for: A) B) C) D)

Only direct labor and direct materials. Direct labor, direct materials, and applied overhead. Direct labor, direct materials, and actual overhead. Only direct materials and applied overhead.

72) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Work in Process Debit Beginning Balance Direct Materials

0 Transferred Out 61,000

Direct Labor

104,000

Overhead

187,200

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Credit 258,200

Ending Balance

94,000

Only Job #007 was still in process at the end of March and this job had been charged with $52,000 in direct materials cost.The amount of direct materials cost charged to completed jobs during March was: A) B) C) D)

$26,000. $52,000. $9,000. $94,000.

73) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Work in Process Debit Beginning Balance Direct Materials

0 Transferred Out 70,000

Direct Labor

100,000

Overhead

260,000

Ending Balance

130,000

Credit 300,000

Only Job #007 was still in process at the end of March and this job had been charged with $40,000 in direct materials cost.The amount of direct materials cost charged to completed jobs during March was: A) B) C) D)

$20,000. $50,000. $30,000. $40,000.

74) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Version 1

Work in Process Debit Beginning Balance Direct Materials

0 Transferred Out 72,000

Direct Labor

102,000

Overhead

122,400

Ending Balance

83,000

Credit 213,400

Only Job #007 was still in process at the end of March and this job had been charged with $17,000 in direct materials cost.The predetermined overhead application rate at Capri Boat is what percentage of direct labor costs? A) B) C) D)

83% 68% 120% 240%

75) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Work in Process Debit Beginning Balance Direct Materials

0 Transferred Out 70,000

Direct Labor

100,000

Overhead

260,000

Ending Balance

130,000

Credit 300,000

Only Job #007 was still in process at the end of March and this job had been charged with $40,000 in direct materials cost.The predetermined overhead application rate at Capri Boat is what percentage of direct labor costs?

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A) B) C) D)

38% 62% 260% 580%

76) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Work in Process Debit Beginning Balance Direct Materials

0 Transferred Out 57,000

Direct Labor

100,000

Overhead

120,000

Ending Balance

82,000

Credit 195,000

Only Job #007 was still in process at the end of March and this job had been charged with $16,000 in direct materials cost.The amount of overhead costs applied to Job #007 during March was: A) B) C) D)

$66,000. $30,000. $36,000. $84,000.

77) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Work in Process Debit Beginning Balance Direct Materials

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0 Transferred Out 70,000

Credit 300,000

Direct Labor

100,000

Overhead

260,000

Ending Balance

130,000

Only Job #007 was still in process at the end of March and this job had been charged with $40,000 in direct materials cost.The amount of overhead costs applied to Job #007 during March was: A) B) C) D)

$90,000. $26,250. $65,000. $60,000.

78) Capri Boat Corporation uses a job order cost system and applies overhead based on a percentage of direct labor cost. Cost flows through the Work in Process Inventory account during March are given below: Work in Process Debit Beginning Balance Direct Materials

0 Transferred Out 70,000

Direct Labor

100,000

Overhead

260,000

Ending Balance

130,000

Credit 300,000

Only Job #007 was still in process at the end of March and this job had been charged with $40,000 in direct materials cost.The journal entry that accounts for the $300,000 transferred out of Work in Process account includes a debit of $300,000 to: A) B) C) D)

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Finished Goods. Cost of Goods Sold. Accounts Receivable. Sales.

79) Canfield Construction applies overhead to its projects at a rate of $68 per direct labor hour. Laborers are paid an average rate of $30 per hour. The Jefferson Apartments project was charged a total of $2,200,000 in direct materials and $480,000 in direct labor costs.Overhead applied to the Jefferson Apartments project amounted to: A) B) C) D)

$480,000. $1,720,000. $1,088,000. $16,000.

80) Canfield Construction applies overhead to its projects at a rate of $65 per direct labor hour. Laborers are paid an average rate of $30 per hour. The Jefferson Apartments project was charged a total of $1,200,000 in direct materials and $450,000 in direct labor costs.Overhead applied to the Jefferson Apartments project amounted to: A) B) C) D)

$450,000. $650,000. $975,000. $1,600,000.

81) Canfield Construction applies overhead to its projects at a rate of $65 per direct labor hour. Laborers are paid an average rate of $30 per hour. The Jefferson Apartments project was charged a total of $1,200,000 in direct materials and $450,000 in direct labor costs.The journal entry to transfer the completed Jefferson Apartments project to Canfield's finished goods inventory would include: A) B) C) D)

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A debit to the Finished Goods Inventory account of $975,000. A debit to the Finished Goods Inventory account of $2,625,000. A debit to the Finished Goods Inventory account of $1,650,000. A credit to the Work in Process Inventory account of $2,175,000.

82) Canfield Construction applies overhead to its projects at a rate of $65 per direct labor hour. Laborers are paid an average rate of $30 per hour. The Jefferson Apartments project was charged a total of $1,200,000 in direct materials and $450,000 in direct labor costs.The journal entry made by Canfield to record the sale of the Jefferson Apartments project to King Development Company for $5,250,000 would include: A) B) C) D)

83)

A debit to Sales of $5,250,000. A debit to Cost of Goods Sold of $2,625,000. A credit to Finished Goods Inventory of $975,000. A debit to Finished Goods Inventory of $975,000.

Which of the following statements is true about activity-based costing? A) B) C) D)

Only one activity should be used for a company. Numerous activity bases are used in applying overhead costs to products. There can only be one cost driver to apply overhead costs to products. Direct materials and direct labor are applied to jobs based upon cost drivers.

84) In an activity-based costing system, manufacturing overhead costs are divided into separate: A) B) C) D)

85)

Cost drivers. Activity cost pools. Activity bases. Indirect cost centers.

Benefits of activity-based costing include all of the following except: A) B) C) D)

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More accurate measures of product costs. More accurate evaluations of product profitability. A better understanding of what "drives" manufacturing overhead costs. More subjective product pricing decisions.

86)

An activity-based costing system would probably not be appropriate if: A) B) C) D)

87)

A company produces more than one product line. A company produces only one product. A company is highly automated. A company has more than one production facility.

An activity base is said to be a "driver" of overhead costs when the activity base:

A) B) C) D) overhead.

Is independent of the amount of overhead cost incurred. Results in an overhead application rate greater than 100%. Is a causal factor in the amount of overhead cost incurred. Is the largest of the various types of expenditures classified as manufacturing

88) Which of the following would likely be the most appropriate cost driver to allocate machinery set-up costs to products? A) B) C) D)

Machine hours Direct labor hours Number of production runs Repair work orders

89) Starbright manufactures child car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows:Factory utilities: $95,000Factory foremen salaries: $93,000Machinery setup costs: $37,000Total manufacturing overhead: $225,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Factory Utilities

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Allocation Base

Direct labor-hours

Estimated Activity Level 15,060

Factory foremen salaries Setup costs

Machine hours Number of production runs

19,300 175

During the current month, the following levels of activities were incurred: Car Seats Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

$ 74,910 4,540 5,800 45 1,800

Strollers

Baby Swings

$ 129,525 7,850 9,400 76 3,700

$ 44,055 2,670 4,100 54 1,110

Total $ 248,490 15,060 19,300 175 6,610

What are the setup costs allocated to Strollers during the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$9,514 $11,417 $16,069 $6,610

90) Starbright manufactures child car seats, strollers, and baby swings. Starbright’s manufacturing costs are budgeted as follows:Factory utilities: $105,000 Factory foremen salaries: $75,000 Machinery setup costs: $30,000 Total manufacturing overhead: $210,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,258 21,000 83

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs

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Car Seats

Strollers

Baby Swings

Total

$ 55,425 4,619 7,500 25

$ 84,423 7,035 10,250 40

$ 31,258 2,604 3,250 18

$ 171,106 14,258 21,000 83

Units Produced

1,500

2,500

750

4,750

What are the setup costs allocated to Strollers during the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$9,036 $6,502 $14,458 $16,265

91) Starbright manufactures child car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows:Factory utilities: $75,000Factory foremen salaries: $79,000Machinery setup costs: $23,000Total manufacturing overhead: $177,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 13,940 16,400 104

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 46,860 4,260 5,100 30 1,300

$ 78,650 7,150 8,600 48 2,300

$ 27,830 2,530 2,700 26 830

$ 153,340 13,940 16,400 104 4,430

What are the factory foremen salaries allocated to Car Seats during the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

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$13,006 $24,567 $41,427 $79,000

92) Starbright manufactures child car seats, strollers, and baby swings. Starbright’s manufacturing costs are budgeted as follows:Factory utilities: $105,000 Factory foremen salaries: $75,000 Machinery setup costs: $30,000 Total manufacturing overhead: $210,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,258 21,000 83

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 55,425 4,619 7,500 25 1,500

$ 84,423 7,035 10,250 40 2,500

$ 31,258 2,604 3,250 18 750

$ 171,106 14,258 21,000 83 4,750

What are the factory foremen salaries allocated to Car Seats during the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$11,607 $26,786 $36,607 $75,000

93) Starbright manufactures child car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows:Factory utilities: $90,000Factory foremen salaries: $89,000Machinery setup costs: $33,000Total manufacturing overhead: $212,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

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Allocation Base

Estimated Activity Level

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

14,740 17,900 154

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 55,750 4,460 5,600 40 1,400

$ 95,625 7,650 8,600 68 3,300

$ 32,875 2,630 3,700 46 1,030

$ 184,250 14,740 17,900 154 5,730

What are the factory utilities costs allocated to Baby Swings during the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$212,000 $46,710 $27,232 $16,058

94) Starbright manufactures child car seats, strollers, and baby swings. Starbright’s manufacturing costs are budgeted as follows:Factory utilities: $105,000 Factory foremen salaries: $75,000 Machinery setup costs: $30,000 Total manufacturing overhead: $210,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,258 21,000 83

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours

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Car Seats

Strollers

Baby Swings

$ 55,425 4,619 7,500

$ 84,423 7,035 10,250

$ 31,258 2,604 3,250

Total $ 171,106 14,258 21,000

Production Runs Units Produced

25 1,500

40 2,500

18 750

83 4,750

What are the factory utilities costs allocated to Baby Swings during the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$210,000 $51,808 $34,016 $19,177

95) Starbright manufactures child car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows:Factory utilities: $85,000Factory foremen salaries: $86,000Machinery setup costs: $30,000Total manufacturing overhead: $201,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,500 18,850 137

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 41,800 4,400 5,450 35 1,100

$ 71,250 7,500 10,000 62 3,000

$ 24,700 2,600 3,400 40 970

$ 137,750 14,500 18,850 137 5,070

What are the total manufacturing overhead costs allocated to the Baby Swings for the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

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$58,322 $103,166 $39,512 $201,000

96) Starbright manufactures child car seats, strollers, and baby swings. Starbright’s manufacturing costs are budgeted as follows:Factory utilities: $105,000 Factory foremen salaries: $75,000 Machinery setup costs: $30,000 Total manufacturing overhead: $210,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,258 21,000 83

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 55,425 4,619 7,500 25 1,500

$ 84,423 7,035 10,250 40 2,500

$ 31,258 2,604 3,250 18 750

$ 171,106 14,258 21,000 83 4,750

What are the total manufacturing overhead costs allocated to the Baby Swings for the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$69,837 $102,873 $37,290 $210,000

97) Starbright manufactures child car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows:Factory utilities: $90,000Factory foremen salaries: $90,000Machinery setup costs: $34,000Total manufacturing overhead: $214,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

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Allocation Base

Estimated Activity Level

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

14,820 18,250 158

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 60,480 4,480 5,650 40 1,500

$ 103,950 7,700 8,800 70 3,400

$ 35,640 2,640 3,800 48 1,050

$ 200,070 14,820 18,250 158 5,950

What are the total manufacturing overhead costs allocated to the Strollers for the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$63,677 $105,222 $45,101 $214,000

98) Starbright manufactures child car seats, strollers, and baby swings. Starbright’s manufacturing costs are budgeted as follows:Factory utilities: $105,000 Factory foremen salaries: $75,000 Machinery setup costs: $30,000 Total manufacturing overhead: $210,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,258 21,000 83

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours

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Car Seats

Strollers

Baby Swings

Total

$ 55,425 4,619 7,500

$ 84,423 7,035 10,250

$ 31,258 2,604 3,250

$ 171,106 14,258 21,000

Production Runs Units Produced

25 1,500

40 2,500

18 750

83 4,750

What are the total manufacturing overhead costs allocated to the Strollers for the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

$69,837 $102,873 $37,290 $210,000

99) Starbright manufactures child car seats, strollers, and baby swings. Starbright's manufacturing costs are budgeted as follows:Factory utilities: $85,000Factory foremen salaries: $84,000Machinery setup costs: $28,000Total manufacturing overhead: $197,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,340 18,150 129

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 69,760 4,360 5,350 35 1,800

$ 118,400 7,400 9,600 58 2,800

$ 41,280 2,580 3,200 36 930

$ 229,440 14,340 18,150 129 5,530

What is the total amount of manufacturing overhead costs allocated to the Car Seats for the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.)

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A) B) C) D)

$58,201 $100,882 $37,917 $197,000

100) Starbright manufactures child car seats, strollers, and baby swings. Starbright’s manufacturing costs are budgeted as follows:Factory utilities: $105,000 Factory foremen salaries: $75,000 Machinery setup costs: $30,000 Total manufacturing overhead: $210,000The company uses activity-based costing to allocate its manufacturing overhead costs to products based on the following schedule: Overhead Cost

Allocation Base

Factory Utilities Factory foremen salaries Setup costs

Direct labor-hours Machine hours Number of production runs

Estimated Activity Level 14,258 21,000 83

During the current month, the following levels of activities were incurred:

Direct Labor Costs Direct Labor Hours Machine Hours Production Runs Units Produced

Car Seats

Strollers

Baby Swings

Total

$ 55,425 4,619 7,500 25 1,500

$ 84,423 7,035 10,250 40 2,500

$ 31,258 2,604 3,250 18 750

$ 171,106 14,258 21,000 83 4,750

What is the total amount of manufacturing overhead costs allocated to the Car Seats for the current month? (Do not round intermediate calculations. Round your answer to the nearest dollar.) A) B) C) D)

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$69,837 $102,873 $37,290 $210,000

Answer Key Test name: Chapter 17 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) FALSE 8) FALSE 9) TRUE 10) FALSE 11) TRUE 12) TRUE 13) FALSE 14) TRUE 15) FALSE 16) FALSE 17) TRUE 18) TRUE 19) FALSE 20) FALSE 21) TRUE 22) FALSE 23) TRUE 24) TRUE 25) TRUE 26) FALSE Version 1

27) TRUE 28) TRUE 29) TRUE 30) A 31) C 32) B 33) A 34) B 35) B 36) A 37) D 38) C 39) C 40) A 41) A 42) D 43) A 44) D 45) C 46) B 47) C 48) B 49) B 50) B 51) A 52) A 53) B 54) B 55) B 56) A Version 1

57) B 58) A 59) C 60) A 61) C 62) D 63) A 64) D 65) D 66) A 67) C 68) D 69) B 70) A 71) B 72) C 73) C 74) C 75) C 76) C 77) C 78) A 79) C 80) C 81) B 82) B 83) B 84) B 85) D 86) B Version 1

87) C 88) C 89) C 90) C 91) B 92) B 93) D 94) D 95) C 96) C 97) B 98) B 99) A 100) A

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CHAPTER 18: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are seven businesses.Required: In the spaces provided, identify whether a job order costing system or a process costing system would most likely be appropriate. (a) _____ Nancy's Paper Plate Company (b) _____ Two Leg Pants Manufacturers, Incorporated (c) _____ Solid Residential Contractors (d) _____ Float's Boats (e) _____ Big Heart Hospital (f) _____ Fizz Soda, Incorporated (g) _____ Sugarmore Candies, Incorporated

2) There are two distinct types of cost accounting systems: job order costing systems and process costing systems. How does management decide whether to use a job order costing system or a process costing system in any given manufacturing situation? Explain briefly.

3) Milton Manufacturing uses a process costing system. Products are processed successively by Department X and Department Y and are then transferred to the finished goods warehouse. Shown below is cost information for Department Y during the month of May: Cost of work in process at May 1

$ 85,000

Cost of units transferred in from Department X during May

262,000

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Manufacturing costs added in Department Y: Direct materials used

$ 210,000

Direct labor

45,000

Manufacturing overhead

67,000

Total costs charged to Department Y as of May 31

322,000 $ 669,000

The cost of work in process in Department Y at May 31 has been determined to be $113,500.Required: Prepare a general journal entry to summarize for the month of May each of the following categories of transactions: (A) The transfer of production from Department X to Department Y. (B) The recording of manufacturing costs incurred in Department Y during May. (Use a single journal entry.) (C) The transfer of completed units from Department Y to the finished goods warehouse. You may omit explanations.

4) Joyce Industries uses a process costing system. All of the company's manufacturing activities take place in a single processing department. There was no beginning inventory in May. During the month, $60,000 of materials were added and $40,000 of labor and $75,000 of overhead costs were charged to work in process. The entire work in process inventory of 20,000 units was completed and transferred to finished goods. Of these 20,000 units, 15,000 were sold on account at $14 per unit.Required: Prepare a general journal entry to summarize each of the following categories of transactions for the month of May. (You may omit explanations.) (A) The recording of manufacturing costs applied to production (use a single journal entry). (B) The transfer of completed units from work in process to the finished goods warehouse. (C) The sale of 15,000 units manufactured during the month and the related cost of goods sold. Version 1

5) In the first month of operations, the manufacturing costs for Blue Sun Company were as follows: Direct materials used Direct labor Manufacturing overhead (controlling account)

$ 66,600 $ 99,120 $ 142,800

During the month 10,000 units were completed, and 5,000 units were in process at the end of the month. The 5,000 units in process were 100% completed as to materials and 80% completed as to direct labor and overhead.Required: Compute the following: (A) Direct materials cost per equivalent unit (B) Equivalent units of production for direct labor and manufacturing overhead (C) Direct labor cost per equivalent unit (D) Manufacturing overhead cost per equivalent unit (E) Total cost of 10,000 units completed (F) Total cost of 5,000 units in process at the end of the month

6) The records of Westminster Manufacturing Company for the month of May show the following costs in Department A: Beginning Inventory Direct Materials Direct Labor Overhead (150% of Direct Labor Cost) Total

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$ 120,750 405,000 535,500 803,250 $ 1,864,500

The beginning inventory for May consisted of 10,000 units that were 80% complete as to direct materials and 60% complete as to labor and overhead. A total of 100,000 units were completed and transferred out during May, and 20,000 units remained in the work in process inventory. The ending inventory was 80% complete as to direct materials and 40% complete as to labor and overhead.Required: Compute the following: (Do not round your calculations) (A) Direct materials cost per equivalent unit (B) Equivalent units of production for direct labor and overhead (C) Total cost of 100,000 units completed (D) Total cost of 20,000 units in process at the end of the month

7) Elmer Corporation has the following information for the month of October, its first month of operations: (Round intermediate calculations to two decimal places.) Work in Process October 1 Units completed & transferred out in October Work in process October 30 100% completed for materials

0 120,000 32,000

80% completed for conversion costs

Costs added in October: Materials Direct Labor Overhead

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$ 145,900 $ 96,000 $ 108,000

Required: (A) Determine the equivalent units of production for October for (1) materials and (2) direct labor and overhead. (B) Determine the cost per equivalent units for (1) materials, (2) direct labor, and (3) overhead. (C) Determine the cost of the ending work in process. (D) Determine the cost of goods completed. (Hint: Use the amount of the cost of ending work in process that you calculated in Part C in your determination of the cost of goods completed.) (E) If the company sold ¾ of its completed goods for $264,000, what is the gross profit?

8) Monforte Company had the following information available from its records for the current month: % of Materials Complete Beginning Inventory Units Started & Completed

100%

Ending Inventory Cost of direct materials

100% $ 748,000

Conversion costs

833,400

Beginning work-in-process

148,500

% of Direct Labor & Overhead Complete 75%

60%

Units

125,000 200,000 40,000

Required: (A) What are equivalent units of production for materials? (B) What was the cost per equivalent unit of production for materials during the period? (Round your final answer to two decimal places.) (C) What were the equivalent units of production for conversion cost? (D) What was the cost per equivalent unit of production for conversion costs? (Round your final answer to two decimal places.)

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9) What does the term "equivalent units" mean? How is this concept used in computing average per-unit costs?

10) Houston Oil Company uses a process costing system with two departments: (a) the Refining Department and (b) the Packaging Department. During June, its first month of operations, the company manufactured and sold 650,000 gallons of motor oil, generating total revenue of $3,845,000. The company incurred the following manufacturing costs in June:

Direct materials Direct labor Manufacturing overhead

Refining Department $ 770,000 220,000 957,000

Packaging Department $ 192,500 55,000 110,000

Required: (A) What was the per-unit cost per gallon of oil processed by the Refining Department during June? (B) If each case of oil contains four gallons, how much was the per-unit cost per case incurred by the Packaging Department in June? (C) How much was the per-unit cost per case transferred to finished goods in June? (Round your final answer to one decimal place.) (D) How much total gross profit did the company generate in June? (Hint: Start with total revenue and subtract the total costs incurred by the two departments.)

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Answer Key Test name: Chapter 18 Test Bank (Problem Material) 1) (a) Process costing system(b) Process costing system(c) Job order costing system(d) Job order costing system(e) Job order costing system(f) Process costing system(g) Process costing system 2) Whether a manufacturing company should use a job order costing system or a process costing system depends upon the nature of the company's manufacturing operations.A job order costing system is used when each unit of product (or batch of products) has unique characteristics that may affect its manufacturing cost. The unique product or batch is called a job, and the costs of completing each job are accumulated separately. Companies that produce a steady stream of nearly identical units, with each unit passing through the same manufacturing process, use process costing systems. In a process costing system, the cost of performing the manufacturing process is determined for a period of time. The per-unit cost of the product is then determined by dividing the cost of performing the manufacturing process by the number of units produced during a specific time period. Assigning the same "average cost" to each unit produced is appropriate, as the units are essentially identical. 3) Transaction (A)

(B)

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Account Title Work-in-Process Inventory, Department Y Work-in-Process Inventory, Department X Work-in-Process Inventory, Department Y Materials Inventory

Debit $ 262,000

Credit

$ 262,000 $ 322,000 $ 210,000

(C)

Direct Labor

$ 45,000

Manufacturing Overhead

$ 67,000

Finished Goods Inventory

$ 555,500

Work-in-Process Inventory, Department Y ($669,000 − $113,500 = $555,500)

$ 555,500

4) Transaction (A)

(B)

Account Title Work in Process Inventory

Debit $ 175,000

Materials Inventory

$ 60,000

Direct Labor

$ 40,000

Manufacturing Overhead

$ 75,000

Finished Goods Inventory

$ 175,000

Work in Process Inventory (C)

Credit

Accounts Receivable

$ 175,000 $ 210,000

Sales Cost of Goods Sold Finished Goods Inventory

$ 210,000 $ 131,250 $ 131,250

(C) ($175,000 ÷ 20,000 units) × 15,000 units = $131,250 5) (A) $66,600 ÷ 15,000 units = $4.44(B) 10,000 + (0.80 × 5,000) = 14,000 units(C) $99,120 ÷ 14,000 units = $7.08(D) $142,800 ÷ 14,000 units = $10.20(E) ($4.44 + $7.08 + $10.20) × 10,000 units = $217,200(F) (5,000 × $4.44) + [(5,000 × 0.80) × ($7.08 + $10.20)] = $91,320 6) (A) Equivalent units of material: Completed units

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100,000

Equivalent units in ending work in process

16,000

Less: Equivalent units from beginning work in process Equivalent units for May

8,000

Direct material cost per equivalent unit = $405,000 ÷ 108,000 =

108,000 $ 3.75

(B) Equivalent units of labor and overhead: Completed units Equivalent units in ending work in process Less: Equivalent units from beginning work in process Equivalent units for May

100,000 8,000 6,000 102,000

$ 120,750

Cost to complete beginning inventory Material Conversion Cost of units started and completed in May

$ 7,500 52,500

60,000 1,518,750

[90,000 × ($3.75 + $5.25 + $ 7.875)] Total cost of 100,000 completed units

$ 1,699,500

(D) Total cost of ending work in process: Material (16,000 × $3.75) Labor (8,000 × $5.25) Overhead (8,000 × $7.875)

$ 60,000 42,000 63,000

Total

$ 165,000

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7) (A) (1) 120,000 + 32,000 = 152,000 equivalent units(A) (2) 120,000 + (32,000 × 0.80) = 145,600 equivalent units(B) (1) Direct materials perunit cost = $145,900 ÷ 152,000 = $0.96(B) (2) Direct labor per-unit cost = $96,000 ÷ 145,600 = $0.66(B) (3) Overhead per-unit cost = $108,000 ÷ 145,600 = $0.74(C) Direct materials (32,000 × $0.96) Direct labor (32,000 × 0.80 × $0.66) Overhead (32,000 × 0.80 × $0.74)

$ 30,720 16,896 18,944

Ending Work in Process Inventory

$ 66,560

(D) Cost of goods completed = (Total materials added of $145,900 + Direct labor added of $96,000 + Overhead added of $108,000) − Ending Work in Process Inventory of $66,560 [from part (C)] = $349,900 − $66,560 = $283,340(E) Gross Profit = $264,000 − ($283,340 × 75%) = $51,495 8) (A) 200,000 + 40,000 = 240,000(B) $748,000 ÷ 240,000 = $3.12(C) (125,000 × 0.25) = 31,250; 31,250 + 200,000 + (40,000 × 0.60) = 255,250(D) $833,400 ÷ 255,250 = $3.27 9) An equivalent unit is a percentage measure of a completed unit’s resource requirements present in a partially finished unit. In other words, it is a measure of the work done during an accounting period. It includes work done on beginning and ending inventories as well as work on units completely processed during the period.Because average per-unit costs are computed by dividing total costs by units of production, it is necessary that units of production be expressed in homogeneous terms. Finished units cannot be added to partially finished units to produce a meaningful denominator. If the partially finished units are converted to their equivalent finished units, output is expressed in like terms, and an average per-unit cost can be computed by dividing total cost by the equivalent number of units produced during the period.

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10) (A) Total costs incurred by Refining Department = $770,000 + $220,000 + $957,000 = $1,947,000 Per-unit cost per gallon of oil processed by the Refining Department = $1,947,000 ÷ 650,000 gallons = $3.00 per gallon (B) Total costs incurred by Packaging Department = $192,500 + $55,000 + $110,000 = $357,500 Per-unit cost per case incurred by the Packaging Department = $357,500 ÷ 650,000 gallons = $0.55 per gallon Per-unit cost per case transferred to finished goods = $0.55 per gallon × 4 gallons per case = $2.20 per case (C) Per-unit cost per case transferred to finished goods = Per-unit cost per gallon of oil processed by the Refining Department of ($3.00 per gallon × 4 gallons per case) + Per-unit cost per case transferred to finished goods of $2.20 per case = $12.00 + $2.20 = $14.20 per case (D) Total gross profit = Total revenue of $3,845,000 − Total manufacturing costs incurred by both departments of ($1,947,000 + $357,500) = $3,845,000 − $2,304,500 = $1,540,500

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CHAPTER 18 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Companies that provide unique services or products are well suited to job order costing. ⊚ ⊚

true false

2) A company may choose to use process costing or job order costing, but never both simultaneously. ⊚ ⊚

true false

A construction company would most likely be a candidate for a process costing system. ⊚ ⊚

true false

4) Companies that mass-produce identical products such as packaged foods, petroleum, textiles, and automobiles are best suited for process costing systems. ⊚ ⊚

true false

5) Job order costing involves averaging costs across products produced, and as such, the first step in job order costing is to clearly understand the flow of physical units. ⊚ ⊚

true false

6) Conversion costs include direct labor and direct materials associated with converting units, so that they can be transferred out of Work in Process. ⊚ ⊚

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true false

7) Debiting Work in Process in Department Two and crediting Work in Process in Department One represents costs transferred from Department Two to Department One. ⊚ ⊚

true false

8) Jiffy Company has 3,000 units that are 70% complete. Jiffy's "equivalent units" are 3,000 completed units. ⊚ ⊚

true false

Manufacturing overhead is not applied to products when a process costing system is used. ⊚ ⊚

true false

10) Costs flow through a process costing system in the same sequence as actual products move through the assembly process. ⊚ ⊚

true false

11) In most process costing systems, the number of units "in process" at any one time is usually significant relative to the total production output of the period. ⊚ ⊚

true false

12) As costs flow from one production department to the next in a process costing system, one Work in Process Inventory account shows all the changes to the units in production. ⊚ ⊚

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true false

13) An equivalent unit measures the percentage of a completed unit's cost that is present in a partially finished unit. ⊚ ⊚

true false

14) The number of equivalent units of production during a period may be greater than, equal to, or smaller than the actual number of units completed and transferred to the finished goods warehouse. ⊚ ⊚

true false

15) Completing 3,000 units, which were each 75% complete at the beginning of the period, represents 2,250 equivalent units of work during the current period. ⊚ ⊚

true false

16) Equivalent units of production significantly differ from units completed and transferred during the period only when no significant differences exist between beginning and ending work in process. ⊚ ⊚

true false

17) In a process costing system that uses equivalent units of production, the per-unit cost of direct materials equals the total cost of materials used in the current month divided by the number of units completed and transferred during the current month. ⊚ ⊚

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true false

18) The cost transferred to Cost of Goods Sold is equal to the total manufacturing costs incurred for the units sold. ⊚ ⊚

true false

19) In a production cost report, the units in beginning Work in Process are always expressed as equivalent units. ⊚ ⊚

true false

20) The production cost report shows that total equivalent units to account for are the same regardless of whether they are based on monthly input or monthly output. ⊚ ⊚

true false

21) In a production cost report, the “units transferred” refer to the equivalent units completed during the period that have been moved to the next department or to Finished Goods Inventory. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 22) Process costing does not: A) B) C) processes. D)

23)

Accumulate all of the direct costs associated with various production processes. Accumulate all of the indirect costs associated with various production processes. Average direct and indirect costs over the identical units produced by the production Trace overhead costs to various production processes.

Process costing would be suitable for:

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A) B) C) D)

24)

All of the following are characteristics of the products of process costing except that they: A) B) C) D)

25)

Job order system. Process costing system. Production costing system. No cost system is required when jobs are similar.

Process costing systems: A) B) C) D)

27)

Are high volume. Use different amounts of direct materials. Use identical amounts of direct labor. Are created with repetitive operations.

A company that mass-produces identical products is best suited for a: A) B) C) D)

26)

Automobile repair. Production of television sets. Boat building. Kitchen remodeling.

Are used when companies mass-produce identical units. Do not have work in process accounts. Do not use equivalent units of production. Track costs to individual products.

Which company would be best suited for a job order costing system?

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A) B) C) D)

28)

Bic Pens Pepsi Cola Hershey Candy Tiffany Jewelers

Which of the following is not a characteristic of a process costing system?

A) The costs incurred in each process are accumulated in separate Work in Process Inventory accounts. B) It is suitable for mass-produced operations. C) Costs are accumulated separately for each unit of production as it moves through the factory. D) The cost of a finished unit is the sum of the unit costs of performing each manufacturing process.

29)

A process costing system differs from a job order costing system in that:

A) There is no need for overhead application rates in process costing systems. B) Process costing systems are used primarily in service companies, whereas job order costing systems are used in manufacturing companies. C) Per-unit costs are not computed in process costing systems. D) Process costing systems are used when production involves large volumes of standardized products, whereas job order costing systems are used when each job or batch of products is uniquely different.

30) In either a job order or a process costing system, credits to the Materials Inventory account represent: A) B) C) D)

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The cost of materials purchased during the period. The cost of materials relating to finished goods. The cost of unused materials returned to the inventory. The cost of materials placed into production.

31) The Work in Process – Assembly account would be credited and the Work in Process – Packaging account would be debited when: A) Goods are transferred from Assembly to Packaging. B) Goods are transferred from Packaging to Assembly. C) The units are complete and ready for sale. D) The number of units started during the period is greater than the number of units in process at the end of the period.

32)

For which of the following categories is it not important to identify the number of units? A) B) C) D)

The number of units completed during the period. The number of units transferred to the next department during the period. Beginning work in process. The number of units started during the period.

33) Duffy Brothers manufactures a single product using a process involving (1) mixing ingredients and (2) a subsequent packaging operation. Duffy uses a process costing system to account for the flow of costs through its production process. In the production process described, what is the Work in Process Inventory: Packaging Department account debited for? A) Costs transferred from the Work in Process Inventory: Mixing Department only. B) The cost of materials, direct labor, and overhead applicable to the packaging operation only. C) Costs transferred from the Work in Process Inventory: Mixing Department, as well as materials, direct labor, and overhead applicable to the packaging operation. D) Costs transferred to the Finished Goods Inventory.

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34) Duffy Brothers manufactures a single product using a process involving (1) mixing ingredients and (2) a subsequent packaging operation. Duffy uses a process costing system to account for the flow of costs through its production process. In Duffy's operation, the Finished Goods Inventory account is debited for: A) The cost of units transferred directly from the Mixing Department. B) The cost of units transferred directly from the Packaging Department. C) The cost of units transferred directly from both the Mixing Department and the Packaging Department. D) The cost of the units sold.

35) Sue’s Soup Products uses a process costing system with two processing departments: the Mixing and Cooking Department and the Canning Department. Work in process inventories are reduced to zero at the end of each month. In March, the Mixing and Cooking Department incurred manufacturing costs of $63,000 to mix 42,000 gallons of soup. The Canning Department incurred manufacturing costs of $9,000. A total of 170,000 cans of soup were transferred to the finished goods warehouse during the month. The journal entry to record the transfer of soup out of the Mixing and Cooking Department during March would include: A) B) C) D)

A debit to Work in Process Inventory: Mixing and Cooking Department of $63,000. A credit to Work in Process Inventory: Canning Department of $72,000. A debit to Finished Goods Inventory of $72,000. A credit to Work in Process Inventory: Mixing and Cooking Department of $63,000.

36) Sue’s Soup Products uses a process costing system with two processing departments: the Mixing and Cooking Department and the Canning Department. Work in process inventories are reduced to zero at the end of each month. In March, the Mixing and Cooking Department incurred manufacturing costs of $63,000 to mix 42,000 gallons of soup. The Canning Department incurred manufacturing costs of $9,000. A total of 170,000 cans of soup were transferred to the finished goods warehouse during the month. The journal entry to record the transfer of soup out of the Canning Department during March would include: Version 1

A) B) C) D)

A credit to Work in Process Inventory: Canning Department of $9,000. A credit to Work in Process Inventory: Canning Department of $63,000. A debit to Finished Goods Inventory of $72,000. A credit to Finished Goods Inventory: Mixing and Cooking Department of $72,000.

37) Sue's Soup Products uses a process costing system with two processing departments: the Mixing and Cooking Department and the Canning Department. Work in process inventories are reduced to zero at the end of each month. In March, the Mixing and Cooking Department incurred manufacturing costs of $76,000 to mix 38,000 gallons of soup. The Canning Department incurred manufacturing costs of $9,000. A total of 180,000 cans of soup were transferred to the finished goods warehouse during the month. The per-unit cost per gallon of soup transferred to the Canning Department during March was: A) B) C) D)

$2.00. $4.22. $2.24. $4.74.

38) Sue’s Soup Products uses a process costing system with two processing departments: the Mixing and Cooking Department and the Canning Department. Work in process inventories are reduced to zero at the end of each month. In March, the Mixing and Cooking Department incurred manufacturing costs of $63,000 to mix 42,000 gallons of soup. The Canning Department incurred manufacturing costs of $9,000. A total of 170,000 cans of soup were transferred to the finished goods warehouse during the month. The per-unit cost per gallon of soup transferred to the Canning Department during March was: A) B) C) D)

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$1.50. $1.62. $1.71. $1.83.

39) Sue's Soup Products uses a process costing system with two processing departments: the Mixing and Cooking Department and the Canning Department. Work in process inventories are reduced to zero at the end of each month. In March, the Mixing and Cooking Department incurred manufacturing costs of $112,000 to mix 40,000 gallons of soup. The Canning Department incurred manufacturing costs of $13,000. A total of 260,000 cans of soup were transferred to the finished goods warehouse during the month. The per-unit cost per can of soup transferred to the finished goods warehouse during March was: A) B) C) D)

$2.80. $0.48. $1.58. $3.13.

40) Sue’s Soup Products uses a process costing system with two processing departments: the Mixing and Cooking Department and the Canning Department. Work in process inventories are reduced to zero at the end of each month. In March, the Mixing and Cooking Department incurred manufacturing costs of $63,000 to mix 42,000 gallons of soup. The Canning Department incurred manufacturing costs of $9,000. A total of 170,000 cans of soup were transferred to the finished goods warehouse during the month. The per-unit cost per can of soup transferred to the finished goods warehouse during March was: A) B) C) D)

$0.05. $0.42. $0.37. $1.71.

41) Evans Products uses a process costing system with two processing departments: the Mixing Department and the Finishing Department. In June, unit costs incurred by the Mixing Department amounted to $4.00 per unit. Per-unit costs transferred to the finished goods warehouse during the month amounted to $22. Work in process inventories are reduced to zero each month. The transfer of 35,000 units to the Finishing Department in June required:

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A) B) C) D)

A debit to Finished Goods Inventory of $770,000. A credit to Work in Process Inventory: Mixing Department of $770,000. A credit to Work in Process Inventory: Finishing Department of $140,000. A debit to Work in Process Inventory: Finishing Department of $140,000.

42) Evans Products uses a process costing system with two processing departments: the Mixing Department and the Finishing Department. In June, unit costs incurred by the Mixing Department amounted to $4.00 per unit. Per-unit costs transferred to the finished goods warehouse during the month amounted to $22. Work in process inventories are reduced to zero each month. The entry to record the sale of 3,500 units in June would include: A) B) C) D)

A debit to Work in Process Inventory: Finishing Department of $77,000. A debit to Finished Goods Inventory of $77,000. A debit to Cost of Goods Sold of $77,000. A credit to Cost of Goods Sold of $77,000.

43) Evans Products uses a process costing system with two processing departments: the Mixing Department and the Finishing Department. In June, unit costs incurred by the Mixing Department amounted to $10.00 per unit. Per-unit costs transferred to the finished goods warehouse during the month amounted to $29. Work in process inventories are reduced to zero each month.If 80% of all inventory was sold at $38 per unit and 3,400 units were sold, what is the cost of the finished goods inventory at year-end? A) B) C) D)

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$42,500 $24,650 $98,600 $8,500

44) Evans Products uses a process costing system with two processing departments: the Mixing Department and the Finishing Department. In June, unit costs incurred by the Mixing Department amounted to $4.00 per unit. Per-unit costs transferred to the finished goods warehouse during the month amounted to $22. Work in process inventories are reduced to zero each month. If 80% of all inventory was sold at $32 per unit and 3,500 units were sold, what is the cost of the finished goods inventory at year-end? A) B) C) D)

$16,800 $77,000 $19,250 $96,250

45) If 6,900 units were in beginning inventory, 27,000 units were started, and 7,000 units were in the ending inventory, how many units were transferred out? A) B) C) D)

40,900 units 27,000 units 26,900 units 27,100 units

46) If 8,000 units were in beginning inventory, 26,000 units were started, and 6,000 units were in the ending inventory, how many units were transferred out? A) B) C) D)

47)

40,000 units 26,000 units 28,000 units 24,000 units

Equivalent units of production are:

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A) B) C) D)

48)

Equivalent units are usually computed for: A) B) C) D)

49)

A measure representing the percentage of a unit's cost that has been completed. Not computed separately for each input added during production. Not assigned to beginning Work in Process or ending Work in Process. The total units completed during the period.

Only direct materials. Only direct labor. Only factory overhead. Direct materials, direct labor, and factory overhead costs.

In most process costing systems, per-unit costs are determined by:

A) Dividing the number of units completed during the period by the total manufacturing costs incurred during the period. B) Dividing the total manufacturing costs incurred during the period by the number of units that were worked on during the period. C) Dividing the total manufacturing costs incurred during the period by the equivalent number of units that were completed during the period. D) Unit costs cannot be determined in a process costing system.

50) In a process costing system, costs flow from one Work in Process Inventory account to the next in the same sequence as: A) B) C) D)

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Units flow through production. In a LIFO periodic inventory system. Shipped to customers. In a job order cost system.

51) In a process costing system, the number of units started and completed for a period is equal to: A) B) C) D)

52)

Units transferred out less units in beginning work in process. Units transferred out less units in ending work in process. Units transferred out plus units of beginning work in process. Units transferred out plus units in ending work in process.

The number of equivalent units of production:

A) Is equal to the number of units completed by a department. B) May not be greater than the number of units completed by a department. C) Is used to complete the overhead application rate. D) May be less than, equal to, or greater than the number of physical units completed during the period.

53)

Equivalent units of production represent units of: A) B) C) D)

54)

Companies that compute equivalent units of production do so to: A) B) C) D)

55)

Finished goods inventory. Units of work in process inventory. Work performed during the period. Sales generated during the period.

Comply with income tax regulations. Compute total manufacturing costs for the period. Determine a manufacturing overhead application rate. Determine departmental per-unit costs.

The computation of equivalent units is generally not necessary when:

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A) Beginning work in process inventories are significantly larger than ending work in process inventories. B) Beginning and ending work in process inventories differ only slightly. C) The number of units in ending work in process exceeds the number of units completed and transferred to finished goods during the period. D) Per-unit costs become distorted as a result of not computing equivalent units of production.

56) The Finishing Department of Berlet Industries works on only one product, and all costs are incurred uniformly while these units remain in the department. On March 1, 5,000 units were in process that were 48% completed. An additional 54,000 units were transferred into the Finishing Department during March. On March 31, there were 28,000 units in process that were 78% completed. Compute the equivalent units of production for the Finishing Department during March. A) B) C) D)

78,440 units 54,000 units 50,440 units 49,840 units

57) The Finishing Department of Berlet Industries works on only one product, and all costs are incurred uniformly while these units remain in the department. On March 1, 6,000 units were in process that were 45% completed. An additional 60,000 units were transferred into the Finishing Department during March. On March 31, there were 25,000 units in process that were 75% completed. Compute the equivalent units of production for the Finishing Department during March. A) B) C) D)

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81,450 units 60,000 units 57,050 units 69,550 units

58) Department X of a manufacturing company works on only one product, and all costs are incurred uniformly as the product goes along the assembly line. The 9,000 units in process on December 1 were 60% completed. An additional 27,000 units were placed in production during December. On December 31, the 11,000 units in process were 58% completed. The equivalent units of production during December amounted to: A) B) C) D)

26,160. 47,000. 37,020. 48,020.

59) Department X of a manufacturing company works on only one product, and all costs are incurred uniformly as the product goes along the assembly line. The 8,000 units in process on December 1 were 60% completed. An additional 40,000 units were placed in production during December. On December 31, the 10,000 units in process were 60% completed. The equivalent units of production during December amounted to: A) B) C) D)

39,200. 60,800. 57,200. 58,800.

60) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

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June

July

140

1,200 1,060

940 850

The units remaining in work in process at the end of June were 30% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 70% complete.For the month of June, the number of equivalent units of direct materials produced was: A) B) C) D)

1,200. 1,060. 140. 940.

61) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

June

July

0 750 600

150 950 850

The units remaining in work in process at the end of June were 30% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 60% complete. For the month of June, the number of equivalent units of direct materials produced was: A) B) C) D)

750. 600. 150. 950.

62) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

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Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

June

July

700 620

840 720

The units remaining in work in process at the end of June were 30% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 50% complete. For the month of June, the number of equivalent units of labor and overhead produced was: A) B) C) D)

700. 620. 644. 540.

63) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

June

July

0 750 600

150 950 850

The units remaining in work in process at the end of June were 30% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 60% complete.For the month of June, the number of equivalent units of labor and overhead produced was: A) B) C) D)

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750. 600. 645. 595.

64) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

June

July

100

1,100 1,000

920 820

The units remaining in work in process at the end of June were 25% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 40% complete. For the month of July, the number of equivalent units of direct materials produced was: A) B) C) D)

720. 820. 1,200. 920.

65) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

June

July

0 750 600

150 950 850

The units remaining in work in process at the end of June were 30% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 60% complete.For the month of July, the number of equivalent units of direct materials produced was:

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A) B) C) D)

700. 800. 900. 950.

66) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month Total number of units transferred to finished goods

June

July

100

1,300 1,200

960 880

The units remaining in work in process at the end of June were 50% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 70% complete. For the month of July, the number of equivalent units of labor and overhead produced was: A) B) C) D)

960. 830. 956. 910.

67) Aves Treats, Incorporated produces birdseeds. All direct materials used in the production process are added at the beginning of the manufacturing process. Labor and overhead are added evenly thereafter, as each unit is mixed and packaged. Aves Treats uses process costing and had the following unit production information available for the months of June and July:

Number of units in beginning work in process inventory Number of units started during the month

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June

July

0 750

150 950

Total number of units transferred to finished goods

600

850

The units remaining in work in process at the end of June were 30% complete. During the month of July, all of the beginning work in process units were completed and the units remaining in work in process at the end of the month were 60% complete.For the month of July, the number of equivalent units of labor and overhead produced was: A) B) C) D)

830. 320. 955. 895.

68) During August, Department Z started and completed 90,000 units and also finished 18,000 units that were 75% completed on July 31. On August 31, Department Z's ending inventory consisted of 26,000 units that were 45% completed. All manufacturing costs are incurred at a uniform rate throughout Department Z's production process. The number of equivalent units of production for Department Z during August is: A) B) C) D)

106,200. 90,000. 94,500. 117,800.

69) If beginning inventory in Work in Process is zero, 2,000 units are started during the period, and 300 units remain in ending inventory, how many units were completed and transferred out? A) B) C) D)

2,000 units 285 units 300 units 1,700 units

70) If beginning inventory in Work in Process is zero, 2,000 units are started during the period, and 1,700 units were completed and transferred out, how many units remain in ending inventory? Version 1

A) B) C) D)

2,000 units 285 units 300 units 1,700 units

71) During July, the equivalent units of direct materials added to the product that were worked on by Department A amounted to a total of 80,000 applied as follows: beginning inventory, 12,000 units; units started and completed in July, 62,000 units; and ending inventory, 6,000 units. Assuming that the cost of direct materials requisitioned by the department in July was $190,000; the amount of the materials cost to be assigned to the ending inventory would be: (Do not round intermediate calculations.) A) B) C) D)

$14,250. $18,387. $2. $28,500.

72) During July, the equivalent units of direct materials added to the product that were worked on by Department A amounted to a total of 90,000 applied as follows: beginning inventory, 20,000 units; units started and completed in July, 60,000 units; and ending inventory, 10,000 units. Assuming that the cost of direct materials requisitioned by the department in July was $135,000; the amount of the materials cost to be assigned to the ending inventory would be: (Do not round intermediate calculations.) A) B) C) D)

$16,875. $54,000. $15,000. $18,000.

73) Work in process June 1 Units completed and transferred out Work in process June 30, 60% completed for labor and

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0 110,000 50,000 22

overhead

Note: Materials are all added in the beginning of the process. How many units were started in June? A) B) C) D)

92,000 units 60,000 units 160,000 units 110,000 units

74) Work in process June 1 Units completed and transferred out Work in process June 30, 60% completed for labor and overhead

0 110,000 50,000

Note: Materials are all added in the beginning of the process. What are the equivalent units for materials? A) B) C) D)

92,000 units 60,000 units 160,000 units 110,000 units

75) Work in process June 1 Units completed and transferred out Work in process June 30, 60% completed for labor and overhead

0 110,000 50,000

Note: Materials are all added in the beginning of the process. What are the equivalent units for direct labor and overhead?

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A) B) C) D)

140,000 units 80,000 units 160,000 units 130,000 units

76) Work in process June 1 Units completed and transferred out Work in process June 30, 60% completed for labor and overhead

0 110,000 50,000

Note: Materials are all added in the beginning of the process. If direct labor and overhead costs totaled $172,000, what would be the per-unit cost? A) B) C) D)

$1.23 per unit $1.08 per unit $1.56 per unit $3.44 per unit

77) During May, the number of equivalent units of materials applied to units produced by Department Q totaled 48,000, computed as follows: beginning inventory, 5,000 equivalent units; units started and completed in May, 37,000 equivalent units; and ending inventory, 6,000 equivalent units. Assuming that the cost of direct materials used by Department Q in May was $440,000, the materials cost assigned to unfinished units at May 31 would be: (Do not round intermediate calculations.) A) $55,000. B) $26,400. C) $70,400. D) Impossible to determine unless we know the percentage of completion for ending inventory units.

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78) During May, the number of equivalent units of materials applied to units produced by Department Q totaled 48,000, computed as follows: beginning inventory, 5,000 equivalent units; units started and completed in May, 37,000 equivalent units; and ending inventory, 6,000 equivalent units. On the basis of this information, which of the following statements is true? A) The number of units transferred in May from Department Q to the next process or department was 37,000. B) There were more units in Department Q's ending inventory than in Department Q's beginning inventory for May. C) Department Q completed 48,000 units of product during May. D) Department Q used enough materials during May to produce 48,000 equivalent units.

79) A summary of work completed with related unit and total costs in a process costing system is called a(n): A) B) C) D)

80)

Equivalent units of production form. Cost requisition form. Summary of conversion costs. Production cost report.

A typical production cost report will contain all of the following except: A) B) C) D)

The equivalent units of output. The total cost accounted for. The costs per equivalent units. The costs assigned to each job.

81) During the month of June, $352,150 of costs were transferred from Department A to Department B. The journal entry to summarize the transfer of these costs includes:

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A) B) C) D)

A debit to department A for $352,150. A credit to department B for $352,150. A credit to department A for $352,150. No entry is required when costs are transferred between departments.

82) During the month of August, $582,000 of costs were transferred from the Mixing Department to the Baking Department. The journal entry to summarize the transfer of these costs includes: A) B) C) D)

A debit to the Mixing department for $582,000. A debit to the Baking department for $582,000. A credit to the Baking department for $582,000. A debit to Finished Goods Inventory.

83) For the month of December, its first month of operations, the Radcliffe Corporation completed and transferred 800 units of product costing $80,000 to produce to Finished Goods Inventory. If Radcliffe sold 650 units during the same month, how much was cost of goods sold for the same period? A) B) C) D)

84)

$80,000 $8,000 $6,500 $65,000

In evaluating the efficiency of a production department, management should: A) B) C) D)

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Consider all costs of production across departments. Consider that department’s activities only. Consider all corporate-wide period costs. Compare the costs of production across departments.

85)

To identify the cause of a change in a product’s total unit cost, management may: A) B) C) D)

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Compute per-unit product cost in total. Compute per-unit total cost. Compute per-unit product cost for each individual production department. Compare prior period to current period per-unit product cost in total.

Answer Key Test name: Chapter 18 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) FALSE 4) TRUE 5) FALSE 6) FALSE 7) FALSE 8) FALSE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) TRUE 14) TRUE 15) FALSE 16) FALSE 17) FALSE 18) TRUE 19) FALSE 20) TRUE 21) TRUE 22) D 23) B 24) B 25) B 26) A Version 1

27) D 28) C 29) D 30) D 31) A 32) A 33) C 34) B 35) D 36) C 37) A 38) A 39) B 40) B 41) D 42) C 43) B 44) C 45) C 46) C 47) A 48) D 49) C 50) A 51) A 52) D 53) C 54) D 55) B 56) C Version 1

57) C 58) A 59) A 60) A 61) A 62) C 63) C 64) D 65) D 66) C 67) C 68) A 69) D 70) C 71) A 72) C 73) C 74) C 75) A 76) A 77) A 78) D 79) D 80) D 81) C 82) B 83) D 84) B 85) C

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CHAPTER 19: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms introduced or emphasized in this chapter:Activity-based managementValue-added activityTarget costingJust-in-time manufacturing systemLife-cycle costingNon-value-added activityTotal quality managementValue engineeringRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided below each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. _____ (a) The process of using activity-based costs to help reduce and eliminate non-valueadded activities. _____ (b) Can be eliminated without affecting the desirability of the product from the perspective of the customer. _____ (c) The length of time for a product to pass completely through a specific manufacturing process or the manufacturing process viewed as a whole. _____ (d) If eliminated, the desirability of the product to consumers is decreased. _____ (e) The consideration of all potential resources consumed by the product over its entire life. _____ (f) A process driven by the customer, focused on design, and encompassing the entire life of the product. _____ (g) A process that focuses on the earliest stages of product development, before wellestablished processes are created.

2) Pomme Farms operates an apple cider press. The production of cider involves the following activities:Inspect incoming shipments of apples.Store apples in adjacent barn until needed.Transport apples from storage barn to the press building.Load apples onto the conveyor leading to the press.Run press.Fill bottles with completed cider.Dispose of waste from press.Store filled bottles until sale.Required: (A) Identify Pomme's value-added activities. (B) Identify any non-value-added activities performed by Pomme.

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3) Explain the distinction between value-added and non-value-added activities. Provide an example of each.

4) Ray-Dee, Incorporated is considering the introduction of a new deluxe quality stereo tabletop radio. This radio will produce exceptional sound quality through new speaker technology. Market research indicates that customers would be willing to pay $400 for a radio of the quality considered. Ray-Dee requires a 30% return on sales for all its products. Required: Compute Ray-Dee's target cost for the radio under consideration.

5) Pool-Glow, Incorporated has developed a new light for lighting swimming pools. After doing market research, it has determined that customers would be willing to pay $140 for this new light. Pool-Glow seeks to earn 25% profit on the new light. At present, Pool-Glow makes an old-style light for $101.25, which sells for $130. (A) What must the target cost be in order to earn the 25% profit that the company demands? (B) If Pool-Glow can adjust its costs to the target cost, the company estimates that it can sell 50,000 lights. What would Pool-Glow's profit be at this point? (C) How many of the old-style lights would have to be sold to reach the same profit?

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6) Candycane Company is trying to determine how long it takes for one of its products to pass through the production process. The following data was assembled regarding how many days the product spends in various production activities: Activity Inspection Storage Assembly Handling Painting Packaging

Number of days 12 14 8 6 8 4

Required: (A) Which of the above activities are value-added activities? (B) What is Candycane's total cycle time (in days)? (C) What is Candycane's manufacturing efficiency ratio?

7) Methodical Corporation is considering the implementation of a JIT inventory system. The company recently analyzed its cycle time to determine the average number of days spent in each activity of its production process. A summary of the analysis is shown below: Production Activity Receiving materials Inspecting materials Storing materials Moving materials into production

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Number of Days 1 2 5 3

Setting-up production equipment Cutting materials Assembling materials Painting finished products Packaging finished products

4 3 4 2 1

Required: (A) Which of the above are value-added production activities? (B) What is Methodical's total cycle time (in days)? (C) What is Methodical's manufacturing efficiency ratio? (D) Which activities might be reduced or eliminated should Methodical implement a JIT system?

Briefly explain the nature and goals of a JIT manufacturing system.

9) Explain how it is possible to reduce the total cost of quality by increasing the amount spent on prevention and appraisal activities.

10)

Name the four components of the cost of quality and provide three examples of each.

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Answer Key Test name: Chapter 19 Test Bank (Problem Material) 1) (a) Activity-based management (b) Non-value-added activity (c) None* (d) Value-added activity (e) Life-cycle costing (f) Target costing (g) Total quality management *(c) This description refers to "cycle time." 2) (A) Value-added activities would include:Load apples onto the conveyer leading to the pressRun pressFill bottles with completed cider(B) Non-value-added activities include:Inspect incoming shipments of applesStore apples in adjacent barn until neededTransport apples from storage barn to the press buildingDispose of waste from pressStore filled bottles until sold 3) Value added activities enhance a product's or a service's desirability from the point of view of the consumer, while non-value-added activities do nothing to increase the desirability in the consumer's view. Storage, handling, and inspection all represent non-value-added activities, while assembly and finishing a product are value-added activities.

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4) Target cost = Target price − profit margin = $400 − (0.30 × $400) = $280 5) (A) $140 × 0.25 = $35 = profit; Target cost = $140 − $35 = $105 (B) Total profit = 50,000 × $35 = $1,750,000 (C) Old light selling profit (price − cost) = $130 − $101.25 = $28.75Old style lights that would have to be sold to reach the same profit = $1,750,000 ÷ $28.75 = 60,870 6) (A) Assembly, Painting, and Packaging (B) Total cycle time = 12 + 14 + 8 + 6 + 8 + 4 = 52 days (C) Manufacturing efficiency ratio = Value-added days divided by total days = 20 ÷ 52 = 38.5%. 7) (A) Cutting, Assembling, Painting, and Packaging (3 + 4 + 2 + 1 = 10 days) (B) 1 + 2 + 5 + 3 + 4 + 3 + 4 + 2 + 1 = 25 days (C) 10 days ÷ 25 days from Part (B) = 40% (D) Receiving materials, Inspecting materials, Storing materials, Moving materials into production, and Setting-up production equipment

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8) In a JIT system, materials are acquired and goods are produced "justin-time" to fill customer orders. Thus, production levels are "pulled" by demand, rather than "pushed" in an effort to create demand. The goals of a JIT system are to eliminate (minimize) non-value-added activities, to increase focus on product quality throughout the production process, to cultivate long-lasting supplier relationships, and to carry little or no ending inventories. 9) Investments in appraisal and prevention activities will reduce the number of defective units produced. This will reduce the cost of internal failure in the form of scrap and rework. The cost of external failure such as lost sales and warranty service will also be reduced via enhanced appraisal and prevention activities. 10) Prevention Costs

Appraisal Costs

1. Training 2. Maintenance

1. Inspection 2. Supplier relations 3. Testing

3. Quality planning

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Internal Failure 1. Rework 2. Downtime

External Failure 1. Warranty 2. Lost sales

3. Scrap

3. Repairs

CHAPTER 19 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) The value chain includes research and development, customer service, marketing, and suppliers. ⊚ ⊚

true false

2) International Financial Reporting Standards (IFRS) requires that most research and development (R&D) activities be expensed immediately. ⊚ ⊚

true false

Non-value-added activities are those that add to a product's desirability. ⊚ ⊚

true false

4) Activities related to internal failure such as rework, scrap, and engineering change orders are value-added activities since they cannot be eliminated without increasing costs elsewhere in the value chain. ⊚ ⊚

Non-value-added activities do not add to the desirability of a product to a customer. ⊚ ⊚

true false

Value-added activities add to a product's desirability from the manufacturer's perspective. ⊚ ⊚

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true false

7) The process of using activity-based costs to help reduce and eliminate non-value-added activities is activity-based management. ⊚ ⊚

true false

8) The development of activity-based cost data is a necessary prerequisite to activity-based management. ⊚ ⊚

true false

9) Activity-based costing systems refer to acquiring materials and manufacturing goods only as needed to fill customers' orders. ⊚ ⊚

10)

true false

Activity-based management is a subset of activity-based costing. ⊚ ⊚

true false

11) In the target costing process, target price is computed by adding the desired profit margin to the target product cost. ⊚ ⊚

12)

true false

Target cost equals target price plus profit margin. ⊚ ⊚

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true false

13) The target costing process begins with finding a low-cost supplier to reduce the overall cost of production. ⊚ ⊚

true false

14) To arrive at a target cost, the target selling price and a satisfactory profit margin are added together. ⊚ ⊚

true false

15) The objective of target costing is to create a production process that provides adequate profits. ⊚ ⊚

16)

true false

A just-in-time manufacturing system is also known as a supply push system. ⊚ ⊚

true false

17) Just-in-time inventory systems are characterized by extremely large inventories of materials, works in process, and finished goods. ⊚ ⊚

true false

18) In a just-in-time manufacturing system, reliable vendor relationships are essential only if the prices they charge are the lowest possible prices. ⊚ ⊚

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true false

19) A just-in-time inventory system is dependent on reliability of equipment and production workers are often trained in how to make routine repairs. ⊚ ⊚

true false

20) Cycle time is the length of time required for a product to pass completely through a manufacturing process. ⊚ ⊚

true false

21) The basic approach of just-in-time inventory systems is to try to eliminate inefficiency and to improve product quality. ⊚ ⊚

true false

22) Rather than aiming to produce inventory, just-in-time inventory systems attempt to pull production according to customer demand. ⊚ ⊚

true false

23) Internal failure costs happen when an unsatisfactory good or service is delivered to a customer. ⊚ ⊚

true false

24) Total quality management centers on new product development as opposed to focusing on cost planning over the entire value chain. ⊚ ⊚

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true false

25) "Six Sigma" describes the length of time it takes a product to pass through the six stages of manufacturing, from processing through inspection. ⊚ ⊚

26)

A quality cost report would be comprised of prevention costs only. ⊚ ⊚

27)

true false

Activities that increase scrap and rework tend to increase productivity. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 28) The suppliers and production component of the value chain would include all of the following costs except: A) B) C) D)

29)

All of the following are components of the value chain except: A) B) C) D)

30)

Direct production labor. Production set-up. Salaries for sales personnel. Receipt of direct materials from suppliers.

Research and design activities. Obtaining raw materials. Supporting the product after it is sold. Maintaining large inventory levels so that orders can be filled promptly.

Examples of value-added activities include all of the following except:

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A) B) C) D)

Product design. Assembly activities. Machinery set-up activities. Establishing efficient distribution channels.

31) Which of the following activities performed by a manufacturer of roller blades is a valueadded activity? A) B) C) D)

32)

Value-added activities include: A) B) C) D)

33)

Designs that meet engineering specifications, but not customer expectations Poor quality supplier deliveries Delayed distribution to a customer Clear and truthful marketing

Setting up machinery. Storing direct materials. Employee idle time. Product design.

Which of the following is a value-added activity by a manufacturer of chocolate candies? A) B) C) D)

The addition of chocolate syrup into the candy mix. Hiring production workers. Storing the candy bars until they are distributed to stores. Managing the cost of electricity by the production department.

34) Which of the following is not one of the basic procedures related to activity-based costing?

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A) B) C) D)

35)

The primary objective of activity-based management is: A) B) C) D)

36)

To develop more accurate product costs. To reduce and eliminate non-value-added activities. To increase product quality. To identify instances of internal failure.

Techniques to manage costs in the value chain include all of the following except: A) B) C) D)

37)

Identify the activities that drive overhead costs Create activity cost pools associated with these cost driver activities Compute internal failure costs Determine the cost per unit of each activity

Activity based management. Target costing. Process costing. Total quality management.

Target costing is directed toward:

A) Increasing the activity costs associated with existing products. B) Identifying the amount by which the costs of existing products must be reduced to achieve a target profit margin. C) The creation and design of products that will provide adequate profits. D) The improvement of existing production processes by eliminating non-value adding activities.

38)

The identification of a target price for a newly designed product or service is focused on:

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A) B) C) D)

39)

The expected costs of production. The required profit margin. The prices charged by existing and potential competitors. The product’s functional requirements and their importance to the customer.

The following are all characteristics of target costing except:

A) B) C) customer. D)

Understanding the pricing process in order to increase selling prices. Driving costs down while satisfying customer needs and expectations. Emphasizing the product's functional characteristics and their importance to the Reducing development time.

40) Summit Products, Incorporated is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $84 for such a widget and that 44,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $54. If Summit Products requires a 20% return on sales to undertake production, what is the target cost for the new widget? A) B) C) D)

$64.00 $67.20 $73.20 $16.80

41) Summit Products, Incorporated is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65. If Summit Products requires a 25% return on sales to undertake production, what is the target cost for the new widget?

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A) B) C) D)

$65.00 $67.50 $80.00 $81.25

42) Summit Products, Incorporated is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $84 for such a widget and that 44,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $54. Summit has learned that a competitor plans to introduce a similar widget at a price of $74. In response, Summit may reduce its selling price to $74. If Summit requires a 20% return on sales, what is the target cost for the new widget? A) B) C) D)

$74.00 $59.20 $16.80 $14.80

43) Summit Products, Incorporated is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65. Summit has learned that a competitor plans to introduce a similar widget at a price of $80. In response, Summit may reduce its selling price to $80. If Summit requires a 25% return on sales, what is the target cost for the new widget? A) B) C) D)

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$80.00 $60.00 $23.75 $20.00

44) Summit Products, Incorporated is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $88 for such a widget and that 48,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $56. At a price of $78, Summit's market research indicates that it can sell 58,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $78 price compare to what it would have earned in the absence of the competitor's product? A) B) C) D)

Profit will be $75,000 higher. Profit will be $75,000 lower. Profit will be unaffected if Summit can reach the revised target cost. Profit will be $58,000 higher.

45) Summit Products, Incorporated is interested in producing and selling an improved widget. Market research indicates that customers would be willing to pay $90 for such a widget and that 50,000 units could be sold each year at this price. The current cost to produce the widget is estimated to be $65. At a price of $80, Summit's market research indicates that it can sell 60,000 units per year. Assuming Summit can reach its new target cost, how will Summit's profit at the $80 price compare to what it would have earned in the absence of the competitor's product? A) B) C) D)

46)

Profit will be $75,000 higher. Profit will be $75,000 lower. Profit will be unaffected if Summit can reach the revised target cost. Profit will be $37,500 higher.

The just-in-time manufacturing system: A) B) C) D)

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Contrasts with the supply push systems. Complements the supply push systems. Neither complements nor contrasts with the supply push systems. Contrasts the demand-pull system.

47)

Just-in-time manufacturing systems are also known as: A) B) C) D)

48)

Supply push systems. Supply pull systems. Demand-push manufacturing. Demand-pull manufacturing.

The manufacturing efficiency ratio equals: A) B) C) D)

Value-added time divided by cycle time. Value-added time multiplied by cycle time. Cycle time divided by value-added time. The average of cycle time divided by value-added time.

49) Which of the following is not commonly used to measure product quality in a just-in-time system? A) B) C) D)

50)

An effective just-in-time system will include: A) B) C) D)

51)

Defects per million Merchandise returns Manufacturing efficiency ratio Warranty claims

Specialized employees. An efficient plant layout. Sizable inventories of raw materials. Many suppliers.

Cycle time includes:

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A) B) C) D)

52)

During cycle time, value is added only during: A) B) C) D)

53)

Storage and waiting time. Processing time. Movement time. Inspection time.

Four categories of costs associated with product quality are: A) B) C) D)

55)

Processing time. Storage and waiting time. Movement time. Inspection time.

Which of the following elements in a product's cycle time should be maximized? A) B) C) D)

54)

Processing time, storage and waiting time, movement time, and inspection time. Processing time, inspection time, and inventory time. Processing time, storage and waiting time, finishing time, and selling time. Processing time, storage and waiting time, movement time, and finishing time.

External failure, internal failure, prevention, and carrying. External failure, internal failure, prevention, and appraisal. External failure, internal failure, training, and appraisal. Warranty, product liability, prevention, and training.

Which of the following is not an example of the cost of quality?

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A) B) C) D)

56)

Which of the following is not a prevention cost? A) B) C) D)

57)

Costs to prevent poor quality from occurring. Costs of appraising and inspecting the product. Costs to correct problems before the customer receives the goods. Advertising costs.

External failure costs include: A) B) C) D)

59)

Training costs Warranty costs Maintenance costs Quality planning costs

Quality costs do not include: A) B) C) D)

58)

Prevention costs Internal failure costs Target costs Appraisal costs

Inspections of materials. Training. Rework. Repairs.

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning

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$ 35,200 $ 16,600 $ 7,000

Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 10,500 $ 3,800 $ 8,620 $ 7,900 $ 8,000 $ 20,250 $ 10,300 $ 7,100

What are the total prevention costs for the Abrams Corporation? A) B) C) D)

60)

$43,100 $35,970 $22,100 $34,100

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 32,000 $ 15,000 $ 7,000 $ 12,500 $ 3,000 $ 7,500 $ 6,300 $ 8,000 $ 22,250 $ 8,700 $ 5,500

What are the total prevention costs for the Abrams Corporation? A) B) C) D)

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$38,300 $34,500 $19,700 $35,250

61)

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 33,400 $ 15,700 $ 7,000 $ 7,800 $ 3,350 $ 7,990 $ 7,000 $ 8,000 $ 17,100 $ 9,400 $ 6,200

What are the total appraisal costs for the Abrams Corporation? A) B) C) D)

62)

$20,750 $40,400 $30,500 $31,290

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 32,000 $ 15,000 $ 7,000 $ 12,500 $ 3,000 $ 7,500 $ 6,300 $ 8,000 $ 22,250 $ 8,700 $ 5,500

What are the total appraisal costs for the Abrams Corporation?

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A) B) C) D)

63)

$38,300 $34,500 $19,700 $35,250

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 35,800 $ 16,900 $ 7,000 $ 11,400 $ 3,950 $ 8,830 $ 8,200 $ 8,000 $ 21,300 $ 10,600 $ 7,400

What are the total internal failure costs for the Abrams Corporation? A) B) C) D)

64)

$22,550 $35,300 $44,000 $37,530

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales

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$ 32,000 $ 15,000 $ 7,000 $ 12,500 $ 3,000 $ 7,500 $ 6,300 $ 8,000 $ 22,250

Downtime Repairs

$ 8,700 $ 5,500

What are the total internal failure costs for the Abrams Corporation? A) B) C) D)

65)

$38,300 $34,500 $19,700 $35,250

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 35,600 $ 16,800 $ 7,000 $ 11,100 $ 3,900 $ 8,760 $ 8,100 $ 8,000 $ 20,950 $ 10,500 $ 7,300

What are the total external failure costs for the Abrams Corporation? A) B) C) D)

66)

$34,900 $37,010 $22,400 $43,700

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework

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$ 32,000 $ 15,000 $ 7,000 $ 12,500 $ 3,000 17

Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 7,500 $ 6,300 $ 8,000 $ 22,250 $ 8,700 $ 5,500

What are the total external failure costs for the Abrams Corporation? A) B) C) D)

67)

$38,300 $34,500 $19,700 $35,250

The Abrams Corporation incurred the following quality costs during the year:

Inspections Training Quality planning Maintenance Rework Warranty Testing of equipment Scrap Lost sales Downtime Repairs

$ 32,000 $ 15,000 $ 7,000 $ 12,500 $ 3,000 $ 7,500 $ 6,300 $ 8,000 $ 22,250 $ 8,700 $ 5,500

As a percentage of total costs, which quality cost category is the highest? A) B) C) D)

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Prevention Internal failure Appraisal External failure

Answer Key Test name: Chapter 19 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) FALSE 4) FALSE 5) TRUE 6) FALSE 7) TRUE 8) TRUE 9) FALSE 10) FALSE 11) TRUE 12) FALSE 13) FALSE 14) FALSE 15) TRUE 16) FALSE 17) FALSE 18) FALSE 19) TRUE 20) TRUE 21) TRUE 22) TRUE 23) FALSE 24) FALSE 25) FALSE 26) FALSE Version 1

27) FALSE 28) C 29) D 30) C 31) D 32) D 33) A 34) C 35) B 36) C 37) C 38) D 39) A 40) B 41) B 42) B 43) B 44) A 45) A 46) A 47) D 48) A 49) C 50) B 51) A 52) A 53) B 54) B 55) C 56) B Version 1

57) D 58) D 59) D 60) B 61) B 62) A 63) A 64) C 65) B 66) D 67) C

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CHAPTER 20: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Consider variable and fixed costs. Required: (A) What is the effect of an increase or decrease in activity upon variable costs per unit of activity? (B) What is the effect of an increase or decrease in activity upon total fixed costs?

2) Listed below are nine technical accounting terms introduced or emphasized in this chapter:Cost-volume-profit analysisContribution margin ratioVariable costBreak-even pointActivity baseCost driverMargin of safetyHigh-low methodContribution marginRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (a) The amount by which sales revenue exceeds total variable cost expressed as a percentage of sales. ____ (b) The amount by which sales volume exceeds the break-even point. ____ (c) The study of financial statements by a potential investor or creditor as a means of evaluating the profitability and solvency of a business. ____ (d) A type of activity that has a causal effect in the occurrence of a particular cost. ____ (e) The level of sales at which revenue equals operating expenses. ____ (f) A cost that responds to changes in sales volume by less than a proportionate amount. ____ (g) A mathematical technique used to determine the fixed and variable elements of a mixed or semi-variable cost.

What is meant by the phrase "relevant range of activity?"

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Describe the important relationships shown on a cost-volume-profit graph.

5) The following data are available for a product manufactured and sold by Logan Company: Maximum capacity with present facilities Total fixed cost (per period)

40,000 units $ 468,000

Variable cost per unit

$ 128

Sales price per unit

$ 212

Required: Compute the following: (A) Contribution margin per unit (B) Number of units that must be sold to break-even (Round units to the next highest full unit.) (C) Dollar sales volume to produce income of $864,000 before taxes (Round units to the next highest full unit.)

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6) Spotless, Incorporated, sells only one product. The sales price per unit is $50, with variable cost per unit of $40. Fixed costs are $60,000 per month. Maximum capacity is 34,000 units per month. Required: Answer the following questions: (A) To break-even, how many units must Spotless sell per month? (B) If Spotless, Incorporated, sold 25,000 units, what would be its operating income for the month? (C) At present capacity, what is the maximum operating income Spotless can expect to earn per month? (D) Assuming that direct labor cost can be reduced by $2 per unit, what would the maximum operating income be per month?

7) Gary Corporation manufactures a single product. The selling price is $104 per unit, and variable costs amount to $78 per unit. The fixed costs are $36,000 per month (Round any units to the next highest full unit). Required: Answer the following questions: (A) What is the contribution margin per unit? (B) What is the contribution margin ratio? (C) What is the monthly sales volume (in dollars) at the break-even point? (D) How many units must be sold each month to earn a monthly operating income of $32,000? (E) What is the monthly margin of safety (in dollars) if 3,000 units are sold each month? (F) What will be the monthly operating income if 3,000 units are sold each month?

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8) Fantasy Corporation manufactures a single product. The selling price is $125 per unit, and variable costs amount to $81 per unit. The fixed costs are $28,500 per month (Round any units to the next highest full unit). Required: Answer the following questions: (A) What is the contribution margin per unit? (B) What is the contribution margin ratio? (Rounded to 1 decimal place) (C) What is the monthly sales volume (in dollars) at the break-even point? (D) How many units must be sold each month to earn a monthly operating income of $50,000? (E) What is the monthly margin of safety (in dollars) if 1,500 units are sold each month? (F) What will be the monthly operating income if 1,500 units are sold each month?

9) International, Incorporated expects total sales of $55 million, a margin of safety of $25 million, and a contribution margin ratio of 25%. Required: Compute the following: (A) Variable costs (B) Break-even sales volume (in dollars) (C) Fixed costs (D) Operating income

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10) A manufacturing company experiencing severe financial difficulties has applied for a large government guaranteed loan. As a condition for obtaining the guarantee, the government mandates that the company significantly reduce its annual break-even point. Required: What steps might the company take to achieve the required reduction in its break-even point?

11)

A manufacturing company produced the following report:

Sales (100 units @ $200)

$ 20,000

Manufacturing expenses Variable expenses

$ 14,500

Fixed expenses Cost of Goods Sold

500

15,000 5,000

Selling and Administrative Variable expenses

1,500

Fixed expenses

4,000

Net Loss

5,500 ($ 500)

Required: Answer the following questions: (A) How many units would have to be sold to break-even? (B) If fixed overhead were to increase by $1,800 what would be the break-even point in units? (C) What is operating income if sales increase by 25%?

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12) Pet Park International sells cat food and dog food. Its monthly fixed costs average $620,000. Cat food sales represent 80% of the company's total revenue. Dog food sales constitute the remaining 20%. The company has provided the following information expressed on a per-case basis: Selling Price Cat food Dog food

$ 40 $ 30

Contribution Margin $ 16 $9

Required: (A) Determine the total monthly sales revenue required to break-even. (Round your answer to the nearest whole dollar.) (B) Determine the total monthly sales revenue required to earn an operating income of $135,000. (C) Determine the company's margin of safety at a monthly sales level of $2,500,000. (D) If monthly fixed costs increase by $10,000, determine the break-even point, expressed in sales dollars.

13) First-Class Company sells a single product. The per-unit selling price is $250, and variable costs are 60% of this selling price. Fixed costs are currently $68,000 per month. Required: (A) Calculate the monthly break-even point in units (B) First-Class is considering the acquisition of new robotic equipment. Depreciation on the new robots will increase monthly fixed costs by $8,000, but reduce variable costs to 50% of the current selling price. If First-Class acquires the robots what will be the new monthly break-even point in units?

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14) Stan Todd, Incorporated wants to manufacture a new cell phone that can be worn on the wrist. Information from doing market research shows that he can sell this phone for $25 each. His fixed costs would be $145,000 a year and variable costs would amount to $10 per phone. Required: Answer the following questions: (A) What would the contribution margin ratio be? (B) What sales volume in units would Stan need to break-even? (C) What sales volume in units would Stan need to earn $200,000 profit? (D) What would be the margin of safety if he sold 25,000 units (use the information calculated in #2)?

15) Diana Company, a sole proprietorship, sells only one product. The regular price is $160. Variable costs are 55% of this selling price, and fixed costs are $8,400 a month. Management decides to decrease the selling price from $160 to $145 per unit. Assume that the cost of the product and the fixed operating expenses are not changed by this pricing decision. Required: Answer the following questions: (A) At the original selling price of $160 a unit, what is the contribution margin ratio? (B) At the original selling price of $160 a unit, what dollar volume of sales per month is required for Diana Company to break-even? (Round your answer to the nearest whole dollar.) (C) At the original selling price of $160 a unit, what dollar volume of sales per month is required for Diana Company to earn a monthly operating income of $6,500? (Round your answer to the nearest whole dollar.) (D) At the reduced selling price of $145 a unit, what is the contribution margin ratio? (E) At the reduced selling price of $145 a unit, what dollar volume of sales per month is required to break-even? (Round your intermediate percentage to one decimal place and final answer to the nearest whole dollar.) Version 1

16)

Mitchum, Incorporated produced different amounts of product X each month as follows: Units

April May June July August

Costs

370 420 350 550 450

$ 21,300 $ 22,050 $ 21,000 $ 24,000 $ 22,500

Required: Using the high-low method, determine: (A) The variable expense per unit (B) The fixed expense (C) If Mitchum produced 410 units what would total expenses be?

17) The following information is available regarding the total manufacturing overhead costs of Paymore, Incorporated, for five months of the current year:

February March April May June

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Machine Hours 6,900 5,000 6,300 9,333 6,833

Manufacturing Overhead Costs $ 6,250 $ 5,375 $ 6,025 $ 7,975 $ 6,050

Required: (A) Using the high-low method, compute the following (Round your answers to the nearest whole number): (1) The variable element of overhead cost per machine-hour (2) The fixed element of monthly overhead cost (B) Use the cost relationship determined in part (A) to estimate the total manufacturing overhead costs for July, given that 7,250 machine-hours are scheduled.

18) The following information is available regarding the total repair costs of Alexander Design Company for six months of the current year: Units Produced January February March April May June

1,500 1,750 1,000 1,250 1,875 2,250

Repair Cost $ 15,875 $ 16,500 $ 11,250 $ 15,250 $ 17,750 $ 20,250

Required: (A) Using the high-low method, compute the following: (1) The variable element of repair cost per unit of production (2) The fixed element of the monthly repair cost (B) Use the cost relationship determined in part (A) to estimate the total repair cost for July, given that production is scheduled for 2,300 units.

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Answer Key Test name: Chapter 20 Test Bank (Problem Material) 1) (A) Since total variable costs rise (or fall) in proportion to an increase (or decrease) in activity, variable costs per unit of activity remain relatively constant.(B) Total fixed costs tend to remain constant despite increases or decreases in the level of business activity– so long as the level of activity remains within the relevant range. 2) (a) Contribution margin ratio(b) Margin of safety(c) None*(d) Cost driver(e) Break-even point(f) None*(g) High-low method*(c) The statement describes financial statement analysis. Cost-volume-profit analysis requires more detailed data than are available in financial statements and generally is performed by managers, rather than outsiders.*(f) This describes semi-variable costs. 3) The relevant range represents the operating levels (such as between 35% and 85% of full capacity) over which output is likely to vary and for which the assumptions made about cost behavior are reasonably realistic. When the level of activity falls outside the relevant range, assumptions as to the total amount of fixed costs, the variable cost per unit, and the degree of variability of semi-variable costs may no longer be valid. 4) The important relationships shown on a cost-volume-profit graph are changes in revenue, costs, and operating income in relation to changes in the level of business activity. The point at which a business moves from a loss to a profit position (the break-even point) is also shown, but this is relatively less important because the objective of a business endeavor is to earn a high rate of return on investment, not to break even.

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5) (A) $212 sales price − $128 variable cost per unit = $84(B) $468,000 ÷ $84 = $5,572 units(C) ($468,000 + $864,000) ÷ $84 = 15,858 units × $212 = $3,361,896 6) (A) $60,000 fixed costs ÷ $10 contribution margin = 6,000 units(B) (25,000 × $50 per unit) sales revenue − (25,000 units × $40 per unit) variable costs − $60,000 fixed costs = $190,000 operating income(C) (34,000 × $50 per unit) sales revenue − (34,000 units × $40 per unit) variable costs − $60,000 fixed costs = $280,000 operating income(D) (34,000 × $50 per unit) sales revenue − (34,000 units × $38 per unit) variable costs − $60,000 fixed costs = $348,000 operating income 7) (A) $104 − $78 = $26 per unit(B) $26 / $104 = 25%(C) $36,000 fixed costs / 25% contribution margin ratio = $144,000(D) ($32,000 + $36,000) / $26 = 2,616 units(E) (3,000 × $104) − $144,000 break-even sales volume = $168,000(F) $168,000 margin of safety × 25% = $42,000 8) (A) $125 − $81 = $44 per unit(B) $44 ÷ $125 = 35.2%(C) $28,500 fixed costs ÷ 35.2% contribution margin ratio = $80,966(D) ($28,500 + $ 50,000) ÷ $44 = 1,785 units(E) (1,500 units × $125) − $80,966 breakeven sales volume = $106,534(F) $106,534 margin of safety × 35.2% = $37,500 9) (a) Variable costs: $55,000,000 × (100% − 25%) = $41,250,000(b) Break-even sales volume: $55,000,000 − $25,000,000 = $30,000,000(c) Fixed costs: $30,000,000 × 25% = $7,500,000(d) Operating income: $25,000,000 × 25% = $6,250,000

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10) The company must 1) increase its contribution margin ratio, and/or 2) reduce periodic fixed costs. The contribution margin ratio will increase as a result of a reduction in any unit variable cost. Thus, the company may attempt to reduce the amount of direct labor cost per unit. This could be accomplished by negotiating more favorable wage rates from labor. The per-unit cost of direct materials could be reduced by obtaining price concessions from suppliers. An increase in sales price would also increase the contribution margin ratio. However, it is unlikely that a struggling firm would have the market power to raise prices and maintain market share. Attempts to reduce fixed costs could include disposal of plant assets associated with excess capacity. Efforts to re-engineer the production process might include: reductions in setup time; product simplification intended to reduce ordering, receiving and inspection costs; process improvements to eliminate unnecessary handling and storage; etc. 11) (A) Contribution margin: $200 − $145 − $15 = $40 (500 + 4,000) ÷ $40 = 112.5 (rounded to 113 units)(B) (500 + 4,000 + 1,800) ÷ $ 40 = 157.5 or 158 units(C) Sales (25% additional) Manufacturing costs

$ 25,000

Variable expenses 25% additional Fixed expenses Cost of goods sold Gross Profit Selling and Administrative

18,125 500 18,625 $ 6,375

Variable expenses 25% additional Fixed Costs

$ 1,875 4,000

Operating income

$ 500

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12) (A) $620,000 ÷ [(80% × 40%) + (20% × 30%)] = $1,631,579(B) (620,000 + $135,000) ÷ [(80% × 40%) + (20% × 30%)] = $1,986,842(C) $2,500,000 − $1,631,579 = $868,421(D) ($620,000 + $10,000) ÷ [(80% × 40%) + (20% × 30%)] = $1,657,895 13) (A) Break-even point: $68,000 ÷ ($250 − (0.60 × $250)) = 680 units(B) New Break-even point: $76,000 ÷ ($250 − (0.50 × $250)) = 608 units 14) (A) $25 − $10 = $15; $15 ÷ $25 or 60%(B) Break-even = $145,000 ÷ $15 = 9,667 units(C) To earn a profit of $200,000: ($200,000 + $145,000) ÷ $15 = 23,000 units(D) 25,000 × $25 = $625,000 $625,000 − ($25 × 9,667) = $383,325 15) (A) Sales price (100%) − variable costs (55%) = 45%(B) Sales Volume = (Fixed Costs + Operating Income) ÷ Contribution Margin Ratio = ($8,400 + $0) ÷ 0.45 = $18,667(C) Sales Volume = (Fixed Costs + Operating Income) ÷ Contribution Margin Ratio = ($8,400 + $6,500) ÷ 0.45 = $33,111(D) Contribution margin ratio = [$145 − ($160 × 0.55)] ÷ $145 = 39.3%(E) Sales Volume = (Fixed Costs + Operating Income) ÷ Contribution Margin Ratio = ($8,400 + $0) ÷ 39.3% = $21,374 16) (A) Highest Activity Lowest Activity

July June

Changes

550 units 350

$ 24,000 cost $ 21,000

200

$ 3,000

Variable cost per unit = $3,000 ÷ 200 = $15(B) Fixed cost = $24,000 − (550 × $15) = $24,000 − $8,250 = $15,750(C) $15,750 + (410 × $15) = $21,900 17) Part (A) (1): Highest level of Activity

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Machine Hours 9,333

Manufacturing Overhead Costs $ 7,975

Lowest level of Activity

5,000

$ 5,375

Changes

4,333

$ 2,600

(A)(1) Variable cost = $2,600 ÷ 4,333 units = $0.60 per machinehour(A)(2) $7,975 total cost − ($0.60 per machine-hour × 9,333 machine-hours) = $2,375 fixed costs(B) $2,375 fixed costs + ($0.60 per machine-hour × 7,250 machine-hours) variable cost = $6,725 total cost 18) (A) (1) Units Highest level of Activity Lowest level of Activity

2,250 1,000

Maintenance Cost $ 20,250 $ 11,250

Changes

1,250

$ 9,000

Variable cost = $9,000 ÷ 1,250 units = $7.20 per unit(A) (2) $20,250 total cost − ($7.20 per unit × 2,250 units) = $4,050 fixed costs(B) $4,050 fixed costs + ($7.20 per unit × 2,300 units) variable cost = $20,610 total cost

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CHAPTER 20 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Costs that increase in total amount in direct proportion to an increase in output are called variable costs. ⊚ ⊚

true false

2) When cost-volume-profit analysis is used, the need for a cost accounting system is eliminated. ⊚ ⊚

With variable costs, the cost per unit varies with changes in volume. ⊚ ⊚

true false

With fixed costs, the cost per unit varies with changes in volume. ⊚ ⊚

true false

5) Any business that operates at less than capacity will have smaller fixed costs than variable costs. ⊚ ⊚

true false

Executive salaries are typically considered variable costs. ⊚ ⊚

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true false

7) As volume increases, per unit variable costs will decrease on a per-unit basis and stay the same in total. ⊚ ⊚

As volume increases, per unit fixed costs stay the same. ⊚ ⊚

true false

As volume increases, total fixed costs remain the same. ⊚ ⊚

true false

10) One characteristic common to all types of costs is the tendency to rise and fall in direct proportion to changes in the volume of business output. ⊚ ⊚

11)

Economies of scale can be achieved by using facilities more intensively. ⊚ ⊚

12)

true false

The range over which output may be expected to vary is called the relevant range. ⊚ ⊚

true false

13) The volume of output that causes fixed costs to be equal in amount to total revenue is called the break-even point. ⊚ ⊚ Version 1

true false 2

14) The break-even point is the level of activity at which operating income is equal to cost of goods sold. ⊚ ⊚

15)

true false

The contribution margin is the difference between total revenue and fixed costs. ⊚ ⊚

true false

16) The higher the unit contribution margin, the higher the volume of unit sales required to cover a given amount of fixed costs. ⊚ ⊚

17)

Contribution margin equals total revenue minus variable costs. ⊚ ⊚

18)

true false

The contribution margin is the amount by which revenue exceeds variable costs. ⊚ ⊚

true false

19) Contribution margin ratio is equal to contribution margin per unit divided by unit sales price. ⊚ ⊚

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true false

20) The margin of safety sales volume times the contribution margin ratio equals operating income. ⊚ ⊚

true false

21) Margin of safety is the dollar amount by which actual sales volume exceeds the breakeven sales volume. ⊚ ⊚

true false

22) Cost-volume-profit analysis is often complex when applied to a company with different products. ⊚ ⊚

23)

Sales of products with high contribution margins often are described as quantity sales. ⊚ ⊚

24)

true false

The high-low method is the only method to be used when determining semivariable costs. ⊚ ⊚

true false

25) In cost-volume-profit analysis, the number of units sold is assumed to be equal to the number of units produced. ⊚ ⊚

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true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 26) Which of the following is an example of a fixed cost for an airline? A) B) C) D)

27)

Fixed costs would include all of the following except: A) B) C) D)

28)

Insurance expense Amortization expense Sales commission expense Executive salaries expense

Within the relevant range, fixed costs: A) B) C) D)

30)

rent for the warehouse. annual salary of the CEO. depreciation. sales commission expense.

Which of the following is typically a variable cost? A) B) C) D)

29)

Depreciation on the corporate headquarters Fuel costs Income taxes expense Passengers' meals

fall as sales volume falls. rise as sales volume rises. rise as sales volume falls. remain steady when sales volume changes.

When volume increases, fixed cost per unit:

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A) B) C) D)

31)

A semivariable cost: A) B) C) D)

32)

the production range from zero to 100% of plant capacity. the production range over which CVP assumptions are valid. the production range beyond the break-even point. the production range that covers fixed but not variable costs.

In cost-volume-profit analysis, income tax expense: A) B) C) D)

34)

increases and decreases directly and proportionately with changes in volume. changes in response to a change in volume, but not proportionately. increases if volume increases, but remains constant if volume decreases. changes inversely in response to a change in volume.

A company's relevant range of production is: A) B) C) D)

33)

increases. decreases. stays the same. increases or decreases, depending upon the situation.

is included among the monthly operating expenses as a variable cost. is considered a fixed cost of doing business. is treated as a semivariable cost that is partially dependent upon sales volume. is generally ignored.

The break-even point in a cost-volume-profit graph is always found:

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A) B) C) D)

at 50% of full capacity. at the sales volume resulting in the lowest average unit cost. at the volume at which total revenue equals total variable costs. at the volume at which total revenue equals total fixed costs plus total variable costs.

35) Management expects total sales of $40 million, a margin of safety of $10 million, and a contribution margin ratio of 45%. Which of the following estimated amounts is not consistent with this information? A) B) C) D)

Variable costs, $22 million Fixed costs, $13.5 million Operating income, $6 million Break-even sales volume, $30 million

36) How will a company's contribution margin be affected by an investment in equipment that increases fixed costs in order to achieve a reduction in direct labor cost? A) Contribution margin will increase. B) Contribution margin will fall. C) Contribution margin will either increase or decrease depending on the relative magnitudes of the changes in fixed and variable costs. D) Contribution margin will remain the same.

37)

A 45% contribution margin ratio means that:

A) the company should contribute 45% of its operating income to qualified charities for maximum tax benefits. B) 55% of the company's revenue is consumed by fixed and variable costs. C) the company's revenue has increased by 45% during the current accounting period. D) 45% of the company's revenue is available to cover fixed costs and to contribute toward operating income.

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38)

The contribution margin ratio is expressed as: A) B) C) D)

a percentage of revenue. a total dollar amount for the period. a contribution margin per unit. total contribution margin amount.

39) A company with monthly revenue of $128,000, variable costs of $52,000, and fixed costs of $40,800 has a contribution margin of: A) B) C) D)

$128,000. $87,200. $76,000. $38,000.

40) A company with monthly revenue of $120,000, variable costs of $50,000, and fixed costs of $40,000 has a contribution margin of: A) B) C) D)

$90,000. $80,000. $70,000. $30,000.

41) A company with monthly fixed costs of $240,000 expects to earn monthly operating income of $56,000 by selling 8,000 units per month. What is the company's expected unit contribution margin? A) B) C) D)

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$37 per unit $30 per unit $7 per unit The information given is insufficient to determine unit contribution margin.

42) A company with monthly fixed costs of $170,000 expects to earn monthly operating income of $25,000 by selling 6,500 units per month. What is the company's expected unit contribution margin? A) B) C) D)

$30 per unit $26 per unit $22 per unit The information given is insufficient to determine unit contribution margin.

43) If the monthly sales volume required to break even is $190,000 and monthly fixed costs are $55,900, the contribution margin ratio is closest to: A) B) C) D)

29%. 71%. 23%. 340%.

44) If the unit sales price is $42, variable costs are $21 per unit and fixed costs are $36,000 what is the contribution margin ratio per unit? A) B) C) D)

17% 50% 100% 200%

45) If the unit sales price is $12, variable costs are $6 per unit and fixed costs are $26,000 what is the contribution margin ratio per unit?

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A) B) C) D)

46)

40% 50% 60% 70%

A company's most profitable products are often those which: A) B) C) D)

have the highest contribution margin ratios and the highest sales volumes. have the highest contribution margin ratios and the lowest sales volumes. have the lowest contribution margin ratios and the highest sales volumes. have the lowest contribution margin ratios and the lowest sales volumes.

47) Millar Company produces a single product that it sells for $89 a unit. If the fixed costs of manufacturing and selling the product are $68,400 a month and the variable costs are $57 a unit, which of the below is correct? A) The fixed costs amount to $32 per unit at any level of output within a relevant volume range. B) The company will break even with a sales volume of $68,400 a month. C) An increase in sales volume above $68,400 a month will cause an increase in fixed costs. D) The contribution margin per unit of product is $32.

48) In comparison to selling a product with a low contribution margin ratio, selling a product with a high contribution margin ratio always: A) B) C) D)

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requires less dollar sales volume to cover a given level of fixed costs. results in a greater margin of safety. results in higher operating income. results in a higher contribution margin per unit sold.

49)

The contribution margin ratio is computed as: A) B) C) D)

sales minus variable costs, divided by sales. fixed costs plus variable costs, divided by sales. sales minus fixed costs, divided by sales. sales divided by variable costs.

50) Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What is the contribution margin ratio of Mitchell 's product? A) B) C) D)

65% 80% 72% 20%

51) Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What is the monthly sales volume in dollars necessary to break-even? A) B) C) D)

$82,500 $66,500 $97,059 $77,500

52) Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. How many units must be sold each month to earn a monthly operating income of $8,000? (Round your final answer up to the nearest whole number.)

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A) B) C) D)

971 units 1,442 units 122,500 units 353 units

53) Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What will be the monthly margin of safety (in dollars) if 1,800 units are sold each month? A) B) C) D)

$82,500 $70,500 $12,000 $16,500

54) Mitchell Corporation manufactures a single product. The selling price is $85 per unit, and variable costs amount to $68 per unit. The fixed costs are $16,500 per month. What will be Mitchell's monthly operating income if 1,800 units are sold each month? A) B) C) D)

$136,500 $70,500 $30,600 $14,100

55) The following data are available for product number CK74, manufactured and sold by Ruby Corporation: Maximum capacity with present facilities Total fixed cost (per period)

12,000 units $ 1,047,800

Variable cost per unit

$ 126.00

Sales price per unit

$ 188.00

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The contribution margin per unit for product number CK74 is: A) B) C) D)

$64.00. $62.00. $157.00. $95.00.

56) The following data are available for product number CK74, manufactured and sold by Ruby Corporation: Maximum capacity with present facilities Total fixed cost (per period)

4,500 units $ 986,337

Variable cost per unit

$ 120.29

Sales price per unit

$ 200.48

The contribution margin per unit for product number CK74 is: A) B) C) D)

$26.00. $80.19 $117.00. $63.00.

57) The following data are available for product number CK74, manufactured and sold by Ruby Corporation: Maximum capacity with present facilities Total fixed cost (per period)

9,000 units $ 739,500

Variable cost per unit

$ 124.00

Sales price per unit

$ 182.00

The number of units of CK74 that Ruby must sell to break- even is:

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A) B) C) D)

4,210. 4,063. 5,964. 12,750.

58) The following data are available for product number CK74, manufactured and sold by Ruby Corporation: Maximum capacity with present facilities Total fixed cost (per period)

4,500 units $ 986,337

Variable cost per unit

$ 120.29

Sales price per unit

$ 200.48

The number of units of CK74 that Ruby must sell to break- even is: A) B) C) D)

30,000. 20,500. 8,200. 12,300.

59) The following data are available for product number CK74, manufactured and sold by Ruby Corporation: Maximum capacity with present facilities Total fixed cost (per period)

4,500 units $ 986,337

Variable cost per unit

$ 120.29

Sales price per unit

$ 200.48

The dollar sales volume necessary to produce operating income of $245,000 is closest to: (Round the answer to the nearest whole number.)

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A) B) C) D)

60)

$2,052,228. $4,124,000. $2,465,842. $3,078,343.

In order to calculate break-even sales units, fixed costs are divided by the: A) B) C) D)

contribution margin per unit. contribution margin percentage. target operating income. sales volume.

61) All other things held constant, how will an increase in selling price affect the break-even point measured in units? A) B) C) D)

The break-even point will decrease. The break-even point will increase. The break-even point will remain constant. The effect on the break-even point can't be predicted with certainty.

62) If unit sales prices are $42 and variable costs are $32 per unit, how many units would have to be sold to break-even if fixed costs equal $27,000? A) B) C) D)

86,400 units 270,000 units 2,700 units 113,400 units

63) If unit sales prices are $7 and variable costs are $5 per unit, how many units would have to be sold to break-even if fixed costs equal $8,000?

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A) B) C) D)

2,000 units 3,000 units 4,000 units 3,800 units

64) If the unit sales price is $40 and variable costs are $32, how many units have to be sold to earn a profit of $5,400 if fixed costs equal $28,000? A) B) C) D)

675 units 3,500 units 28,675 units 4,175 units

65) If the unit sales price is $7 and variable costs are $3, how many units have to be sold to earn a profit of $3,600 if fixed costs equal $5,000? A) B) C) D)

900 units 1,250 units 1,500 units 2,150 units

66) If the unit sales price is $12, variable costs are $6 per unit, and fixed costs are $36,000, what sales volume (in dollars) is necessary to break-even? A) B) C) D)

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$90,000 $72,000 $70,000 $60,000

67) If the unit sales price is $18, variable costs are $9 per unit and fixed costs are $18,000, how many units must be sold to earn an income of $180,000? (Round the answer up to the next whole number.) A) B) C) D)

2,000 units 22,000 units 20,000 units 18,000 units

68) If the unit sales price is $14, variable costs are $7 per unit and fixed costs are $42,000, how many units must be sold to earn an income of $250,000? (Round the answer up to the next whole number.) A) B) C) D)

52,142 units 41,715 units 34,762 units 29,796 units

69) If monthly fixed costs are $24,000 and the contribution margin ratio is 30%, the monthly sales volume required to break even is: A) B) C) D)

$7,200. $80,000. $87,200. $31,200.

70) If monthly fixed costs are $21,000 and the contribution margin ratio is 42%, the monthly sales volume required to break even is:

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A) B) C) D)

$8,820. $50,000. $78,000. $39,207.

71) Accents Associates sells only one product, with a current selling price of $210 per unit. Variable costs are 60% of this selling price, and fixed costs are $50,000 per month. Management has decided to reduce the selling price to $205 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price.At the current selling price of $210 per unit, the contribution margin ratio is: A) B) C) D)

40%. 60%. 126%. 80%.

72) Accents Associates sells only one product, with a current selling price of $70 per unit. Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. At the current selling price of $70 per unit, the contribution margin ratio is: A) B) C) D)

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60%. 40%. 67%. 120%.

73) Accents Associates sells only one product, with a current selling price of $40 per unit. Variable costs are 20% of this selling price, and fixed costs are $20,000 per month. Management has decided to reduce the selling price to $35 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price.At the current selling price of $40 per unit, the dollar volume of sales per month necessary for Accents to break-even is: A) B) C) D)

$20,000. $25,000. $125,000. Some other amount.

74) Accents Associates sells only one product, with a current selling price of $70 per unit. Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. At the current selling price of $70 per unit, the dollar volume of sales per month necessary for Accents to break-even is: A) B) C) D)

$12,000. $20,000. $30,000. Some other amount.

75) Accents Associates sells only one product, with a current selling price of $220 per unit. Variable costs are 40% of this selling price, and fixed costs are $36,000 per month. Management has decided to reduce the selling price to $215 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price.At the current selling price of $220 per unit, what dollar volume of sales per month is required for Accents to earn a monthly operating income of $10,000?

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A) B) C) D)

$36,000 $287,500 $76,667 Some other amount

76) Accents Associates sells only one product, with a current selling price of $70 per unit. Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. At the current selling price of $70 per unit, what dollar volume of sales per month is required for Accents to earn a monthly operating income of $15,000? A) B) C) D)

$25,000 $30,000 $45,000 Some other amount

77) Accents Associates sells only one product, with a current selling price of $70 per unit. Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. At the reduced selling price of $65 per unit, the contribution margin ratio is: (Round the answer to one decimal place.) A) B) C) D)

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43.1%. 56.9%. 52.8%. 60.0%.

78) Accents Associates sells only one product, with a current selling price of $70 per unit. Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. At the reduced selling price of $65 per unit, what dollar volume of sales per month is required to break-even? (Round your intermediate percentage to one decimal place and final answer to nearest whole dollar.) A) B) C) D)

$27,842 $22,727 $21,090 $29,540

79) Grand Gimmicks Company produces a single product with a current selling price of $170. Variable costs are $130 per unit, and fixed costs per month average $6,240. Management is considering increasing the selling price to $190 per unit. Assume that the variable cost per unit of the product and monthly fixed expenses will not change as a result of the proposed increase in selling price. At the current selling price of $170 per unit, the contribution margin ratio is approximately: A) B) C) D)

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23.5%. 76.4%. 34.7%. 21.3%.

80) Grand Gimmicks Company produces a single product with a current selling price of $170. Variable costs are $130 per unit, and fixed costs per month average $6,240. Management is considering increasing the selling price to $190 per unit. Assume that the variable cost per unit of the product and monthly fixed expenses will not change as a result of the proposed increase in selling price. At the current selling price of $170 per unit, closest to what dollar volume of sales per month is required for Grand Gimmicks to break-even? (Round your intermediate percentage to one decimal place and final answer to the nearest whole dollar.) A) B) C) D)

$6,178 $8,299 $26,554 $20,800

81) Grand Gimmicks Company produces a single product with a current selling price of $170. Variable costs are $130 per unit, and fixed costs per month average $6,240. Management is considering increasing the selling price to $190 per unit. Assume that the variable cost per unit of the product and monthly fixed expenses will not change as a result of the proposed increase in selling price. At the current selling price of $170 per unit, closest to what dollar volume of sales per month is necessary for Grand Gimmicks to generate monthly operating income of $12,000? (Round the intermediate percentage to one decimal place.) A) B) C) D)

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$24,162 $51,063 $58,838 $77,617

82) Grand Gimmicks Company produces a single product with a current selling price of $170. Variable costs are $130 per unit, and fixed costs per month average $6,240. Management is considering increasing the selling price to $190 per unit. Assume that the variable cost per unit of the product and monthly fixed expenses will not change as a result of the proposed increase in selling price. At the proposed increased selling price of $190 per unit, the contribution margin ratio is closest to: A) B) C) D)

60.2%. 31.6%. 68.4%. 50.8%.

83) Grand Gimmicks Company produces a single product with a current selling price of $170. Variable costs are $130 per unit, and fixed costs per month average $6,240. Management is considering increasing the selling price to $190 per unit. Assume that the variable cost per unit of the product and monthly fixed expenses will not change as a result of the proposed increase in selling price. At the proposed increased selling price of $190 per unit, closest to what dollar volume of sales per month is required to break-even? (Round your intermediate percentage to one decimal place.) A) B) C) D)

84)

$19,747 $10,400 $9,123 $18,480

The margin of safety is calculated by:

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A) B) C) D)

dividing fixed costs plus target income by the contribution margin. subtracting break-even income from current income. subtracting break-even sales from current sales. subtracting fixed costs from current contribution margin.

85) The dollar amount by which sales can decline before an operating loss is incurred is called the: A) B) C) D)

contribution margin. contribution margin ratio. margin of safety. relevant range.

86) A company with an operating income of $66,000 and a contribution margin ratio of 46% has a margin of safety of: (Round the answer to the nearest whole number.) A) B) C) D)

$30,360. $143,478. $122,222. It is not possible to determine the margin of safety from the information provided.

87) A company with an operating income of $72,000 and a contribution margin ratio of 56% has a margin of safety of: (Round the answer to the nearest whole number.) A) B) C) D)

$40,320. $128,571. $163,636. It is not possible to determine the margin of safety from the information provided.

88) In the area of cost-volume-profit analysis, the contribution margin ratio shows how much each dollar of sales contributes to: Version 1

A) B) C) D)

cover the fixed costs of the business and providing operating income. fixed expenses and variable expenses. variable expenses and interest charges. variable expenses when production is at normal capacity.

89) If a product sells for $42, variable costs are $32 and fixed costs are $480,000, what would total sales have to be in order to break-even? A) B) C) D)

$1,536,000 $4,800,000 $2,016,000 $480,000

90) If a product sells for $8, variable costs are $6 and fixed costs are $150,000, what would total sales have to be in order to break-even? A) B) C) D)

91)

$390,000 $399,999 $600,000 $699,999

The following information is available:

Sales Break-even sales Contribution margin ratio

$ 120,000 $ 70,000 31%

What is the operating income?

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A) B) C) D)

92)

$0 $70,000 $21,700 $15,500

The following information is available:

Sales Break-even sales Contribution margin ratio

$ 90,000 $ 50,000 26%

What is the operating income? A) B) C) D)

$40,000 $50,000 $8,000 $10,400

93) Product X sells for $36 per unit and has related variable costs of $20 per unit. The fixed costs of producing product X are $110,000 per month. How many units of product X must be sold each month to earn a monthly operating income of $66,000? A) B) C) D)

6,875 units 4,125 units 11,000 units 3,056 units

94) Product X sells for $35 per unit and has related variable costs of $25 per unit. The fixed costs of producing product X are $65,000 per month. How many units of product X must be sold each month to earn a monthly operating income of $85,000?

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A) B) C) D)

2,833 units 6,000 units 15,000 units 10,000 units

95) Sultan Company produces a single product. The selling price is $50 per unit, and variable costs amount to $20 per unit. Sultan's fixed costs per month total $80,000. What is the contribution margin ratio of Sultan 's product? A) B) C) D)

25% 75% 60% 40%

96) Sultan Company produces a single product. The selling price is $50 per unit, and variable costs amount to $20 per unit. Sultan's fixed costs per month total $80,000. What is the monthly sales volume in dollars necessary to break-even? (Round the answer to the nearest dollar.) A) B) C) D)

$320,000 $106,667 $200,000 $133,333

97) Sultan Company produces a single product. The selling price is $50 per unit, and variable costs amount to $20 per unit. Sultan's fixed costs per month total $80,000. How many units must be sold each month to earn a monthly operating income of $25,000?

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A) B) C) D)

833 units 2,300 units 3,500 units Some other amount

98) Sultan Company produces a single product. The selling price is $50 per unit, and variable costs amount to $20 per unit. Sultan's fixed costs per month total $80,000. What will be the monthly margin of safety (in dollars) if 3,000 units are sold each month? (Round the answer to the nearest dollar.) A) B) C) D)

$16,667 $100,000 $43,333 $150,000

99) Sultan Company produces a single product. The selling price is $50 per unit, and variable costs amount to $20 per unit. Sultan's fixed costs per month total $80,000. What will be Sultan 's monthly operating income if 3,700 units are sold each month? A) B) C) D)

$15,000 $31,000 $75,000 $105,000

100) A product sells for $140, variable costs are $105, and fixed costs are $72,000. If the selling price can be increased by 22% with a similar increase in variable costs, how many fewer units would have to be sold to earn $230,000? (Round the answer up to the next whole number.)

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A) B) C) D)

409 units 1,147 units 1,556 units 3,700 units

101) A product sells for $125, variable costs are $80, and fixed costs are $45,000. If the selling price can be increased by 20% with a similar increase in variable costs, how many fewer units would have to be sold to earn $300,000? (Round the answer up to the next whole number.) A) B) C) D)

102)

5,595 units 7,667 units 1,278 units 6,389 units

Operating income can be calculated by: A) B) C) D)

dividing fixed costs by the contribution margin ratio. multiplying fixed costs by the contribution margin ratio. multiplying the margin of safety by the contribution margin ratio. dividing the margin of safety by the contribution margin ratio.

103) Montclair Company earns an average contribution margin ratio of 40% on its sales. The local store manager estimates that he can increase monthly sales volume by $45,000 by spending an additional $7,000 per month for direct mail advertising. Compute the monthly increase in operating income if the manager's estimate about the increased sales volume is accurate. A) B) C) D)

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$11,000 $23,000 $16,000 $18,000

104) Raymond & Sons generates an average contribution margin ratio of 45% on its sales. Management estimates that by spending $3,500 more per month to rent additional facilities, the business will be able to increase operating income by $10,000 per month. Management must feel that the additional facilities will increase monthly sales volume (in dollars) by: A) B) C) D)

$4,725. $8,775. $13,500. $30,000.

105) The Davidson Company's breakeven point in units is 40,000. Assuming that variable costs are 60% and fixed costs are $300,000, what is the company's projected operating income if sales are $1,000,000? A) B) C) D)

$750,000 $100,000 $250,000 $400,000

106) The Gillett Company's breakeven point in units is 25,000. Assuming that variable costs are 50% and fixed costs are $500,000, what is the company's projected operating income if sales are $1,250,000? A) B) C) D)

$750,000 $100,000 $125,000 $400,000

107) The Parry Company’s breakeven point in units is 20,000. Assuming that variable costs are 30% and fixed costs are $100,000, what is the company’s projected operating income if sales are $750,000?

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A) B) C) D)

$425,000 $125,000 $250,000 $400,000

108) Grayson Enterprises manufactures springs and shock absorbers. Springs account for 40% of the company's total sales revenue, whereas shocks account for about 60%. The contribution margin ratios for springs and shocks are 45% and 35%, respectively. Grayson's fixed costs average $450,000 per month. Grayson's monthly break-even point expressed in sales dollars is: (Round the answer to the nearest dollar.) A) B) C) D)

$1,000,000. $1,285,714. $1,153,846. $2,285,714.

109) Grayson Enterprises manufactures springs and shock absorbers. Springs account for 40% of the company's total sales revenue, whereas shocks account for about 60%. The contribution margin ratios for springs and shocks are 45% and 35%, respectively. Grayson's fixed costs average $450,000 per month. In order to earn an operating income of $252,000, Grayson's monthly sales must be: A) B) C) D)

110)

$1,700,000. $1,750,000. $1,800,000. $1,850,000.

Nanu Corporation manufactures two products; data are shown below: Contribution Margin Ratio

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Relative Sales Mix

Product X Product Y

40% 30%

40% 60%

If Nanu's monthly fixed costs average $425,000, what is its break-even point expressed in sales dollars? A) B) C) D)

111)

$1,320,000 $1,250,000 $1,400,000 $990,000

Unique Corporation manufactures two products; data are shown below: Contribution Margin Ratio 50% 30%

Product D Product F

Relative Sales Mix 40% 60%

If Unique's monthly fixed costs average $400,000, what is its break-even point expressed in sales dollars? (Round the answer to the nearest dollar.) A) B) C) D)

112)

$1,320,462 $1,250,000 $1,400,000 $1,052,632

Stupper Corporation manufactures two products; data are shown below:

Product D Product F

Contribution Margin Ratio 50% 60%

Relative Sales Mix 60% 40%

If Stupper's monthly fixed costs average $200,000, what is its break-even point expressed in sales dollars? (Round the answer to the nearest dollar.)

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A) B) C) D)

$320,000 $250,000 $370,370 $152,632

113) The following information is available regarding the total manufacturing overhead of Olsen Company for a recent four-month period. Machine Hours April May June July

66,000 50,000 103,000 99,000

Manufacturing Overhead $ 174,000 $ 157,000 $ 204,700 $ 185,000

Using the high-low method, compute the variable element of manufacturing overhead cost per machine hour. A) B) C) D)

$2.38 per machine hour $.90 per machine hour $.33 per machine hour $.83 per machine hour

114) The following information is available regarding the total manufacturing overhead of Olsen Company for a recent four-month period. Machine Hours April May June July

90,000 80,000 110,000 95,000

Manufacturing Overhead $ 170,000 $ 153,000 $ 198,000 $ 181,000

Using the high-low method, compute the variable element of manufacturing overhead cost per machine hour.

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A) B) C) D)

$0.87 per machine hour $1.50 per machine hour $1.40 per machine hour $2.10 per machine hour

115) The following information is available regarding the total manufacturing overhead of Olsen Company for a recent four-month period. Machine Hours April May June July

60,000 50,000 100,000 96,000

Manufacturing Overhead $ 171,000 $ 154,000 $ 199,000 $ 182,000

Using the high-low method, compute the fixed element of Olsen's monthly overhead cost. A) B) C) D)

$109,000 $89,600 $94,000 $45,000

116) The following information is available regarding the total manufacturing overhead of Olsen Company for a recent four-month period. Machine Hours April May June July

90,000 80,000 110,000 95,000

Manufacturing Overhead $ 170,000 $ 153,000 $ 198,000 $ 181,000

Using the high-low method, compute the fixed element of Olsen's monthly overhead cost.

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A) B) C) D)

$33,000 $35,000 $37,500 $40,000

117) The following information is available regarding the total manufacturing overhead of Olsen Company for a recent four-month period. Machine Hours April May June July

92,000 50,000 116,000 112,000

Manufacturing Overhead $ 187,000 $ 170,000 $ 315,200 $ 198,000

Olsen's projected August operations will require approximately 195,000 machine hours. Using the high-low method, compute total manufacturing overhead estimated for August. A) B) C) D)

$340,200 $127,000 $170,000 $489,000

118) The following information is available regarding the total manufacturing overhead of Olsen Company for a recent four-month period. Machine Hours April May June July

90,000 80,000 110,000 95,000

Manufacturing Overhead $ 170,000 $ 153,000 $ 198,000 $ 181,000

Olsen's projected August operations will require approximately 120,000 machine hours. Using the high-low method, compute total manufacturing overhead estimated for August.

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A) B) C) D)

$165,000 $187,500 $197,500 $213,000

119) The levels of production and of manufacturing overhead for the first five months of the current year for Duke & Duchess Products are shown below:

January February March April May

Units Produced 11,500 12,250 11,125 11,950 10,750

Manufacturing Overhead $ 58,650 $ 59,413 $ 58,262 $ 59,104 $ 57,889

Using the high-low method, compute the variable element of manufacturing overhead per unit. (Round your answer to two decimal places.) A) B) C) D)

$0.83 per unit $1.02 per unit $0.95 per unit $0.08 per unit

120) The levels of production and of manufacturing overhead for the first five months of the current year for Duke & Duchess Products are shown below:

January February March April May

Units Produced 11,500 12,250 11,125 11,950 10,750

Manufacturing Overhead $ 58,650 $ 59,413 $ 58,262 $ 59,104 $ 57,889

Using the high-low method, Duke & Duchess's monthly fixed overhead cost is closest to which of the following? (Round your intermediate computations to two decimal places.) Version 1

A) B) C) D)

$59,413 $12,495 $12,250 $46,918

121) The levels of production and of manufacturing overhead for the first five months of the current year for Duke and Duchess Products are shown below: Units Produced 11,500 12,250 11,125 11,950 10,750

January February March April May

Manufacturing Overhead $ 58,650 $ 59,413 $ 58,262 $ 59,104 $ 57,889

In June, Duke and Duchess expects to manufacture 18,000 units. Using the high-low method, compute the total estimated manufacturing overhead for June. (Round your intermediate computations to two decimal places.) A) B) C) D)

$65,278 $61,668 $63,948 $18,360

122) The monthly high and low levels of direct labor hours and of total manufacturing overhead for Onyx Company are as shown: Direct Labor Hours Highest observed level Lowest observed level

8,000 4,000

Manufacturing Overhead $ 34,000 $ 26,000

On the basis of the above data, the cost formula for Onyx's monthly manufacturing overhead can be expressed as:

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A) B) C) D)

$18.00 average cost per direct labor hour. $1.80 average cost per direct labor hour. $26,000 fixed cost plus $1.50 per direct labor hour. $18,000 fixed cost plus $2.00 per direct labor hour.

123) The monthly high and low levels of direct labor hours and of total manufacturing overhead for Onyx Company are as shown: Direct Labor Hours Highest observed level Lowest observed level

8,000 4,000

Manufacturing Overhead $ 34,000 $ 26,000

In a month in which 6,500 direct labor hours are worked, Onyx's manufacturing overhead should be approximately: A) B) C) D)

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$18,000. $28,000. $31,000. $35,000.

Answer Key Test name: Chapter 20 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) FALSE 4) TRUE 5) FALSE 6) FALSE 7) FALSE 8) FALSE 9) TRUE 10) FALSE 11) TRUE 12) TRUE 13) FALSE 14) FALSE 15) FALSE 16) FALSE 17) TRUE 18) TRUE 19) TRUE 20) TRUE 21) TRUE 22) TRUE 23) FALSE 24) FALSE 25) TRUE 26) A Version 1

27) D 28) C 29) D 30) B 31) B 32) B 33) D 34) D 35) C 36) A 37) D 38) A 39) C 40) C 41) A 42) A 43) A 44) B 45) B 46) A 47) D 48) A 49) A 50) D 51) A 52) B 53) B 54) D 55) B 56) B Version 1

57) D 58) D 59) D 60) A 61) A 62) C 63) C 64) D 65) D 66) B 67) B 68) B 69) B 70) B 71) A 72) A 73) B 74) B 75) C 76) C 77) B 78) C 79) A 80) C 81) D 82) B 83) A 84) C 85) C 86) B Version 1

87) B 88) A 89) C 90) C 91) D 92) D 93) C 94) C 95) C 96) D 97) C 98) A 99) B 100) C 101) C 102) C 103) A 104) D 105) B 106) C 107) A 108) C 109) C 110) B 111) D 112) C 113) B 114) B 115) A 116) A Version 1

117) D 118) D 119) B 120) D 121) A 122) D 123) C

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CHAPTER 21: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms introduced or emphasized in this chapter:Opportunity costIncremental analysisSunk costSplit-off pointJoint costsOut-of-pocket costsRelevant informationJoint products Required:Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ______(a) Data pertaining to future time periods that may vary among alternative courses of action. ______(b) The point at which manufacturing costs are split between finished goods inventory and work in progress. ______(c) The benefit foregone by pursuing one course of action over another. ______(d) Products that emerge from common materials and shared production processes. ______(e) A cost incurred in the past that will not change as a result of future actions. ______(f) Costs yet to be incurred which are expected to vary under different courses of action. ______(g) The examination of differences between future costs and revenue under varying courses of action.

2) Consider the relevant costs in business decisions. Required:(A) Explain what is meant by each of the following terms: (1) opportunity cost, (2) sunk cost, and (3) out-of-pocket cost.(B) Identify which, if any, of the above three types of cost would be considered relevant in making a business decision.

Information regarding current operations of the Farrell Corporation is given below:

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Sales Variable Costs Fixed Costs

$ 950,000 $ 450,000 $ 310,000

The sales manager estimates that a proposed addition to Farrell's factory will increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year. Required:(A) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.(B) Calculate by how much the proposed addition will either increase or reduce operating income.

4) Prudent Products Corporation manufactures and sells 1,000 motorcycle engines each month. A primary component in each motor is an oil pump used to keep the motor lubricated. Prudent Products has the monthly capacity to produce 1,500 oil pumps. The variable unit costs associated with manufacturing each pump are shown below:

Direct materials Direct labor Variable manufacturing overhead

$ 38 28 48

Fixed manufacturing overhead per month (for up to 1,500 units of production) averages $46,000. Volk's Autos, Incorporated, has offered to purchase 250 oil pumps from Prudent Products per month to be used in its own motorcycles. Required: Answer the following questions:(A) What is Prudent Product's average unit cost of manufacturing each oil pump if it rejects Volk's Autos' order? (B) What is the incremental unit cost of producing each additional oil pump? (C) If this special order is accepted, what selling price per unit must Prudent Products charge Volk's Autos in order to earn a $20,000 monthly pretax profit on the sale?

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5) Explain why an American corporation might sell a product in Eastern Europe at a price significantly below that for which it sells the same product in the United States.

6) Links, Incorporated produces golf gloves. The gloves sell for $16 each. Variable costs are $8.50 and fixed costs are $1.50 each. An Australian company has offered to pay $12 each for 2,000 gloves. The manufacturing capacity will not be affected by this special order and it will not affect regular sales. Fixed assets will not change but variable selling costs will increase by $1.75 a glove due to delivery costs. Required: Answer the following questions: (A) What is the relevant cost per unit on this special order? (B) How will company profits be affected if Links accepts the Australian company’s offer? (C) Should the company accept this special order? Why?

7) Nielson has 5,000 defective televisions on hand, which cost $380,000 to manufacture. Nielson can either sell these defective televisions as scrap for $65 per unit, or spend an additional $120,000 on repairs and then sell the televisions for $135 per unit. Required: Should Nielson repair the defective televisions to sell them as scrap? Version 1

8) Essential Company normally produces and sells 4,000 video monitors for personal computers each month. Variable manufacturing costs amount to $62 per unit, and fixed manufacturing costs are $170,000 per month. The regular sales price of the monitors is $140 per unit. The company is considering a special order from a foreign computer maker to buy an additional 1,000 monitors per month at a special price of $70 per unit. Filling this special order would not affect Essential Company's regular sales volume or fixed manufacturing costs. Required: Determine the following: (A) The average cost per unit at the 4,000-unit-per-month production level (B) The average cost per unit at the 5,000-unit-per-month production level (C) The amount of the increase or the decrease (indicate the correct term) in Essential Company's operating income that would result from accepting the special order

9) Paramount Bikes, Incorporated, uses 10,000 derailleurs in its bicycles each year. Derailleurs currently cost the company $20.90 per unit to manufacture, determined as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

$ 50,600 55,000 37,400 66,000

Total costs

$ 209,000

Cost per unit ($209,000 ÷ 10,000 units)

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$ 20.90

Paramount Bikes, Incorporated, has been approached by an outside supplier that will provide derailleurs at a price of $16 per unit. If Paramount Bikes, Incorporated, stops producing derailleurs, the direct materials, direct labor, and variable manufacturing overhead will be eliminated, as will $30,000 of the fixed manufacturing overhead. Required: Use incremental analysis to determine whether Paramount Bikes, Incorporated, should make or buy derailleurs and quantify the cost savings.

10) Grassy Fertilizer manufactures two lines of garden grade fertilizer as part of a joint production process: GF10 and GF20. Joint costs up to the split-off point total $85,000 per batch. These joint costs are allocated to GF10 and GF20 in proportion to their relative sales values at the split-off point of $40,000 and $60,000, respectively.Both lines of garden grade fertilizer can be further processed into commercial grade fertilizer. The following table summarizes the costs and revenue associated with additional processing of GF10 and GF20:

GF10 GF20

Additional Processing Costs $ 18,000 $ 38,000

Final Selling Price per Batch of Commercial Grade Fertilizer $ 67,000 $ 97,000

Required: Answer the following questions: (A) How should the $85,000 in joint costs be allocated to (1) GF10 and (2) GF20?(B) Which product (GF10 or GF20) would result in a net decrease in operating income if processed into a commercial grade fertilizer?(C) Which product (GF10 or GF20) would result in a net increase in operating income if processed into a commercial grade fertilizer?

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11) Currier, Incorporated, manufactures and distributes a large number of products. The costs per unit for one product, a pole, are as follows: Direct materials and direct labour Variable factory overhead Fixed factory overhead

$ 16 11 7

Currier recently decided to buy the pole from another manufacturer for $32 per unit because the unit cost was less than its unit cost of $34. Required: Based solely on the cost data given, evaluate this decision.

12) Widmark Company originally manufactured cell phones at a total cost of $60,000. The phones have since become obsolete due to new technology. The company can sell the obsolete phones to a dealer for scrap for $11,500. Alternatively, the company could rebuild the phones to bring them up-to-date at a total cost of $13,000 and then sell the rebuilt phones for $20,000. Required: Answer the following questions: (A) Should the company scrap them or rebuild the phones? (B) Assume, instead, that the original manufacturing cost had been $50,000 (rather than $60,000) and the company could sell the rebuilt phones for $25,000. Should Widmark scrap or rebuild the phones?

13) Portable Enterprises produces two lines of mobile homes: Double-wide and single-wide. Unit cost and revenue data pertaining to each product are shown below: Version 1

Selling price Total variable costs

Double-wide

Single-wide

$ 70,000 45,000

$ 40,000 20,000

Each double-wide home requires 350 direct labor hours and 125 machine hours. Each singlewide home requires 175 direct labor hours and 150 machine hours. Demand for each line of homes far exceeds the company's total production capacity. Required: Answer the following questions: (A) If Portable’s production capacity is constrained by limited direct labor hours, which line of homes should it produce? (B) If Portable's total production capacity is constrained by machine hours, which line of homes should it produce?

14) Robbins Company has been producing a part for a camera they manufacture. The costs for this part are as follows:

Fixed costs Total variable costs Units produced

$ 392,000 $ 112,000 28,000

Robbins has an opportunity to purchase this part rather than manufacture it. To purchase the part will cost $3 a unit. If the part is purchased, fixed costs will be reduced by 20%. Should Robbins Corporation make or buy this part? Why?

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15) Explain why it would be irresponsible and shortsighted for managers to base decisions entirely on revenue and cost figures.

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Answer Key Test name: Chapter 21 Test Bank (Problem Material) 1) (a) Relevant information(b) None*(c) Opportunity cost(d) Joint products(e) Sunk cost(f) Out-of-pocket costs(g) Incremental analysis*(b) The statement does not describe any of the terms described in this chapter. 2) (A) (1) Opportunity cost is the benefit foregone by not pursuing an alternative course of action.(A) (2) A sunk cost is an outlay that has been irrevocably incurred at some time in the past; sunk costs cannot be changed, no matter what course of action is taken.(A) (3) An out-ofpocket cost is an expenditure of current funds (cash or other liquid resources) which may not have occurred yet, and which may vary among the alternative courses of action.(B) The only costs relevant to a decision are those costs that vary among the alternative courses of action being considered. Because opportunity costs and out-of-pocket costs vary among the alternative courses of action, these types of costs are relevant in making decisions. Sunk costs are not relevant to decisions because they cannot be changed, regardless of what decision is made. 3) (A) The $310,000 of current fixed cost is a result of past decisions and cannot be changed as a result of the decision at hand. It is therefore a sunk cost. The $320,000, on the other hand, is a fixed cost associated with the proposed addition. This cost has not yet been incurred. Because it is necessary to the proposed addition it is an out-of-pocket cost.(B) The proposed addition will increase operating income by $74,737.Increase in variable costs = $450,000 × ($750,000 ÷ $950,000) = $355,263Increase in sales of $750,000 − Increase in variable costs of $355,263 − Increase in fixed costs of $320,000 = $74,737

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4) (A) ($38 + $28 + $48) + ($46,000 ÷ 1,000 units) = $160(B) $38 + $28 + $48 = $114(C) Incremental manufacturing costs per unit Required profit per unit ($20,000/250 units)

$ 114 80

Required unit sales price

$ 194

5) An American corporation will sell its product in Eastern Europe at any price in excess of the incremental unit cost to produce the product, assuming that it has excess capacity to produce the product and that by so doing, its domestic sales will not be reduced. Such sales, even at significantly lower prices, will generate contribution margin that can be applied to fixed cost or operating income. 6) (A) Variable cost $8.50 + Variable selling costs $1.75 = $10.25(B) (Selling price $12 − Variable cost $10.25) × 2,000 gloves = $3,500(C) Yes, the company should accept the special order because the selling price of the special order covers variable costs and the additional cost of selling, and results in contribution margin of $1.75 per unit. 7) Nielson should repair the defective televisions because operating income will increase by $230,000. Proceeds from sale of repaired TVs (5,000 × $135) Less: Cost of repairs Net proceeds from sale of repaired TVs Less: Scrap value of defective TVs (5,000 × $65)

$ 675,000 (120,000) $ 555,000 (325,000)

Net advantage if TVs are repaired

$ 230,000

8) (A) $62 + ($170,000 ÷ 4,000 units) = $104.50(B) $62 + ($170,000 ÷ 5,000 units) = $96(C) Incremental revenue from special order ($70 × 1,000 units) Incremental costs ($62 variable cost × 1,000 units)

$ 70,000 (62,000)

Net increase in operating income

$ 8,000

9) The company can save $13,000 per year by buying the derailleurs.

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Make the Part

Buy the Part

Incremental Analysis

Manufacturing costs: Direct materials

$ 50,600

Direct labor

55,000

Variable overhead

37,400

Fixed overhead Purchase price ($16 per unit)

66,000

$ 36,000 160,000

30,000 (160,000)

$ 209,000

$ 196,000

$ 13,000

Totals

10) (A)<br>

GF10 GF20

Sales Value at % of Total Split-Off Point Sales Value at Split-Off Point $ 40,000 40% × 60,000 60% ×

Joint Costs

$ 85,000 $ 85,000

Allocation

= =

$34,000 $51,000

<br>(B)<br> Revenue if GF20 is processed further Revenue if GF20 is sold at split-off Incremental revenue of further processing GF20 Incremental COST of further processing GF20

$ 97,000 (60,000) $ 37,000 (38,000)

Decrease to operating income if further processed

$ 1,000

<br>(C)<br> Revenue if GF10 is processed further Revenue if GF10 is sold at split-off Incremental revenue of further processing GF10 Incremental COST of further processing GF10

$ 67,000 (40,000) $ 27,000 (18,000)

Increase to operating income if further processed

$ 9,000

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11) The decision was not sound. While Currier's average unit cost of the pole was $34, the variable cost was only $27 per unit. By paying $32 per unit to another manufacturer, Currier is actually paying $5 per unit more than its apparent out-of-pocket cost. Other subjective considerations should, of course, be evaluated, but the question asks for an evaluation only in terms of the cost data given. 12) (A)The original cost of manufacturing the phones of $60,000 has no bearing on the decision since this is a sunk cost. Scrap

Rebuild

Selling price Cost

$ 11,500 0

$ 20,000 13,000

Increase in operating income

$ 11,500

$ 7,000

(B)The original cost of manufacturing the phones of $50,000 has no bearing on the decision since this is a sunk cost. Scrap

Rebuild

Selling price Cost

$ 11,500 0

$ 25,000 13,000

Increase in operating income

$ 11,500

$ 12,000

13) Note, in each case, the line of homes with the highest contribution margin per unit of limiting resource should be produced.(A)Contribution margin per direct labor hour.:Double-wide: $25,000 ÷ 350 direct labor hours = $71.43Single-wide: $20,000 ÷ 175 direct labor hours = $114.29(B)Contribution margin per machine hour:Double-wide: $25,000 ÷ 125 machine hours = $200.00Single-wide: $20,000 ÷ 150 machine hours = $133.33 14) The cost of making the part is $504,000 while the cost of buying the part is only $397,600. Robbins should buy the part.Decrease in fixed costs if part is purchased = $392,000 × 0.20 = $78,400Fixed costs if part is purchased = $392,000 − $78,400 = $313,600Purchase cost = 28,000 units × $3 per unit = $84,000

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Make the Part

Buy the Part

Fixed costs Variable costs Purchase cost

$ 392,000 112,000

$ 313,600 0 84,000

Total

$ 504,000

$ 397,600

15) Revenue and cost figures are often based on estimates about the future. As such, they are usually subject to varying degrees of error. Furthermore, most decisions also require an examination of legal requirements, ethical implications, environmental consequences, political concerns, and social issues. Thus, while incremental analysis is an excellent tool for evaluating among decision alternatives, managers should not automatically follow the first course of action offering promise of increased profitability. Rather, they should remain open to the possibility that a more creative, and perhaps more profitable, solution may exist.

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CHAPTER 21 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Identifying information relevant to a particular business decision requires an understanding of both quantitative and qualitative considerations. ⊚ ⊚

true false

All incremental revenue or incremental costs are relevant. ⊚ ⊚

true false

3) Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision. ⊚ ⊚

4) data.

true false

In making a decision, management will look thoroughly at both relevant and irrelevant ⊚ ⊚

true false

5) In order to be consistent with IASB Standards, U.S. GAAP now requires that borrowing costs on assets that require a substantial period to bring them to a marketable condition be expensed immediately. ⊚ ⊚

true false

Differential costs are those that are the same among alternatives. ⊚ ⊚

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true false

Nonfinancial considerations are relevant in decision-making. ⊚ ⊚

true false

Incremental revenue is relevant in decision-making. ⊚ ⊚

true false

9) The term "out-of-pocket cost" is often used to describe costs which have not yet been incurred and which may vary among alternative courses of action. ⊚ ⊚

10)

true false

Opportunity costs are irrelevant in decision-making. ⊚ ⊚

true false

11) A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action. ⊚ ⊚

12)

Sunk costs may be defined as unavoidable future costs resulting from past decisions. ⊚ ⊚

13)

true false

Sunk costs are relevant to decisions about replacing plant assets.

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⊚ ⊚

14)

Opportunity costs are recorded in the accounting records. ⊚ ⊚

15)

true false

An opportunity cost is a relevant cost when making a business decision. ⊚ ⊚

18)

true false

Sunk costs have already been incurred and cannot be changed by future actions. ⊚ ⊚

17)

true false

A sunk cost is an expenditure that has proven to be nonproductive. ⊚ ⊚

16)

true false

Incremental analysis rarely requires the decision maker to exercise judgment. ⊚ ⊚

true false

19) The relevant costs and revenues that should be considered in a special order decision include variable costs, fixed costs, and incremental revenues. ⊚ ⊚

20)

true false

Joint products are similar products that serve the same exact function.

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⊚ ⊚

21)

Joint costs are the middle costs of a product. ⊚ ⊚

22)

true false

Maple syrup and pancakes are examples of joint products. ⊚ ⊚

true false

23) In determining whether to scrap or to rebuild defective units of product, the cost already incurred in producing the defective units is not relevant. ⊚ ⊚

true false

24) Products resulting from a shared manufacturing process are referred to as complimentary products. ⊚ ⊚

true false

25) When sales of one product contribute to the sales of another product, the two products are referred to as contribution products. ⊚ ⊚

true false

26) The split-off point is the point at which joint products can be separated into two or more products. ⊚ ⊚

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true false

27) The most common method to allocate joint costs is in proportion to the relative sales value of the products. ⊚ ⊚

true false

28) A decision to discontinue a given product on the basis of contribution margin data should include consideration of the probable impact of the discontinuance on the sales of other products. ⊚ ⊚

true false

29) Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, the repaired units can be sold for $425,000. The company receives an offer to purchase these motors for $325,000 before repairing them. The company's decision should be to sell the motors at the offered price. ⊚ ⊚

true false

30) Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, the repaired units can be sold for $275,000. The company receives an offer to purchase these motors for $100,000 before repairing them. The company's decision should be to sell the motors at the offered price. ⊚ ⊚

31)

Direct material costs are always considered relevant costs in a make or buy decision. ⊚ ⊚

32)

true false

Sunk costs are relevant costs when considering a special order.

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⊚ ⊚

true false

33) In addition to quantitative information, many nonfinancial factors must be taken into consideration when making a decision. ⊚ ⊚

34)

true false

Both IFRS and U.S. GAAP require borrowing costs to be capitalized in a similar manner. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 35) Perfect Plumbing Corporation currently manufactures a valve for use in water pumps that it produces for sale. The company is considering purchasing the valves from an outside supplier rather than manufacturing them. Which of the following costs is not relevant to the decision? A) The cost of direct material required to make the valve. B) The price charged by the outside supplier for an identical valve. C) The cost of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve. D) The salvage value of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.

36)

Incremental revenues: A) B) C) D)

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Always increase revenue when one course of action is selected over another. Always decrease revenue when one course of action is selected over another. May increase or decrease when one course of action is selected over another. Cause revenues to remain steady.

37)

Which of the following types of cost are always relevant to a decision? A) B) C) D)

Sunk costs Average costs Incremental costs Fixed costs

38) Mell Company manufactured 100 personal computers at a cost of $30,000. It can sell them as is for $65,000, or install hard disks in them for $25,000 and sell them for $105,000. The $30,000 original manufacturing cost is: A) B) C) D)

39)

Which cost is not relevant in making financial decisions? A) B) C) D)

40)

Sunk costs Opportunity costs Incremental costs Out-of-pocket costs

Incremental costs can be defined as: A) B) C) D)

41)

An out-of-pocket cost because it has already been paid. A sunk cost because it is not relevant to the decision. An incremental cost because it is relevant to the decision. A fixed cost because it will remain the same no matter which action is taken.

Costs that are expected to increase regardless of the course of action chosen. The differences between costs incurred under alternative courses of action. Costs incurred in the past. Costs that are irrelevant in decision making.

A cost that has already been incurred and cannot be changed is called a(n):

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A) B) C) D)

Opportunity cost. Out-of-pocket cost. Joint cost. Sunk cost.

42) Costs that have not yet been incurred and that may vary among different courses of action are called: A) B) C) D)

Opportunity costs. Out-of-pocket costs. Joint costs. Sunk costs.

43) By choosing to go into business for himself, Jim Lazar foregoes the possibility of getting a highly paid job with a large company. This is called a(n): A) B) C) D)

44)

Sunk cost. Out-of-pocket cost. Opportunity cost. Joint cost.

Which of the following would be an example of a sunk cost?

A) The cost of a new oil burner that replaced a destroyed one B) The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one C) Depreciation expense D) Lost revenue from a bad debt

45)

Sunk costs:

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A) B) C) D)

46)

Have already been incurred as a result of past actions. Vary among the alternative courses of action being considered. Are benefits that could have been obtained by following another course of action. Result from unfavorable cost variances.

Which factor is not relevant in deciding whether or not to accept a special order? A) Incremental revenue that will be earned B) Additional costs that will be incurred C) The effect that the order will have on the company's regular sales volume and selling

prices D) The average cost of production if the special order is accepted

47) Accepting a special order is profitable whenever the revenue from the special order exceeds: A) B) C) D)

The average unit cost of production multiplied by the number of units in the order. The incremental cost of producing the order. The materials and direct labor costs of producing the order. The fixed manufacturing costs for the period.

48) In deciding whether or not to accept a special order, what is the opportunity cost of using machinery for which the firm has sufficient excess capacity to accept the order? A) B) C) D)

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The historical cost of the machinery The undepreciated cost of the machinery The same machinery cost allocated to regular production orders Zero

49) Burns Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Which of the following is not a relevant factor in Burns' decision concerning whether to accept the special order from Allen? A) B) C) D)

The opportunity cost involved in accepting Allen's order. The incremental cost of manufacturing an additional 5,000 saws per month. The $65 average cost per unit to manufacture a power saw. Where and at what price Allen intends to sell the saws.

50) Burns Industries currently manufactures and sells 22,000 power saws per month, although it has the capacity to produce 37,000 units per month. At the 22,000-unit-per-month level of production, the per-unit cost is $69, consisting of $42 in variable costs and $27 in fixed costs. Burns sells its saws to retail stores for $82 each. Allen Distributors has offered to purchase 5,200 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Assume that Allen Distributors offers to purchase the additional 5,200 saws at a price of $49 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will: A) B) C) D)

Decrease by $104,000. Decrease by $171,600. Increase by $36,400. Increase by $254,800.

51) Burns Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Assume that Allen Distributors offers to purchase the additional 5,000 saws at a price of $47 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:

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A) B) C) D)

Increase by $35,000. Increase by $185,000. Decrease by $40,000. Decrease by $240,000.

52) Burns Industries currently manufactures and sells 15,000 power saws per month, although it has the capacity to produce 30,000 units per month. At the 15,000-unit-per-month level of production, the per-unit cost is $54, consisting of $34 in variable costs and $20 in fixed costs. Burns sells its saws to retail stores for $75 each. Allen Distributors has offered to purchase 4,500 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least: A) B) C) D)

$20. $54. $75. $34.

53) Burns Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least: A) B) C) D)

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$20. $50. $80. $40.

54) Burns Industries currently manufactures and sells 12,000 power saws per month, although it has the capacity to produce 27,000 units per month. At the 12,000-unit-per-month level of production, the per-unit cost is $48, consisting of $31 in variable costs and $17 in fixed costs. Burns sells its saws to retail stores for $72 each. Allen Distributors has offered to purchase 4,200 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Burns decides to accept the special order for 4,200 units from Allen at a unit sales price that will add $88,200 per month to its operating income. The unit price Burns is charging Allen is: A) B) C) D)

$31. $52. $48. $72.

55) Burns Industries currently manufactures and sells 20,000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.Burns decides to accept the special order for 5,000 units from Allen at a unit sales price that will add $100,000 per month to its operating income. The unit price Burns is charging Allen is: A) B) C) D)

$20.80. $60.00. $62.50. $55.00.

56) John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below: Direct materials Direct labor Variable manufacturing overhead

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$ 34 $ 26 $ 39

Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $37,000. Joan Reid, Incorporated has offered to purchase 300 motors from John Boyd per month to be used in its own outboard motors.If Joan Reid's order is rejected, what will be John Boyd 's average unit cost of manufacturing each motor? A) B) C) D)

$99 per unit $60 per unit $136 per unit Some other amount

57) John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below: Direct materials Direct labor Variable manufacturing overhead

$ 24 $ 16 $ 29

Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $27,000. Joan Reid, Incorporated has offered to purchase 200 motors from John Boyd per month to be used in its own outboard motors.If Joan Reid's order is rejected, what will be John Boyd 's average unit cost of manufacturing each motor? A) B) C) D)

$68 per unit $70 per unit $96 per unit Some other amount

58) John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below: Direct materials Direct labor Variable manufacturing overhead

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$ 27 $ 19 $ 32

Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $30,000. Joan Reid, Incorporated has offered to purchase 230 motors from John Boyd per month to be used in its own outboard motors.What is the incremental cost of producing each additional motor? A) B) C) D)

$46 per unit $78 per unit $108 per unit Some other amount

59) John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below: Direct materials Direct labor Variable manufacturing overhead

$ 24 $ 16 $ 29

Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $27,000. Joan Reid, Incorporated has offered to purchase 200 motors from John Boyd per month to be used in its own outboard motors.What is the incremental cost of producing each additional motor? A) B) C) D)

$29 per unit $69 per unit $95 per unit Some other amount

60) John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below: Direct materials Direct labor Variable manufacturing overhead

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$ 25 $ 17 $ 30

Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $28,000. Joan Reid, Incorporated has offered to purchase 210 motors from John Boyd per month to be used in its own outboard motors.Assuming John Boyd wants to earn a pretax profit of $10,710 on this special order, what price must it charge Joan Reid? A) B) C) D)

$72 per unit $83 per unit $100 per unit $123 per unit

61) John Boyd Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Boyd has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below: Direct materials Direct labor Variable manufacturing overhead

$ 24 $ 16 $ 29

Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $27,000. Joan Reid, Incorporated has offered to purchase 200 motors from John Boyd per month to be used in its own outboard motors.Assuming John Boyd wants to earn a pretax profit of $10,000 on this special order, what price must it charge Joan Reid? A) B) C) D)

$69 per unit $83 per unit $95 per unit $119 per unit

62) JCN Industries normally produces and sells 5,000 keyboards for personal computers each month. Variable manufacturing costs amount to $25 per unit, and fixed costs are $146,000 per month. The regular sales price of the keyboards is $86 per unit. JCN has been approached by a foreign company that wants to purchase an additional 1,000 keyboards per month at a reduced price. Filling this special order would not affect JCN 's regular sales volume or fixed manufacturing costs.On the basis of the above information only, which of the following is not true?

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A) At the 5,000-unit level of production, JCN's average cost per unit is $54.20. B) At the 6,000-unit level of production, JCN's average cost per unit is $49.33. C) It would not be profitable for JCN to consider the special order at a price less than $49 per unit. D) The fixed manufacturing costs of $146,000 are not relevant to this decision regarding the special order.

63) JCN Industries normally produces and sells 5,000 keyboards for personal computers each month. Variable manufacturing costs amount to $25 per unit, and fixed costs are $146,000 per month. The regular sales price of the keyboards is $86 per unit. JCN has been approached by a foreign company that wants to purchase an additional 1,000 keyboards per month at a reduced price. Filling this special order would not affect JCN 's regular sales volume or fixed manufacturing costs.Assume that the price offered by the foreign company is $43 per unit. Accepting the special order will cause JCN's operating income to: A) B) C) D)

64)

Which is an example of joint products? A) B) C) D)

65)

Increase by $18,000. Decrease by $2,000. Decrease by $33,000. Decrease by $35,000.

Sugar and beef Pens and erasers Granulated charcoal and methyl alcohol Iron and plastic

Products for which sales of one contribute to the sales of another are called:

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A) B) C) D)

Complementary products. Competing products. Contributory products. Codependent products.

66) Fancy Furniture produced a batch of 2,000 coffee tables at a cost of $355,000. It was discovered that the entire batch was finished improperly. Fancy can sell the tables as seconds for $305,000 or spend an additional $315,000 to refinish them and sell them for $605,000.In deciding whether to rework the tables or sell them as is, management should: A) Compare the $305,000 proceeds from the sale of the tables as is, with the $355,000 cost of the tables. B) Compare the $605,000 possible revenue from refinished tables with the total cost of $355,000 plus $315,000 to refinish. C) Compare the $315,000 cost to refinish the tables with the incremental revenue of $300,000 if the tables are refinished. D) Eliminate any alternative that results in a loss on the sale of the product.

67) Fancy Furniture produced a batch of 2,000 coffee tables at a cost of $355,000. It was discovered that the entire batch was finished improperly. Fancy can sell the tables as seconds for $305,000 or spend an additional $315,000 to refinish them and sell them for $605,000.Which of the following is not relevant to management's decision regarding refinishing the tables or selling them as is? A) The additional $300,000 revenue that can be generated if the tables are refinished. B) The $355,000 manufacturing cost of the tables already incurred. C) The additional $315,000 cost to refinish the tables. D) The effect of selling "seconds" on Fancy's reputation as a fine-furniture manufacturer.

68) The cost of draining sap out of a maple tree to manufacture maple syrup and maple sugar is an example of:

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A) B) C) D)

69)

After-split-off costs. Sunk costs. Incremental costs. Joint costs.

Products that emerge from a shared manufacturing process are referred to as: A) B) C) D)

Complementary products. Joint products. Contributory products. Codependent products.

70) The Magic Microbrewery has a limited amount of vat capacity available in which it can ferment beer. In deciding which beers to brew, Magic management should consider: A) B) C) D)

The contribution margins of the individual beers. The unit contribution margins of the individual beers. The contribution margin ratios of the individual beers. The contribution margin per unit of vat capacity of the individual beers.

71) The Fine Point Company currently produces all of the components for its one product, an electric pencil sharpener. The unit cost of manufacturing the motor for this pencil sharpener is: Direct materials Direct labor Variable overhead Fixed overhead

$ 1.75 $ 1.65 $ 0.75 $ 0.60

The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:

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A) B) C) D)

$4.75. $4.15. $3.55. $4.05.

72) Aircraft Products, a manufacturer of aircraft landing gear, makes 1,500 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $75 and fixed costs of $55. The valves could be purchased from an outside supplier at $82 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to: A) B) C) D)

Increase by $39,000. Increase by $22,500. Decrease by $22,500. Decrease by $39,000.

73) Aircraft Products, a manufacturer of aircraft landing gear, makes 1,000 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60. The valves could be purchased from an outside supplier at $77 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to: A) B) C) D)

Increase by $26,000. Increase by $17,000. Decrease by $9,000. Decrease by $29,000.

74) Perry’s Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many of the company's products, and also sold directly to retailers for $38 per unit. At the current level of production, the cost per unit to produce TushSeat consists of: Direct materials

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$ 9 19

Direct labor Variable overhead Fixed overhead

$ 7 $ 6 $ 3

It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers.Assume that Perry's fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Perry must negotiate a price per unit from the outside supplier that is less than: A) B) C) D)

$27. $25. $22. $23.

75) Perry’s Cycle Company manufactures annually 20,000 units of TushSeat, a bicycle seat used on many of the company's products, and also sold directly to retailers for $38 per unit. At the current level of production, the cost per unit to produce TushSeat consists of: Direct materials Direct labor Variable overhead Fixed overhead

$ 9 $ 7 $ 6 $ 3

It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers.Assume that seats can be purchased from the outside supplier at $25 each, and that 60% of total fixed costs incurred in producing TushSeat will be eliminated by this strategy. Buying the seats instead of manufacturing them would cause Perry's operating income to: A) B) C) D)

Decrease by $20,000. Increase by $36,000. Increase by $16,000. Decrease by $24,000.

76) Creative Star Corporation produces three lines of desks from wood: Classic, Royal, and Standard. Cost and revenue data pertaining to each product are shown below: Classic

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Royal

Standard

Selling price Total variable costs

$ 175 $ 75

$ 245 $ 165

$ 95 $ 65

Classic desks require five square yards of wood, Royal requires ten square yards, and Standard requires three square yards. High demand for each product line far exceeds the company's production capacity.If Creative Star Corporation has an unlimited supply of wood available, which products should it produce? A) B) C) D)

Royal only. Classic and Royal. Royal and Standard. Classic only.

77) Creative Star Corporation produces three lines of desks from wood: Classic, Royal, and Standard. Cost and revenue data pertaining to each product are shown below:

Selling price Total variable costs

Classic

Royal

Standard

$ 175 $ 75

$ 245 $ 165

$ 95 $ 65

Classic desks require five square yards of wood, Royal requires ten square yards, and Standard requires three square yards. High demand for each product line far exceeds the company's production capacity.If Creative Star Corporation has a limited supply of wood available, which products should it produce? A) B) C) D)

Royal only. Classic and Royal. Royal and Standard. Classic only.

78) Creative Star Corporation produces three lines of desks from wood: Classic, Royal, and Standard. Cost and revenue data pertaining to each product are shown below: Classic Selling price Total variable costs

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$ 193 $ 84

Royal $ 263 $ 174

Standard $ 113 $ 74

Classic desks require five square yards of wood, Royal requires ten square yards, and Standard requires three square yards. High demand for each product line far exceeds the company's production capacity.If Creative Star Corporation has only 340,000 square yards of wood available, what is the highest total amount of fixed cost the company can incur and still breakeven? A) B) C) D)

$4,420,000 $3,026,000 $7,412,000 $12,353,333

79) Creative Star Corporation produces three lines of desks from wood: Classic, Royal, and Standard. Cost and revenue data pertaining to each product are shown below:

Selling price Total variable costs

Classic

Royal

Standard

$ 175 $ 75

$ 245 $ 165

$ 95 $ 65

Classic desks require five square yards of wood, Royal requires ten square yards, and Standard requires three square yards. High demand for each product line far exceeds the company's production capacity.If Creative Star Corporation has only 250,000 square yards of wood available, what is the highest total amount of fixed cost the company can incur and still breakeven? A) B) C) D)

$2,500,000 $4,000,000 $5,000,000 $6,000,000

80) BT&T Corporation manufactures telephones. Recently, the company produced a batch of 600 defective telephones at a cost of $9,000. BT&T can sell these telephones as scrap for $9 each. It can also rework the entire batch at a cost of $6,500, after which the telephones could be sold for $20 per unit.Which of the following statements is false regarding the defective units?

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A) B) C) D)

BT&T will not recover its costs if it sells the defective units as scrap. BT&T will recover total costs incurred if it reworks the defective units. BT&T will not recover the total costs incurred if it reworks the defective units. BT&T will recover more of its additional costs if it decides to rework the defective

units.

81) BT&T Corporation manufactures telephones. Recently, the company produced a batch of 640 defective telephones at a cost of $9,400. BT&T can sell these telephones as scrap for $10 each. It can also rework the entire batch at a cost of $6,900, after which the telephones could be sold for $21 per unit.If BT&T reworks the defective telephones, by how much will its operating income change? A) B) C) D)

Increase by $7,040 Decrease by $2,860 Increase by $6,540 Decrease by $6,540

82) BT&T Corporation manufactures telephones. Recently, the company produced a batch of 600 defective telephones at a cost of $9,000. BT&T can sell these telephones as scrap for $9 each. It can also rework the entire batch at a cost of $6,500, after which the telephones could be sold for $20 per unit.If BT&T reworks the defective telephones, by how much will its operating income change? A) B) C) D)

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Increase by $500 Decrease by $1,600 Increase by $5,500 Decrease by $6,500

83) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $19,500. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $40,000, whereas product B1 can be sold for $60,000. Product A1 can be processed further to make product A2, at an incremental cost of $35,500. A2 can be sold for $82,500. Product B1 can be processed further to make product B2, at an incremental cost of $45,500. B2 can be sold for $92,500.Joint costs allocated to product A1 total: A) B) C) D)

$7,800. $11,700. $9,750. $19,500.

84) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000. Product A1 can be processed further to make product A2, at an incremental cost of $38,000. A2 can be sold for $85,000. Product B1 can be processed further to make product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.Joint costs allocated to product A1 total: A) B) C) D)

$8,800. $13,500. $13,200. $22,000.

85) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $23,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $32,100, whereas product B1 can be sold for $74,900. Product A1 can be processed further to make product A2, at an incremental cost of $39,000. A2 can be sold for $86,000. Product B1 can be processed further to make product B2, at an incremental cost of $49,000. B2 can be sold for $96,000.Joint costs allocated to product B1 total:

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A) B) C) D)

$6,900. $16,100. $11,500. $23,000.

86) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000. Product A1 can be processed further to make product A2, at an incremental cost of $38,000. A2 can be sold for $85,000. Product B1 can be processed further to make product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.Joint costs allocated to product B1 total: A) B) C) D)

$8,800. $13,200. $13,500. $22,000.

87) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $21,500. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $31,200, whereas product B1 can be sold for $72,800. Product A1 can be processed further to make product A2, at an incremental cost of $37,500. A2 can be sold for $84,500. Product B1 can be processed further to make product B2, at an incremental cost of $47,500. B2 can be sold for $94,500.The net change in operating income resulting from a decision to manufacture product A2 is: A) B) C) D)

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$53,300 (increase). $15,800 (decrease). $15,800 (increase). $37,500 (increase).

88) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000. Product A1 can be processed further to make product A2, at an incremental cost of $38,000. A2 can be sold for $85,000. Product B1 can be processed further to make product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.The net change in operating income resulting from a decision to manufacture product A2 is: A) B) C) D)

$15,000 (increase). $15,000 (decrease). $5,000 (increase). $45,000 (increase).

89) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $20,500. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $35,700, whereas product B1 can be sold for $66,300. Product A1 can be processed further to make product A2, at an incremental cost of $36,500. A2 can be sold for $83,500. Product B1 can be processed further to make product B2, at an incremental cost of $46,500. B2 can be sold for $93,500.The net change in operating income resulting from a decision to manufacture product B2 is: A) B) C) D)

$19,300 (increase). $19,300 (decrease). $46,500 (decrease). $27,200 (increase).

90) General Chemical Company (GCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $22,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $42,000, whereas product B1 can be sold for $63,000. Product A1 can be processed further to make product A2, at an incremental cost of $38,000. A2 can be sold for $85,000. Product B1 can be processed further to make product B2, at an incremental cost of $48,000. B2 can be sold for $95,000.The net change in operating income resulting from a decision to manufacture product B2 is: Version 1

A) B) C) D)

$6,000 (decrease). $16,000 (decrease). $48,000 (decrease). $48,000 (increase).

91) Seidman Company manufactures and sells 22,000 units of product X per month. Each unit of product X sells for $16 and has a contribution margin of $7. If product X is discontinued, $37,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company's other products. If product X is discontinued, Seidman Company's monthly income before taxes should: A) B) C) D)

Increase by $154,000. Increase by $117,000. Decrease by $154,000. Decrease by $117,000.

92) Seidman Company manufactures and sells 30,000 units of product X per month. Each unit of product X sells for $16 and has a contribution margin of $7. If product X is discontinued, $85,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company's other products. If product X is discontinued, Seidman Company's monthly income before taxes should: A) B) C) D)

Increase by $210,000. Increase by $125,000. Decrease by $210,000. Decrease by $125,000.

93) Speedy Company manufactures four products. Direct materials and direct labor are available in sufficient quantities, but machine capacity is limited to 3,000 hours. Cost and revenue data for the four products are given below:

Selling price per

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Product A

Product B

Product C

Product D

$ 36

$ 42

$ 46

$ 56

unit Variable cost per unit Unit produced per machine hour

$ 19

$ 16

$ 25

$ 37

Of the four products, which is the most profitable for Speedy Company? A) B) C) D)

Product A Product B Product C Product D

94) Legendary Motors has 6,600 defective autos on hand, which cost $12,144,000 to manufacture. Legendary can either sell these defective autos as scrap for $7,600 per auto, or spend an additional $17,920,000 on repairs and then sell them for $11,600 per unit. What is the net advantage to repair the autos compared to selling them for scrap? A) B) C) D)

$76,560,000 $17,920,000 $8,480,000 $50,160,000

95) Legendary Motors has 7,000 defective autos on hand, which cost $12,880,000 to manufacture. Legendary can either sell these defective autos as scrap for $8,000 per auto, or spend an additional $18,320,000 on repairs and then sell them for $12,000 per unit. What is the net advantage to repair the autos compared to selling them for scrap? A) B) C) D)

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$84,000,000 $18,320,000 $9,680,000 $56,000,000

96) Express, Incorporated, is considering replacing equipment. The following data are available: Old Equipment Original cost Disposal value now Disposal value in 5 years Annual cash operating costs

$ 50,000 $ 8,000 $ 0 $ 9,000

Replacement Equipment $ 40,000 $ 0 $ 0 $ 8,000

Which of the data above is a sunk cost? A) B) C) D)

The annual cost of operating the new equipment. The annual cost of operating the old equipment. The disposal value of the old equipment. The original cost of the old equipment.

97) Express, Incorporated, is considering replacing equipment. The following data are available: Old Equipment Original cost Disposal value now Disposal value in 5 years Annual cash operating costs

$ 41,000 $ 7,100 $ 0 $ 8,100

Replacement Equipment $ 31,900 $ 0 $ 0 $ 7,100

What are the total relevant costs of keeping the old equipment? A) B) C) D)

$7,100. $41,000. $9,100. $40,500.

98) Express, Incorporated, is considering replacing equipment. The following data are available: Old Equipment

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Replacement Equipment

Original cost Disposal value now Disposal value in 5 years Annual cash operating costs

$ 50,000 $ 8,000 $ 0 $ 9,000

$ 40,000 $ 0 $ 0 $ 8,000

What are the total relevant costs of keeping the old equipment? A) B) C) D)

$8,000 $50,000 $10,000 $45,000

99) It would be _____________ for managers to make decisions based only on financial information. A) B) C) D)

Prudent Short-sighted Irrefutable Factual

100) Which of the following would not be an important nonfinancial factor for a farming company to consider in making a decision about the application of fertilizer? A) B) C) D)

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The weather forecast during the week of the application. The industry reports on ethical sourcing of fertilizer. The planned fertilizing schedule of a competing farming company. The full disclosure of fertilizer ingredients to the farming company's clients.

Answer Key Test name: Chapter 21 Test Bank - Algorithmic and Static 1) TRUE 2) TRUE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) TRUE 8) TRUE 9) TRUE 10) FALSE 11) FALSE 12) FALSE 13) FALSE 14) FALSE 15) FALSE 16) TRUE 17) TRUE 18) FALSE 19) FALSE 20) FALSE 21) FALSE 22) FALSE 23) TRUE 24) FALSE 25) FALSE 26) TRUE Version 1

27) TRUE 28) TRUE 29) TRUE 30) FALSE 31) TRUE 32) FALSE 33) TRUE 34) TRUE 35) C 36) C 37) C 38) B 39) A 40) B 41) D 42) B 43) C 44) B 45) A 46) D 47) B 48) D 49) D 50) C 51) A 52) D 53) D 54) B 55) B 56) C Version 1

57) C 58) B 59) B 60) D 61) D 62) C 63) A 64) C 65) A 66) C 67) B 68) D 69) B 70) D 71) B 72) B 73) B 74) C 75) D 76) D 77) D 78) C 79) C 80) B 81) C 82) C 83) A 84) A 85) B 86) B Version 1

87) C 88) C 89) B 90) B 91) D 92) D 93) B 94) C 95) C 96) D 97) D 98) D 99) B 100) C

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CHAPTER 22: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Answer the following questions about business units:(A) Define what is meant by each of the following: profit center, investment center, and cost center. (Your answer should make clear the distinction between each of these types of centers.) (B) Briefly describe the criteria used to evaluate each of the three types of centers listed in part a.

2) Listed below are seven technical accounting terms introduced or emphasized in this chapter:Cost centerPerformance marginProfit centerContribution marginCommitted costsCommon fixed costsTransfer priceEach of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.____ (a) Costs that jointly benefit several responsibility centers of the business and that do not vary significantly with changes in sales volume. ____ (b) The amount charged by a responsibility center for the goods it sells to another responsibility center. ____ (c) Used to evaluate the performance of a manager based solely on revenue and costs under the manager’s control. ____ (d) A responsibility center of a business that may be evaluated by the return earned on assets. ____ (e) The subtotal in a responsibility income statement that is most useful in evaluating the short-term effects of various marketing strategies on profitability.

3) Hal-Marts, Incorporated, has two sales departments: equipment and clothing. During February, these two investment centers reported the following operating results: Version 1

Equipment Sales Contribution margin Traceable fixed costs

$ 490,000 35% $ 29,200

Clothing $ 250,000 50% $ 26,800

In addition, fixed costs common to both departments amounted to $54,400. Required: Prepare a responsibility income statement for Hal-Marts, Incorporated (End the statement with “Operating income.”)

4) Gameland Village is segmented into two sales departments: software and video games. During April, these two investment centers reported the following operating results: Software Sales Variable costs (as a percentage of Sales) Traceable fixed costs

$ 400,000 65% $ 20,000

Video Games $ 200,000 56% $ 16,000

In addition, fixed costs common to both departments amounted to $42,000.Required:Prepare a responsibility income statement for Gameland Village. (End the statement with “Operating income.”)

Shown below is the current monthly income statement of Metro Video, by profit centers:

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Metro Video Responsibility Accounting Income Statement For the Month of April Entire Company Segments Equipment Video Rentals Sales Sales $ 560,000 $ 280,000 $ 280,000 Variable costs 268,800 198,800 70,000 Contribution margin $ 291,200 $ 81,200 $ 210,000 Fixed costs traceable to 67,200 25,200 42,000 departments Department responsibility margin Common fixed costs Operating income

$ 224,000

$ 56,000

$ 168,000

61,600 $ 162,400

The contribution margin ratios are as follows: entire company 52%, equipment sales 29%, and video rentals 75%.Required:On the basis of this information, compute the increase (or decrease) in monthly income from operations that may be expected to result from each of the following actions:(A) Spending $5,000 per month in advertising is expected to increase sales in the Equipment Sales Department by 35%.(B) Closing the Equipment Sales Department and allowing the Video Rentals Department to expand is expected to increase the revenue of the Video Rentals Department by $105,000 per month. This action also is expected to increase fixed costs traceable to the Video Rentals Department by $40,000 per month.

6) Identify and discuss briefly the two concepts generally used in assigning costs to responsibility centers of a business.

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7) Classico's Pizza, a chain of pizza parlors, views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 3,600,000 $ 2,970,000 $ 270,000 $ 1,440,000

Required:Compute the following measures for this investment center:(A) Contribution margin (B) Contribution margin ratio (C) Responsibility margin (D) Increase in annual responsibility margin that would be expected to result from a 10% increase in sales volume

8) Old Jeans, Incorporated, has two divisions or profit centers, one makes regular fit jeans and the other makes relaxed fit jeans. The information for the two centers for the month of May follows:

Sales Variable cost (as a % of Sales) Traceable fixed costs

Regular fit

Relaxed fit

$ 400,000 40% $ 40,000

$ 175,000 50% $ 70,000

There are also common fixed costs of $27,500.Required:Prepare a responsibility income statement by profit center and in total.

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9) Milton's, a large department store, prepares income statements by sales department. These statements follow the contribution margin approach, showing contribution margin and responsibility margin for each profit center as well as monthly income from operations for the store.Required:Indicate the classification of each of the costs listed below by inserting the appropriate code letters in the space provided.Code LettersVC = Variable costsTF = Traceable fixed costsCF = Common fixed costsX = None of the aboveCosts:____ (a) The cost of merchandise sold in the Women's Sportswear Department ____ (b) Advertising a sale in the Housewares Department (classify as a fixed cost) ____ (c) Depreciation on equipment used in the Automotive Service Department ____ (d) Depreciation on the store's heating and air conditioning system ____ (e) Monthly salary of the manager of the Toy Department ____ (f) Sales taxes collected from customers and paid to local tax authorities ____ (g) Monthly salaries of store security guards

10) Shown below are the current-year data for two investment centers of Chelsea Trading, Incorporated The total assets utilized by each of these investment centers during the year amount to $1,500,000:

Revenue Variable expenses Traceable fixed costs

Center 1

Center 2

$ 2,260,000 $ 1,732,000 $ 364,000

$ 2,040,000 $ 1,424,000 $ 536,000

Required:(A) Compute the following measures for each investment center: Center (1) (2)

Contribution Margin $_____ $_____

Contribution Margin Ratio _____% _____%

Responsibility Margin $_____ $_____

(B) Assume that a $3,000 monthly expenditure for advertising could increase the monthly sales of either investment center by $20,000. (1) Which center should the company advertise to receive the maximum benefit from its advertising expenditure? (2) Explain your reasoning:

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11) Satellite Products, Incorporated owns two subsidiaries, Saturn Systems and Neptune Audio. Saturn Systems supplies printed circuit boards used by Neptune Audio in its state-of-the-art stereo radio. Neptune Audio receives 20,000 boards from Saturn Systems annually. Each radio produced requires a single board. The market price of these boards is $40. Their total variable cost of production is $20. The market price of the radio is $105. The unit variable cost of the radio is $30 excluding the cost of the circuit board. Saturn Systems is currently operating at full capacity of 35,000 boards per year (including those transferred to Neptune Audio). Demand for the boards is strong and all 35,000 could be sold to outside customers. Saturn Systems uses the full market price as the transfer price charged to Neptune Audio. The manager of Neptune Audio argues that Saturn Systems benefits from intercompany transfers because of reduced advertising and other selling costs. Thus, he wants to negotiate a lower transfer price of $35.Required: (A) Calculate the contribution margins for the two subsidiaries using the $40 transfer price. (B) Recalculate the contribution margins at the $35 price suggested by the manager of Neptune Audio. What effect would the change in transfer price have on the company as a whole? (C) Suppose that Neptune Audio operates in a country that imposes a 40% tax rate on corporate income. Saturn Systems is located in a country where the tax rate is only 10%. What would you recommend regarding the transfer price charged by Saturn for the boards transferred to Neptune?

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Answer Key Test name: Chapter 22 Test Bank (Problem Material)

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1) (A) A profit center generates revenue as well as incurs costs. Examples include a sales department within a store, the store itself, and a sales territory. An investment center is a profit center for which management can make decisions regarding capital investments. Examples include stores, branch offices, and hotels. A cost center incurs costs but does not directly generate revenue. Examples include service departments, such as the accounting department or the legal department that render services to other parts of the business.(B) Profit centers are evaluated primarily upon their profitability; therefore, responsibility income statements are prepared showing the revenue and costs applicable to each profit center. Each center's performance may then be compared with budgeted amounts, with the center's performance in past periods, and with the profitability of other profit centers within the organization. The performance of an investment center may be evaluated using return on investment (ROI) measurements, such as return on assets (operating income or responsibility margin as a percentage of average total assets utilized by the segment during the period).From a financial viewpoint, a cost center is evaluated on its ability to control (minimize) costs. The level of costs incurred is compared to such standards as budgets, costs incurred in prior periods, and the volume of activity within the cost center during the current period. Qualitative considerations are also of great importance in evaluating cost centers. Revenue provides an objective measure of the benefit to the business resulting from the operation of a profit center, but no such measure exists for the benefit derived from the operations of most cost centers. Thus, both the "quality" of the services rendered by a cost center and the "value" of these services to the business are subjective judgments. 2) (a) Common fixed costs(b) Transfer price(c) Performance margin(d) None*(e) Contribution margin*(d) The statement describes investment center. Version 1

3) Hal-Marts, Incorporated Responsibility Accounting Income Statement For the Month of February Entire Company Investment Centers Equipment Clothing Sales $ 740,000 $ 490,000 $ 250,000 Variable costs 443,500 318,500 125,000 Contribution margin $ 296,500 $ 171,500 $ 125,000 Fixed costs traceable to 56,000 29,200 26,800 departments Department responsibility margin Common fixed costs Operating income

$ 240,500

$ 142,300

$ 98,200

54,400 $ 186,100

Contribution margin:Equipment Department: $490,000 × 0.35 = $171,500Clothing Department: $250,000 × 0.50 = $125,000Variable costs:Equipment Department: $490,000 − $171,500 = $318,500Clothing Department: $250,000 − $125,000 = $125,000 4) Gameland Village Responsibility Accounting Income Statement For the Month of April Entire Company Investment Centers Software Video Games Sales $ 600,000 $ 400,000 $ 200,000 Variable costs 372,000 260,000 112,000 Contribution margin $ 228,000 $ 140,000 $ 88,000 Fixed costs traceable to 36,000 20,000 16,000 departments Department responsibility margin Common fixed costs Operating income

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$ 192,000

$ 120,000

$ 72,000

42,000 $ 150,000

Contribution margin:Software Department: $400,000 × 0.65 = $140,000Video Games Department: $200,000 × 0.56 = $88,000Variable costs:Software Department: $400,000 − $318,500 = $260,000Video Games Department: $200,000 − $125,000 = $112,000 5) (A) Expected increase in monthly contribution margin($81,200 × 35%) Cost of monthly advertising

$ 28,420

Expected increase in monthly income from operations

$ 23,420

(5,000)

(B) Loss of segment margin from Equipment Sales Department Increase in contribution margin from expansion of the Video Rentals Department ($105,000 × 75%) Increase in fixed costs traceable to Video Rentals Department

$ (56,000) 78,750

Expected (decrease) in monthly income from operations

$ (17,250)

(40,000)

6) In assigning costs to parts of a business, the following two concepts are generally applied:Costs are classified into the categories of variable costs and fixed costs. When costs are classified in this manner, a subtotal may be developed in the income statement showing the contribution margin of the business center.Each center is charged with only those costs that are directly traceable to that center. A cost is "directly traceable" to a particular center if that center is solely responsible for the cost being incurred; traceable costs should disappear if the center is discontinued. 7) (A) $3,600,000 − $2,970,000 = $630,000(B) $630,000 ÷ $3,600,000 = 17.5%(C) $3,600,000 − $2,970,000 − $270,000 = $360,000(D) ($3,600,000 × 10%) × 17.5% (from Part B) = $63,000 8) Old Jeans, Incorporated Responsibility Accounting Income Statement For the Month of May Entire Company Segments Regular Fit Relaxed Fit

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Sales Variable costs Contribution margin Fixed costs traceable to departments

$ 575,000 247,500 $ 327,500 110,000

$ 400,000 160,000 $ 240,000 40,000

$ 175,000 87,500 $ 87,500 70,000

Department responsibility margin

$ 217,500

$ 200,000

$ 17,500

Common fixed costs Operating income

27,500 $ 190,000

9) (a) VC(b) TF(c) TF(d) CF(e) TF(f) X(g) CF 10) (A) Center (1) (2)

Contribution Margin $ 528,000 $ 616,000

Contribution Margin Ratio 23% 30%

Responsibility Margin $ 164,000 $ 80,000

(B) (1) Center 2(B) (2) Since Center 2 has the higher contribution margin ratio, an increase in sales of a given size will generate more contribution margin from Center 2 than from Center 1. (The expected $20,000 increase in sales will generate $6,000 in contribution margin at Center 2, compared with $4,600 at Center 1.) 11) (A) Contribution margins at transfer price of $40:Saturn Systems: ($40 − $20) × 35,000 = $700,000Neptune Audio: ($105 − $70) × 20,000 = $700,000(B) Contribution margins at transfer price of $35:Saturn Systems [($40 − $20) × 15,000] + [($35 − $20) × 20,000] = $600,000Neptune's Audio ($105 − $65) × 20,000 = $800,000(C) The contribution margin for the company as a whole is the same under either transfer price. In order to move as much operating income as possible to the lower tax jurisdiction, Satellite should impose the largest transfer price allowed by law on the circuit boards. This will result in minimizing the taxable income of Neptune Audio and maximizing the taxable income of Saturn Systems. The company's overall tax expense will be minimized. Version 1

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CHAPTER 22 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Profit centers generate revenues and costs. ⊚ ⊚

true false

2) If a business activity qualifies as a profit center, it cannot also qualify as an investment center. ⊚ ⊚

true false

3) An investment center is a profit center for which management has been given decisionmaking responsibility for making significant capital investment decisions. ⊚ ⊚

true false

4) Evaluating the performance of cost centers involves subjective judgments as to the value of the services rendered by these centers. ⊚ ⊚

true false

5) An accounting system designed to measure the performance of each center within a business is referred to as a profitability accounting system. ⊚ ⊚

true false

6) One purpose of a responsibility accounting system is to evaluate the performance of center managers. ⊚ ⊚

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true false

7) A responsibility income statement shows the revenue and expenses of each cost center within a particular part of a business. ⊚ ⊚

true false

8) In responsibility income statements, revenue is first assigned to the centers responsible for creating that revenue. ⊚ ⊚

true false

9) In assigning costs to centers, each center is charged with costs attributed to the center and based on company-wide rates. ⊚ ⊚

true false

10) If operations at a center are discontinued, all traceable costs attributed to the center would be discontinued. ⊚ ⊚

11)

Traceable fixed costs usually cannot be eliminated even if the center is closed. ⊚ ⊚

12)

true false

All costs become traceable at some level of the organization. ⊚ ⊚

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true false

13)

A cost that is directly traceable to a particular center must be a variable cost. ⊚ ⊚

true false

14) Common fixed costs jointly benefit several parts of the business and would not change significantly even if one of the parts of the business were discontinued. ⊚ ⊚

true false

15) A common cost may become a traceable cost as it moves up to larger responsibility centers. ⊚ ⊚

16)

true false

Revenue, less variable costs, less traceable fixed costs, is called the contribution margin. ⊚ ⊚

true false

17) Responsibility margin is useful in evaluating the consequences of short-run marketing strategies, while contribution margin is more useful in evaluating long-term profitability. ⊚ ⊚

true false

18) The contribution margin approach to preparing reports for managers classifies costs into fixed and variable costs. ⊚ ⊚

19)

true false

The responsibility margin is the contribution margin less common fixed costs.

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⊚ ⊚

20)

Performance margin is equal to controllable fixed costs minus the contribution margin. ⊚ ⊚

21)

true false

The transfer price is the dollar amount used in recording sales to primary customers. ⊚ ⊚

true false

22) When an external market exists for a transferred product or service, most companies use either negotiated transfer prices or cost-plus transfer prices. ⊚ true ⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 23) A responsibility accounting system measures the performance of each of the following centers except: A) B) C) D)

24)

Profit center. Investment center. Control center. Cost center.

The part of a business a particular manager is held responsible for is called a:

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A) B) C) D)

25)

An example of a profit center is: A) B) C) D)

26)

The accounting department in a manufacturing company. The maintenance department of a university. The furniture department of a retail department store. The human resources department in a hospital.

The primary difference between profit centers and cost centers is that: A) B) C) D)

27)

Cost center. Profit center. Investment center. Responsibility center.

Profit centers generate revenue. Cost centers incur costs. Profit centers are evaluated using return on investment criteria. Profit centers provide services to other centers in the organization.

An investment center:

A) Is a profit center for which management is able to objectively measure the cost of the assets used in the center's operations. B) Is a cost center for which management is able to identify the original amount invested. C) May be either a cost center or a profit center. D) Is a subunit of the organization that provides services to other centers within the organization.

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28) Disneyland is one of several theme parks owned by The Walt Disney Company. Assume that Disneyland's management has been given decision-making responsibility for making significant capital investment decisions. Disneyland should be evaluated as: A) B) C) D)

An investment center. A cost center. An entertainment center. A profit center (other than an investment center).

29) Disneyland charges visitors for admission to the park but not for individual rides or attractions. "Splash Mountain" is one of the rides in Disneyland. It incurs costs (or expenses) but does not directly generate revenue. The Walt Disney Company should evaluate "Splash Mountain" as: A) B) C) D)

A revenue center. A cost center. An investment center. A profit center (other than an investment center).

30) San Francisco's famous Saint Francis Hotel is owned by Westin Hotel and Resort Group. Saint Francis' management has been given decision-making responsibility for making significant capital investments. Westin should evaluate the Saint Francis as: A) B) C) D)

A cost center. A historical landmark. An investment center. A profit center (other than an investment center).

31) One of the unique services provided by San Francisco's Saint Francis Hotel is cleaning and polishing coins (pocket change) for the guests. From the standpoint of hotel management, this "money laundry" should be viewed as:

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A) B) C) D)

32)

A contribution center. A cost center. An investment center. A profit center (other than an investment center).

Cost centers are evaluated primarily on the basis of their ability to control costs and: A) B) C) D)

Their return on assets. Residual income. The quantity and quality of the services they provide. Their contribution margin ratio.

33) Carrier Corporation produces heating and air conditioning equipment at a number of plants throughout the United States including one in Syracuse, New York. Carrier should evaluate its Syracuse plant as: A) B) C) D)

A cost center. An investment center. A profit center (other than an investment center). A committed center.

34) Carrier Corporation's Syracuse plant is organized into Air Conditioning and Heating Products divisions. The management of the Syracuse plant should evaluate the Heating Products division as: A) B) C) D)

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A cost center. An investment center. A profit center (other than an investment center). A revenue center.

35) John Thomas is the manager of materials movement for the Syracuse plant of Carrier Corporation. Thomas should be evaluated as manager of: A) B) C) D)

36)

The human resources department of a large company would be considered: A) B) C) D)

37)

A cost center. An investment center. A profit center (other than an investment center). Human resources under his supervision.

A cost center. A profit center. An investment center. A revenue center.

The bookstore of a university would be considered: A) B) C) D)

A cost center. A profit center. An investment center. A revenue center.

38) Which of the following is not a valid reason for developing responsibility center information?

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A) Responsibility center information is useful in deciding how to allocate resources among segments of the business. B) Separately measuring the revenue and expenses of each responsibility center is a necessary step in developing financial statements for the business entity viewed as a whole. C) Responsibility center information is useful in evaluating the performance of segment managers. D) Responsibility center information helps management to quickly identify sections of the business that are performing poorly.

39) The term responsibility center reflects the idea that the "centers" of a business usually are defined in a manner such that each center is: A) B) C) D)

40)

In a responsibility accounting system, the recording of revenue and costs begins with the: A) B) C) D)

41)

Responsible for earning a specified amount of profit. Responsible for all business operations in a specific region. Under the control of a specified center manager. Approximately the same size.

Most profitable segments of the business. Least profitable segments of the business. Broadest areas of management responsibility. Smallest areas of management responsibility.

Responsibility accounting systems measures the performance of: A) B) C) D)

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The entire company. Each center individually. Both the entire company and each center individually. Neither the entire company nor each center individually.

42) Successful operation of a responsibility accounting system requires all of the following except: A) B) C) D)

43)

Budgets prepared for each responsibility center. The use of a bonus pool based on ROA (return on assets). An accounting system that measures the performance of each responsibility center. The preparation of timely performance reports.

Responsibility accounting systems should begin with: A) B) C) D)

A budget by center. A performance report by center. A measure of corporate performance. A company-wide income statement.

44) In preparing a responsibility income statement that shows contribution margin and responsibility margin, generally two concepts are involved in allocating costs to the various centers. These concepts are: A) Whether the costs are variable or fixed and whether they are material in dollar amount. B) Whether the costs are traceable to the responsibility center and whether the responsibility center is organized as a profit center or an investment center. C) Whether the costs are variable or fixed and whether they are directly traceable to the responsibility center. D) Whether the costs are traceable to the responsibility center and whether they are material in dollar amount.

45)

A responsibility income statement generally does not show the:

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A) B) C) D)

Contribution margin of each responsibility center. Traceable fixed costs allocated to each responsibility center. Responsibility margin of each responsibility center. Net income of each responsibility center.

46) Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 5,300,000 $ 3,044,000 $ 310,000 $ 2,200,000

The contribution margin of the local branch is: A) B) C) D)

$5,300,000. $2,200,000. $2,256,000. $3,044,000.

47) Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 5,500,000 $ 3,254,000 $ 320,000 $ 2,400,000

The contribution margin of the local branch is: A) B) C) D)

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$5,500,000. $2,400,000. $2,246,000. $3,254,000.

48) Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 6,100,000 $ 3,794,000 $ 350,000 $ 3,000,000

The contribution margin ratio of the local branch is closest to: A) B) C) D)

62%. 51%. 49%. 38%.

49) Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 5,500,000 $ 3,254,000 $ 320,000 $ 2,400,000

The contribution margin ratio of the local branch is closest to: A) B) C) D)

59%. 41%. 49%. 52%.

50) Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 4,700,000 $ 2,534,000 $ 280,000 $ 1,600,000

The responsibility margin of the local branch is:

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A) B) C) D)

$1,886,000. $4,700,000. $2,166,000. $1,600,000.

51) Chic Jewelers views each branch location as an investment center. The local branch reported the following results for the current year: Sales Variable expenses Traceable fixed costs Average total assets of the branch

$ 5,500,000 $ 3,254,000 $ 320,000 $ 2,400,000

The responsibility margin of the local branch is: A) B) C) D)

$5,500,000. $1,926,000. $2,246,000. $2,400,000.

52) Dalton Company follows a policy of allocating all common costs equally among its profit centers. A partial responsibility income statement for a typical month is shown below:

Responsibility margins Common fixed costs Income from operations

Dalton Company $ 179,000 $ 146,100 $ 32,900

Profit Center 1 $ 73,000 $ 48,700 $ 24,300

Profit Center 2 $ 63,000 $ 48,700 $ 14,300

Profit Center 3 $ 43,000 $ 48,700 $ (5,700)

After evaluating these data, Dalton Company decides to close Profit Center 3. This action eliminates all revenue, variable costs, and fixed costs traceable to Center 3, but eliminates only $29,400 in common fixed costs. Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.Closing Profit Center 3 should cause Dalton's monthly operating income to:

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A) B) C) D)

Decrease by $19,300. Increase by $5,700. Increase by $13,600. Decrease by $13,600.

53) Dalton Company follows a policy of allocating all common costs equally among its profit centers. A partial responsibility income statement for a typical month is shown below:

Responsibility margins Common fixed costs Income from operations

Dalton Company $ 200,000 $ 165,000 $ 35,000

Profit Center 1 $ 80,000 $ 55,000 $ 25,000

Profit Center 2 $ 70,000 $ 55,000 $ 15,000

Profit Center 3 $ 50,000 $ 55,000 $ (5,000)

After evaluating these data, Dalton Company decides to close Profit Center 3. This action eliminates all revenue, variable costs, and fixed costs traceable to Center 3, but eliminates only $35,000 in common fixed costs. Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.Closing Profit Center 3 should cause Dalton's monthly operating income to: A) B) C) D)

Increase by $5,000. Decrease by $15,000. Decrease by $7,000. Decrease by $20,000.

54) Dalton Company follows a policy of allocating all common costs equally among its profit centers. A partial responsibility income statement for a typical month is shown below:

Responsibility margins Common fixed costs Income from operations

Dalton Company $ 200,000 $ 165,000 $ 35,000

Profit Center 1 $ 80,000 $ 55,000 $ 25,000

Profit Center 2 $ 70,000 $ 55,000 $ 15,000

Profit Center 3 $ 50,000 $ 55,000 $ (5,000)

After evaluating these data, Dalton Company decides to close Profit Center 3. This action eliminates all revenue, variable costs, and fixed costs traceable to Center 3, but eliminates only $35,000 in common fixed costs. Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.After the closing of Profit Center 3, the monthly income from operations for Profit Center 1, as measured by Dalton Company should be approximately: Version 1

A) B) C) D)

55)

The contribution margin is calculated by: A) B) C) D)

56)

Subtracting fixed costs traceable to a center from its contribution margin. Subtracting common fixed costs from the contribution margin. Subtracting variable costs from sales. Subtracting common fixed costs from variable costs.

Responsibility margin is equal to revenue, less: A) B) C) D)

58)

Subtracting fixed costs from sales. Subtracting variable costs from sales. Subtracting fixed and variable costs from sales. Subtracting common costs from sales.

The responsibility margin is calculated by: A) B) C) D)

57)

$25,000. $17,500. $10,000. $15,000.

Contribution margin and traceable fixed costs. Variable costs. Variable costs and traceable fixed costs. Variable fixed costs, traceable fixed costs, and common costs.

Traceable fixed costs that the manager of a department cannot change are called:

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A) B) C) D)

Controllable. Committed. Conditional. Common.

59) Parker's newly hired director of accounting services feels that the property taxes on the Cairo factory should be allocated to the fabricating, assembly, and finishing departments based upon the square footage they occupy. Of the following, which is not a valid reason to reject this recommendation? A) The property taxes would not change even if one or more of the departments were eliminated. B) Such an allocation violates GAAP. C) The property taxes are not under the control of department managers. D) The allocation may imply changes in efficiency that are unrelated to center performance.

60) Sloan Sporting Goods has stores in four geographic regions. Each region has at least 20 stores. In the company's responsibility accounting system, sales are recorded separately for each sales department within each store. The total sales for a particular region are determined by: A) Combining the total sales of all stores in that region. B) Using a separate revenue account to record the sales transaction for each region. C) Taking a percentage of the company's total sales that is equal to the percentage of the company's stores located in that region. D) Adding together the sales tickets for all sales transactions in the region.

61)

Depreciation on the factory would be an example of a:

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A) B) C) D)

62)

The concept of contribution margin applies: A) B) C) D)

63) that:

Controllable fixed cost. Period cost. Responsibility cost. Committed fixed cost.

Only to investment centers. Only to profit centers. Only to cost centers. To all types of responsibility centers.

In a responsibility income statement, the term, common fixed costs, describes fixed costs

A) B) C) D)

Are under the manager's immediate control. Jointly benefit several responsibility centers of the business. Occur in virtually every responsibility center of the business (such as salaries). Are easily traceable to specific profit centers.

64) Steel Fabricating, Incorporated manufactures furniture at its plants in Akron, Greensboro, and Schenectady. The company prepares monthly income statements segmented by plant. These income statements are organized to disclose contribution margin, performance margin, and responsibility margin for each plant, in addition to operating income for the company as a whole.Of the following, which should be classified as a common fixed cost? A) B) C) D)

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Depreciation on the Schenectady factory. Salaries of the plant managers. Salaries of the company's legal staff. Property taxes on the Akron factory.

65) Steel Fabricating, Incorporated manufactures furniture at its plants in Akron, Greensboro, and Schenectady. The company prepares monthly income statements segmented by plant. These income statements are organized to disclose contribution margin, performance margin, and responsibility margin for each plant, in addition to operating income for the company as a whole.The company's CEO must decide which of the three factories to expand in order to increase productive capacity. She should be most interested in the: A) B) C) D)

Variable costs of each factory. Contribution margin at each factory. Fixed costs traceable to each factory. Responsibility margins of each factory.

66) Steel Fabricating, Incorporated manufactures furniture at its plants in Akron, Greensboro, and Schenectady. The company prepares monthly income statements segmented by plant. These income statements are organized to disclose contribution margin, performance margin, and responsibility margin for each plant, in addition to operating income for the company as a whole.The Akron factory employs two quality control inspectors at an annual salary of $70,000 each. These salaries should be classified as: A) B) C) D)

Common fixed cost. Variable cost. Committed fixed cost. Controllable fixed cost.

67) Steel Fabricating, Incorporated manufactures furniture at its plants in Akron, Greensboro, and Schenectady. The company prepares monthly income statements segmented by plant. These income statements are organized to disclose contribution margin, performance margin, and responsibility margin for each plant, in addition to operating income for the company as a whole.All of the following costs are traceable to a specific factory except: A) B) C) D)

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Depreciation on the company's fleet of tractor trailer trucks. Direct materials. Salaries of production supervisors. Wages of production set-up laborers.

68) Patterson's Department Store prepares monthly income statements by sales departments. These income statements are organized to show contribution margin, performance margin, and responsibility margin for each sales department, as well as operating income for the store as a whole.The monthly salaries of the employees of the store's Accounting Department should be classified as a: A) B) C) D)

Common fixed cost. Traceable fixed cost. Committed fixed cost. Controllable fixed cost.

69) Patterson's Department Store prepares monthly income statements by sales departments. These income statements are organized to show contribution margin, performance margin, and responsibility margin for each sales department, as well as operating income for the store as a whole.Depreciation of the fixtures and equipment used exclusively in a particular sales department should be classified as a: A) B) C) D)

Common fixed cost. Variable cost. Controllable fixed cost. Committed fixed cost.

70) Patterson's Department Store prepares monthly income statements by sales departments. These income statements are organized to show contribution margin, performance margin, and responsibility margin for each sales department, as well as operating income for the store as a whole.All of the following costs are traceable to specific sales departments except: A) B) C) D)

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Cost of goods sold. Depreciation of equipment and fixtures used in the department. Advertising a special sale in a particular department. The salary of the store manager.

71) Patterson's Department Store prepares monthly income statements by sales departments. These income statements are organized to show contribution margin, performance margin, and responsibility margin for each sales department, as well as operating income for the store as a whole.The cost of heating and air conditioning the store should be: A) B) C) D)

Allocated among the sales departments based upon relative sales volume. Allocated among the sales departments based upon their relative floor space. Classified as a common fixed cost. Omitted from the company's income statements.

72) Patterson's Department Store prepares monthly income statements by sales departments. These income statements are organized to show contribution margin, performance margin, and responsibility margin for each sales department, as well as operating income for the store as a whole.In deciding how the store will benefit most from increasing the sales of selected departments, the store manager should be most interested in the: A) B) C) D)

Total sales of each department. Contribution margin ratios of each department. Fixed costs traceable to each department. Responsibility margins of each department.

73) Many companies view performance margin as a more useful tool than responsibility margin for evaluating segment managers. This is because: A) Managers have no control over traceable fixed costs. B) Performance margin is not affected by the size of the department. C) Performance margin indicates the change in operating income that would result from closing the department. D) Performance margin includes only those revenue and costs under the manager's direct control.

74) If a company wanted to evaluate the manager's ability to control costs, the company would probably look at the:

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A) B) C) D)

Performance margin. Responsibility margin. Contribution margin. Segment margin.

75) In the short run, the greatest increase in profitability will result from increasing sales in those profit centers with the: A) B) C) D)

Highest performance margins. Lowest traceable fixed costs. Highest contribution margin ratios. Highest responsibility margins.

76) The dollar amount used by one division which supplies a good or a service to another division within a company is called a: A) B) C) D)

77)

Market price. Transfer price. Fair price. Agreed-upon price.

The most common value used for transfer pricing is: A) B) C) D)

Total fixed costs. Total fixed and variable costs. Market value less fixed costs. Market value.

78) Company MHF operates subsidiaries in two countries. One of the subsidiaries consumes the output of the other in the production of a good for sale to the public. The company could increase cash flows by: Version 1

A) Using a transfer price based on full cost. B) Using a transfer price to transfer as much income as possible to the subsidiary located in the lower tax country. C) Using a transfer price based on market value. D) Using a transfer price to transfer as much income as possible to the subsidiary located in the higher tax country.

79) Division managers at Colonial Company are paid a bonus based on the responsibility margin of their respective responsibility centers. Division A sells goods to Division B and to outside customers. The manager of Division B would most likely prefer that transfer prices be based on: A) B) C) D)

The market value of the goods purchased from Division A. The market value of the goods purchased from Division A plus a fixed percentage. The cost of the goods purchased from Division A. The cost of the goods purchased from Division A plus a fixed percentage.

80) Division X supplies partially completed units of product to division Y. The divisions negotiated a price of $45 per unit. Assuming Division X completed and transferred 2,500 units to division Y, the total transfer price on this transaction is: A) B) C) D)

$87,500. $2,500. $62,500. $112,500.

81) Division X supplies partially completed units of product to division Y. The divisions negotiated a price of $30 per unit. Assuming Division X completed and transferred 3,000 units to division Y, the total transfer price on this transaction is:

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A) B) C) D)

$30,000. $60,000. $90,000. $3,000.

82) Division X supplies partially completed units of product to division Y. The divisions negotiated a price of $31 plus 25% per unit. Assuming Division X completed and transferred 5,100 units to division Y, the total transfer price on this transaction is: A) B) C) D)

$56,100. $118,575. $5,100. $197,625.

83) Division X supplies partially completed units of product to division Y. The divisions negotiated a price of $30 plus 20% per unit. Assuming Division X completed and transferred 5,000 units to division Y, the total transfer price on this transaction is: A) B) C) D)

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$180,000. $120,000. $150,000. $5,000.

Answer Key Test name: Chapter 22 Test Bank - Algorithmic and Static 1) TRUE 2) FALSE 3) TRUE 4) TRUE 5) FALSE 6) TRUE 7) FALSE 8) TRUE 9) FALSE 10) TRUE 11) FALSE 12) TRUE 13) FALSE 14) TRUE 15) TRUE 16) FALSE 17) FALSE 18) TRUE 19) FALSE 20) FALSE 21) FALSE 22) FALSE 23) C 24) D 25) C 26) A Version 1

27) A 28) A 29) B 30) C 31) B 32) C 33) B 34) C 35) A 36) A 37) B 38) B 39) C 40) D 41) B 42) B 43) A 44) C 45) D 46) C 47) C 48) D 49) B 50) A 51) B 52) D 53) B 54) D 55) B 56) A Version 1

57) C 58) B 59) B 60) A 61) D 62) B 63) B 64) C 65) D 66) D 67) A 68) A 69) D 70) D 71) C 72) B 73) D 74) A 75) C 76) B 77) D 78) B 79) C 80) D 81) C 82) D 83) A

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CHAPTER 23: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Explain what is meant by "profit rich, yet cash poor."

Discuss the benefits that a company may derive from a formal budgeting process.

3) Consider how budgeted amounts are established.Required:(A) The text discusses two basic philosophies as to the levels at which budgeted amounts should be set. Identify and describe briefly each of these two philosophies. (B) Which of the two management philosophies would be more likely to elicit the following comment. "At our company, budgeted revenue is set so high and budgeted costs so low that no department can ever meet the budget. This way, department managers can never relax; they are motivated to keep working harder no matter how well they are already doing."

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4) Listed below are eight operating budgets. In the space provided, list which of these budgets is typically prepared first, second, third, etc.Required: a. ____ Operating expense budget b. ____ Budgeted income statement c. ____ Ending finished goods forecast d. ____ Production schedule (in units) e. ____ Manufacturing cost estimates f. ____ Cost of goods sold budget g. ____ Sales forecast h. ____ Manufacturing cost budget

Describe briefly the purpose of a master budget and discuss its elements.

6) On January 1 of the current year, Gotham Corporation has direct materials on hand of $82,000. Of this amount, Gotham owes suppliers $51,000 on account. The company has prepared the following budget estimates for January: Direct materials inventory, 1/31 Direct materials budgeted for use in January Accounts payable to suppliers, 1/31

$ 90,000 $309,000 $ 62,000

Required:Determine the following:(A) Purchases of direct materials budgeted in January (B) Cash payments to suppliers budgeted in January

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7) Brian Furniture, Incorporated manufactures a variety of desks, chairs, tables, and shelf units that are sold to public school systems throughout the Midwest. The controller of the company's School Desk Division is currently preparing a budget for the second quarter of the current year. The following sales forecast has been developed by the division's sales manager: April May June July August

6,500 desk and chair sets 7,500 desk and chair sets 9,000 desk and chair sets 8,700 desk and chair sets 8,800 desk and chair sets

The following information is also available:The inventory of finished desk and chair sets at the end of each month must be equal to 30% of the budgeted sales for the next month. On April 1, there will be 1,950 units of desk and chair sets on hand.Work-in-process inventories are negligible and can be safely ignored.Each desk and chair set requires 10 board feet of pine planks. Pine planks cost $0.75 per board foot, and the division ends each month with enough pine to cover 20% of the next month's production requirements. This requirement will be met on April 1 of the current year.Required:Prepare a production budget and a materials purchases budget for April, May, and June and in total for the three-month period.

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8) On April 1, Fisher Corporation borrowed $400,000 from its bank by signing a 9%, 5-year note payable. The note calls for 60 monthly payments of $6,150, which includes both interest and principal components. Required:Determine the following:(A) Interest expense budgeted for April (B) The carrying value of the note to be reported in the company's budgeted balance sheet as of April 30 (C) Interest expense budgeted for May. (Round to nearest whole dollar.) (D) The carrying value of the note to be reported in the company's budgeted balance sheet as of May 31. (Round to nearest whole dollar.)

9) The director of budgeting for Bond Products is beginning the process of preparing a cash budget for each month of the coming year. The sales forecast for the month of January is as follows: Estimated cash sales Estimated sales on account

$ 90,000 $680,000

In the past, the accounts receivable originating from credit sales have been collected in the following pattern: In the month of sale In the first month following the sale In the second month following the sale Written off as uncollectible

15% 50% 25% 10%

Credit sales in the last two months of the current year, some of which remain uncollected at yearend, were as follows: November December

$ 580,000 $ 730,000

Required:Compute the amount of cash expected to be collected from customers in January of the coming year.

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10) Knightsbridge Corporation has the following information available for the month of June. In May, 30-day credit sales were $175,000; 80% of this amount is estimated to be collectible in June.June sales are estimated to be $425,000; cash sales are usually 25% of total sales. Only 10% of credit sales are collected in the month in which the sale is made.Total fixed expenses are $60,000 per month, including $26,000 depreciation. Variable expenses are 55% of sales. All expenses requiring payment are paid in cash when incurred.A $40,000 note payable must be paid on June 30.As of May 31, the cash balance is $94,000. Required:Prepare a cash budget for Knightsbridge Corporation for the month of June.

11) Harding Company expected sales to be 50,000 units in February, 45,000 in March, and 55,000 units in April. Each unit sells for $18.00 each. The following costs pertain to each unit: Direct labor

$5.00

Direct Materials

$3.00

Variable overhead

$1.75

Total fixed overhead

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$45,000 per month

Harding is considering an advertising campaign that will cost $15,000 per month from January through March; it is expected to increase sales by 8% a month. At the same time Harding will reduce sales prices to $17.00 per unit while keeping costs steady. Required: (A) What will operating income be in each of the three months before the advertising campaign?(B) If Harding goes ahead with the advertising campaign, what will operating income be in each of the three months?(C) Would you advise them to go ahead with the campaign? Why or why not?

12) Aron Company makes computer screens, Model 1 and Model 2. Aron anticipates selling the screens as follows:

Quarter ending 3/31 Quarter ending 6/30 Quarter ending 9/30 Quarter ending 12/31

Unit of Model 1 5,000 4,500 5,500 6,000

Units of Model 2 6,000 5,500 6,500 7,000

The inventory on January 1 of the current year included 2500 units of Model 1 and 3000 units of Model 2. Aron wants to have on hand 45% of the anticipated sales of the following month for each model.Required:Prepare a production budget for the first 3 quarters of the current calendar year for both models.

13) The cost accountant for Bradley, Incorporated, prepared the following monthly performance report relating to the Finishing Department:

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Direct materials used Direct labor Variable manufacturing overhead Fixed manufacturing overhead

Budgeted Production (6,000 Units) $90,000 48,000 6,000 66,000

Actual Production (6,500 Units) $99,000 55,200 9,000 64,200

Required: (A) Compute the amounts that should be included for each of the following in a flexible budget prepared for a 6,500-unit level of production: (1) Direct materials (2) Direct labor (3) Fixed manufacturing overhead (B) Assume that a revised performance report is prepared for the 6,500-unit level of production using a flexible budget approach. Compute the cost variances for each of the following and indicate whether each variance is favorable (F) or unfavorable (U): (1) Direct materials (2) Direct labor (3) Fixed manufacturing overhead

14) What is meant by the term flexible budget? What role do flexible budgets play in evaluating performance?

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Answer Key Test name: Chapter 23 Test Bank (Problem Material) 1) Companies must often tie up large sums of cash in direct materials, work in process, and finished goods inventories. As finished goods are sold, cash continues to remain tied up in accounts receivable. Thus, a company may be reporting record profits, yet still experience cash flow problems. 2) The benefits of budgeting are the benefits that come from thinking ahead. Budgeting helps to coordinate the activities of the different departments, provides a basis for evaluating department performance, and provides managers with responsibility for future decision-making. In addition, the budgeting process forces management to estimate future economic conditions, including costs of materials, demand for the company's products, and interest rates.

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3) (A) The text identifies the two philosophies as (1) the behavioral approach and (2) the total quality management approach. The behavioral approach assumes that departmental managers will be most highly motivated if they view the budget as a "fair" basis for evaluating departmental performance. Budgeted amounts are set at reasonable and achievable levels that can be achieved through reasonably efficient operations. Failure to stay within the budget is viewed as unacceptable. Under the total quality management approach, the entire organization is committed to the goal of completely eliminating inefficiency and nonvalue-adding activities. In setting perfection as the goal of the organization, budgeted amounts may be set at levels representing absolute efficiency. Even a highly efficient department should fall slightly short of the budget standards. (B) The budget referred to in the quotation embodies the assumptions of the total quality management philosophy of setting budgeted amounts. 4) (a) 7 (or 6)(b) 8(c) 5(d) 2(e) 3(f) 6 (or 7)(g) 1(h) 4 5) A master budget is a group of related budgets and forecasts that, together, summarize and coordinate all planned activities of a business. The master budget usually consists of a sales forecast, a production schedule, a manufacturing costs budget, an operating expense budget, a capital expenditures budget, and projected financial statements. The number and type of individual budgets and schedules that make up the master budget depend upon the size and the characteristics of the business. 6) (A) Direct materials used in January Plus: Direct materials inventory, 1/31 Less: Direct materials inventory, 1/1 Direct materials to be purchased in January

$ 309,000 90,000 (82,000) $ 317,000

(B) Accounts payable, 1/1

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$ 51,000 9

Plus: Material purchases budgeted in January Less: Accounts payable, 1/31 Payments to suppliers budgeted in January

317,000 (62,000) $306,000

7) Production Budget Budgeted sales Desired ending finished goods inventory Total needs Less: beginning finished goods inventory

April 6,500 2,250

May 7,500 2,700

June 9,000 2,610

Total 23,000 2,610

8,750 1,950

10,200 2,250

11,610 2,700

25,610 1,950

Units to be produced

6,800

7,950

8,910

23,660

Material Purchases Budget Board feet of pine used in production Desired ending inventory of pine (board feet) Total needs Less: beginning inventory of pine (board feet) Board feet to be purchased Price per board foot

April 68,000

May 79,500

June 89,100

Total 236,600

15,900

17,820

17,460

83,900 13,600

97,320 15,900

106,560 17,820

254,060 13,600

70,300 $ 0.75

81,420 $ 0.75

88,740 $ 0.75

240,460 $ 0.75

Purchase cost

$52,725

$61,065

$66,555

$180,345

8) (A)$400,000 × 9% × 1/12 = $3,000(B) Carrying value at April 1

$ 400,000

Total debt service in April

$ 6,150

Interest expense in April (from A)

(3,000)

Amount applied to principal in April

(3,150)

Carrying value at April 30

$ 396,850

(C)$396,850 × 9% × 1/12 = $2,976(D) Carrying value at April 30 (from B) Total debt service in May

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$ 396,850 $ 6,150

Interest expense in May (from C)

(2,976)

Amount applied to principal in May

(3,174)

Carrying value at May 31

$ 393,676

9) Cash expected to be collected in January: From November credit sales ($580,000 × 25%) From December credit sales ($730,000 × 50%) From forecast January credit sales ($680,000 × 15%) From forecast January cash sales Total cash expected to be collected from customers during January of coming year

$145,000 365,000 102,000 90,000 $702,000

10) KNIGHTSBRIDGE CORPORATION Cash Budget For the Month of June Cash balance at beginning of month

$ 94,000

Receipts: Collections from customers: May credit sales ($175,000 × 0.8)

$140,000

June credit sales ($425,000 × 0.75 × 0.1)

31,875

June cash sales ($425,000 × 0.25)

106,250

Total cash available

278,125 $372,125

Disbursements: Fixed expenses ($60,000 − $26,000)

$ 34,000

Variable expenses ($425,000 × 0.55)

233,750

Note payable

40,000

Cash balance at end of month

(307,750) $ 64,375

11) (A)

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February

March

April

Sales in units × Selling price Total Revenue Costs:

50,000 $18.00 $ 900,000

45,000 $18.00 $ 810,000

55,000 $ 18.00 $ 990,000

Direct Labor Direct Materials Variable Overhead Fixed Overhead Total Costs

$ 250,000 150,000 87,500 45,000 $ 532,500

$ 225,000 135,000 78,750 45,000 $ 483,750

$ 275,000 165,000 96,250 45,000 $ 581,250

Operating Income

$ 367,500

$ 326,250

$ 408,750

February

March

April

Sales in units × Selling price Total Revenue Costs:

54,000 $ 17.00 $ 918,000

48,600 $ 17.00 $ 826,200

59,400 $ 17.00 $ 1,009,800

Direct Labor Direct Materials Variable Overhead Fixed Overhead Total Costs

$ 270,000 162,000 94,500 60,000 $ 586,500

$ 243,000 145,800 85,050 60,000 $ 533,850

$ 297,000 178,200 103,950 60,000 $ 639,150

Operating Income

$ 331,500

$ 292,350

$ 370,650

(B)

(C) No, they should not go ahead with the campaign. Total operating income for the three months decreases at all sales levels. There is no financial advantage to have the advertising campaign. 12) Model 1 Expected Sales Ending Inventory Total Beginning Inventory

3/31 5,000 2,025 7,025 2,500

6/30 4,500 2,475 6,975 2,025

9/30 5,500 2,700 8,200 2,475

Units to produce

4,525

4,950

5,725

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Model 2 Expected Sales Ending Inventory Total Beginning Inventory

3/31 6,000 2,475 8,475 3,000

6/30 5,500 2,925 8,425 2,475

9/30 6,500 3,150 9,650 2,925

Units to produce

5,475

5,950

6,725

13) (A) (1) ($9,000/6,000 units) × 6,500 units = $97,500 (2) ($48,000/6,000 units) × 6,500 units = $52,000 (3) $66,000 (Fixed costs remain unchanged throughout the relevant range of production.) (B) (1) $97,500 flexible budget − $99,600 actual = $2,100 U (2) $52,000 flexible budget − $55,200 actual = $3,200 U (3) $66,000 per flexible budget − $64,200 actual = $1,800 F

14) A flexible budget is one that may be geared to any volume level; budgeted amounts, therefore, can be based upon the actual (as distinguished from the planned) level of volume attained during a budget period.If management is using budgets as a means of evaluating performance, flexible budget amounts provide a reasonable yardstick for comparison–management can determine easily what costs should have been at the volume of activity actually attained. A comparison between these budgeted figures for any responsibility center and actual results achieved then becomes a reasonable basis for evaluation. Differences between planned and actual volume (which may not be within the control of the person being evaluated) are eliminated from consideration.

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CHAPTER 23 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A company that is profitable may not have sufficient cash on hand to meet its immediate needs. ⊚ ⊚

true false

2) A company's operating cycle is the time between purchases of direct materials and conversion of these materials back into cash. ⊚ ⊚

true false

The operating cycle is the average time required to manufacture products for sale. ⊚ ⊚

true false

4) Because a budget is merely a forecast of future events, its benefits are extremely narrow and limited. ⊚ ⊚

true false

5) If a budget is to provide a basis for evaluating departmental performance, departmental managers should not know what their budget targets are until after the budget period has ended. ⊚ ⊚

true false

6) The total quality management approach to budgeting sets budgeted amounts at levels that can be achieved through reasonably efficient operations. ⊚ ⊚

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true false

7) The behavioral approach to budgeting has as its goal the complete elimination of inefficiency. ⊚ ⊚

true false

8) A budget prepared using the total quality management approach is always achievable by departments within a company. ⊚ ⊚

true false

9) Under the "total quality management" philosophy, budgeted amounts should be set at realistic and achievable levels rather than at levels representing absolute efficiency. ⊚ ⊚

true false

10) If the behavioral approach is employed to determine the levels at which budgeted amounts are set, then reasonable and achievable levels should be used. ⊚ ⊚

true false

11) If the total quality management approach is employed to determine the level at which budgeted amounts are set, then absolute efficiency is assumed. ⊚ ⊚

true false

12) In a master budget, the sales forecast would be dependent upon the budgeted production figures. ⊚ ⊚ Version 1

true false 2

13) A master budget is a comprehensive financial plan setting forth the financial and operational goals of a business. ⊚ ⊚

14)

true false

A master budget actually includes a number of related budgets. ⊚ ⊚

true false

15) Once a company determines its desired production level, it uses that estimated production level to forecast sales for the period. ⊚ ⊚

true false

16) A cash budget determines the maximum amount of money that can be spent during the period. ⊚ ⊚

true false

17) In preparing a master budget, budgeted levels for production, manufacturing costs, and operating expenses normally are determined after preparing the sales forecast. ⊚ ⊚

true false

18) The typical starting point of a master budget would be to prepare a budgeted balance sheet. ⊚ ⊚

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true false

19) The preparation of a budgeted balance sheet requires consideration of the budgeted capital expenditures and budgeted net income. ⊚ ⊚

true false

20) A budget provides a comprehensive plan enabling multiple departments to work together in a coordinated manner. ⊚ ⊚

true false

21) A common means of performance evaluation occurs by comparing budgeted amounts with actual amounts. ⊚ ⊚

true false

22) A flexible budget allows management to spend more or less for labor and materials without regard to the amount of production. ⊚ ⊚

23)

Flexible budgets can be prepared for sales budgets but not for productions budgets. ⊚ ⊚

24)

true false

In a flexible budget, both variable and fixed costs will vary with the level of activity. ⊚ ⊚

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true false

25) A performance report based on a flexible budget can be easily adjusted to show budgeted revenues and costs at different levels of activity. ⊚ ⊚

true false

26) Flexible budgeting may be viewed as combining the concepts of budgeting with costvolume-profit analysis. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 27) Mentha Company currently has the following statistics:Days in inventory: 80Days in accounts receivable: 68What is Mentha's operating cycle? A) B) C) D)

80 days 68 days 148 days Cannot be determined from the information given

28) Mentha Company currently has the following statistics:Days in inventory: 80Operating cycle: 148What is Mentha's days in accounts receivable? A) B) C) D)

80 days 68 days 148 days Cannot be determined from the information given

29) Mentha Company currently has the following statistics:Days in accounts receivable: 68Operating cycle: 148What is Mentha's days in inventory?

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A) B) C) D)

30)

The benefits of budgeting include all of the following except: A) B) C) D)

31)

80 days 68 days 148 days Cannot be determined from the information given

Enabling the company to produce more for less cost. Assigning responsibility for situations that require corrective action. Coordinating activities between departments within the organization. Creating standards for evaluating performance.

Which of the following is not a benefit of a careful and thorough budgeting process?

A) Budgeting increases management's awareness of the company's external economic environment. B) Budgeted net income assures the company of operating profitably. C) The budget may provide advance warning of pending problems. D) Budgets provide a yardstick for evaluating future performance.

32)

Benefits derived from budgeting include all of the following except: A) B) C) D)

33)

Improved relationship with shareholders. Enhanced management responsibilities. Improved coordination of activities. Enhanced performance evaluations.

The most widely used budgeting philosophy is the:

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A) B) C) D)

34)

Operational approach. Behavioral approach. Strategic approach. Tactical approach.

A budget that adds a new month when the current month ends is called a: A) B) C) D)

Capital budget. Master budget. Rolling budget. Quarterly budget.

35) Which philosophy in setting budgeted amounts assumes both the complete elimination of inefficiencies and a level of absolute efficiency? A) B) C) D)

The behavioral approach. The total quality management approach. The strategic approach. The master budget approach.

36) Which of the following is not a characteristic of the total quality approach to setting budgetary targets? A) B) C) D)

37)

Absolute efficiency A perception that the budget is fair Budgetary targets that are unattainable Budgeted performance expectations that cannot be exceeded

When budgeted amounts are set at reasonable and achievable levels:

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A) B) C) D)

38)

Capital expenditures budgets are typically prepared for a period of: A) B) C) D)

39)

3 months. 6 months. One year. Several years.

A master budget usually includes all of the following except: A) B) C) D)

40)

They reflect a "total quality management" philosophy of management. A highly efficient department should fall slightly short of budget standards. Meeting the budgeted amounts ensures a maximum level of profitability. Failure to stay within the budget is viewed as an unacceptable level of performance.

A sales forecast. A cash budget. A projected tax return. Projected financial statements.

The master budget may be comprised of: A) B) C) D)

The production budget. The current period income statement. The current period balance sheet. The current period statement of cash flows.

41) A segment of a master budget relating to that portion of a business under the control of a particular manager is termed a:

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A) B) C) D)

42)

Which of the following is not considered an operating budget? A) B) C) D)

43)

The marketing budget The cost of goods sold budget The overhead budget The capital expenditures budget

Which element of a master budget would normally be prepared first? A) B) C) D)

45)

Manufacturing cost budget Production schedule Capital expenditures budget Sales forecast

Which of the following is considered a financial budget? A) B) C) D)

44)

Performance report. Production report. Responsibility budget. Cash budget.

A production budget A cash budget A budget of operating expenses A sales forecast

Which of the following is a major component of a master budget?

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A) B) C) D)

46)

A production throughput schedule A machinery maintenance schedule A cash budget An employee training budget

Which of the following is considered an operating budget? A) B) C) D)

The prepayments budget The debt service budget The customer service budget The capital expenditures budget

47) The sales forecast directly affects many elements of the master budget. Which of the following would be least affected by short-term fluctuations in the sales forecasts? A) B) C) D)

48)

The production schedule The budgeted income statement The capital expenditures budget The operating expense budget

The production schedule in units:

A) Cannot be prepared until the budgeted income statement is completed. B) Is dependent upon the sales forecast for the period. C) Is based upon the manufacturing cost budget, that is, upon the level of funds available for manufacturing costs. D) Is the starting point in the preparation of the master budget.

49)

Preparation of a budgeted income statement does not require:

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A) B) C) D)

50)

Which element of a master budget would normally be prepared last? A) B) C) D)

51)

Estimates of cost of goods sold. Estimates of the timing of cash receipts and payments. Preparation of sales forecast. Anticipation of operating expenses.

A cash budget A budgeted balance sheet A budgeted income statement A production budget

A cash budget is affected directly by each of the following except: A) B) C) D)

A capital expenditures budget. A sales forecast. A manufacturing cost budget. A budgeted income statement.

52) In a cash budget, the budgeted level of cash receipts depends on all of the following except: A) B) C) D)

The sales forecast. The credit terms offered to customers. The credit terms offered by suppliers. Experience in collecting receivables.

53) The following information is from the manufacturing budget and budgeted financial statements of Altman Corporation: Direct materials inventory, 1/1

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$ 85,000

Direct materials inventory, 12/31 Direct materials budgeted for use during year Accounts payable to suppliers, 1/1 Accounts payable to suppliers, 12/31

$ 101,000 $ 343,000 $ 53,000 $ 63,000

For the year, budgeted purchases of direct materials amounted to: A) B) C) D)

$327,000. $359,000. $349,000. $369,000.

54) The following information is from the manufacturing budget and budgeted financial statements of Altman Corporation: Direct materials inventory, 1/1 Direct materials inventory, 12/31 Direct materials budgeted for use during year Accounts payable to suppliers, 1/1 Accounts payable to suppliers, 12/31

$ 86,000 $ 102,000 $ 344,000 $ 54,000 $ 64,000

For the year, budgeted purchases of direct materials amounted to: A) B) C) D)

$344,000. $328,000. $360,000. $370,000.

55) The following information is from the manufacturing budget and budgeted financial statements of Altman Corporation: Direct materials inventory, 1/1 Direct materials inventory, 12/31 Direct materials budgeted for use during year Accounts payable to suppliers, 1/1 Accounts payable to suppliers, 12/31

$ 76,000 $ 92,000 $ 334,000 $ 44,000 $ 54,000

For the year, budgeted cash payments to suppliers amounted to:

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A) B) C) D)

$360,000. $340,000. $318,000. $350,000.

56) The following information is from the manufacturing budget and budgeted financial statements of Altman Corporation: Direct materials inventory, 1/1 Direct materials inventory, 12/31 Direct materials budgeted for use during year Accounts payable to suppliers, 1/1 Accounts payable to suppliers, 12/31

$ 86,000 $ 102,000 $ 344,000 $ 54,000 $ 64,000

For the year, budgeted cash payments to suppliers amounted to: A) B) C) D)

$344,000. $350,000. $334,000. $354,000.

57) Wateredge Corporation has budgeted a total of $363,800 in costs and expenses for the upcoming quarter. Of this amount, $45,200 represents depreciation expense and $7,500 represents the expiration of prepayments. Wateredge's current payables balance is $267,000 at the beginning of the quarter. Budgeted payments on current payables for the quarter amount to $372,000. The company's estimated current payables balance at the end of the quarter is: A) B) C) D)

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$258,800. $206,100. $213,600. $312,200.

58) Wateredge Corporation has budgeted a total of $361,800 in costs and expenses for the upcoming quarter. Of this amount, $45,000 represents depreciation expense and $7,300 represents the expiration of prepayments. Wateredge's current payables balance is $265,000 at the beginning of the quarter. Budgeted payments on current payables for the quarter amount to $370,000. The company's estimated current payables balance at the end of the quarter is: A) B) C) D)

59)

$179,500. $204,500. $203,500. $310,000.

Sherman has budgeted sales for the upcoming quarter as follows:

Units

April

May

June

1,150

1,450

1,300

The desired ending finished goods inventory for each month is one-half of next month's budgeted sales. Three pounds of direct material are required for each unit produced. If direct material costs $6 per pound, and must be paid for in the month of purchase, the budgeted direct materials purchases (in dollars) for April are: A) B) C) D)

60)

$7,800. $23,400. $24,750. $15,600.

Sherman has budgeted sales for the upcoming quarter as follows:

Units

April

May

June

1,600

1,900

1,750

The desired ending finished goods inventory for each month is one-half of next month's budgeted sales. Three pounds of direct material are required for each unit produced. If direct material costs $5 per pound, and must be paid for in the month of purchase, the budgeted direct materials purchases (in dollars) for April are:

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A) B) C) D)

$17,500. $40,500. $26,250. $38,250.

61) On March 1, Hugh Corporation plans to borrow $460,000 from the Scotland State Bank by signing a 9%, 15-year note payable. The note calls for 180 monthly payments of $4,670, which includes both interest and principal components. Hugh's budgeted interest expense for March is: A) B) C) D)

$230. $3,450 $1,220. $4,670.

62) On March 1, Hugh Corporation plans to borrow $550,000 from the Scotland State Bank by signing a 12%, 15-year note payable. The note calls for 180 monthly payments of $6,000, which includes both interest and principal components. Hugh's budgeted interest expense for March is: A) B) C) D)

$5,000. $2,444. $5,500. $6,000.

63) On March 1, Hugh Corporation plans to borrow $630,000 from the Scotland State Bank by signing a 6%, 15-year note payable. The note calls for 180 monthly payments of $5,320, which includes both interest and principal components. Of Hugh's budgeted debt service cost of $5,320 in March, the amount applied to the principal of the note totals:

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A) B) C) D)

$210. $5,320. $2,170. $3,150.

64) On March 1, Hugh Corporation plans to borrow $550,000 from the Scotland State Bank by signing a 12%, 15-year note payable. The note calls for 180 monthly payments of $6,000, which includes both interest and principal components. Of Hugh’s budgeted debt service cost of $6,000 in March, the amount applied to the principal of the note totals: A) B) C) D)

$500. $4,000. $4,500. $5,000.

65) Ross Corporation makes all sales on account. The June 30th balance sheet balance in its accounts receivable is $350,000, of which $240,000 pertain to sales that were made during June. Budgeted sales for July are $1,200,000. Ross collects 70% of sales in the month of sale; 20% in the following month; and the final 10% in the second month after the sale. What are Ross's budgeted collections for July? A) B) C) D)

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$998,000 $899,000 $1,080,000 $1,110,000

66) Ross Corporation makes all sales on account. The June 30th balance sheet balance in its accounts receivable is $400,000, of which $240,000 pertain to sales that were made during June. Budgeted sales for July are $1,250,000. Ross collects 70% of sales in the month of sale; 20% in the following month; and the final 10% in the second month after the sale. What are Ross's budgeted collections for July? A) B) C) D)

$1,275,000 $939,000 $1,195,000 $915,000

67) Ross Corporation makes all sales on account. The June 30th balance sheet balance in its accounts receivable is $430,000, of which $255,000 pertain to sales that were made during June. Budgeted sales for July are $1,280,000. Ross collects 70% of sales in the month of sale; 20% in the following month; and the final 10% in the second month after the sale. What is the budgeted balance of Ross's accounts receivable as of July 31? A) B) C) D)

$1,151,000 $469,000 $1,122,000 $964,500

68) Ross Corporation makes all sales on account. The June 30th balance sheet balance in its accounts receivable is $400,000, of which $240,000 pertain to sales that were made during June. Budgeted sales for July are $1,250,000. Ross collects 70% of sales in the month of sale; 20% in the following month; and the final 10% in the second month after the sale. What is the budgeted balance of Ross's accounts receivable as of July 31?

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A) B) C) D)

$375,000 $455,000 $415,000 $396,000

69) On October 1 of the current year, Molloy Corporation prepared a cash budget for October, November, and December. All of Molloy's sales are made on account. The following information was used in preparing estimated cash collections: August sales (actual) September sales (actual) October sales (estimated) November sales (estimated) December sales (estimated)

$ 44,000 $ 54,000 $ 24,000 $ 74,000 $ 64,000

Approximately 65% of all sales are collected in the month of the sale, 20% is collected in the following month, and 15% is collected in the month thereafter. Budgeted collections from customers in October total: A) B) C) D)

$122,000. $26,400. $33,000. $41,400.

70) On October 1 of the current year, Molloy Corporation prepared a cash budget for October, November, and December. All of Molloy’s sales are made on account. The following information was used in preparing estimated cash collections: August sales (actual) September sales (actual) October sales (estimated) November sales (estimated) December sales (estimated)

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$ 40,000 $ 50,000 $ 20,000 $ 70,000 $ 60,000

Approximately 60% of all sales are collected in the month of the sale, 30% is collected in the following month, and 10% is collected in the month thereafter. Budgeted collections from customers in October total: A) B) C) D)

$39,000. $27,000. $31,000. $110,000.

71) On October 1 of the current year, Molloy Corporation prepared a cash budget for October, November, and December. All of Molloy's sales are made on account. The following information was used in preparing estimated cash collections: August sales (actual) September sales (actual) October sales (estimated) November sales (estimated) December sales (estimated)

$ 38,000 $ 48,000 $ 21,000 $ 68,000 $ 58,000

$47,100. $137,000. $57,300. $51,900.

72) On October 1 of the current year, Molloy Corporation prepared a cash budget for October, November, and December. All of Molloy’s sales are made on account. The following information was used in preparing estimated cash collections: August sales (actual) September sales (actual) October sales (estimated) November sales (estimated)

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$ 40,000 $ 50,000 $ 20,000 $ 70,000 19

December sales (estimated)

$ 60,000

$32,000. $53,000. $59,000. $48,000.

73) On October 1 of the current year, Molloy Corporation prepared a cash budget for October, November, and December. All of Molloy's sales are made on account. The following information was used in preparing estimated cash collections: August sales (actual) September sales (actual) October sales (estimated) November sales (estimated) December sales (estimated)

$ 46,000 $ 56,000 $ 26,000 $ 76,000 $ 66,000

$55,000. $168,000. $62,400. $65,000.

74) On October 1 of the current year, Molloy Corporation prepared a cash budget for October, November, and December. All of Molloy’s sales are made on account. The following information was used in preparing estimated cash collections: August sales (actual) September sales (actual) October sales (estimated)

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$ 40,000 $ 50,000 $ 20,000 20

November sales (estimated) December sales (estimated)

$ 70,000 $ 60,000

75)

As the volume of output increases: A) B) C) D)

76)

Variable costs per unit will increase. Variable costs per unit will decrease. Variable costs per unit will not change. Variable costs in total will decrease.

As the volume of output decreases: A) B) C) D)

77)

$55,000. $60,000. $64,000. $59,000.

Fixed costs per unit will increase. Fixed costs per unit will decrease. Fixed costs per unit will not change. Fixed costs in total will decrease.

Costs that rise and fall proportionately with the volume of output are often referred to as: A) B) C) D)

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Variable costs. Flexible costs. Idle capacity costs. Uncontrollable costs.

78) A budget that can be easily adjusted to show budgeted revenues, costs, and cash flows at different levels of activity is known as: A) B) C) D)

A flexible budget. A master budget. A production budget. A multi-level budget.

79) A factory produces 50,000 units for the month of June, although its budgeted output was 40,000 units. In this case: A) A comparison of budgeted results and actual results will be misleading unless the company uses a flexible budget. B) Actual fixed costs per unit may be expected to exceed budgeted levels. C) Actual cost per unit will be higher than standard cost per unit. D) Both total production costs and unit production costs should be approximately 25% above budgeted levels.

80)

A flexible budget is one that: A) B) C) D)

81)

Is revised monthly in the light of changing business conditions. Is a compromise plan reflecting diverse views of various supervisors. Contains estimated cost data for several different levels of activity. Separates factory overhead between the variable and fixed portions.

A flexible budget: A) B) C) D)

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Consists of estimates of costs and expenses for various possible levels of activity. Is designed to be adjusted at frequent intervals for changes in the general price level. Is better suited for use with a job cost system than a standard cost system. Cannot be prepared when a standard cost system is in use.

82)

Flexible budgeting may be viewed as combining the concepts of budgeting and: A) B) C) D)

Incremental analysis. Product costing. Cost-volume-profit analysis. Financial statement analysis.

83) Flexible budgeting may be used for profit centers by applying cost-volume-profit relationships to the actual level of: A) B) C) D)

Units produced. Resources consumed. Costs incurred. Sales achieved.

84) In a flexible budget for a profit center, which of the following items would not be expected to vary with the level of activity? A) B) C) D)

Revenue Fixed manufacturing overhead Direct materials cost Variable manufacturing overhead

85) Armstrong, Incorporated uses a flexible budget. Armstrong produced 15,900 units in May incurring direct materials cost of $20,193. Its master budget for the year projected direct materials cost of $358,360, at a production volume of 289,000 units. A flexible budget for May should reflect direct materials cost of:

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A) B) C) D)

$20,716. $19,466. $19,716. $20,193.

86) Armstrong, Incorporated uses a flexible budget. Armstrong produced 16,000 units in May incurring direct materials cost of $20,480. Its master budget for the year projected direct materials cost of $362,500, at a production volume of 290,000 units. A flexible budget for May should reflect direct materials cost of: A) B) C) D)

$20,480. $20,000. $21,000. $19,750.

87) Skelton Corporation had planned to produce 50,000 units of product during the first quarter of the current year. The company prepared the following budget on May 1: Budgeted (50,000 units) Variable costs: Direct materials used Direct labor Variable overhead Fixed costs: Manufacturing overhead Total manufacturing costs

$ 36,000 45,000 22,500

58,500 $162,000

During the first quarter, Skelton produced 60,000 units and incurred total manufacturing costs of $184,000. Which of the following amounts should not be included in Skelton's flexible budget at a 60,000unit level?

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A) B) C) D)

Direct materials used, $43,200 Direct labor, $54,000 Variable overhead, $27,000 Fixed manufacturing overhead, $70,200

88) Skelton Corporation had planned to produce 50,000 units of product during the first quarter of the current year. The company prepared the following budget on May 1: Budgeted (50,000 units) Variable costs: Direct materials used Direct labor Variable overhead Fixed costs: Manufacturing overhead Total manufacturing costs

$ 36,000 45,000 22,500

58,500 $162,000

During the first quarter, Skelton produced 60,000 units and incurred total manufacturing costs of $184,000. A performance report for Skelton's first quarter of operations using a flexible budget approach would show: A) B) C) D)

Actual costs over budget by $1,300. Actual costs over budget by $11,700. Actual costs over budget by $15,150. Total costs per the flexible budget of $194,400.

89) Skelton Corporation had planned to produce 50,000 units of product during the first quarter of the current year. The company prepared the following budget on May 1: Budgeted (50,000 units)

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Variable costs: Direct materials used Direct labor Variable overhead Fixed costs: Manufacturing overhead Total manufacturing costs

$ 36,000 45,000 22,500

58,500 $162,000

During the first quarter, Skelton produced 60,000 units and incurred total manufacturing costs of $184,000. The cost-volume relationship used to prepare Skelton's flexible budget for various production levels includes: A) B) C) D)

Fixed cost of $1.17 per unit. Manufacturing overhead costs of $1.43 per unit. Variable costs of $2.07 per unit. Total cost of $3.05 per unit.

90) Baskin Promotions, Incorporated sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 82,000 T-shirts: Sales Cost of Goods Sold Gross Profit Operating Expenses ($100,000 is fixed) Operating Income Income Taxes (30% of operating income) Net Income

$ 1,436,640 842,140 594,500 426,360 168,140 50,442 $ 117,698

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 62,000 T-shirts. In a flexible budget for sales of 62,000 T-shirts, how much would Baskin budget for operating expenses? Version 1

A) B) C) D)

$246,760 $346,760 $426,360 $326,360

91) Baskin Promotions, Incorporated sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 80,000 T-shirts: Sales Cost of Goods Sold Gross Profit Operating Expenses ($100,000 is fixed) Operating Income Income Taxes (30% of operating income) Net Income

$ 1,400,000 820,000 580,000 418,400 161,600 48,480 $ 113,120

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 60,000 T-shirts. In a flexible budget for sales of 60,000 T-shirts, how much would Baskin budget for operating expenses? A) B) C) D)

$238,800 $338,800 $218,400 $418,400

92) Baskin Promotions, Incorporated sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 90,000 T-shirts: Sales Cost of Goods Sold

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$ 1,584,000 931,500

Gross Profit Operating Expenses ($100,000 is fixed) Operating Income Income Taxes (30% of operating income) Net Income

652,500 458,200 194,300 58,290 $ 136,010

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 70,000 T-shirts. What unit cost did Baskin use in budgeting the cost of goods sold for the year? A) B) C) D)

$6.14 per unit $10.35 per unit $17.60 per unit Some other amount

93) Baskin Promotions, Incorporated sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 80,000 T-shirts: Sales Cost of Goods Sold Gross Profit Operating Expenses ($100,000 is fixed) Operating Income Income Taxes (30% of operating income) Net Income

$ 1,400,000 820,000 580,000 418,400 161,600 48,480 $ 113,120

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 60,000 T-shirts. What unit cost did Baskin use in budgeting the cost of goods sold for the year?

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A) B) C) D)

$6.00 per unit $10.25 per unit $17.50 per unit Some other amount

94) Baskin Promotions, Incorporated sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 81,000 T-shirts: Sales Cost of Goods Sold Gross Profit Operating Expenses ($100,000 is fixed) Operating Income Income Taxes (30% of operating income) Net Income

$ 1,418,310 831,060 587,250 422,380 164,870 49,461 $ 115,409

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 61,000 T-shirts. Assume Baskin actually achieves the 61,000 unit sales level, and that net income actually earned at this level was $72,300. A performance report would indicate that net income was: A) B) C) D)

$2,671 over budget. $43,109 under budget. $15,939 under budget. At the budgeted level.

95) Baskin Promotions, Incorporated sells T-shirts decorated for a variety of concert performers. The company has developed the following budget for the coming year based on a sales forecast of 80,000 T-shirts: Sales Cost of Goods Sold

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$ 1,400,000 820,000

Gross Profit Operating Expenses ($100,000 is fixed) Operating Income Income Taxes (30% of operating income) Net Income

580,000 418,400 161,600 48,480 $ 113,120

Cost of goods sold and variable operating expenses vary directly with sales, and the income tax rate is 30% at all levels of operating income. If the concert season is slow due to poor weather, Baskin estimates that sales could fall to as low as 60,000 T-shirts. Assume Baskin actually achieves the 60,000 unit sales level, and that net income actually earned at this level was $70,000. A performance report would indicate that net income was: A) B) C) D)

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$2,660 over budget. $43,120 under budget. $90,000 under budget. At the budgeted level.

Answer Key Test name: Chapter 23 Test Bank - Algorithmic and Static 1) TRUE 2) TRUE 3) FALSE 4) FALSE 5) FALSE 6) FALSE 7) FALSE 8) FALSE 9) FALSE 10) TRUE 11) TRUE 12) FALSE 13) TRUE 14) TRUE 15) FALSE 16) FALSE 17) TRUE 18) FALSE 19) TRUE 20) TRUE 21) TRUE 22) FALSE 23) FALSE 24) FALSE 25) TRUE 26) TRUE Version 1

27) C 28) B 29) A 30) A 31) B 32) A 33) B 34) C 35) B 36) B 37) D 38) D 39) C 40) A 41) C 42) C 43) D 44) D 45) C 46) C 47) C 48) B 49) B 50) B 51) D 52) C 53) B 54) C 55) B 56) B Version 1

57) B 58) B 59) B 60) C 61) B 62) C 63) C 64) A 65) D 66) C 67) B 68) B 69) C 70) C 71) D 72) B 73) D 74) D 75) C 76) A 77) A 78) A 79) A 80) C 81) A 82) C 83) D 84) B 85) C 86) B Version 1

87) D 88) A 89) C 90) B 91) B 92) B 93) B 94) A 95) A

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CHAPTER 24: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Define standard costs. Under what conditions should previously established standard costs be revised?

2) Listed below are seven technical accounting terms introduced or emphasized in this chapter:Labor rate varianceLabor efficiency varianceVolume varianceMaterials price varianceStandard costsMaterials quantity varianceOverhead spending varianceRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ____ (A) A materials variance, which is the responsibility of the Purchasing Department. ____ (B) The variance that exists whenever actual production levels differ from normal levels. ____ (C) Unit costs expected to be incurred under normal conditions. ____ (D) A labor variance caused by a difference between standard and actual hours required to complete a task. ____ (E) The variance caused by incurring more overhead costs than allowed for at a given level of production.

3) Explain how standard costs for direct labor are established and why this process should not be the sole responsibility of a company's cost accountant.

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4) Levron Corporation manufactures a line of cosmetics. The standard price of the ingredients in its beauty cream is $7 per ounce; the standard amount of material allowed per jar is 1.25 ounces. During December, 5,300 jars were produced, requiring 6,784 ounces of ingredients at a total direct materials cost of $37,312. Required: (A) Calculate the materials price variance for December. Indicate whether it is favorable (F) or unfavorable (U). (B) Identify who is responsible for this variance. (C) Calculate the materials quantity variance for December. Indicate whether it is favorable (F) or unfavorable (U). (D) Calculate the total materials variance for December. Indicate whether it is favorable (F) or unfavorable (U).

5) The following computations of March labor variances for Sam's Supply Company are incomplete. The missing items are labeled (A) through (D). Labor rate variance = 4,800 hours × [(A) − $8.50] = $350 favorable Labor efficiency variance = (B) × [5,000 hours – (C)] = $(D) Required: (A) In the table below, identify each missing item by name and the missing value. If the missing value is a variance, state whether it is favorable (F) or unfavorable (U).

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Name of Item

Value

(1) (2) (3) (4)

(B) During March, the supervisor left for vacation without arranging for a replacement. Which variance(s) would have been most affected by this situation?

6) Job Number 811 involved the production of 200 units of product MF. The total standard and actual costs for materials and direct labor on this job are shown below: Standard

Actual

Direct materials: Standard: 520 pounds @ $3.40 per pound

$ 1,768

Actual: 540 pounds @ $3.45 per pound

$ 1,863

Direct labor: Standard: 220 hours @ $10 per hour Actual: 213 hours @ $11 per hour

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$ 2,200 $ 2,343

Required: Compute the following cost variances for Job Number 811. Indicate whether each variance is favorable (F) or unfavorable (U). (A) Materials price variance (B) Materials quantity variance (C) Labor rate variance (D) Labor efficiency variance

7) The Hemlock Corporation produces a single product. The company has developed the following standards for labor and materials:

Standard quantity or hours per unit Standard price or rate Standard cost per unit

Direct Materials

Direct Labor

? pounds per unit

2.0 hours per unit $15 per hour $30.00

? per pound ?

During the past month, the company purchased 3,500 pounds of direct materials at a total cost of $4,550. All of this material was used in the production of 1,300 units of output. Direct labor cost totaled $40,300 for the month. The following variances have been computed: Materials quantity variance Total materials variance Labor efficiency variance

$ 670 unfavorable $ 325 favorable $ 3,475 favorable

Required: Compute the following. If the result is a variance indicate whether it is favorable or unfavorable. (If necessary, round your answers to one decimal point.) (A) The standard price of materials (B) The standard quantity of materials allowed per unit of output (C) The actual direct labor cost per hour for the month (D) The labor rate variance Version 1

8) The Deluxe Company purchased and used 2,900 yards of material in its manufacturing process. The actual cost of the materials was $2.20 per yard. Standard materials and costs were 2,700 yards at $2.00 per yard. Required: Compute each of the following variances and indicate whether each variance is favorable (F) or unfavorable (U): (A) Materials quantity variance (B) Materials price variance (C) Total material variance

9) Caesar, Incorporated purchased and used 47,600 pounds of goods to produce an actual quantity of 15,300 units. Each unit required 3 pounds of goods. The quantity variance was $10,200 unfavorable and the price variance was $7,140 unfavorable. Required: Compute each of the following. (Round your answers to two decimal points.) (A) Standard price per pound (B) Actual price

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10) Livingston Corporation recently implemented a standard cost system. The company's cost accountant has provided the following data to perform a variance analysis for May: Standard Cost Information Direct Material Standard Price Standard Quantity Allowed Per Unit Direct Labor Standard Rate Standard Hours Allowed Per Unit Fixed Overhead Budgeted Normal Level of Production Variable Overhead Application Rate Fixed Overhead Application Rate ($24,000÷12,000 units) Total Overhead Application Rate Actual Cost Information Cost of Material Purchased & Used

$ 12 per pound 4 pounds per unit $ 7 per hour 0.5 hours per unit $ 24,000 per month 12,000 units per month $ 1.80 per unit $ 2.00 per unit $ 3.80 per unit

$ 429,000

Pounds of Material Purchased & Used Cost of Direct Labor

39,000 pounds $ 23,100

Hours of Direct Labor Cost of Variable Overhead

4,200 hours $ 17,750

Cost of Fixed Overhead

$ 24,200

Actual Volume of Production

10,400

units

Required: Compute the following variances. Indicate whether each variance is favorable (F) or unfavorable (U). (A) Materials price variance (B) Materials quantity variance (C) Labor rate variance (D) Labor efficiency variance (E) Overhead spending variance (F) Overhead volume variance

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11) The cost of goods sold at standard cost for Field Company for the current year amounted to $425,000 and was 60% of net sales. As of the end of the year, the total of balances remaining in cost variance accounts was a net unfavorable cost variance of $8,000, which is not considered material.Required:(A) What is the amount shown in Field 's income statement for cost of goods sold? (B) What is the amount reported in Field 's income statement for gross profit on sales? (If required, round your answer to nearest whole dollar.)

12) During its first month of operations, the Beech Company charged Work in Process Inventory with $40,000 of direct materials, $46,000 of direct labor costs, and $80,000 of manufacturing overhead costs. Beech Company uses a standard cost system, and the variances at the end of this first month are as follows: Materials price variance (favorable) Materials quantity variance (unfavorable) Labour rate variance (favorable) Labour efficiency variance (favorable) Overhead spending variance (unfavorable) Overhead volume variance (favorable)

$ 3,500 F 500 U 2,000 F 2,500 F 1,900 U 1,300 F

Required:(A) Compute the actual cost of direct materials placed into production during the month. (B) Compute the actual cost of direct labor hours worked during this month. (C) Compute the actual cost of manufacturing overhead for this month. (D) Assume that the balance in the Work in Process account is $6,000 at the end of this first month and the total standard unit cost is $20 per unit. What is the number of units completed during this month and transferred to Finished Goods Inventory?

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13) Consider the following statement: "No manager should be held responsible for a volume variance."Required:Briefly explain why a volume variance should not be investigated and viewed as the responsibility of some manager in an organization.

14) Rogers Manufacturing produces a component part used throughout the computer industry. Variable overhead is allocated to production at a rate of $5 per unit. The company's monthly fixed overhead costs average $30,000. Normal output levels average 40,000 units per month. During April, Rogers produced 50,000 units and incurred actual overhead costs of $280,000.Required:(A) Compute the following and indicate whether any variances are favorable (F) or unfavorable (U): (1) Total overhead applied to production in April (2) Total overhead budgeted in April for the level of output achieved (3) Overhead spending variance for April (4) Overhead volume variance for April (B) For which of Rogers' two overhead variances is the production manager held responsible?

15)

Assume the following data for John Company's August operations.

Standard overhead per direct labor hour based on normal monthly capacity of 30,000 hours:

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Fixed($270,000/30,000 hours)

Variable($660,000/30,000 hours)

Direct labor hours actually worked in August Actual overhead costs incurred(including $270,000 fixed costs)

$31 28,000 hours $824,000

Required:Compute the following and indicate whether any variances are favorable (F) or unfavorable (U):(A) Amount of overhead applied to Work in Process during August (B) Total manufacturing overhead budgeted based on hours worked during August (C) Overhead spending variance for August (D) Overhead volume variance for August

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Answer Key Test name: Chapter 24 Test Bank (Problem Material) 1) A standard cost is the per-unit cost budgeted or expected to be incurred under normal, efficient conditions. Standard costs are estimated separately for materials, direct labor, and overhead used in each type of product that a company manufactures. Standard costs are established and revised each period during the budgeting process. Standard costs are continually reviewed and periodically revised if significant changes occur in production methods or in the prices paid for materials, labor, and overhead. 2) (A) Materials price variance (B) Volume variance (C) Standard costs (D) Labor efficiency variance (E) Overhead spending variance

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3) First, the specific direct labor requirements to produce each product must be identified. Once this has been accomplished, the setting of direct labor standards involves both the wage rate and the amount of time allowed to produce each product. Standard cost systems are influenced by complex relationships related to: cost, quality, prices, industry trends, seasonality, plant capacity, automation, overtime, motivation, and skill levels. The setting of reasonable direct labor standards often requires input from human resource managers, industrial engineers, union representatives, supervisors, cost accountants, and factory employees. Establishing realistic cost standards requires input from many different sources— often including people from outside of the business organization.

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4) (A) Materials price variance = Actual Quantity × (Standard Price − Actual Price) Materials price variance = 6,784 ounces × [$7 − ($37,312 ÷ 6,784)] Materials price variance = 6,784 ounces × ($7.00 − $5.50) = $10,176 F (B) Purchasing agent (C) Materials quantity variance = Standard Price × (Standard Quantity − Actual Quantity) Materials quantity variance = $7 per ounce × [(5,300 × 1.25) − 6,784 ounces] Materials quantity variance = $7 per ounce × (6,625 ounces − 6,784 ounces) = $1,113 unfavorable (D) Total materials variance = $10,176 F (from part A) − $1,113 unfavorable (from Part B) = $9,063 F Alternatively: Total materials variance = Standard cost of $46,375 (or 6,625 × $7) − Actual cost of $37,312 = $9,063 F 5) (A) Name of Item

Value

(1) Standard rate

$ 8.57

(2) Standard rate

$ 8.57

(3) Actual hours

4,800

(4) Labor efficiency variance

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$ 1,714 F

(A) (1) Labor rate variance = Actual hours × (Standard rate − Actual rate) $350 = 4,800 hours × (Standard rate − $8.50) $350 ÷ 4,800 = (Standard rate − $8.50) $0.07 + $8.50 = Standard rate of $8.57 (rounded) (A) (2) Labor efficiency variance = Standard rate × (Standard hours − Actual hours) Standard rate = $8.57 (See part (A) (1) for computation.) (A) (3) Actual hours = 4,800 (given in formula for labor rate variance) (A) (4) Labor efficiency variance = $8.57 × (5,000 hours − 4,800 hours) = $1,714 F (B) Labor efficiency variance 6) (A) 540 pounds × ($3.40 standard − $3.45 actual) = ($27) (that is $27 Unfavorable) (B) $3.40 × (520 pounds standard − 540 pounds actual) = ($68) (that is, $68 Unfavorable) (C) 213 hours × ($10 standard − $11 actual) = ($213) (that is, $213 Unfavorable) (D) $10 × (220 standard hours − 213 actual hours) = $70 F

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7) (A) Materials price variance = Total materials variance − Materials quantity variance Materials price variance = $325 − ($670) = $995 (Actual quantity × Actual price) − (Actual quantity × Standard price) = $995 $4,550 − (3,500 × Standard price) = $995 Standard price = $5,545 ÷ 3,500 = $1.58 (B) Materials quantity variance = Actual quantity × Standard price − Standard quantity × Standard price = $670 3,500 × $1.58 (from a) − (Standard quantity × $1.58) = $670 Standard quantity = ($5,530 − $670) ÷ $1.58 = 3,076 pounds Standard quantity per unit = 3,076 ÷ 1,300 = 2.37 pounds per unit (C) Labor efficiency variance = Actual hours × Standard rate − Standard hours × Standard rate = $3,475 F (Actual hours × $15) − (2 × (1,300)) × $15 = $3,475 Actual hours = ($39,000 − $3,475) ÷ $15 = 2,368.3 hours Actual rate = Actual direct labor cost ÷ Actual hours = $40,300 ÷ 2,368.3 = $17.02 per hour (D) Labor rate variance = Actual hours × Actual rate − Actual hours × Standard rate = $40,300 − $35,525 = $4,775 U 8) Actual × Actual Actual × Standard 2,900 × $2.20 = $6,380 2,900 × $2.00 = $5,800

Standard × Standard 2,700 × $2.00 = $5,400

(A) Materials quantity variance = $5,800 − $5,400 = $400 unfavorable (B) Materials price variance = $6,380 − $5,800 = $580 unfavorable (C) Total material variance = $400 + $580 = $980 unfavorable

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9) (A) Quantity variance = Standard price × (Actual quantity − Standard quantity) $10,200 U = Standard price × [47,600 − (15,300 × 3)] $10,200 U = Standard price × (47,600 − 45,900) $10,200 U = Standard price × 1,700 Standard price = $10,200 ÷ 1,700 = $6 (B) Price variance = Actual quantity × (Actual price − Standard price) $7,140 U = 47,600 × (Actual price − $6) $7,140 U = (47,600 × Actual price) − (47,600 × $6) $7,140 U = (47,600 × Actual price) − $285,600 $7,140 + $285,600 = 47,600 × Actual price $292,740 = 47,600 × Actual price Actual price = $278,460 ÷ 47,600 = $6.15 Actual Quantity × Actual Price 47,600 × $6.15= $292,740

Actual Quantity × Standard Price 47,600 × $6 = $285,600

Standard Quantity × Standard Price 45,900 × $6 = $275,400

Price variance = $7,140 UQuantity variance = 10,200 UMaterial variance $17,340 U 10) (A) 39,000 pounds × ($12 standard − $11 actual) = $39,000 F(B) $12 × (41,600 lbs. standard – 39,000 lbs. actual) = $31,200 F(C) 4,200 hours × ($7 standard − $5.50 actual) = $6,300 F(D) $7 × (5,200 hours standard – 4,200 hours actual) = $7,000 F(E) $42,720 budgeted − $41,950 actual = $770 F(F) $20,800 applied − $24,000 budgeted = −$3,200 U 11) (A) Cost of goods sold, at standard Add: Net unfavorable cost variance

$ 425,000 8,000

Cost of goods sold in income statement

$ 433,000

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(B) Net sales = $425,000 ÷ 0.60 = $708,333 (rounded) Gross profit = Net sales of $708,333 − Cost of goods sold of $433,000 (from part A) = $275,333 12) (A) $40,000 − $3,500 + $500 = $37,000(B) $46,000 − $2,000 − $2,500 = $41,500(C) $80,000 + $1,900 − $1,300 = $80,600(D) ($40,000 + $4,600 + $80,000 − $6,000) ÷ 2 = 8,000 units 13) As long as the production departments of an organization are producing the desired number of units, the volume variance does not indicate either efficient or inefficient production. The volume variance arises from fluctuations in the level of production from month to month. Such fluctuations may occur for a variety of reasons such as seasonal demand, scheduled vacation time, etc. Unless the producing departments fail to produce the scheduled number of units, no manager should be viewed as responsible for the volume variance. 14) (A) (1) Total overhead applied to production in April = [($30,000 ÷ 40,000 units) + $5] × 50,000 units = $287,500(A) (2) Total overhead budgeted in April for the level of output achieved = $30,000 + ($5 × 50,000 units) = $280,000(A) (3) Overhead spending variance = $280,000 budgeted − $280,000 actual = $0(A) (4) Overhead volume variance = $37,500 fixed overhead applied − $30,000 budgeted fixed overhead = $7,500 Favorable 15) (A)28,000 × $31 standard per hour = $868,000(B) Fixed (unaffected by level of activity) Variable (28,000 hours × $22)

$270,000 616,000

Total per flexible budget

$886,000

(C)Spending variance = overhead per flexible budget − actual overhead= $886,000 (part B) − $824,000 (given)= $62,000 favorable(D)Volume variance = overhead applied (standard rate) − overhead= per flexible budget= $868,000 (part A) − $886,000 (part B)= $18,000 unfavorable

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CHAPTER 24 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) A standard cost is the per unit cost actually incurred under normal operating conditions. ⊚ ⊚

true false

A good standard cost system should always generate unfavorable variances. ⊚ ⊚

true false

3) Standard cost systems are generally compatible with job cost systems or with process cost systems. ⊚ ⊚

true false

Standard costs actually are ideal costs per unit. ⊚ ⊚

true false

5) A standard cost is a budgeted or expected cost that can be used in conjunction with job order costing, process costing, or with activity-based costing systems. ⊚ ⊚

true false

6) Amounts charged to Work in Process during production are recorded at the standard costs for the number of units produced. ⊚ ⊚

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true false

7) In a standard cost system, actual manufacturing costs are charged to Work in Process as they are incurred. ⊚ ⊚

true false

8) In most companies using standard cost systems, the costs charged to Work in Process, Finished Goods, and Cost of Goods Sold are the actual manufacturing costs incurred. ⊚ ⊚

true false

9) In setting standards, management's level of performance expectation must be something less than ideal. ⊚ ⊚

10)

true false

Standard costs are typically reviewed once per year. ⊚ ⊚

true false

11) In setting standard costs, management's expectations are that the standard costs will always be met. ⊚ ⊚

12)

true false

The level of production plays an important role in determining cost standards. ⊚ ⊚

true false

13) A materials price variance is arrived at by taking standard quantity multiplied by actual price, less standard price.

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⊚ ⊚

true false

14) A materials quantity variance is the standard price multiplied by standard quantity, less actual quantity. ⊚ ⊚

15)

true false

A favorable variance would be credited to a cost variance account. ⊚ ⊚

true false

16) A labor efficiency variance relates to the number of hours actually worked, compared to the standard hours. ⊚ ⊚

17)

true false

Standard costs are established only for direct labor and direct materials. ⊚ ⊚

true false

18) The materials price variance is calculated by multiplying the difference between actual unit price and standard unit price by the standard units purchased. ⊚ ⊚

true false

19) The use of excessive quantities of material in manufacturing a product causes an unfavorable materials quantity variance. ⊚ ⊚

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true false

20) A favorable materials price variance indicates that actual prices paid in acquiring materials were more than standard prices. ⊚ ⊚

21)

true false

A favorable variance occurs when actual costs are less than standard costs. ⊚ ⊚

true false

22) A difference between a standard cost and an actual cost would be recorded in the Work in Process account. ⊚ ⊚

true false

23) A variance is said to be unfavorable when actual manufacturing costs exceed standard manufacturing costs. ⊚ ⊚

24)

true false

An unfavorable cost variance will be debited to a cost variance account. ⊚ ⊚

true false

25) A spending variance results from incurring more overhead costs than allowed for the actual level of activity achieved. ⊚ ⊚

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true false

26) The presence of fixed costs in manufacturing overhead causes the actual amount of manufacturing overhead per unit of output to vary, depending on the actual production volume attained. ⊚ ⊚

true false

27) It is possible for the overhead volume variance to be favorable and the overhead spending variance to be unfavorable. ⊚ ⊚

28)

true false

External auditors are often called upon to evaluate cost variances. ⊚ ⊚

true false

29) In evaluating cost variances, the accounting department determines whether variances are favorable or unfavorable. ⊚ ⊚

30)

The company's CEO is the only person who analyzes costs variances. ⊚ ⊚

31)

true false

The purchasing manager is often included in evaluating cost variances. ⊚ ⊚

true false

32) A total cost variance for materials can be caused by differences in the quantity used, or in the price paid, but not by both.

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⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 33) Variance accounts: A) Cause financial statements to be more comparable because different companies cost their inventories in the same manner. B) Can be recorded with great precision so that inventories are valued with complete accuracy. C) Cause a lower net income, resulting in lower income taxes. D) Assist management in controlling costs by quickly bringing differences in actual and expected costs to management’s attention.

34)

Standard costs:

A) May be used in job order cost systems but not in process cost accounting systems. B) Should be revised upward when actual manufacturing costs are higher than expected because of waste and inefficiency. C) Are the same for all companies in a given industry. D) Are the costs that should be incurred to produce a product under normal conditions.

35)

Which of the following is not an advantage of using a standard cost system?

A) It eliminates the need for analysis of variances. B) It can be used in conjunction with job order costing, process costing, or with activity-based costing systems. C) It provides managers with detailed information as to the nature and amount of the differences between actual manufacturing costs incurred and the standard manufacturing costs expected. D) It quickly directs management’s attention to situations in which outcomes differ from expectations.

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36)

Which statement is true regarding a standard cost system? A) B) C) D)

Both actual and standard costs are used. Only standard costs are used. If variances occur, then something negative in the operations has occurred. Standards are used only when actual amounts are not available.

37) In a system designed to measure cost variances, goods transferred from the Work in Process account to the Finished Goods Inventory are valued at: A) B) C) D)

38)

Actual cost. Market value. Standard cost. The lower of actual cost or market value.

A standard cost is the per-unit cost incurred under: A) B) C) D)

Ideal operating conditions. Perfect operating conditions. Normal, but efficient operating conditions. Minimally acceptable operating conditions.

39) The Starbright Corporation has compiled the following data. The company intends to use this information to develop standard costs per unit for its single product:Direct materials = $56 per tonDirect labor = $13.35 per hourVariable manufacturing overhead = $5.6 per direct labor hourFixed manufacturing overhead = $19,300Expected production = 2,000 unitsEach unit of the company's single product requires 2.5 tons of direct materials and 23.1 hours to manufacture. What is the standard cost for direct materials per unit for Starbright’s single product?

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A) B) C) D)

$56 per unit $106 per unit $156 per unit $140 per unit

40) The Starbright Corporation has compiled the following data. The company intends to use this information to develop standard costs per unit for its single product:Direct materials = $50 per tonDirect labor = $12.75 per hourVariable manufacturing overhead = $5 per direct labor hourFixed manufacturing overhead = $18,700Expected production = 1,700 unitsEach unit of the company’s single product requires 2.5 tons of direct materials and 22.5 hours to manufacture. What is the standard cost for direct materials per unit for Starbright's single product? A) B) C) D)

$50 per unit $100 per unit $150 per unit $125 per unit

41) The Starbright Corporation has compiled the following data. The company intends to use this information to develop standard costs per unit for its single product:Direct materials = $46 per tonDirect labor = $12.35 per hourVariable manufacturing overhead = $4.6 per direct labor hourFixed manufacturing overhead = $18,300Expected production = 1,500 unitsEach unit of the company's single product requires 2.0 tons of direct materials and 22.1 hours to manufacture. What is the standard cost for direct labor per unit for Starbright's single product? (Round your answer to the nearest dollar.) A) B) C) D)

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$86 per unit $273 per unit $166 per unit $271 per unit

42) The Starbright Corporation has compiled the following data. The company intends to use this information to develop standard costs per unit for its single product:Direct materials = $50 per tonDirect labor = $12.75 per hourVariable manufacturing overhead = $5 per direct labor hourFixed manufacturing overhead = $18,700Expected production = 1,700 unitsEach unit of the company’s single product requires 2.5 tons of direct materials and 22.5 hours to manufacture. What is the standard cost for direct labor per unit for Starbright's single product? (Round your answer to the nearest dollar.) A) B) C) D)

$100 per unit $287 per unit $180 per unit $285 per unit

43) The Starbright Corporation has compiled the following data. The company intends to use this information to develop standard costs per unit for its single product:Direct materials = $53 per tonDirect labor = $13.05 per hourVariable manufacturing overhead = $5.3 per direct labor hourFixed manufacturing overhead = $19,000Expected production = 1,850 unitsEach unit of the company's single product requires 2.0 tons of direct materials and 22.8 hours to manufacture. What is the standard total manufacturing overhead cost? A) B) C) D)

$120.84 $19,000 $298.00 $242,554

44) The Starbright Corporation has compiled the following data. The company intends to use this information to develop standard costs per unit for its single product:Direct materials = $50 per tonDirect labor = $12.75 per hourVariable manufacturing overhead = $5 per direct labor hourFixed manufacturing overhead = $18,700Expected production = 1,700 unitsEach unit of the company’s single product requires 2.5 tons of direct materials and 22.5 hours to manufacture. What is the standard total manufacturing overhead cost?

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A) B) C) D)

$191,250 $18,700 $487,900 $209,950

45) In establishing standard costs for labor, management must look at all of the following except: A) B) C) D)

46)

Time allowed to produce each product. Direct labor requirements for each product. The wage rate of a direct laborer. The quantity of materials for each product.

When standard costs are used in a cost accounting system:

A) A favorable cost variance results when standard amounts are less than actual costs. B) Cost variances are shown in the year-end balance sheet as assets, if favorable, or as liabilities, if unfavorable. C) Costs charged to the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts are actual costs. D) Costs charged to the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts are at standard budgeted amounts.

47) If the standard quantity of materials is 84,800 units at $0.15 per unit and the actual quantity is 95,300 units at $0.12 per unit, then the total materials cost variance is: A) B) C) D)

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$2,859 Favorable. $1,575 Unfavorable. $1,284 Favorable. $2,859 Unfavorable.

48) If the standard quantity of materials is 84,500 units at $0.15 per unit and the actual quantity is 95,000 units at $0.12 per unit, then the total materials cost variance is: A) B) C) D)

$2,850 Favorable. $1,575 Unfavorable. $1,275 Favorable. $2,850 Unfavorable.

49) If the standard quantity of materials is 84,200 units at $0.16 per unit and the actual quantity is 94,700 units at $0.13 per unit, then the materials quantity variance is: A) B) C) D)

$2,841 Favorable. $1,680 Unfavorable. $1,161 Favorable. $2,841 Unfavorable.

50) If the standard quantity of materials is 84,500 units at $0.15 per unit and the actual quantity is 95,000 units at $0.12 per unit, then the materials quantity variance is: A) B) C) D)

$2,850 Favorable. $1,575 Unfavorable. $1,275 Favorable. $2,850 Unfavorable.

51) If the standard quantity of materials is 84,000 units at $0.15 per unit and the actual quantity is 94,500 units at $0.12 per unit, then the materials price variance is: A) B) C) D)

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$2,835 Favorable. $1,575 Unfavorable. $1,260 Favorable. $2,835 Unfavorable.

52) If the standard quantity of materials is 84,500 units at $0.15 per unit and the actual quantity is 95,000 units at $0.12 per unit, then the materials price variance is: A) B) C) D)

$2,850 Favorable. $1,575 Unfavorable. $1,275 Favorable. $2,850 Unfavorable.

53) If the standard quantity of materials is 85,100 units at $0.15 per unit and the actual quantity is 95,600 units at $0.12 per unit, then the journal entry to record the cost of materials used includes: A) B) C) D)

A debit to Work in Process Inventory of $11,472. A debit to Work in Process Inventory of $12,765. A debit to Materials Price variance of $2,868. A credit to Materials Price variance of $1,575.

54) If the standard quantity of materials is 84,500 units at $0.15 per unit and the actual quantity is 95,000 units at $0.12 per unit, then the journal entry to record the cost of materials used includes: A) B) C) D)

A debit to Work in Process Inventory of $11,400. A debit to Work in Process Inventory of $12,675. A debit to Materials Price variance of $2,850. A credit to Materials Price variance of $1,575.

55) If actual direct labor cost was $7,560 and standard labor cost was $7,000, the journal entry to record this would include:

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A) A credit to the labor rate variance account of $560 and a credit to Direct Labor of $7,000. B) A debit to the labor rate variance account of $560 and a debit to Direct Labor of $7,000. C) A credit to the labor rate variance account of $560 and a debit to Direct Labor of $7,560. D) A debit to the labor rate variance account of $560 and a credit to Direct Labor of $7,560.

56)

There will be a favorable materials price variance if: A) B) C) D)

57)

Controlling the materials price variance is usually the responsibility of: A) B) C) D)

58)

The purchasing agent. The marketing director. The production supervisor. The cost accountant.

Controlling the materials quantity variance is usually the responsibility of: A) B) C) D)

59)

The standard price per unit is less than the actual price per unit. The standard price per unit is greater than the actual price per unit. The actual quantity purchased is greater than expected. The actual quantity purchased is less than expected.

The cost accountant. The purchasing agent. The marketing director. The production supervisor.

There is an unfavorable labor efficiency variance when:

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A) B) C) D)

Actual hours are greater than standard hours. Actual hours are less than standard hours. The standard rate per hour is greater than the actual rate per hour. The standard rate per hour is less than the actual rate per hour.

60) If the actual cost per pound of direct material is less than the standard cost per pound, there is: A) B) C) D)

61)

A favorable materials price variance. An unfavorable materials price variance. A favorable materials quantity variance. A favorable total materials variance.

The calculation of the labor rate variance is: A) B) C) D)

Standard Rate × (Standard Hours − Actual Hours). Standard Hours × (Standard Rate − Actual Rate). Actual Hours × (Standard Rate − Actual Rate). Actual Rate × (Standard Hours − Actual Hours).

62) If the actual amount of direct materials used in production was less than the standard amount allowed for units produced, there was: A) B) C) D)

A favorable materials price variance. A favorable total materials variance. A favorable materials quantity variance. An unfavorable materials quantity variance.

63) If the hourly wage rate actually paid during January is higher than the standard rate, the result is:

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A) B) C) D)

64)

An unfavorable labor rate variance. A favorable labor rate variance. An unfavorable labor efficiency variance. A favorable total labor variance.

The calculation of the labor efficiency variance is: A) B) C) D)

Standard Hourly Rate × (Standard Hours − Actual Hours). Standard Hours × (Standard Rate − Actual Rate). Actual Hours × (Standard Rate − Actual Rate). Actual Rate × (Standard Hours − Actual Hours).

65) Using more direct labor hours for units produced than the amount allowed by the standard results in: A) An unfavorable total labor variance. B) An unfavorable labor efficiency variance, regardless of the wage rate paid to employees. C) An unfavorable labor efficiency variance only if the wage rate is higher than standard cost allowed. D) A favorable labor rate variance, because the hourly wage rate is automatically reduced when workers operate less efficiently.

66) James Incorporated's flexible budget for June, based upon actual output, called for the use of 9,900 pounds of materials at a standard cost of $6.80 per pound. The Production Department actually used 10,100 pounds of materials costing $6.50 per pound during June. James's materials price variance for June is:

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A) B) C) D)

$2,970 Unfavorable. $2,970 Favorable. $3,030 Unfavorable. $3,030 Favorable.

67) James Incorporated’s flexible budget for June, based upon actual output, called for the use of 10,500 pounds of materials at a standard cost of $7.40 per pound. The Production Department actually used 10,700 pounds of materials costing $7.10 per pound during June. James's materials price variance for June is: A) B) C) D)

$3,150 Unfavorable. $3,150 Favorable. $3,210 Unfavorable. $3,210 Favorable.

68) James Incorporated's flexible budget for June, based upon actual output, called for the use of 10,900 pounds of materials at a standard cost of $7.80 per pound. The Production Department actually used 11,100 pounds of materials costing $7.50 per pound during June. The materials quantity variance for James's June operations is: A) B) C) D)

$3,270 favorable. $3,330 unfavorable. $1,560 unfavorable. $3,330 favorable.

69) James Incorporated’s flexible budget for June, based upon actual output, called for the use of 10,500 pounds of materials at a standard cost of $7.40 per pound. The Production Department actually used 10,700 pounds of materials costing $7.10 per pound during June. The materials quantity variance for James's June operations is:

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A) B) C) D)

$3,150 favorable. $3,210 unfavorable. $1,480 unfavorable. $3,210 favorable.

70) James Incorporated's flexible budget for June, based upon actual output, called for the use of 10,700 pounds of materials at a standard cost of $7.60 per pound. The Production Department actually used 10,900 pounds of materials costing $7.30 per pound during June. The journal entry to record the cost of direct materials used in June includes each of the following except: A) B) C) D)

A debit to Materials Quantity Variance of $1,520. A debit to Work in Process Inventory of $81,320. A credit to Direct Materials Inventory of $81,320. A credit to Materials Price Variance of $3,270.

71) James Incorporated’s flexible budget for June, based upon actual output, called for the use of 10,500 pounds of materials at a standard cost of $7.40 per pound. The Production Department actually used 10,700 pounds of materials costing $7.10 per pound during June. The journal entry to record the cost of direct materials used in June includes each of the following except: A) B) C) D)

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A debit to Work in Process Inventory of $77,700. A credit to Materials Price Variance of $3,210. A credit to Direct Materials Inventory of $77,700. A debit to Materials Quantity Variance of $1,480.

72) Greenleaf's flexible budget for June, based on actual output, called for the use of 10,000 square feet of materials at a standard cost of $9.90 per square foot. Company records show that the actual price paid for the materials used in June was $9.70 per square foot, and that the direct materials price variance for the month was $2,090 favorable. The materials quantity variance for Greenleaf's June operations was: A) B) C) D)

$1,000 favorable. $4,455 unfavorable. $4,365 favorable. Impossible to determine from the data given.

73) Maple Company's flexible budget, based upon the number of equivalent units produced, called for the use of 5,000 square yards of fabric at a standard cost of $2.45 per square yard. The Production Department actually used 5,200 square yards costing $2.35 per square yard during June. The materials price variance for Maple Company for June is: A) B) C) D)

$520 favorable. $990 favorable. $30 unfavorable. $520 unfavorable.

74) Maple Company's flexible budget, based upon the number of equivalent units produced, called for the use of 5,000 square yards of fabric at a standard cost of $2.45 per square yard. The Production Department actually used 5,200 square yards costing $2.35 per square yard during June. The materials quantity variance for Maple Company for June is: A) B) C) D)

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$990 favorable. $520 unfavorable. $490 unfavorable. $520 favorable.

75) Maple Company's flexible budget, based upon the number of equivalent units produced, called for the use of 5,000 square yards of fabric at a standard cost of $2.45 per square yard. The Production Department actually used 5,200 square yards costing $2.35 per square yard during June. The journal entry to record the cost of direct materials used in June includes: A) B) C) D)

A debit to Work in Process Inventory of $12,220. A credit to Materials Price Variance of $520. A debit to Materials Price Variance of $520. A credit to Direct Materials Inventory of $12,250.

76) Maple Company's flexible budget, based upon the number of equivalent units produced, called for the use of 5,000 square yards of fabric at a standard cost of $2.45 per square yard. The Production Department actually used 5,200 square yards costing $2.35 per square yard during June. With respect to materials costs, the supervisor of the Production Department should be held responsible for: A) B) C) D)

A favorable cost variance of $520. A favorable cost variance of $990. An unfavorable cost variance of $550. An unfavorable cost variance of $490.

77) Roman Manufacturing's July production involved actual direct labor costs of $46,287 for 3,700 direct labor hours. The budget for the July level of production called for 3,800 direct labor hours at $12.50 per hour, using a standard cost system. With respect to labor costs, Roman's production manager is responsible for:

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A) B) C) D)

Any labor rate variance as well as any labor efficiency variance. Only a labor rate variance. Only a labor efficiency variance. Only unfavorable labor variances.

78) Roman Manufacturing's July production involved actual direct labor costs of $36,921 for 3,100 direct labor hours. The budget for the July level of production called for 3,200 direct labor hours at $11.90 per hour, using a standard cost system. Roman's labor rate variance for July is: A) B) C) D)

$1,190 favorable. $1,159 favorable. $31 unfavorable. $1,159 unfavorable.

79) Roman Manufacturing's July production involved actual direct labor costs of $46,287 for 3,700 direct labor hours. The budget for the July level of production called for 3,800 direct labor hours at $12.50 per hour, using a standard cost system. Roman's labor rate variance for July is: A) B) C) D)

$1,250 favorable. $1,213 favorable. $37 unfavorable. $1,213 unfavorable.

80) Roman Manufacturing's July production involved actual direct labor costs of $38,432 for 3,200 direct labor hours. The budget for the July level of production called for 3,300 direct labor hours at $12.00 per hour, using a standard cost system. Roman's labor efficiency variance for July is:

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A) B) C) D)

$1,200 favorable. $1,168 favorable. $1,168 unfavorable. $32 unfavorable.

81) Roman Manufacturing's July production involved actual direct labor costs of $46,287 for 3,700 direct labor hours. The budget for the July level of production called for 3,800 direct labor hours at $12.50 per hour, using a standard cost system. Roman's labor efficiency variance for July is: A) B) C) D)

$1,250 favorable. $1,190 favorable. $1,213 unfavorable. $37 unfavorable.

82) Roman Manufacturing's July production involved actual direct labor costs of $46,287 for 3,700 direct labor hours. The budget for the July level of production called for 3,800 direct labor hours at $12.50 per hour, using a standard cost system. Which of the following is the most likely explanation for the types of labor variances resulting from Roman's July operations? A) Management used workers who received a higher wage and worked more efficiently. B) Management reduced the wage rates in July, which caused the workers to deliberately slow down productivity. C) Management used less experienced workers whose lower wage rate more than offset their lower productivity. D) Management paid workers more than standard hourly rates, but the excess pay did not result in increased productivity.

83)

Eagle Company uses a standard cost system that has provided the following data:

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Units of output manufactured Direct labor Standard hours allowed Standard wage rate Actual direct labor

2hours per unit of product $ 15.20per hour 180 hours, total cost of $3,096

The direct labor rate variance for the period was: A) B) C) D)

84)

$664 favorable. $360 favorable. $360 unfavorable. $664 unfavorable.

Eagle Company uses a standard cost system that has provided the following data:

Units of output manufactured Direct labor Standard hours allowed Standard wage rate Actual direct labor

2 hours per unit of product $16 per hour 180 hours, total cost of $3,240

The direct labor rate variance for the period was: A) B) C) D)

85)

$425 favorable. $360 favorable. $360 unfavorable. $425 unfavorable.

Eagle Company uses a standard cost system that has provided the following data:

Units of output manufactured Direct labor Standard hours allowed Standard wage rate Actual direct labor

2 hours per unit of product $16.80 per hour 200 hours, total cost of $3,760

The direct labor efficiency variance for the period was:

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A) B) C) D)

86)

$400 favorable. $400 unfavorable. $336 favorable. $336 unfavorable.

Eagle Company uses a standard cost system that has provided the following data:

Units of output manufactured Direct labor Standard hours allowed Standard wage rate Actual direct labor

2 hours per unit of product $16 per hour 180 hours, total cost of $3,240

The direct labor efficiency variance for the period was: A) B) C) D)

87)

$360 favorable. $360 unfavorable. $320 favorable. $320 unfavorable.

Eagle Company uses a standard cost system that has provided the following data:

Units of output manufactured Direct labor Standard hours allowed Standard wage rate Actual direct labor

2 hours per unit of product $16.10 per hour 190 hours, total cost of $3,439

The journal entry to record the cost of direct labor used in this period includes: A) B) C) D)

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A debit to Work in Process Inventory of $3,059. A debit to Work in Process Inventory of $2,737. A credit to Direct Labor Rate Variance of $380. A credit to Direct Labor Rate Variance of $322.

88)

Eagle Company uses a standard cost system that has provided the following data:

Units of output manufactured Direct labor Standard hours allowed Standard wage rate Actual direct labor

2 hours per unit of product $16 per hour 180 hours, total cost of $3,240

The journal entry to record the cost of direct labor used in this period includes: A) B) C) D)

89)

The use of inexpensive, low quality materials often results in: A) B) C) D)

90)

A debit to Work in Process Inventory of $2,880. A debit to Work in Process Inventory of $2,560. A credit to Direct Labor Rate Variance of $320. A credit to Direct Labor Rate Variance of $360.

A favorable materials quantity variance. A favorable labor rate variance. An unfavorable materials quantity variance. An unfavorable materials price variance.

Excessive overtime hours worked by direct labor workers often results in: A) B) C) D)

An unfavorable labor rate variance. A favorable labor rate variance. A favorable materials price variance. An unfavorable materials price variance.

91) Variance account balances, if small in amount, are normally closed at the end of the period to the:

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A) accounts. B) C) D)

Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold Cost of Goods Sold account. Work in Process Inventory and Finished Goods Inventory accounts. Finished Goods Inventory, and Cost of Goods Sold accounts.

92) Variance account balances that are material in amount are normally closed at the end of the period to the: A) B) accounts. C) D)

93)

Cost of Goods Sold account. Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold Work in Process Inventory and Finished Goods Inventory accounts. Finished Goods Inventory, and Cost of Goods Sold accounts.

A material variance account balance at the end of the year should be:

A) Carried forward to the next fiscal year. B) Shown as other income in the income statement. C) Added to cost of goods sold in the income statement. D) Apportioned among the Work in Process Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts.

94) In a standard cost system, the cost of completed units transferred from Work in Process Inventory to Finished Goods Inventory is recorded at: A) B) C) D)

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Standard cost. Actual cost. Standard cost plus the variance from actual cost. Standard cost minus the variance from actual cost.

95) EJB Company used a "normal" production level of 10,000 units to determine the standard per-unit cost of manufacturing overhead. Which of the following statements is not true? A) There is no overhead volume variance for a given month if actual production that month is 10,000 units. B) When actual production exceeds 10,000 units, use of standard costs results in a favorable overhead volume variance. C) When actual production is less than 10,000 units, use of standard costs results in an unfavorable total overhead variance. D) Overhead variances arising as a result of producing more or less than 10,000 units do not indicate either strong or poor performance by the Production Department.

96)

The total overhead variance is the difference between: A) B) C) D)

97)

Factory overhead variances are usually recorded when: A) B) C) D)

98)

Budgeted overhead and applied overhead. Actual overhead and budgeted overhead. Actual overhead and applied overhead. Applied overhead and budgeted overhead.

Overhead is applied to Work in Process. Goods are finished and transferred to finished goods inventory. Goods are sold. Actual factory overhead costs are incurred.

A supervisor's salary is an example of: A) B) C) D)

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Direct labor. Variable factory overhead. A standard cost. Fixed manufacturing costs.

99)

The overhead spending variance:

A) Occurs automatically whenever actual production levels differ from the "normal" production level used to compute the standard overhead cost per unit. B) Is the difference between amounts spent for actual manufacturing overhead costs and the amount applied to production. C) Is computed as the difference between variable overhead per the flexible budget and actual variable overhead costs incurred. D) Is the portion of the total overhead variance that is considered "controllable" by the production manager.

100) Cooper Corporation produces decorator wall coverings. Budgeted production is 240,000 square feet per month, and the standard direct labor requirement to make this amount is 6,000 hours. All overhead is allocated based on direct labor hours. The following information is available:

Production in units Total labor hours Total variable overhead Total fixed overhead

Budgeted Actual Results Amounts 228,000 288,000 5,700 7,200 $ 8,550 $ 10,800 $ 5,130 $ 5,510

Total overhead

$ 13,680

$ 16,310

The journal entry to apply overhead to Work in Process Inventory for the month included: A) B) C) D)

A debit to Work in Process Inventory of $16,310. A debit to Work in Process Inventory of $13,680. A debit to Work in Process Inventory of $17,280. A credit to Work in Process Inventory of $970.

101) Cooper Corporation produces decorator wall coverings. Budgeted production is 240,000 square feet per month, and the standard direct labor requirement to make this amount is 6,000 hours. All overhead is allocated based on direct labor hours. The following information is available:

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Production in units Total labor hours Total variable overhead Total fixed overhead

Budgeted Actual Results Amounts 240,000 300,000 6,000 7,500 $ 9,000 $ 11,200 $ 4,500 $ 4,800

Total overhead

$ 13,500

$ 16,000

The journal entry to apply overhead to Work in Process Inventory for the month included: A) B) C) D)

A debit to Work in Process Inventory of $16,000. A debit to Work in Process Inventory of $13,500. A debit to Work in Process Inventory of $16,875. A credit to Work in Process Inventory of $875.

102) Cooper Corporation produces decorator wall coverings. Budgeted production is 240,000 square feet per month, and the standard direct labor requirement to make this amount is 6,000 hours. All overhead is allocated based on direct labor hours. The following information is available:

Production in units Total labor hours Total variable overhead Total fixed overhead

Budgeted Actual Results Amounts 200,000 260,000 5,000 6,500 $ 7,500 $ 9,750 $ 6,250 $ 6,700

Total overhead

$ 13,750

$ 16,450

The overhead spending variance for the month in question was: A) B) C) D)

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$450 unfavorable. $2,700 unfavorable. $1,425 favorable. $4,125 unfavorable.

103) Cooper Corporation produces decorator wall coverings. Budgeted production is 240,000 square feet per month, and the standard direct labor requirement to make this amount is 6,000 hours. All overhead is allocated based on direct labor hours. The following information is available:

Production in units Total labor hours Total variable overhead Total fixed overhead

Budgeted Actual Results Amounts 240,000 300,000 6,000 7,500 $ 9,000 $ 11,200 $ 4,500 $ 4,800

Total overhead

$ 13,500

$ 16,000

The overhead spending variance for the month in question was: A) B) C) D)

$250 unfavorable. $2,500 unfavorable. $875 favorable. $3,375 unfavorable.

104) Cooper Corporation produces decorator wall coverings. Budgeted production is 240,000 square feet per month, and the standard direct labor requirement to make this amount is 6,000 hours. All overhead is allocated based on direct labor hours. The following information is available:

Production in units Total labor hours Total variable overhead Total fixed overhead Total overhead

Budgeted Actual Results Amounts 276,000 336,000 6,900 8,400 $ 10,350 $ 12,600 $ 8,280 $ 8,620 $ 18,630

$ 21,220

The overhead volume variance for the month in question was: A) B) C) D)

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$340 unfavorable. $1,800 favorable. $4,050 favorable. $1,800 unfavorable.

105) Cooper Corporation produces decorator wall coverings. Budgeted production is 240,000 square feet per month, and the standard direct labor requirement to make this amount is 6,000 hours. All overhead is allocated based on direct labor hours. The following information is available:

Production in units Total labor hours Total variable overhead Total fixed overhead

Budgeted Actual Results Amounts 240,000 300,000 6,000 7,500 $ 9,000 $ 11,200 $ 4,500 $ 4,800

Total overhead

$ 13,500

$ 16,000

The overhead volume variance for the month in question was: A) B) C) D)

106)

$250 unfavorable. $1,125 favorable. $3,375 favorable. $1,125 unfavorable.

An unfavorable overhead volume variance results from: A) B) C) D)

An unfavorable overhead spending variance. Poor decisions made by the production manager. Producing at levels of output that exceed normal output levels. Producing at levels of output that fall short of normal output levels.

107) If fewer units are produced than had been estimated when standard unit costs were determined, there would normally be: A) B) C) D)

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A favorable labor efficiency (usage) variance. An unfavorable overhead volume variance. A favorable materials quantity variance. An unfavorable overhead spending variance.

108)

An unfavorable volume variance in a factory is generally: A) B) C) D)

The responsibility of the production manager. Viewed as an idle capacity loss. The result of actual volume exceeding normal volume. Treated as part of the controllable factory overhead variance.

109) The Victor Corporation has been incurring favorable overhead volume variances in each of the last several months. These persistent favorable variances indicate: A) B) C) D)

110)

Victor's management is unusually efficient. The overhead application rate should be revised upward. Monthly output is consistently under budget. Monthly output is consistently over that budgeted.

Overhead volume variances indicate: A) B) C) D)

Efficient performance. Inefficient performance. Fluctuations in the level of production from month to month. Inadequate budgeting.

111) A large unanticipated reduction in the property taxes on a company's factory would, all other things equal, most likely cause: A) B) C) D)

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A favorable overhead spending variance. An unfavorable overhead spending variance. A favorable overhead volume variance. An unfavorable overhead volume variance.

112) An unfavorable labor rate variance could most likely result from all of the following except: A) B) laborers. C) D)

Producing at levels of output that exceed normal output levels. Using highly skilled laborers to perform tasks normally performed by unskilled Having laborers work excessive overtime hours. Using outdated standard cost figures.

113) Dawson Company has a union contract that calls for an 8% cost of living increase in the wages paid to all factory workers as of July 1 of the current year. This suggests that: A) B) C) D)

114)

The labor rate variance for July will be unfavorable. The labor rate variances during the first half of the current year have been favorable. The standard labor cost per unit should be revised as of July 1. The labor efficiency variance for July will be unfavorable.

An unfavorable labor efficiency variance is most likely to occur if: A) B) C) D)

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Employees are paid at an overtime wage rate. Employees are inefficient and units must be reworked. Labor cost per unit exceeds materials costs per unit. Employee turnover rates are low.

Answer Key Test name: Chapter 24 Test Bank - Algorithmic and Static 1) FALSE 2) FALSE 3) TRUE 4) FALSE 5) TRUE 6) TRUE 7) FALSE 8) FALSE 9) TRUE 10) FALSE 11) FALSE 12) TRUE 13) FALSE 14) TRUE 15) TRUE 16) TRUE 17) FALSE 18) FALSE 19) TRUE 20) FALSE 21) TRUE 22) FALSE 23) TRUE 24) TRUE 25) TRUE 26) TRUE Version 1

27) TRUE 28) FALSE 29) TRUE 30) FALSE 31) TRUE 32) FALSE 33) D 34) D 35) A 36) A 37) C 38) C 39) D 40) D 41) B 42) B 43) D 44) D 45) D 46) D 47) C 48) C 49) B 50) B 51) A 52) A 53) B 54) B 55) D 56) B Version 1

57) A 58) D 59) A 60) A 61) C 62) C 63) A 64) A 65) B 66) D 67) D 68) C 69) C 70) C 71) C 72) B 73) A 74) C 75) B 76) D 77) A 78) C 79) C 80) A 81) A 82) A 83) C 84) C 85) D 86) D Version 1

87) B 88) B 89) C 90) A 91) B 92) B 93) D 94) A 95) C 96) C 97) A 98) D 99) D 100) C 101) C 102) A 103) A 104) B 105) B 106) D 107) B 108) B 109) D 110) C 111) A 112) A 113) C 114) B

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CHAPTER 25: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight accounting terms introduced or emphasized in this chapter:Balanced score cardStock optionsCapital turnoverEconomic value addedResidual incomeReturn on investmentReturn on salesValue chainRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided, indicate the accounting term described, or answer "none" if the statement does not correctly describe any of the terms. (a) _______ is the amount by which operating earnings exceeds a minimum acceptable return on the average invested capital. The minimum rate of return represents the opportunity cost of using the invested capital. (b) ______ is the operating income divided by the average invested capital associated with the generation of that income. (c) _______ is computed by dividing the operating income by the total sales for a particular business segment or product line. It tells managers the amount of earnings generated from a dollar of sales. (d) _______ give an employee the right to purchase a pre-specified number of shares at a prespecified price within a certain future time period. They provide incentives for managers to increase stock prices. (e) _______ is the set of activities necessary to create and distribute a desirable product or service to a customer. (f) _______ is a specific type of residual income. It is computed by multiplying weighted average cost of capital by total assets minus current liabilities, and subtracting that product from the after-tax operating income. (g) _______ is a measure created by dividing sales by the average invested capital to generate those sales. It tells managers the amount of sales generated by a dollar of invested capital. (h) _______ is a system for performance measurement that links a company's strategy to specific goals, assesses progress towards those goals, and measures specific initiatives to achieve those goals. It is a systematic attempt to create a business performance measurement process that integrates objectives across four business lenses to achieve the organization's strategic goals.

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2) Define the measurement model known as the DuPont system used for evaluating business performance.

The following information regarding the Duncan Company is available:

Sales Cost of Sales Operating Expenses Operating Earnings Average Invested Capital ROI Return on Sales Capital Turnover

(A) $ 110,500 $ 208,000 $ 78,000 (B) (C) (D) 40%

Required: Compute the missing amounts (A) through (D). (Round your percentage answers to the nearest whole percent.)

The following information is available for the Hancock Company.

Sales Cost of Sales Operating Expenses Operating Earnings Average Invested Capital Minimum Acceptable Return Residual Income

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$ 756,000 $ 315,000 $ 252,000 (A) $ 1,890,000 12% (B)

Capital Turnover ROI

Required: Compute the missing amounts (A) through (D).

5) Briefly describe the primary reason for using a performance measure such as return on investment (ROI) and identify three primary criticisms of using ROI as the only business performance measure.

6) Define the terms, residual income and economic value added, and briefly describe their impact on motivation.

7) Briefly describe the balanced scorecard and identify the four lenses that are linked to the firm’s strategy.

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Explain the importance of incentive systems for motivating performance.

9) Identify and explain the components of management compensation and the tradeoffs that compensation designers make.

10) Briefly describe the four difficulties that arise when using a balanced scorecard and explain how an organization can avoid some of these difficulties.

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Answer Key Test name: Chapter 25 Test Bank (Problem Material) 1) (a) Residual income(b) Return on investment(c) Return on sales(d) Stock options(e) Value chain(f) Economic value added(g) Capital turnover(h) Balanced scorecard 2) The DuPont measures return on investment by dividing the operating earnings of a product line or division by the average invested capital used in that product line or division. The DuPont System breaks up ROI into its components: Profitability (return on sales) and turnover (sales/investment). 3) (A) $110,500 + $208,000 + $78,000 = $396,500(B) Let AIC equal Average Invested Capital$396,500 ÷ AIC = 40%$396,500 ÷ 0.4 = $991,250(C) $78,000 ÷ $991,250 = 8% (rounded)(D) $78,000 ÷ $396,500 = 20% (rounded) 4) (A) $756,000 − $315,000 − $252,000 = $189,000(B) $189,000 − (0.12 × $1,890,000) $189,000 − $226,800 = ($37,800)(C) $756,000 ÷ $1,890,000 = 40%(D) $189,000 ÷ $1,890,000 = 10%

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5) The primary reason for using any performance measurement criteria such as ROI is to motivate employees to make decisions consistent with the goals and objectives of the organization. ROI motivates managers to earn the highest possible profits while using the minimum amount of average invested capital. Thus, managers who are measured and rewarded only on their divisions’ ROI may decide to increase profits and decrease capital in their divisions in ways that are inconsistent with the best interests of the whole company.The first criticism is the short horizon problem that occurs because managers frequently move from one job to another. As a result, many people believe ROI encourages a short-term orientation to the detriment of longer-term planning. A second problem with using ROI as the only business performance measure is that, under some circumstances, it presents an incentive for a manager to reject a good project that would increase the ROI for the firm as a whole. The project rejection occurs when investing in the project would reduce the division’s ROI. A third criticism of ROI is the inherent difficulty in measuring both the average invested capital and the actual operating earnings associated with that capital. Many units within an organization share invested capital, and often the allocation of capital between those units is arbitrary. 6) Residual income is the amount by which operating earnings exceeds a minimum acceptable return on the average invested capital. Economic value added (EVA) is a refinement of the residual income measure that makes many adjustments for items like taxes, interest, and amortization. Like residual income, EVA does not motivate managers to turn down investments that are expected to earn a return below their current ROI, as long as it is above the minimum acceptable return to the firm.

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7) The balanced scorecard is a system for performance measurement that links a company’s strategy to specific goals and objectives, provides measures for assessing progress toward those goals, and indicates specific initiatives to achieve those goals. It is a systematic attempt to create a business performance measurement process that integrates objectives across the span of the value chain. The main objective of the balanced scorecard is achieving the organization’s strategic goals. The balanced scorecard looks at firm performance through four lenses: (1) the traditional financial perspective; (2) a customer perspective; (3) a business process perspective; and (4) a learning and growth perspective. 8) Employees may have goals and objectives that differ from those of the organization. Incentive systems provide a tool that helps align employee goals with those of the organization by drawing attention to the organization's goals, by choosing to measure particular components of performance, and by rewarding employees for the actual outcomes associated with those components of performance being measured. 9) In creating management compensation plans, designers consider multiple characteristics such as fixed salary versus bonuses and the type of bonuses (cash, stock or stock options, for example). In addition, numerous design trade-offs are available such as choices related to the time horizon over which compensation is available, choosing to emphasize local versus global performance, or choosing a cooperative or a competitive incentive scheme.

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10) Companies using the balanced scorecard have identified several difficulties in using the four lenses described. First, organizations have difficulty assessing the importance or weights attached to the various perspectives that are part of the scorecard. Second, measuring, quantifying, and evaluating some of the qualitative components that are part of the balanced scorecard present significant technical hurdles. A third difficulty arises from a lack of clarity and sense of direction because of the large number of performance measures used in the four perspectives. Finally, scorecard users suggest that the time and expense required to maintain and operate a fully designed and functioning balanced scorecard system can be significant. Organizations can avoid some of these difficulties by limiting the number of measures used in each perspective and focusing on critical business issues. In choosing the measures to be used with the balanced scorecard, management should select those measures that present the best evidence for cause and effect linkages and those that can have a significant impact on achieving the organization’s strategy. At any point in time trade-offs are likely to exist between the various strategic goals identified in the balanced scorecard.

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CHAPTER 25 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Return on investment (ROI) tells us how much earnings can be expected for the average invested dollar. ⊚ ⊚

true false

2) Most organizations try to achieve their goals by providing incentives to employees who use resources wisely. ⊚ ⊚

true false

3) Accounting systems do not offer any benefit to management in generating and focusing employee motivation. ⊚ ⊚

true false

Capital turnover is equal to sales divided by average invested capital. ⊚ ⊚

true false

5) Return on investment indicates the profitability that can be expected from one dollar of sales. ⊚ ⊚

true false

6) To increase return on sales, a manager could decrease cost of goods sold while increasing revenues. ⊚ ⊚

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true false

7) Capital turnover can be improved by reducing invested capital while keeping sales constant. ⊚ ⊚

true false

8) The return on investment is calculated by multiplying the capital turnover by the return on sales. ⊚ ⊚

Capital turnover is calculated by dividing operating income by average invested capital. ⊚ ⊚

10)

true false

Operating earnings rather than net income is used to compute return on sales. ⊚ ⊚

true false

11) A common criticism of capital ROI as a performance measurement criterion is that it encourages a long-term orientation sometimes to the detriment of shorter-term planning. ⊚ ⊚

12)

true false

Using only ROI as a business performance measure often leads to the best decisions. ⊚ ⊚

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true false

13) Residual income is calculated by subtracting the minimum acceptable return on the average invested capital from the operating income. ⊚ ⊚

true false

14) Residual income is the difference between net operating income at breakeven and actual net operating income. ⊚ ⊚

15)

true false

EVA stands for "evaluating value added" performance. ⊚ ⊚

true false

16) The balanced scorecard approach attempts to measure whether an organization is meeting its strategic goals. ⊚ ⊚

true false

17) The value chain consists of only those activities that increase the selling price of a product as it is distributed to a customer. ⊚ ⊚

true false

18) The main objective of the balanced scorecard system of performance measurement is achieving the organization's strategic goals. ⊚ ⊚

19)

true false

The value chain starts with the supplier and ends with the consumer.

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⊚ ⊚

true false

20) A stock option is a right to sell a certain number of shares at a specific price sometime in the future. ⊚ ⊚

true false

21) Stock based performance evaluation of managers is considered riskier than accounting based performance evaluation. ⊚ ⊚

22)

true false

Bonuses may be used to reward employees who meet performance goals. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 23) Which of the following accounting system characteristics cannot generate motivation? A) B) C) D)

24)

Creating and setting goals Measuring progress towards those goals Allocating rewards towards goal achievement Balancing debits and credits

The Parry Company provided the following information regarding its operations:

Total assets

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End of Year 1

End of Year 2

$ 43,000,000 Year 1

$ 48,000,000 Year 2

Net operating income Net sales

$ 868,000 2,175,000

$ 918,000 2,750,000

What is Parry's ROI for Year 2? (Round your answer to 2 decimal places.) A) B) C) D)

25)

1.91% 3.73% 2.02% 3.52%

The Parry Company provided the following information regarding its operations:

Total assets

Net operating income Net sales

End of Year 1

End of Year 2

$ 50,000,000 Year 1

$ 55,000,000 Year 2

$ 875,000 2,525,000

$ 925,000 3,100,000

What is Parry's ROI for Year 2? (Round your answer to 2 decimal places.) A) B) C) D)

26)

1.50% 2.72% 1.76% 1.82%

The Lastrom Company provided the following information regarding its operations:

Total assets

Net operating income Net sales

End of Year 1

End of Year 2

$ 65,000,000 Year 1

$ 70,000,000 Year 2

$ 1,775,000 4,025,000

$ 1,825,000 4,600,000

What is Lastrom's ROI for Year 2? (Round your answer to 2 decimal places.)

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A) B) C) D)

27)

2.70% 4.23% 2.63% 4.12%

The Lastrom Company provided the following information regarding its operations:

Total assets

Net operating income Net sales

End of Year 1

End of Year 2

$ 75,000,000 Year 1

$ 80,000,000 Year 2

$ 1,875,000 4,525,000

$ 1,925,000 5,100,000

What is Lastrom's ROI for Year 2? (Round your answer to 2 decimal places.) A) B) C) D)

28)

2.48% 2.72% 2.40% 2.50%

Which of the following is not a way an accounting system can generate motivation?

A) The accounting system can help create and set goals through the budgeting process. B) The accounting system can introduce punitive measures for employees that do not achieve goals, for example, limiting pay. C) The accounting system can provide feedback and progress updates periodically. D) The accounting system can provide information to allocate rewards appropriately.

29)

Which ratio tells managers about how the invested capital is generating sales dollars?

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A) B) C) D)

30)

Return on investment Receivable turnover Capital turnover Return on sales

The return on investment is calculated by: A) B) C) D)

Multiplying the capital turnover by the return on sales. Dividing the capital turnover by the return on sales. Dividing average invested capital by sales. Multiplying operating income by capital turnover.

31) Which of the following measures the amount of sales dollars generated from each dollar of capital invested in assets? A) B) C) D)

Return on sales Return on investment Accounts receivable turnover Capital turnover

32) Which of the following is not one of the components of the DuPont system for measuring and evaluating business performance? A) B) C) D)

33)

Return on sales Return on investment Inventory turnover Capital turnover

The following information regarding Mahen, Incorporated is available:

Sales

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$ 1,950,000

Cost of goods sold Operating expenses Operating income Average invested capital

1,350,000 540,000 60,000 2,950,000

What is the return on investment for Mahen, Incorporated? (Round your answer to 2 decimal places.) A) B) C) D)

34)

20.34% 2.03% 3.08% 30.77%

The following information regarding Mahen, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,500,000 900,000 450,000 150,000 2,500,000

What is the return on investment for Mahen, Incorporated? A) B) C) D)

35)

5% 6% 10% 20%

The following information regarding Mahen, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,900,000 1,300,000 530,000 70,000 2,900,000

What is the return on sales for Mahen, Incorporated? (Round your answer to 2 decimal places.)

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A) B) C) D)

36)

20.69% 2.41% 3.68% 31.58%

The following information regarding Mahen, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,500,000 900,000 450,000 150,000 2,500,000

What is the return on sales for Mahen, Incorporated? A) B) C) D)

37)

5% 6% 10% 20%

The following information regarding Mahen, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,700,000 1,100,000 490,000 110,000 2,700,000

What is the capital turnover for Mahen, Incorporated? (Round your answer to 2 decimal places.) A) B) C) D)

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35.29% 4.07% 6.47% 62.96%

38)

The following information regarding Mahen, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,500,000 900,000 450,000 150,000 2,500,000

What is the capital turnover for Mahen, Incorporated? A) B) C) D)

39)

166% 5% 10% 60%

The following information regarding Brookes, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,440,000 630,000 540,000 270,000 2,062,500

What is the return on investment for Brookes, Incorporated? (Round your percentage answer to the nearest whole percent.) A) B) C) D)

40)

70% 19% 13% 9%

The following information regarding Brookes, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

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$ 1,440,000 630,000 540,000 270,000 2,062,500

What is the return on sales for Brookes, Incorporated? (Round your percentage answer to the nearest whole percent.) A) B) C) D)

41)

13% 19% 9% 70%

The following information regarding Brookes, Incorporated is available:

Sales Cost of goods sold Operating expenses Operating income Average invested capital

$ 1,440,000 630,000 540,000 270,000 2,062,500

What is the capital turnover for Brookes, Incorporated? (Round your percentage answer to the nearest whole percent.) A) B) C) D)

38% 54% 70% 86%

42) Clancy Stores has sales of $1,624,000, cost of sales of $663,000, and operating expenses of $302,000. What is Clancy's return on sales? (Round your answer to 2 decimal places.) A) B) C) D)

59.17% 40.83% 59.42% 40.58%

43) Clancy Stores has sales of $1,574,000, cost of sales of $653,000, and operating expenses of $292,000. What is Clancy's return on sales?

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A) B) C) D)

44)

58.5% 41.5% 60% 40%

Dwyer Company's ROI is 6% and its return on sales is 16%. What is its capital turnover? A) B) C) D)

3% 37.5% 300% Some other percentage

45) Morgan Company has a ROI of 5% and a capital turnover of 8%. What is its return on sales? A) B) C) D)

133% 75% 62.5% Some other percentage

46) A system that considers the earnings per sales dollar and the investment used to generate those sales dollars is called: A) B) C) D)

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The economic value added system. The balanced scorecard system. The DuPont system. The residual income system.

47) Division Y of the Mortisen Company produces and sells two products. Each product's operating income and average capital resources are shown below:Product A: Operating Income $470,000 Average capital $4,850,000 Product B: Operating Income $320,000 Average capital $3,950,000 What is division Y's ROI for product A? (Round your answer to 2 decimal places.) A) B) C) D)

11.90% 9.69% 6.60% 8.10%

48) Division Y of the Mortisen Company produces and sells two products. Each product's operating income and average capital resources are shown below: Product A: Operating Income $500,000 Average capital $5,000,000 Product B: Operating Income $350,000 Average capital $4,100,000 What is division Y's ROI for product A? A) B) C) D)

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12.0% 10.0% 11.0% 12.5%

49) Division Y of the Mortisen Company produces and sells two products. Each product's operating income and average capital resources are shown below:Product A: Operating Income $600,000 Average capital $5,500,000 Product B: Operating Income $450,000 Average capital $4,600,000 What is division Y's ROI for product B? (Round your percentage answer to 2 decimal places.) A) B) C) D)

13.04% 10.91% 9.78% 8.18%

50) Division Y of the Mortisen Company produces and sells two products. Each product's operating income and average capital resources are shown below: Product A: Operating Income $500,000 Average capital $5,000,000 Product B: Operating Income $350,000 Average capital $4,100,000 What is division Y's ROI for product B? (Round your percentage answer to the nearest whole percent.) A) B) C) D)

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12% 10% 9% 13%

51) Division Y of the Mortisen Company produces and sells two products. Each product's operating income and average capital resources are shown below: Product A: Operating Income $500,000 Average capital $5,000,000 Product B: Operating Income $350,000 Average capital $4,100,000 Assuming division Y's manager has an opportunity to undertake an investment that would require a $500,000 investment and yield $40,000 in net operating income for its product B, what would the ROI be for the entire division? (Round your percentage answer to the nearest whole percent.) A) B) C) D)

52)

11% 10% 9% 8%

The primary reason for using a performance measure, such as ROI, is to: A) Motivate organizations to embrace strategic plans that are consistent with employee

goals. B) Motivate the CEO and CFO to maintain their stock holdings in the company. C) Motivate employees to make decisions consistent with goals and objectives of the organization. D) Motivate employees to hold stock in the company for long-term periods.

53)

Which of the following is not a criticism of using ROI as the only performance measure?

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A) It may incentivize short-term decisions at the expense of long-term planning. B) It may incentivize decisions that are effective at the division-level, but not necessarily at the enterprise-level. C) It may incentivize employees to act in ways that are consistent with the overall goals and objectives of the organization. D) It may be too reliant on subjective or arbitrary allocations of capital.

54) In an effort to boost his department's ROI, the manager of an automobile repair shop prioritizes repairs that use his department's car lift (its major capital investment). However, the car company's CEO would actually prefer that a more comprehensive approach to car repairs be used across multiple departments. The CEO's favored approach would be better for the company overall, although it would hurt the department manager's personal ROI. Which of the following would be an appropriate response? A) No response is needed. The manager should continue to prioritize his own ROI. B) The company should eliminate ROI entirely from its performance evaluations since it can be so easily abused. C) The company should combine multiple divisions together so ROI is better aligned with the CEO's goals. D) The company should consider adopting multiple performance measures, in addition to ROI, to evaluate the department manager's performance in line with the company's overall objectives.

55) Which of the following statements is most correct about Return on Investment, Economic Value Added, and Residual Income? A) B) C) D)

56)

ROI was developed in response to criticisms levied against EVA. RI is a refinement of the EVA measure. ROI is a refinement of the RI measure. EVA and RI were developed in response to criticisms levied against ROI.

Residual income can be defined as:

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A) Income remaining after dividends are paid out. B) Operating earnings minus return on investment. C) Operating earnings plus a minimum acceptable return times average invested capital. D) Operating earnings minus a minimum acceptable return times average invested capital.

57)

Calculate the residual income assuming the following information:

Operating earnings Minimum acceptable return Invested capital

A) B) C) D)

58)

$148,500 $106,150 $236,500 $42,350

Calculate the residual income assuming the following information:

Operating earnings Minimum acceptable return Invested capital

A) B) C) D)

59)

$ 385,000 11% $ 1,350,000

$ 375,000 12% $ 1,300,000

$156,000 $108,000 $219,000 $45,000

In considering customer needs, the balanced scorecard method will look at:

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A) B) C) D)

Market share growth and customer retention. Return on sales and sales turnover. Residual income and return on investment. Organizational procedures and information systems.

60) The set of activities necessary to create and distribute a desirable product or service to a customer is known as: A) B) C) D)

61)

A customer perspective. Business process perspective. Balanced scorecard. Value chain.

The value chain usually starts with the ________ and ends with the ________. A) B) C) D)

Supplier, customer. Retailer, wholesaler. Customer, retailer. Retailer, customer.

62) Which of the following is not a measure used by the financial perspective lens of the balanced scorecard? A) B) C) D)

ROI EVA Residual income Net operating income

63) Which of the following is not one of the strategies of the financial perspective lens of the balanced scorecard?

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A) B) C) D)

64)

Improve shareholder perspectives Improve credit rating Improve customer relations Reduce risk

Which of the following is not one of the balanced scorecard lenses? A) B) C) D)

Financial perspective Learning and growth perspective Production perspective Business process perspective

65) Which of the following is not a strategy of the learning and growth lens of a balanced scorecard? A) B) C) D)

Improve retention of employees Improve customer relations Improve employee productivity Increase new product development

66) One of the strategies of the business process perspective lens of the balanced scorecard is to improve the quality of the manufacturing process. Which of the following is not one of the measures? A) B) C) D)

Employee turnover Machine downtime Percent of orders filled Scrap as a percentage of raw materials

67) Which of the following statements correctly describes management compensation options? Version 1

A) Most managers do not receive a fixed salary component as part of their compensation; instead their compensation is based solely on bonuses and incentives. B) Perquisites (perks) are rarely used to hire and retain employees. C) Bonuses are typically awarded for meeting or achieving specific goals. D) Stock options and awards are part of the fixed salary compensation of manager compensation.

68) Which of the following is not an example of a "perk" that might be part of a management compensation package? A) The company provides stock options to its senior-level employees when they meet certain performance objectives. B) A furnished apartment provided to the CEO so she does not have to commute each day. C) Chauffeured transportation to and from an executive's home so he may review reports during his commute. D) Round-trip airfare on the company's private jet is available for all executive-level supervisors so they may oversee multiple geographical divisions of the company.

69)

Management compensation plans:

A) May be affected by adopting International Financial Reporting Standards since IFRS-based earnings are typically higher than U.S. GAAP earnings. B) May be affected by adopting International Financial Reporting Standards since IFRS-based earnings are typically lower than U.S. GAAP earnings. C) Will not be affected by IFRS since IFRS-based earnings are equivalent to U.S. GAAP earnings. D) Are decided by shareholders who do not consider U.S. GAAP or IFRS when deciding how much compensation managers receive.

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Answer Key Test name: Chapter 25 Test Bank - Algorithmic and Static 1) TRUE 2) TRUE 3) FALSE 4) TRUE 5) FALSE 6) TRUE 7) TRUE 8) TRUE 9) FALSE 10) TRUE 11) FALSE 12) FALSE 13) TRUE 14) FALSE 15) FALSE 16) TRUE 17) FALSE 18) TRUE 19) TRUE 20) FALSE 21) TRUE 22) TRUE 23) D 24) C 25) C 26) A Version 1

27) A 28) B 29) C 30) A 31) D 32) C 33) B 34) B 35) C 36) C 37) D 38) D 39) C 40) B 41) C 42) D 43) D 44) B 45) C 46) C 47) B 48) B 49) C 50) C 51) C 52) C 53) C 54) D 55) D 56) D Version 1

57) C 58) C 59) A 60) D 61) A 62) D 63) C 64) C 65) B 66) A 67) C 68) A 69) A

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CHAPTER 26: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are eight technical accounting terms introduced or emphasized in this chapter.Capital budgetingPayback periodDiscountingAnnuityReturn on average investmentAverage investmentIncremental cash flowsNet present valueRequired: Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms.____ (a) The process of analyzing investments in plant assets. ____ (b) The number of years required to recover the entire cost of an investment from its net cash flows. ____ (c) A stream of equal cash flows to be received or paid. ____ (d) The estimated average annual income of an investment expressed as a percentage of its average initial cost. ____ (e) The numerator in the return on average investment computation. ____ (f) The amount an investor should be willing to pay today for the right to receive a specified amount of cash at a specified future date. ____ (g) The process of computing the present value of future cash flows.

2) What factors should be taken into consideration when appraising the adequacy of the rate of return of a capital investment proposal?

3) Carter and Company is trying to decide which of two investments they should consider. The following information is available:

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Cost Salvage value Annual cash flow

Investment A

Investment B

$ 400,000 0 104,000

$ 600,000 40,000 160,000

Each investment is expected to have a useful life of 5 years. Required: (A) What is the rate of return on average investment of (1) Investment A and (2) Investment B? (B) What is the payback period of (1) Investment A and (2) Investment B? (Round your answers to two decimal points.)

4) Redman Company is considering an investment in new machinery. The details of the investment are as follows: Cost of the machinery

$ 250,000

Annual cash flows

$ 75,000

Useful life Residual value

4 Years $ 25,000

The company uses straight-line depreciation for its machinery. The company uses a discount rate of 12% in evaluating all capital investments. (Note: The present value of $1 for 4 years at 12% is 0.636. The present value of an ordinary annuity for $1 for 4 years at 12% is 3.037.) Required: (A) What is the payback period? (Round your answer to one decimal place.) (B) What is the rate of return on average investment? (Round your percentage answer to one decimal place.) (C) What is the net present value? (D) Would you advise the company to invest in this machinery? Why or why not?

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5) Consider the following information: The present value of $1 at a 10% compound interest rate for five years is 0.621.The present value of $1 at 10% received annually for five years is 3.791.The present value of $1 at 10% received annually for six years is 4.355, and the present value of $1 due six years hence at 10% is 0.564.Required: Determine the present value of the following cash flows discounted at an annual rate of 10%: (A) $96,000 to be received five years from today (B) $37,000 to be received annually for five years (C) $58,000 to be received annually for six years, with an additional $16,000 salvage value to be received at the end of the sixth year

6) Consider the use of the payback method to evaluate capital investment decisions.Required: What are the major shortcomings of relying too heavily upon the payback period in evaluating capital investment decisions?

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7) Zhang Corporation is considering investing $190,000 in equipment to produce a new product. Useful service life of the equipment is estimated to be 5 years, with zero salvage value. Straight-line depreciation is used. The company estimates that production and sale of the new product will increase net income by $65,000 a year.Required:Determine each of the following. (Round your years and percentage answers to one decimal place.)(A) The payback period(B) The expected rate of return

8) A project costing $80,000 has an estimated life of 3 years and no salvage value. The estimated net income and net after tax cash flows from the project are as follows: Year

Net After-Tax Income

1 2 3

$ 20,000 35,000 25,000 $ 80,000

Net After Tax-Cash Flow $ 35,000 50,000 45,000 $ 130,000

The company uses straight-line depreciation. The company's minimum desired rate of return for discounted cash flow analysis is 10%. (Note: The present value of $1 at compound interest of 10% at 1, 2, and 3 years is 0.909, 0.826, and 0.751, respectively. The present value of a $1 annuity for three years at 10% is 2.487.)Required: Compute each of the following: (A) Net present value of the project (B) Return on average investment (Round your intermediate calculations and your final answer, stated as a percentage, to two decimal points.)

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9) Golden Flights, Incorporated is considering buying some specialized machinery, which would enable the company to obtain a six-year government contract for the design and engineering of a futuristic plane. The machinery costs $975,000 and must be destroyed for security reasons at the end of the six-year contract period. The estimated annual operating results of the project are as follows: Revenue from sales under the contract

$ 975,000

Expenses other than depreciation

$ 560,000

Depreciation (straight-line basis)

162,500

Increase in net income from government contract

(722,500) $ 252,500

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.The company uses a discount rate of 12% in evaluating all capital investments. (Note: An annuity table shows that the present value of $1 received annually for six years discounted at 12% is 4.111.) Required: Compute each of the following: (A) Payback period (B) Return on average investment (Round your intermediate calculations and your final answer, stated as a percentage, to one decimal point.) (C) Net present value of the investment in this machinery

10) Carry-Along is debating whether or not to invest in new equipment to manufacture a line of high-quality luggage. The new equipment would cost $850,000, with an estimated four-year life and no salvage value. The estimated annual operating results with the new equipment are as follows: Revenue from sales of new luggage line Expenses other than depreciation

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$925,000 $625,000

Depreciation (straight-line basis)

250,000

Increase in net income from the new line

(875,000) $50,000

All revenue from the new luggage line and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. The company uses a discount rate of 12% in evaluating all capital investments. (Note: An annuity table shows that the present value of $1 received annually for four years discounted at 12% is 3.037.)Required:Compute the following for the investment in the new equipment to produce the new luggage line: (A) Annual cash flow (B) Payback period (C) Return on average investment (Round your intermediate calculations and your final answer, stated as a percentage, to one decimal point.) (D) Total present value of the expected future annual cash flows (E) Net present value of the proposed investment

11) Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000 and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows: Incremental revenue

$ 180,000

Incremental expenses: Expenses other than depreciation

$ 85,000

Depreciation (straight-line basis)

38,000

Incremental net income

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(123,000) $ 57,000

All revenue and expenses other than depreciation will be received and paid in cash. The company uses a discount rate of 6% in evaluating all capital investments. (Note: The present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360.)Required: Compute the following for this proposal. (A) Annual net cash flow(B) Payback period (Round your answer to one decimal place.)(C) Return on average investment(D) Net present value

12) Mason Company is evaluating two alternative investment proposals. Below are data for each proposal: Proposal A Initial investment cost

$ 84,000

Estimated useful life Estimated salvage value

5 years $ 4,000

Estimated annual net income

$ 8,200

Proposal B $ 96,000 6 years -0$ 8,000

The following information was taken from present value tables: Present Value $1 due in 5 years, discounted at 12% $1 due in 6 years, discounted at 12% $1 received annually for 5 years, discounted at 12% $1 received annually for 6 years, discounted at 12%

0.567 0.507 3.605 4.111

All revenue and expenses other than depreciation will be received and paid in cash. The company uses a discount rate of 12% in evaluating all capital investments.Required:(A) Compute the following for each proposal:(1) Annual net cash flow(2) Payback period (Round your answers to two decimal points.)(3) Average investment(4) Return on average investment (Round your percentage answers to one decimal point.)(5) Net present value(B) Based on your analysis, which proposal appears to be the best investment? Version 1

13) The computation of return on average investment ignores one characteristic of the earnings stream, which is considered in discounting cash flows. What is this characteristic? Why is it important?

14) Briefly discuss the reasons that a company's management would conduct a regular capital budget audit.

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Answer Key Test name: Chapter 26 Test Bank (Problem Material) 1) (a) Capital budgeting (b) Payback period (c) Annuity (d) Return on average investment (e) None* (f) None* (g) Discounting*(e) This statement describes average annual net income. *(f) This statement describes present value. 2) In appraising the adequacy of a rate of return, an investor should consider the cost of capital, the rates of return of alternate investment opportunities, the risks associated with various opportunities, and the non-financial aspects that surround the investments under consideration.

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3) (A) (1) [$104,000 − ($400,000 ÷ 5)] ÷ ($400,000 ÷ 2) $24,000 ÷ $200,000 = 12% (A) (2) [$160,000 − (($600,000 − $40,000) ÷ 5)] ÷ [($600,000 + $40,000) ÷ 2] $48,000 ÷ $320,000 = 15% (B) (1) $400,000 ÷ $104,000 = 3.85 years (B) (2) $600,000 ÷ $160,000 = 3.75 years 4) (A) Payback period = $250,000 ÷ $75,000 = 3.3 years(B)Rate of return = [$75,000 − ($250,000 − $25,000) ÷ 4] ÷ ($250,000 + $25,000) ÷ 2$18,750 ÷ $137,500 = 13.6%(C) $ 75,000 × 3.037 $ 25,000 × 0.636 Total

= =

$ 227,775 15,900 243,675

Less: Investment

250,000

Net present value

$ (6,325)

(D) The company should not invest in the new machinery. This analysis indicates that the present value of the new machinery’s future cash flows, discounted at a rate of 12%, amounts to $243,675. This is the maximum amount that the company could invest in these machines and still expect to earn the required annual return of 12%. As the actual cost of the investment is $250,000, the machines have the potential to earn a rate of return that is less than the required rate of return of 12%. 5) (A) $96,000 × 0.621 = $59,616(B) $37,000 × 3.791 = $140,267(C) ($58,000 × 4.355) + ($16,000 × 0.564) = $252,590 + $9,024 = $261,614

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6) The major shortcomings of the payback period as a capital budgeting criterion are (1) it ignores the total life of an investment and, therefore, ignores the investment's total profitability potential, and (2) it ignores the timing of future cash flows and, therefore, ignores important present value implications. 7) (A)Annual cash flow = Net income of $65,000 + Depreciation expense of $38,000 = $103,000Cost of $190,000 ÷ Annual cash flow of $103,000 = 1.8 years (rounded)(B) Average net income ÷ Average investment = $65,000 ÷ $95,000 = 68.4% 8) (A)Net present value = [($35,000 × 0.909) + ($50,000 × 0.826) + ($45,000 × 0.751)] − $80,000 = $26,910(B)Average annual net income = $80,000 ÷ 3 = $26,666.67 (rounded)Average investment = ($80,000 − $0) ÷ 2 = $40,000Return on average investment = $26,66.67 ÷ $40,000 = 66.67% (rounded) 9) (A)Annual cash flow = $975,000 − $560,000 = $415,000orNet income from contract = $252,500 + Depreciation $162,500 = $415,000Payback period = Investment of $975,000 ÷ Annual cash flow of $415,000 = 2.34 years(B)Return on average investment = $252,500 Net income increase ÷ ($975,000 ÷ 2) = 51.8% (rounded)(C)Present value of annual cash flows = Annual cash flows of $415,000 × 4.111 = $1,706,065Net present value = Present value of annual cash flows of $1,706,065 − Investment of $975,000 = $731,065 10) (A)Annual cash flow = $925,000 expected revenue − $625,000 cash expenses = $300,000(B)Payback period = $850,000 investment ÷ $300,000 cash flow (part A) = 2.83 years(C)Return on average investment = $50,000 increase in net income ÷ ($850,000 ÷ 2) = 11.8% (rounded)(D)Total present value of expected future annual cash flows = $300,000 (from part A) × 3.037 = $911,100 total present value(E)Net present value of proposed investment = $911,100 (from part D) − $850,000 investment = $61,100 Version 1

11) (A)Annual cash flow = $180,000 incremental revenue − $85,000 other expenses = $95,000(B)Payback period = $450,000 investment ÷ $95,000 (part A) = 4.7 years(C)$57,000 incremental net income / ($450,000 + $70,000)/2 average investment = 21.92%(D) Present value of annual cash flows ($95,000 × 7.360) Present value of salvage value ($70,000 × 0.558) Total present value Less: Cost of Investment

$ 699,200 39,060 $ 738,260 (450,000)

Net present value of proposal

$ 288,260

12) (A) (1)<br> Proposal A

Proposal B

Estimated annual net income Annual depreciation expense

$ 8,200 6,000

$ 8,000 16,000

Annual net cash flow

$ 24,200

$ 24,000

(A) (2)Proposal A: $84,000 investment ÷ $24,200 net cash flow = 3.47 yearsProposal B: $96,000 investment ÷ $24,000 net cash flow = 4.00 years(A) (3) Initial investment cost Estimated salvage value

Average investment

Proposal A

Proposal B

$ 84,000 4,000 $ 88,000

$ 96,000 -0$ 96,000

$ 44,000

$ 48,000

(A) (4)Proposal A:$8,200 income ÷ $44,000 average investment =18.6% (rounded)Proposal B:$8,000 income ÷ $48,000 average investment =16.7% (rounded)(A) (5)Proposal A: Proposal A Present value of annual cash flows ($24,200 × 3.605) Present value of salvage value ($4,000 × 0.567) Total present value Less: Cost of investment

$ 87,241 2,268 $ 89,509 (84,000)

Net present value (Proposal A)

$ 5,509

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Proposal B: Proposal B Present value of annual cash flows ($24,000 × 4.111) Less: Cost of investment

$ 98,664 (96,000)

Net present value (Proposal B)

$ 2,664

(B) From the foregoing analysis, Proposal A appears to be the best investment. As indicated by the higher return on average investment and greater net present value, Proposal A is the more profitable investment. 13) Discounting cash flows takes into consideration the timing of the earnings stream. The return on average investment is based upon average annual earnings and, therefore, does not distinguish between income received early or late in the life of the investment. Discounting cash flows recognizes the "time value of money"—the economic fact that receiving a given cash flow in the near future is preferable to receiving the same cash flow in the more distant future. 14) A company will conduct a capital budget audit in order to guard against overly optimistic or pessimistic estimates in the capital budgeting process. Such estimates arise because employees are frequently evaluated on outcomes that depend on the amount and type of capital investments chosen. If employees realize that a capital budget audit will be undertaken, they will be less likely to furnish biased estimates of quantities central to the capital budgeting calculations.

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CHAPTER 26 TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false. 1) Capital investment refers to large expenditures to purchase plant assets, develop new products, or sell more company stock. ⊚ ⊚

true false

2) The acquiring of a subsidiary company by a publicly traded company would be an example of a capital expenditure. ⊚ ⊚

true false

3) Capital investments are difficult, if not impossible, to reverse once funds have been invested. ⊚ ⊚

true false

Capital budgeting estimates often involve a considerable degree of uncertainty. ⊚ ⊚

true false

5) The impact of a capital budgeting decision upon the environment is an example of a nonfinancial consideration. ⊚ ⊚

true false

Non-financial factors are relevant in capital budgeting. ⊚ ⊚

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true false

Nonfinancial considerations are not accounted for in capital budgeting decisions. ⊚ ⊚

true false

Most capital budgeting techniques involve analysis of net operating profits. ⊚ ⊚

true false

9) The annual net cash flow of an investment refers to the excess revenue it generates over its related expenses. ⊚ ⊚

true false

10) The payback period can be determined by multiplying the amount invested by net cash flows received annually. ⊚ ⊚

true false

11) To determine the average investment over the life of an asset, divide the total depreciation of the investment by two. ⊚ ⊚

true false

12) The present value of a future cash flow is the amount you would pay today for the right to receive that future amount. ⊚ ⊚

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true false

13) The payback period analysis fails to consider the cash flows over the entire life of the investment. ⊚ ⊚

true false

14) A failure of the return on average investment method is that no consideration is given to the time value of money. ⊚ ⊚

15)

true false

The present value of money is always less than its future value. ⊚ ⊚

true false

16) The difference between the present value and future value depends on the rate of interest and the length of time that interest accumulates. ⊚ ⊚

true false

17) The residual value of an asset should be subtracted from the cost of the asset when determining the average amount invested. ⊚ ⊚

18)

true false

In capital budgeting, one may use estimates in making decisions. ⊚ ⊚

true false

19) Perhaps the most important financial considerations in a capital budgeting decision are the decision's effects upon future cash flow and future profitability.

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⊚ ⊚

true false

20) The payback period considers total profitability over the life of an investment and takes into consideration the timing of an investment's future cash flows. ⊚ ⊚

true false

21) When straight-line depreciation is used, the average carrying value of an asset with no salvage value is equal to the asset's original cost divided by its estimated useful life. ⊚ ⊚

true false

22) The return on average investment computation ignores the timing of an investment's future cash flows. ⊚ ⊚

true false

23) In capital budgeting, the investment proposal with the shortest payback period always has the highest rate of return. ⊚ ⊚

true false

24) In considering investment in new plant assets, the payback period is computed without regard to the total useful life of the investment. ⊚ ⊚

25)

true false

A short payback period is preferred so that the investment's costs can be put to other uses.

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⊚ ⊚

true false

26) The net present value of an investment proposal is the difference between the total present value of future net cash flows and the cost of the investment. ⊚ ⊚

true false

27) When the net present value is greater than zero, the investment's rate of return is less than the discount rate. ⊚ ⊚

true false

28) The recognition of depreciation expense often causes the annual net income of an investment to be less than the amount of its annual net cash flows. ⊚ ⊚

true false

29) The discount rate used in discounting cash flows from proposed investments is usually the rate of return required by the investor. ⊚ ⊚

true false

30) When the net present value of an investment is positive, the investment should always be accepted. ⊚ ⊚

true false

31) The higher the required rate of return of an investment, the less an investor will be willing to pay for the investment.

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⊚ ⊚

32)

Results of capital budgeting processes may have serious implications for employees. ⊚ ⊚

33)

true false

The reliability of estimates is a critical factor in capital budget proposals. ⊚ ⊚

34)

true false

Capital budget audits are often undertaken to ensure the accuracy of cash flow estimates. ⊚ ⊚

true false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 35) Which of the following is not considered a capital investment? A) B) C) D)

36)

The purchase of a large machine. The development of a new product line. The purchase of a large order of raw materials used in the production process. The acquisition of a subsidiary company.

Capital investment decisions are not affected by: A) B) C) D)

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Income taxes. Nonfinancial considerations. Depreciation methods. Inventory levels.

37) The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 30%. Currently, sales are $830,000 per year and cost of sales are 65% of sales. The equipment is expected to last for 4 years with no residual value. The cash outflow expected at the beginning of the year is $289,200.By how much would Terme’s annual gross profit increase if the investment is undertaken? A) B) C) D)

$830,000 $87,150 $249,000 $161,850

38) The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 25%. Currently, sales are $750,000 per year and cost of sales are 55% of sales. The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the beginning of the year is $357,500.By how much would Terme's annual gross profit increase if the investment is undertaken? A) B) C) D)

$750,000 $84,375 $187,500 $103,125

39) The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 30%. Currently, sales are $720,000 per year and cost of sales are 60% of sales. The equipment is expected to last for 6 years with no residual value. The cash outflow expected at the beginning of the year is $427,200.What is the amount of depreciation deduction the company could expense annually assuming the straight-line depreciation method is used? A) B) C) D)

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$71,200 $60,000 $28,480 $42,720

40) The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 25%. Currently, sales are $750,000 per year and cost of sales are 55% of sales. The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the beginning of the year is $357,500.What is the amount of depreciation deduction the company could expense annually assuming the straight-line depreciation method is used? A) B) C) D)

$75,000 $41,250 $71,500 $30,250

41) The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 25%. Currently, sales are $810,000 per year and cost of sales are 55% of sales. The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the beginning of the year is $360,500.Ignoring income taxes, what is the estimated annual net operating income increase/decrease? A) B) C) D)

$91,125 decrease $19,025 increase $72,100 decrease $202,500 increase

42) The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 25%. Currently, sales are $750,000 per year and cost of sales are 55% of sales. The equipment is expected to last for 5 years with no residual value. The cash outflow expected at the beginning of the year is $357,500.Ignoring income taxes, what is the estimated annual net operating income increase/decrease? A) B) C) D)

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$9,375 decrease $12,875 increase $43,125 decrease $54,125 increase

43)

Capital investment proposals may not be evaluated by using: A) B) C) D)

44)

The payback period. The return on investment method. The discounted cash flow method. The income statement method.

When management considers an investment, they look for the payback period to be: A) B) C) D)

Short. Long. Profitable. Useful.

45) A company is considering an investment in a machine that costs $140,000. The machine has a 5-year life and no residual value and will be depreciated using the straight-line method. The machine is expected to increase the annual net income by $35,000. The payback period of this investment would be: A) B) C) D)

46)

2.2 years. 4 years. 5 years. 2 years.

Which of the following is generally not considered a capital budgeting technique? A) B) C) D)

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Payback period Return on average investment Return on stockholders' equity Discounted future cash flows

47)

A cost that has been incurred irrevocably by past actions is a(n): A) B) C) D)

Capital expenditure. Incremental cost. Sunk cost. Fixed cost.

48) The selection of an appropriate discount rate for determining net present value of a particular investment proposal does not depend upon: A) B) C) D)

49)

The present value of the proposal's future cash flows. Alternative investment opportunities available. The nature of the investment proposal. The investor's cost of capital.

The payback period:

A) Is the length of time necessary to recover the entire cost of an investment from its resulting annual net cash flow. B) Is the length of time necessary to recover the entire cost of an investment from its resulting annual net income. C) Takes into consideration the profitability of an investment over its entire life, but ignores the timing of its future cash flows. D) Takes into consideration both the profitability of an investment over its entire life and the timing of its future cash flows.

50)

Which of the following factors does the payback method consider?

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A) B) C) D)

Total profitability of an investment The cash flows over the entire life of an investment The timing of cash flows The initial investment

51) Of the following techniques of capital budgeting, which one explicitly incorporates an estimate of an interest rate into the basic computation? A) B) C) D)

52)

Payback method Average rate of return Discounted cash flows method Accounting book value method

The present value of money is always: A) B) C) D)

Less than its future amount. The same as its future amount. More than its future amount. More or less than its future amount depending upon the discount rate.

53) Which method of project selection gives consideration to the time value of money in a capital budgeting decision? A) B) C) D)

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Payback method Average rate of return Discounted cash flows method Accounting rate of return

54) Kenny Company is considering the possibility of investing $1,500,000 in a special project. This venture will return $375,000 per year for 12 years in after tax cash flows. Depreciation on the project will be $187,500 per year using straight-line depreciation. The payback period for the project is: A) B) C) D)

6 years. 12 years. 4 years. 2 years.

55) Jericho Corporation is considering the purchase of new equipment costing initially $96,000. The equipment has an estimated life of 6 years with no salvage value. Straight-line depreciation is to be used. Net annual after tax cash flow is estimated to be $31,200 for 6 years. The payback period is: A) B) C) D)

1.2300 years. 3.0769 years. 5.0799 years. 6.0000 years.

56) Lazar Corporation is evaluating a proposal to invest in a machine costing $89,000. The machine has an estimated useful life of ten years, and an estimated salvage value of $14,000. The machine will increase the company's net income by approximately $9,600 per year. All revenue and expenses other than depreciation will be received and paid in cash.The payback period of the machine is approximately: A) B) C) D)

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Four years. Eight years. Five years. Ten years.

57) Lazar Corporation is evaluating a proposal to invest in a machine costing $89,000. The machine has an estimated useful life of ten years, and an estimated salvage value of $14,000. The machine will increase the company's net income by approximately $9,600 per year. All revenue and expenses other than depreciation will be received and paid in cash.The expected rate of return on average investment of the machine is: A) B) C) D)

10.0%. 17.0%. 18.6%. 48.0%.

58) Newport Corporation is considering investing $65,000 in equipment to produce a new product. The useful service life of the equipment is estimated to be ten years, with no salvage value. Straight-line depreciation is used. The company estimates that production and sale of the new product will increase net income by $6,500 per year.The payback period of this investment is: A) B) C) D)

Four years. Five years. Six years. Over six years.

59) Newport Corporation is considering investing $65,000 in equipment to produce a new product. The useful service life of the equipment is estimated to be ten years, with no salvage value. Straight-line depreciation is used. The company estimates that production and sale of the new product will increase net income by $6,500 per year.The expected rate of return on average investment in this equipment is: A) B) C) D)

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15%. 20%. 7.5%. Some other percentage.

60) Neville Company is considering an investment of $380,000 in heavy equipment, which will enable the company to be more competitive in the construction industry. The useful service life of the equipment is estimated to be 10 years, with $30,000 salvage value. Straight-line depreciation is used. The company estimates that net income will increase by $41,000 per year as a result of the company's ability to handle a wider range of projects with the new equipment.The payback period for this investment is approximately: A) B) C) D)

4.7 years. 9 years. 8.75 years. 5 years.

61) Neville Company is considering an investment of $380,000 in heavy equipment, which will enable the company to be more competitive in the construction industry. The useful service life of the equipment is estimated to be 10 years, with $30,000 salvage value. Straight-line depreciation is used. The company estimates that net income will increase by $41,000 per year as a result of the company's ability to handle a wider range of projects with the new equipment.The expected rate of return on average investment will be approximately: A) B) C) D)

20%. 43%. 23%. 37%.

62) The president of Nash Company is considering a proposal by the factory manager for the purchase of a machine for $72,500. The useful life would be eight years, with no residual scrap value. The use of the machine will produce a positive annual cash flow of $14,000 a year for eight years. What is the net present value of the proposal, discounted at 10%? (Note: An annuity table shows that the present value of $1 received annually for eight years and discounted at 10% is 5.335.)

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A) B) C) D)

$2,190. Zero. ($3,868). $3,868.

63) The management of Salem Corporation is considering the purchase of equipment costing $109,000, which has an estimated life of 3 years and no salvage value. The net after tax cash flow from the project for each of the three years is expected to be $45,000. The company's cost of capital is 10%. What is the net present value of the proposal? (Note: The present value of $1 due in three years, discounted at 10%, is 0.751; present value of $1 received annually for three years, discounted at 10% is 2.487.) A) B) C) D)

($3,616) $2,548 $2,915 ($3,213)

64) Newman Labs is considering buying equipment, which would enable the company to obtain a five-year research contract. The specialized equipment costs $650,000 and will have no salvage value when the five-year contract period is over. The estimated annual operating results of the project are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 750,000 (650,000) $ 100,000

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.The payback period for the investment in equipment is closest to: A) B) C) D)

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5 years. 1 years. 2.5 years. 2.8 years.

65) Newman Labs is considering buying equipment, which would enable the company to obtain a five-year research contract. The specialized equipment costs $650,000 and will have no salvage value when the five-year contract period is over. The estimated annual operating results of the project are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 750,000 (650,000) $ 100,000

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.The return on average investment for this investment is approximately: A) B) C) D)

10%. 20%. 31%. 50%.

66) Newman Labs is considering buying equipment, which would enable the company to obtain a five-year research contract. The specialized equipment costs $650,000 and will have no salvage value when the five-year contract period is over. The estimated annual operating results of the project are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 750,000 (650,000) $ 100,000

All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.What is the net present value of this investment, using a discount rate of 12%? (Note: An annuity table shows that the present value of $1 received annually for five years, discounted at 12%, is 3.605.) A) B) C) D)

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$468,650 $179,150 $289,500 $829,150

67) Helicopter Gear is planning to expand its product line, which requires investment of $478,800 in special-purpose machinery. The machinery has a useful life of six years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 531,000 (504,000) $ 27,000

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.The payback period for this proposed investment is: A) B) C) D)

4.5 years. 8.9 years. 6.0 years. 2.2 years.

68) Helicopter Gear is planning to expand its product line, which requires investment of $475,200 in special-purpose machinery. The machinery has a useful life of six years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 528,000 (501,600) $ 26,400

4.5 years. 12.3 years. 6 years. 2.8 years.

69) Helicopter Gear is planning to expand its product line, which requires investment of $553,700 in special-purpose machinery. The machinery has a useful life of seven years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue

$ 527,500

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Expenses (including straight-line depreciation) Increase in net income

(501,200) $ 26,300

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.The return on average investment for this proposed investment is closest to: A) B) C) D)

4.75%. 38.07%. 4.99%. 9.50%.

70) Helicopter Gear is planning to expand its product line, which requires investment of $475,200 in special-purpose machinery. The machinery has a useful life of six years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 528,000 (501,600) $ 26,400

8.3%. 50%. 25%. 11.1%.

71) Helicopter Gear is planning to expand its product line, which requires investment of $398,000 in special-purpose machinery. The machinery has a useful life of five years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

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$ 530,000 (503,200) $ 26,800

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.What is the net present value of this proposed investment, using a discount rate of 11%? (Note: An annuity table shows that the present value of $1 received annually for five years, discounted at 11%, is 3.696.) A) B) C) D)

($106,400) ($4,746) $291,600 $393,254

72) Helicopter Gear is planning to expand its product line, which requires investment of $475,200 in special-purpose machinery. The machinery has a useful life of six years and no salvage value. The estimated annual results of offering the new products are as follows: Revenue Expenses (including straight-line depreciation) Increase in net income

$ 528,000 (501,600) $ 26,400

All revenue from the new products and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.What is the net present value of this proposed investment, using a discount rate of 12%? (Note: An annuity table shows that the present value of $1 received annually for six years, discounted at 12%, is 4.111.) A) B) C) D)

($105,600) ($41,078) $369,600 $434,121

73) Rooney, Incorporated is considering the purchase of a new machine costing $600,000. The machine's useful life is expected to be 7 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after-tax cash flow is expected to be $149,000. Rooney estimates its cost of capital to be 14%. (The present value of a $1 annuity for 7 years at 14% is 4.288, and the present value of $1 to be received in 7 years is 0.400.)The net present value of the investment in the machine under consideration is:

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A) B) C) D)

$149,000. $38,912. $85,714. $91,000.

74) Rooney, Incorporated is considering the purchase of a new machine costing $640,000. The machine's useful life is expected to be 8 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after-tax cash flow is expected to be $147,000. Rooney estimates its cost of capital to be 14%. (The present value of a $1 annuity for 8 years at 14% is 4.639, and the present value of $1 to be received in 8 years is 0.351.)The net present value of the investment in the machine under consideration is: A) B) C) D)

$40,520. $41,933. $60,480. $75,160.

75) Rooney, Incorporated is considering the purchase of a new machine costing $600,000. The machine's useful life is expected to be 7 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after-tax cash flow is expected to be $152,000. Rooney estimates its cost of capital to be 15%. (The present value of a $1 annuity for 7 years at 15% is 4.160, and the present value of $1 to be received in 7 years is 0.376.)Upper level managers at Rooney, Incorporated are concerned that employee estimates of future cash flows from the new machine may be overly optimistic. To what dollar amount can the annual after-tax cash flow fall before the investment in the new machine should be rejected? A) B) C) D)

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$600,000. $225,600. $36,538. $144,231.

76) Rooney, Incorporated is considering the purchase of a new machine costing $640,000. The machine's useful life is expected to be 8 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after-tax cash flow is expected to be $147,000. Rooney estimates its cost of capital to be 14%. (The present value of a $1 annuity for 8 years at 14% is 4.639, and the present value of $1 to be received in 8 years is 0.351.)Upper level managers at Rooney, Incorporated are concerned that employee estimates of future cash flows from the new machine may be overly optimistic. To what dollar amount can the annual after-tax cash flow fall before the investment in the new machine should be rejected? A) B) C) D)

$640,000. $224,640. $168,080. $137,961.

77) The minimum rate of return used by an investor to bring future cash flows to their present value is called: A) B) C) D)

78)

The investment rate. The prime rate. The discount rate. The present rate.

To compute a future amount from a present value, we need to know: A) B) C) D)

The future value and length of time. The interest rate and length of time. The future annuity amount. The present annuity amount.

79) An investment cost $80,000 with no salvage value, a 5-year useful life, and had an expected annual increase in net income of $7,000. Straight-line depreciation is used. What is the expected return on average investment?

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A) B) C) D)

8.8% 20% 17.5% 10.4%

80) A machine costs $46,000 and had a useful life of 4 years and a residual value of $7,000. What is the net present value of the machine if the annual cash flow is $16,000 and the company uses a discount rate of 10%? (Note: An annuity table shows the present value of $1 at 10% for 4 years to be 0.683. The present value of an ordinary annuity of $1 discounted at 10% for 4 years is 3.170.) A) B) C) D)

$16,501 $33,118 $9,501 $13,000

81) In computing the return on average investment of a particular asset, the asset's annual depreciation expense may be viewed as: A) B) C) D)

An increase in the average amount invested over the life of the asset. An increase in the asset's carrying value each year. A recovery of the amount originally invested in the asset. A decrease in the asset's net cash flows.

82) The average carrying value (or average investment) of an asset with no salvage value is equal to:

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A) B) C) useful life. D) life.

The original cost of the asset divided by its estimated useful life. The original cost of the asset divided by two. The average annual net cash flow of the asset multiplied by the asset's estimated The average annual net income of the asset multiplied by the asset's estimated useful

83) Joseph Company is considering replacing an existing piece of machinery with newer technology. In deciding whether to replace the existing machinery, management should consider which costs as relevant? A) B) C) D)

Future costs which will be classified as fixed rather than variable. Future costs which will be different under the two alternatives. Sunk costs associated with the old machine. Historical costs associated with the old machine.

84) Sterling Corporation has borrowed $72,000 that must be repaid in three years. This $72,000 is to be invested in an nine-year project with an estimated annual net cash flow of $12,000. The payback period for this investment is: A) B) C) D)

Three years. Six years. Nine years. Indeterminable with the given information.

85) Sterling Corporation has borrowed $75,000 that must be repaid in two years. This $75,000 is to be invested in an eight-year project with an estimated annual net cash flow of $15,000. The payback period for this investment is:

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A) B) C) D)

Two years. Five years. Eight years. Indeterminable with the given information.

86) The management of Trylon Farms is considering the purchase of equipment costing $320,000. The equipment has a useful life of eight years, with $20,000 residual value. The use of this equipment will produce positive annual cash flow of $60,000 for eight years, as well as $20,000 from sale of the equipment at the end of the eighth year. What is the net present value of this investment, discounted at an annual rate of 10%? (Note: The present value of $1 due in eight years, discounted at 10%, is 0.467; present value of $1 received annually for eight years, discounted at 10% is 5.335.) A) B) C) D)

$9,340 $320,100 $9,440 $329,440

87) The management of Ortega Manufacturing has three different proposals under consideration. The Accounting Department has prepared the following information: Proposal A Initial $ investment 3,100,000 Useful life of 7 Years equipment Estimated $ 0 salvage value Payback period 4.2 Years Net present $ (30,000) value discounted at 15%*

Proposal B

Proposal C

$ 2,450,000 7 Years

$ 2,055,000 7 Years

$ 400,000

$ 100,000

4.4 Years $ 21,600

4 Years $ 15,800

Which of the above proposals generates the greatest annual cash flow?

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A) B) C) D)

Proposal A Proposal B Proposal C Cannot be determined with the given information

88) The management of Ortega Manufacturing has three different proposals under consideration. The Accounting Department has prepared the following information: Proposal A Initial $ investment 3,100,000 Useful life of 7 Years equipment Estimated $ 0 salvage value Payback period 4.2 Years Net present $ (30,000) value discounted at 15%*

Proposal B

Proposal C

$ 2,450,000 7 Years

$ 2,055,000 7 Years

$ 400,000

$ 100,000

4.4 Years $ 21,600

4 Years $ 15,800

The above data indicate that: A) After considering the timing of future cash flows, each of the three proposals is expected to provide a rate of return in excess of 15%. B) Proposal A will generate net losses annually. C) If the salvage value of proposal A were $52,000 instead of zero, proposal A would have the highest net present value. D) The present value of proposal B's future cash flows is $2,471,600.

89) The management of Ortega Manufacturing has three different proposals under consideration. The Accounting Department has prepared the following information:

Initial investment Useful life of equipment

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Proposal A

Proposal B

Proposal C

$ 3,100,000 7 Years

$ 2,450,000 7 Years

$ 2,055,000 7 Years

Estimated $ 0 salvage value Payback period 4.2 Years Net present $ (30,000) value discounted at 15%*

$ 400,000

$ 100,000

4.4 Years $ 21,600

4 Years $ 15,800

Based on the above data, which of the following is false? A) Proposal A should be considered unacceptable. B) Proposal C is the best alternative because it has the shortest payback period, which is the most meaningful of the capital budgeting statistics. C) Proposal A's negative net present value indicates that this alternative will not generate management's required rate of return. D) Although proposals B and C are each acceptable, proposal B is a better investment considering the time value of money.

90)

Which of the following is not an important financial consideration in capital budgeting? A) B) C) D)

The timing of the investment's future cash flows. The investment's future profitability. The sunk costs related to the investment. The initial cost of the investment and its estimated salvage value.

91) When using the net present value method for evaluating an investment, an increase in the required rate of return will: A) B) C) D)

92)

Make it more difficult to accept the investment. Make it less difficult to accept the investment. Not affect the decision, if the length of the investment's benefits remain constant. Not be a consideration because it is not used in the net present value method.

An investment's annual net cash flow will always be equal to its:

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A) B) C) D)

Annual revenue less its annual expenses. Annual cash receipts less its annual cash disbursements. Annual revenue less its annual cash disbursements. Annual net income plus its annual depreciation expense.

93) Capital budgeting proposals often require input from all of the following stakeholders except: A) B) C) D)

94)

Managers. Employees. Shareholders. Directors.

The accuracy of capital budget decisions is critically dependent on: A) B) C) D)

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The project life span estimates. Currency exchange rates. Employee morale. Supplier availability.

Answer Key Test name: Chapter 26 Test Bank - Algorithmic and Static 1) FALSE 2) TRUE 3) TRUE 4) TRUE 5) TRUE 6) TRUE 7) FALSE 8) FALSE 9) FALSE 10) FALSE 11) FALSE 12) TRUE 13) TRUE 14) TRUE 15) TRUE 16) TRUE 17) FALSE 18) TRUE 19) TRUE 20) FALSE 21) FALSE 22) TRUE 23) FALSE 24) TRUE 25) TRUE 26) TRUE Version 1

27) FALSE 28) TRUE 29) TRUE 30) FALSE 31) TRUE 32) TRUE 33) TRUE 34) TRUE 35) C 36) D 37) B 38) B 39) A 40) C 41) B 42) B 43) D 44) A 45) A 46) C 47) C 48) A 49) A 50) D 51) C 52) A 53) C 54) C 55) B 56) C Version 1

57) C 58) B 59) B 60) D 61) A 62) A 63) C 64) D 65) C 66) B 67) A 68) A 69) D 70) D 71) B 72) B 73) B 74) B 75) D 76) D 77) C 78) B 79) C 80) C 81) C 82) B 83) B 84) B 85) B 86) C Version 1

87) A 88) D 89) B 90) C 91) A 92) B 93) C 94) A

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